1 GENERAL NEWS
1.1 HMRC launches four new taskforces
HMRC have launched four new taskforces to tackle tax evasion. Taskforces are specialist teams that undertake intensive bursts of activity in specific high-risk trade sectors and locations in the UK. The teams visit traders to examine their records and carry out other investigations.
The taskforces launched on 10 July are into the following areas:
- the holiday industry in Blackpool, the Lake District, North Wales, Devon and Cornwall;
- restaurants in Yorkshire and Humber;
- road hauliers in the Midlands;
- the fishing industry in Scotland.
Since 2011/12, HMRC's taskforces have collected more than £80 million, and expects to collect £90 million per year from taskforces launched over the next three years.
1.2 Penalties for inaccurate information provided to HMRC
Schedule 24 to FA07 provides for financial penalties when inaccurate information is provided to HMRC. When such information relates to sources or assets in an overseas jurisdiction the scale of penalty is determined by reference to the category of the territory to which the inaccuracy is connected. The Penalties, Offshore Income etc. (Designation of Territories) Order 2011 designates certain territories as category 1 territories or as category 3 territories for the purposes of Schedule 24 to FA07. Any territory not listed in category 1 or category 3 falls by default into category 2.
SI 2013/1618 reclassifies certain territories from category 2 to category 1 (Liechtenstein and Switzerland) and from category 3 to category 2 (Antigua and Barbuda, Armenia, Bahrain, Barbados, Belize, Dominica, Grenada, Mauritius, San Marino, Saint Kitts and Nevis, Saint Lucia and Saint Vincent and the Grenadines). The order comes into force on 24 July 2013.
www.legislation.gov.uk/uksi/2013/1618/pdfs/uksi_20131618_en.pdf
HMRC guidance on the implications of dishonest conduct by tax agents
HMRC has updated its guidance on the implications of dishonest conduct by tax agents.
www.hmrc.gov.uk/agents/strategy/dishonestconduct.htm
1.3 Revised timeline for the implementation of FATCA
IRS Notice 2013-43 revises the timelines included in the regulations for withholding agents and foreign financial institutions to begin their due diligence, withholding, and reporting requirements under FATCA.
Specifically, this Notice provides a six-month extension for when withholding will begin (ie payments after 30 June 2014) and for implementing new account opening procedures as well as related requirements to comply with FATCA.
The timeline for foreign financial institutions to register as (among other things) participating foreign financial institutions is also extended under the Notice, with the registration portal expected to open on 19 August 2013.
Finally, the Notice provides that financial institutions operating in jurisdictions that have signed an intergovernmental agreement (IGA) covering their financial institutions' compliance with FATCA will be treated as having an effective IGA.
www.irs.gov/pub/irs-drop/n-13-43.pdf
2 PRIVATE CLIENT
2.1 HMRC consults on improving debt collection through PAYE tax codes
The Government has previously consulted twice on the principle of HMRC using the PAYE system to collect more debts due to HMRC ("coding out") as well as increasing the threshold for such collection to £3,000. As part of its efforts to improve the collection of debt HM Revenue & Customs (HMRC) is seeking views on proposed changes to the coding out of debts and underpayments. The Government intends to increase the coding out limit but would welcome views on the detail and implementation of the proposed changes. The consultation will run from 11 July to 5 September 2013.
At present, HMRC can include up to £2,000 a year through the PAYE system, allowing debtors with a source of income within PAYE to spread their payments and reduce HMRC's collection costs. Coding out can also be used where there has been an underpayment of PAYE or a self-assessment balancing payment (an amount owing under a taxpayer's tax return) if it is below the £3,000 limit.
Proposed changes to the annual limit
HMRC's aim is to:
- make more use of coding out;
- collect more from higher earners while protecting lower earners; and
- extend the focus of coding out from just small debts to larger ones.
HMRC is therefore proposing to replace the current single scale by a graduated scale of limits. This would:
- protect those on lower incomes, with no change to the maximum that could be coded out for those earning less than £30,000; and
- introduce a graduated, income related scale for earnings of £30,000 or more so that a maximum of £17,000 could be coded out for a person with earnings of over £90,000.
To avoid any change for low earners, the limit would remain at £3,000 for anyone with a primary source of PAYE income of less than £30,000 a year.
For more information, the consultation document can be found at the following link:
www.gov.uk/government/uploads/system/uploads/attachment_data/file/211628/130710_final_coding_out.pdf
2.2 Tainted charity donations
HMRC has issued draft guidance on the 'tainted charity donations' rules, introduced by FA 2011, which replaced most of the 'substantial donors to charity' rules from April 2013.
Schedule 3 to the Finance Act 2011 introduced new anti-avoidance rules (the Tainted Charity Donations rules) to prevent the abuse of the tax reliefs available to donors to charities and Community Amateur Sports Clubs (CASCs).
The draft guidance applies where taxpayer donors enter into arrangements to obtain financial advantage from a charity or a community amateur sports club [CASC]. Only such donors, charities and CASCs need to consider whether the new rule applies to their donations. The tainted charity donations rules do not apply to:
- a simple donation to charity where no additional arrangements are entered into;
- a donation under Gift Aid that is within the Gift Aid benefit limits;
- a donation, any benefit of which has been taken into account in calculating the relief due for donations to charity of shares, securities and real property, or trading stock.
The tainted charity donations rules ensure that the usual tax reliefs are not available where donors enter into arrangements to obtain a financial advantage from a charity or CASC for themselves, or someone else involved in the arrangement, in return for their donation. Some, but not all, of the previous rules in respect of substantial donors to charity transactions (at s549-557 Income Tax Act 2007 (ITA) and s502-510 Corporation Tax Act 2010 (CTA)) up to, and including, 31 March 2013 are disapplied. After that date the legislation on substantial donors to charity has been largely repealed.
The tainted charity donations rules are based on a purpose test which considers the effects of and circumstances in which the donor, or someone connected to the donor, entered into arrangements to make the donation, and to whether those arrangements are deemed to obtain a financial advantage.
How the rules work
Three conditions, A, B and C must be met for a donation to be a tainted charity donation. Where all three conditions are satisfied, the donor loses any tax relief that they would have been entitled to claim, had the donation not been tainted.
An additional charge to tax may also arise where the donation would have been eligible for relief under the Gift Aid scheme (for individual donors only).
The conditions are:
Condition A – the donation to the charity and arrangements entered into by the donor are connected
Condition B – the main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity
Condition C – the donation is not made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made
All three conditions must be met for the new rules to apply.
These rules only apply to donations that are defined as `relievable charity donations`. Donations that are not defined as relievable charity donations are not affected by these rules.
The guidance provides expanded detail of these conditions, as well as defining 'relievable charity donations' and shows a number of examples.
When a donation is tainted
Where a donation is tainted, the donor is not entitled to claim tax relief that would otherwise have been due in respect of it, or in respect of any other donation that is associated with it.
Gift aid and tainted donations
If the donation would have been a qualifying donation under the Gift Aid scheme if it were not a tainted donation, the charity will continue to be entitled to make a repayment claim to HMRC in respect of income tax. However an income tax charge will arise in connection with this repayment. The amount of the income tax charge is equal to the amount of the repayment of tax that the charity would be entitled to claim in respect of the gift aid donation (whether or not the charity makes the repayment claim).
The draft guidance can be found at: www.hmrc.gov.uk/charities/guidance-notes/tainted-donations.pdf
2.3 CGT, trust distributions and matching to gains of an offshore trust
The First tier Tribunal has concluded that distributions to beneficiaries from new resident trust can be matched to gains in original offshore trust. HMRC had accepted that flip-flop mark II scheme was effective so that gains did not arise in the new trust. However it concluded that as a result of TCGA s97(5) the distributions to beneficiaries from the new trust were nevertheless "from... indirectly" the original trust. This was because the new trust was essentially, and viewed realistically, a continuation of the original trust.
www.bailii.org/uk/cases/UKFTT/TC/2013/TC02766.html
2.4 Whether a discovery assessment validly made
In 2000-01 Mr Smith participated in a marketed tax avoidance scheme designed to create a tax deductible capital loss of £532,695. Mr Smith accepts that, as a result of the Court of Appeal decision in Drummond v HMRC [2009] STC 2206, the scheme, which involved the acquisition and disposal of second-hand insurance bonds, did not achieve its purpose.
Mr Smith's self-assessment tax return for the tax year 2000-01 ("the Return") was submitted on 22 January 2002. It is accepted that some details on the Return were incorrect – for example, the date of disposal of the bonds – but that is not material to the appeal. The Return gave two "white space" disclosures as follows.
"During the period Mr Smith acquired a non-qualifying second hand insurance bond for £532,695. This bond was subsequently redeemed in full, on 6 March 2001 for an amount of £483,228.93.
For tax purposes the surrender proceeds fall to be taxed under both s.54 1TA 1988 (income) and s.22 TCGA 1992 (capital gains).
For income purposes a charge arises equal to the excess of surrender proceeds over premiums paid into the policy. In the case of Mr Smith the income arising is:
£
Proceeds received on surrender 483,228.93
Premiums paid into the policy (510,000.00)
Income Charge NIL
Please refer to the additional disclosure on schedule CG7 for details of the capital gains position."
"In calculating the capital gain arising on the final surrender the proceeds are again the amount received on surrender. However, s.37 TCGA 1992 provides that sale proceeds which have been taken into account for income purposes should not be taken into account for capital gains purposes. As the proceeds of £483,228.93 have been taken into account above in calculating the chargeable event gain, the proceeds for capital gains tax purposes are.-
£
Proceeds received on surrender 483,228.93
Less amounts excluded under s.37 TCGA 1992 (483,228.93)
Proceeds for capital gains purposes NIL
The expenditure incurred for capital gains purposes is the amount paid by Mr Smith for the bond i.e. £532,695.
The capital gains tax computation on surrender of the bond is:
£
Sale proceeds (as above) 0
Allowable expenditure (as above) (532,695)
Capital gain/(loss) (532,695)"
Despite there being various news within HMRC about the procedures for preparing to challenge this particular scheme, no enquiry was raised by 31 January 2003. The HMRC inspector dealing with Mr Smith's affairs was on sick leave from 21 November 2002 to 3 March 2003. HMRC raised a discovery assessment on 29 November 2006.
The Tribunal concluded there was a discovery within the meaning
of TMA s29(1), taking the guidance in the Bluemnthal case
(www.bailii.org/uk/cases/UKFTT/TC/2012/TC02174.html
) :
"[162] We suggest, unless and until a higher court takes a different view, this point is no longer open as regards this tribunal. In our view, HMRC can raise a discovery assessment under s 29(1) TMA, subject to the conditions referred to below, if it newly discovers— which includes a change of mind—any of the circumstances set out in sub-s (1)(a)–(b) apply ie in summary, that insufficient tax has been assessed or excessive relief has been given."
In considering what information was available to HMRC before the enquiry window closed, the Tribunal concluded that information outside Mr Smith's file (such as HMRC's memos and views on the SHIPS case and variants of it) were irrelevant.
In relation to whether a hypothetical inspector could have been reasonably expected to be aware of the unassessed gains, on the basis of the information made available to him before the enquiry window closed, following Blumethal the Tribunal concluded:
In our opinion the relevant law relating to the scheme adopted by Mr Smith was of a degree of complexity such as to make it unreasonable for the officer to be aware of an insufficiency on the basis of the information contained in Mr Smith's tax return. We do consider that the information was sufficient to warrant the hypothetical officer opening a s 9A enquiry – but that is not the relevant test.
The Tribunal therefore concluded the discovery was validly made.
www.bailii.org/uk/cases/UKFTT/TC/2013/TC02768.html
2.5 Consultation on withdrawing relief for interest on loans to purchase life annuities
The Government is inviting views on the withdrawal of relief for interest on loans to purchase life annuities taken out by people aged 65 or over before 1999, the withdrawal to take place from a fixed date in the future. These loans are often referred to as 'home income plans'. Comment is requested by 30 September 2013.
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