HMRC Rebuked Over Top Slicing Relief Mishandling

In a recent ruling that has sent ripples through the tax community, the First-tier Tribunal has not only struck out a case concerning the calculation of top slicing relief but also took the rare step of publicly criticising HM Revenue & Customs (HMRC) for its handling of the matter. This rebuke underscores a broader narrative of taxpayer frustration with HMRC's practices, particularly in how it manages complex tax reliefs.

The Case in Question

The case revolved around the application of top slicing relief, a tax mechanism designed to mitigate the harshness of taxing lump sum withdrawals from life insurance bonds over many years. The relief aims to spread the taxable gain over the bond's duration to prevent an individual's income from jumping into a higher tax bracket in one hit. However, the intricacies of this relief have often led to disputes, and this case was no exception.

In the matter of Sally Judges (as representative for the late R Young) v HMRC [2022] TC08408, the Tribunal found that changes to top slicing relief, introduced by the Finance Act 2020, were not retrospective. This decision was pivotal because HMRC had initially attempted to apply these changes backwards, affecting the tax calculations for years prior to the legislative amendment. This misapplication resulted in an erroneous tax calculation for Mr. Young's estate, leading to an appeal by Mrs. Judges.

The Tribunal's Critique

While the Tribunal's primary role is to adjudicate on the specifics of the law, it went beyond this remit to highlight HMRC's "inconsiderate treatment" of the taxpayer. The Tribunal noted that HMRC's approach seemed to disregard the clear intent of the law regarding the non-retrospective nature of the relief changes. This was not merely a legal oversight but was indicative of a broader issue within HMRC's operational culture:

• Lack of Clarity and Guidance: Post the 'Silver' case, where HMRC lost on similar grounds, there was an expectation for clearer guidance from HMRC. Instead, the agency continued with its previous interpretation, leading to unnecessary legal challenges.
• Disingenuous Engagement: The Tribunal seemed to suggest that HMRC's insistence on applying retrospective changes was not just an error but bordered on disingenuous, especially since the agency had withdrawn an appeal in a similar case (Mariana Silver), acknowledging implicitly that their stance might not hold up in higher courts.
• Impact on Taxpayers: For taxpayers, especially those dealing with the intricacies of estate management like Mrs. Judges, HMRC's stance added layers of complexity, stress, and financial cost. This case showed a clear lack of empathy for the taxpayer's position, focusing instead on an aggressive revenue protection strategy.

A Broader Critique

This isn't an isolated incident. Over the years, HMRC has faced criticism for its approach to taxpayer disputes, often seen as more focused on revenue collection over providing fair and clear tax administration. The Tribunal's comments serve as a stark reminder of the need for:

• More Transparent Communication: Taxpayers deserve clear, timely information on how changes in law affect them, especially in complex areas like investment bond gains.
• Accountability and Fairness: HMRC should be held accountable for misinterpretations that lead to legal battles, not just through lost cases but through systemic changes to prevent such occurrences.
• A More Human-Centric Approach: Tax laws, while complex, should not be administered in a way that seems adversarial to those they are meant to serve.

Conclusion

The Tribunal's decision to strike out the case was a technical victory for Mrs. Judges, but the real impact lies in its critique of HMRC's conduct. This case is a call to action for HMRC to reassess its approach to taxpayer interactions, ensuring that it balances the scales of revenue collection with the rights and reasonable expectations of taxpayers. As we move forward, it's crucial for HMRC to learn from these rebukes, fostering an environment where tax administration is transparent, fair, and considerate of the complexities facing individuals navigating the tax system.

Tax does have to be taxing.

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HMRC Tries It On, and Loses!

 

In Pavan Trading Ltd, HMRC tried it on and then doubled down at the review stage.

When a business exports goods, the sale can be zero rated, but the zero rate is on the basis that the business holds evidence of export.

The taxpayer had good records and was able to produce both official and commercial evidence.

There were some anomalies in the taxpayer’s paperwork, for example, not all payments from USA customers could be identified, deliveries were not made to customers’ main addresses and the values stated on the parcels were lower than the true value.

Crucially, the HMRC officer stated the main reason for assessment was the taxpayer had not supplied HMRC with the export evidence within three months. The officer told the tribunal that had the taxpayer given the main/supplementary evidence to HMRC within three months of each export, HMRC would have accepted the export evidence for zero rating purposes.

HMRC was saying the assessment was because the taxpayer had acceptable evidence of export but that the law required the taxpayer to physically give that paperwork to HMRC within three months of each and every export.

All very nice, except for the fact the law does NOT say that!

Tribunal concluded that HMRC made two errors in law. Firstly, the three-month period for obtaining evidence does not mean the taxpayer has to provide that evidence to HMRC within three months, it simply means the taxpayer must hold the evidence in their records within three months of the transaction.

The second error was that HMRC was of the view that all the evidence of export must be contained within the CP72, ignoring established case law and HMRC’s own guidance that a basket of evidence from a variety of sources is acceptable evidence.

The tribunal concluded “This error was started by Officer Bains, perpetuated by the nonsense written by the review officer, and then compounded by HMRC’s statement of case and skeleton argument. If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it and we have absolutely no hesitation in allowing this appeal.”

What is clear from this case is that HMRC cannot be trusted to get things right, or even apply the law correctly!

Tax does have to be taxing.

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HMRC Fines Company For Filing Too Early!

 

HMRC, for reasons best known to itself, charged a taxpayer with three penalties for filing too early. 

This decision was quite rightly reversed on appeal.

"In the hearing, HMRC agreed that the returns had been filed on 4 September 2020 and explained that the penalties had been issued because the returns had been filed too early and were therefore treated as not having been filed correctly and in time. The return for March 2021, also filed on 4 September 2020, had been accepted but HMRC were unable to explain in the hearing why this return had been accepted but the returns for the earlier periods, filed in the same submission, had not been accepted."

HMRC yet again wasting time and taxpayers' money on pursuing half arsed vendettas.

Tax does have to be taxing.

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HMRC is Insane - A Litany of Failure

 

AccountingWeb hits the nail on the head in its damning indictment of HMRC's vendetta against Smith & Williamson.

The Supreme Court’s judgement on the Smith & Williamson (EBT) case (2022 UKSC 9) offers disturbing hints of illogical, if not insane, thinking within HMRC.

There is a saying that insanity is doing the same thing over and over and expecting different results. This is the repeated pattern of HMRC’s appeals in this case:

• May 2017: First-tier tribunal (FTT) hearing, HMRC lost.
• February 2019: HMRC appealed to the Upper Tribunal (UT), and lost.
• March 2020: HMRC appealed to the Court of Appeal (CA) and failed, for the same reasons as it had in the previous hearings.
• February 2022: HMRC appealed to the Supreme Court, and failed again. 

The justices of the Supreme Court unanimously agreed with three successive judgements that HMRC’s arguments were simply wrong.

This case has little practical effect, since the 2013 changes mean that its circumstances cannot recur. Its primary outcome is to highlight the bloody-minded determination that HMRC so often appears to exhibit when pushing a weak case in pursuit of a sizeable chunk of tax.

Tax does have to be taxing.

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Adrian Chiles Wins Tax Case Against HMRC

The TV presenter Adrian Chiles has won a seven-year battle with HMRC, and saved £400K-500K in taxes. 

HMRC claimed that he was not a freelancer when working for the BBC and ITV between 2012 and 2017, despite Mr Chiles having worked as a contractor through his own limited company since 1996. 

HMRC argued he should have paid more tax as an employee of the broadcasters, where he worked on BBC programmes such as The One Show, Match of the Day 2 and The Apprentice: You're Fired, as well as on Daybreak and as a football commentator at ITV.

HMRC said Mr Chiles owed £1.2m in income taxes and almost £500,000 in National Insurance.

The case was part of a wider crackdown on “disguised employees” who reduce their tax bills by funnelling their income through personal service companies. 

Such arrangements allow an individual to set up a company and pay themselves via a mixture of salary and dividends to save on tax, even if they do not hire any staff. 

Employees pay income tax at 20pc of earnings up to £50,270 and 40pc above, plus NI at 12pc, while contractors typically pay corporation tax at 19pc and lower NI rates of 9pc, while dividends are taxed at rates starting from 7.5pc.

However, a tribunal ruled there was “no suggestion Mr Chiles set out to avoid paying tax” through his company Basic Broadcasting Limited. 

Dave Chaplin of tax advice firm IR35 Shield is quoted by the Telegraph as saying that Mr Chiles had been the “victim of a very poorly run investigation by HMRC inspectors”.

He added: 

“The tax office has put him through the wringer, both mentally and financially, due to the massive costs of having to defend himself, despite always paying his taxes correctly.”

Despite winning the case, Mr Chiles will still have to pay his own legal fees. 

A spokesman for HMRC said the tax authority would “carefully analyse the outcome of the tribunal before considering next steps”.

Tax does have to be taxing.

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HMRC is "Shambolic"

HMRC missed the deadline to appeal locum doctor George Mantides’ partial IR35 case victory, according to an Upper Tier Tribunal (UTT) judgement published last week.

It stated that HMRC had “sought permission” to appeal against a First Tier Tribunal (FTT) decision in 2019 that found the services Mantides provided Medway Maritime Hospital in 2013 fell outside IR35. 

However, its application was “submitted late and the FTT declined to grant an extension of time.”

“A further application by HMRC to this tribunal [UTT] was refused both on the papers and subsequently following an oral hearing,”

Seb Maley, CEO at Qdos (IR35 specialist), said:  

“That HMRC missed the deadline to appeal the contract Mantides held with Medway Maritime Hospital [MMH] tells you everything you need to know about the efficiency of the tax office. 

Not only does HMRC regularly struggle to identify if a contract belongs inside or outside IR35, but they aren’t organised enough to lodge an application to appeal despite it being something as significant as an Upper Tier Tribunal. It’s shambolic.”

While HMRC were due to appeal the MMH verdict, Mantides appealed an FTT ruling which found his services to Royal Berkshire Hospital (RBH), provided via his limited company – George Mantides Ltd – were inside IR35 and therefore liable for Income Tax and National Insurance contributions.

The UTT found that there was not sufficient evidence for the FTT to come to its conclusion that Mantides’ contract with RBH fell inside IR35. 

The judgement said that the UTT was satisfied there “there was nothing in the evidence to support the FTT’s conclusion as to the notice period and the obligation on RBH to provide work to Mr Mantides.”

However, it has delayed reaching a verdict, citing it is waiting for the outcome of another tax case recently heard by the Court of Appeal – PGMOL vs HMRC.

Tax does have to be taxing.

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Death Is a Reasonable Excuse For Late Filing

 

Stokes vs Revenue and Customs

 

"HMRC’s decision was, in my view, flawed, because it did not take into account a relevant fact, being that the appellants’ tax agent was not paying attention to his clients’ affairs between April 2019 and the time the tax returns were filed, due to his father’s illness and death. This means that the Tribunal can reduce the penalties if it thinks it right because of special circumstances."

Tax does have to be taxing.

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FTT Quashes CGT On Home with Large Garden

 

My thanks to a loyal reader who point this case out to me.

The First-tier Tax Tribunal (FTT) has voided a capital gains tax (CGT) assessment imposed on a English couple's sale of their home, whose garden HMRC considered to be larger than necessary for the property's 'reasonable enjoyment’.

The FTT judges decided to take into account not just comparable properties, but all of the relevant facts and evidence, including the size and value of the house and buildings themselves, and the nature of the property's location. 

The facts that the Phillips' house was large and was set in a rural area suggested that it would appeal to somebody who was looking for a larger house and more space around it for privacy and other reasons. 

'We accept that the whole of the area of 0.94 of a hectare comprising the garden and grounds of Mr and Mrs Phillips's property was required for the reasonable enjoyment of the dwelling-house and so falls within the permitted area qualifying for PPR relief', said the FTT judges. 'The assessments made by HMRC...in respect of both Mr and Mrs Phillips in the amount of GBP162,820 are therefore reduced to nil'

Tax does have to be taxing.

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HMRC Tries To Blame Others For Its Mistakes and Fails

 

A case where HMRC desperately tries to find someone to pay for their mistakes....and fails.https://t.co/O8QjVacLaT

— John Andrews (@jmalitrg) August 20, 2020

Conclusion

45.         HMRC did not go through the process required by Reg 75A and so had not created a deemed liability which could be collected using a Reg 80 determination.  It follows that the determination is invalid.

46.         As a result, in the exercise of my jurisdiction under TMA s 50(7), I decide that the Company has been “ overcharged by an assessment other than a self-assessment” and reduce the Reg 80 determination to nil.  The Company’s appeal is therefore allowed.

Tax does have to be taxing.

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HMRC Plucks Figures From The Air To Terrorise People

The FT reports that HMRC has been accused of making up figures to terrorise people by Judge Geraint Jones QC, who said a six-figure bill had been “plucked from the air” to frighten a taxpayer receiving incapacity benefit.

Judge Geraint Jones QC ruled in favour of the taxpayer who had appealed against a tax bill and penalties of £342,000.

The First Tier Tribunal heard that in 2018 HMRC had issued income tax assessments worth £272,840 against Sebastian Cussens, based on its belief that he was a sole trader buying and selling cheap second-hand cars.

HMRC alleged Mr Cussens had failed to declare trading profits between 2005 and 2016 and also issued him with penalties of £70,102. However, the tribunal heard that Mr Cussens, who represented himself with help from his 81-year-old father, had been in receipt of enhanced employment and support allowance. This benefit is paid to people unfit to work because of physical or mental impairments.

The judgment added that, based on observations at the hearing, the tribunal believed Mr Cussens “lacked the skill, ability and perhaps the understanding to deal with this appeal properly”. The judge acknowledged that Mr Cussens had failed to co-operate with HMRC and had not mentioned his health condition to them before the hearing.  Nevertheless, the tribunal found fault with the basis on which HMRC calculated the bill issued to Mr Cussens, heavily criticising its assumption that he could have made a 50 per cent net profit margin as “wild, extravagant and unreasonable”.

The judgment noted that HMRC’s lawyer was unable to explain how the profit margin had been arrived at.

“It smacks of being a situation where, because the appellant had been uncooperative and was sticking his head in the sand, the respondents [HMRC] decided to issue assessments almost “in terrorem in a bid to persuade the appellant to engage properly in the matters under review,” 

The judgment said:

“We have seen nothing whatsoever in the documentary evidence to suggest that any thought, consideration or analysis whatsoever was undertaken by either the [HMRC] assessing officer and/or the [HMRC] review officer to decide whether taking a net profit figure of 50 per cent of supposed turnover was or was not a reasonable basis upon which to proceed. We are firmly of the view that figure was simply ‘plucked from the air’.” 

HMRC said in response to the ruling:

“We are committed to treating all taxpayers with respect by taking individual circumstances into account. We are carefully considering the judgment.”

Is HMRC pleasant plucker?

Tax does have to be taxing.

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HMRC Disappointed With Lorraine Kelly Ruling

Lorraine Kelly has won an appeal against HMRC over a £1.2m tax bill, after a judge ruled she was not employed by ITV, but performs as her "chatty" TV persona.

Kelly received the national insurance and income tax bill from HMRC in 2016.

HMRC claimed that she was an ITV employee, but she said she was a freelancer.

The judge ruled in Kelly's favour that she was a "self-employed star".

The BBC reports that the case centres on a contract that Kelly signed in 2012 - through a company she runs with her husband - to present Lorraine, as well as her former show Daybreak which ended in 2014 when Good Morning Britain was relaunched.

Four years later, she was sent a bill of nearly £900,000 in income tax and more than £300,000 in national insurance contributions.

Kelly appealed against tax authority HMRC, and the case was heard by the first-tier tax tribunal.

Judge Jennifer Dean ruled that the relationship that Kelly had with ITV "was a contract for services and not that of employer and employee".

The tribunal found that Kelly did not receive staff benefits such as holiday or sick pay and was allowed to carry out other work.

The judge said that Kelly could be classed as a "theatrical artist", which would mean any payments to an agent would be allowed as a tax-deductible expense.

Judge Dean said:

"We did not accept that Ms Kelly simply appeared as herself - we were satisfied that Ms Kelly presents a persona of herself, she presents herself as a brand and that is the brand ITV sought when engaging her.

All parts of the show are a performance, the act being to perform the role of a friendly, chatty and fun personality.

Quite simply put, the programmes are entertaining, Ms Kelly is entertaining and the 'DNA' referred to is the personality, performance, the 'Lorraine Kelly' brand that is brought to the programmes.

We should make clear we do not doubt that Ms Kelly is an entertaining lady but the point is that for the time Ms Kelly is contracted to perform live on air she is public 'Lorraine Kelly'.

She may not like the guest she interviews, she may not like the food she eats, she may not like the film she viewed but that is where the performance lies."

A spokesman for HMRC said it was "disappointed" with the ruling.

"We will carefully consider the outcome of the tribunal before deciding whether to appeal."

Hey Hoh, the show must go on!

This Lorraine Kelly tax case really has holed HMRC's IR35 and CEST test below the waterline. It should sink without trace https://t.co/B5l2nHhFzu

— Paul Lewis (@paullewismoney) March 21, 2019

Tax does have to be taxing.

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HMRC's Enquiry That "Drifted Along Aimlessly".

The FTT is unimpressed with the "progress" of an HMRC enquiry that the FTT stated "drifted along aimlessly" and, unsurprisingly, has ordered it closed.

Patel v HMRC [2018] UKFTT 0561 (TC)

Background

Mr Patel (the taxpayer) is a chartered accountant who incorporated his practice to become Ashley King Ltd (the company). The company was charged a fee under a licence agreement for the use of the practice name, business contacts and web domains, the goodwill of which the taxpayer claimed was a personal asset.

The licence fee received under the licence agreement was declared on the taxpayer's self-assessment tax return as income. HMRC opened an enquiry into the taxpayer's 2014/15 tax return in late 2016, in relation to the licence fee and goodwill. The taxpayer provided HMRC with a copy of the licence agreement which explained the nature of the relationship and the payment terms.

HMRC suspected that the licensing arrangement was intended to avoid employer NICs and the matter was referred to various specialist teams within HMRC for advice over the course of the next 12 months.  

At no point did HMRC seek to enquire into the tax return of the company, despite HMRC considering that there could be charges to PAYE and employer NICs as a result of the licence fee arrangement.

The taxpayer made an official complaint, claiming that HMRC were ignoring the information he had provided and his technical arguments. He also informed HMRC that he would seek a direction from the FTT requiring HMRC to close its enquiry. HMRC sought further information from the taxpayer and some 21 months after the enquiry had been opened, issued an information notice to the taxpayer pursuant to paragraph 1, Schedule 36, Finance Act 2008.

The taxpayer considered that he had provided all relevant documents and information to HMRC and applied to the FTT for a direction requiring HMRC to issue a closure notice pursuant to section 28A, Taxes Management Act 1970.

FTT decision

The application was allowed.

HMRC argued that it had not concluded its enquiry in relation to the licensing of the goodwill. Its initial view was that the goodwill could not be personal, in which case the taxpayer would have no goodwill to licence. It was possible that the licence fee payments received from the company should be recharacterised as salary and it therefore required further information from the taxpayer in order to form a definitive view.

HMRC agreed at the hearing that the specialist teams from whom advice had been sought had not been provided with the full facts of the matter and when questioned by the judge, the HMRC enquiring officer confirmed that there was no investigation in respect of the company and that if Class 1 NICs were payable, it was the company, not the taxpayer, which would be liable to pay them. Additionally, if the licence fee payments were salary, then the company would be liable under the PAYE system and as such no amendments would be required to the taxpayer's return.

The FTT referred to Estate 4 Ltd v HMRC [2011] UKFTT 269 (TC) and concluded that HMRC's admission that no amendments could be made to the taxpayer's return settled the matter in his favour. There was no tax at risk since Class 1 NICs cannot be recovered from an employee. Additionally, it was not sensible for the enquiry to be kept open when there was no possibility of an enquiry into the company.

The FTT directed HMRC to issue a closure notice in respect of its enquiry into the taxpayer's tax return.

There it is folks as per this sentence:

"HMRC agreed at the hearing that the specialist teams from whom advice had been sought had not been provided with the full facts of the matter."

HMRC deliberately tries to rig the "game" in its favour when engaging with taxpayers by hiding data and information.

Do not trust HMRC to treat you fairly or honestly!

Tax does have to be taxing.

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