Weekly Tax Update - Monday 25 February 2013

1 GENERAL NEWS

1.1 HMRC and dishonest tax agents

SI 2013/279 appoints 1 April 2013 as the date on which Schedule 38 to the Finance Act 2012(a) comes into force. Schedule 38 makes provision enabling HMRC to issue a tax agent with a conduct notice if it has determined that they have engaged in dishonest conduct, to obtain working papers from them, and impose penalties. Where an individual incurs a penalty in relation to dishonest conduct which exceeds £5,000, the Schedule provides that HMRC may publish certain information about this individual.

www.legislation.gov.uk/uksi/2013/279/pdfs/uksi_20130279_en.pdf

SI 2013/280 appoints 1 April 2013 as the day on which section 101 (late payment of interest on sums due to HMRC) of the harmonised interest regime set out in s101 and s103 of the Finance Act 2009 comes into force in relation to penalties imposed under Parts 3 to 5 of Schedule 38 to the Finance Act 2012 in connection with dishonest conduct by individuals acting as tax agents.

www.legislation.gov.uk/uksi/2013/280/pdfs/uksi_20130280_en.pdf

1.2 UK/Isle of Man co-operation to combat tax evasion HM Treasury has issued the following press release:

"The Government has agreed action with the Isle of Man to clamp down on those who try to hide their money offshore. This forms an integral part of the Government's offshore anti- evasion strategy which will be published later this year. The package includes an automatic tax information exchange agreement and the setting up of a disclosure facility. The disclosure facility will allow investors with accounts in the Isle of Man to come forward and settle their past affairs before information on their accounts is automatically shared.

Under the automatic exchange agreement, a wide range of financial information on UK taxpayers with accounts in the Isle of Man will be reported to HM Revenue & Customs automatically each year. It follows closely the UK-US agreement to improve international tax compliance and to implement FATCA in order to minimise burdens on financial institutions".

The disclosure facility will operate from 6 April 2013 and run until September 2016. Under its terms, liabilities arising from April 1999 must be fully disclosed and there is a guaranteed penalty rate - 10% for returns to be filed before April 2009 and 20% thereafter. The facility will not be available to those under enquiry by HMRC. Where HMRC uses the information made available under the information sharing agreement, it will be seeking significantly higher penalties.

There is no guarantee against criminal investigation for tax related offences; HMRC's published criminal investigation policy will apply. Those who have previously been under investigation will not be able to benefit from the guaranteed penalty rates or start date.

www.hm-treasury.gov.uk/press_12_13.htm

2 PRIVATE CLIENT

2.1 Married couples and joint ownership of rental property

It appears that HMRC is looking carefully at cases where a rental property is owned jointly by a husband and wife and the rents have not been allocated equally between them. This is a classic case where the legislation lays down clear rules which do need to be followed carefully.

The default position for rents receivable in respect of a property owned jointly between husband and wife is that the rents are split 50:50 (section 836 ITA 2007) irrespective of the actual beneficial ownership ratio. However it is possible to claim to split rental income in some other ratio (section 837 ITA 2007) provided the following conditions are met:

the property is held by the couple as tenants in common and not beneficial joint tenants - see HMRC Manual TSEM 9850. there is evidence to support the claim for unequal beneficial ownership (for example a declaration of trust). This evidence has to be submitted with the form 17 - see TSEM 9851. A declaration on form 17 can be made at any time provided it aligns with the factual ownership position as documented - see TSEM 9858.

The declaration must show the beneficial interest in both the income covered by the declaration and the property from which that income arises (Section 837(2) ITA 2007).

The declaration has to be signed and dated and then must reach HMRC within 60 days of the date of signing (section 837(3) ITA 2007 and TSEM9860).

It will then be effective as from the date of signing (section 837(4) ITA 2007).

2.2 Tax avoidance scheme using manufactured overseas dividends

The First-tier Tax Tribunal has considered the case of Peter Chappell and a tax avoidance scheme disclosed in his 2005/06 tax return, which was acknowledged to have no commercial purpose, and which HMRC had identified had been used by another 305 taxpayers. The case was decided against Mr Chappell, and in reaching that conclusion the Tribunal used purposive interpretation (amongst other things) to effectively ignore the specific language in regulation 2B(3) of SI1993/2004 while recognising it was not their place to correct the failings of Parliament.

Mr Chappell was managing director of an investment bank Exotix Ltd and for 2005/06 had total income (before the tax avoidance arrangement) of £553,321. He entered into an arrangement costing him a net £18,000 whereby he borrowed £6,377,000 of loan notes issued by a BVI company and sold them after four days for £6,373,000 (being taxable on £4,164 of interest on a time apportioned basis). Two days later (under the terms of the borrowed loan arrangement) he paid interest amounting to £4,164 and £298,959 which were deemed to be manufactured overseas dividends on which no withholding tax was due. He then re-acquired the loan notes (with a nominal value of £6,377k) the following day for £6,073,000 and settled the account with the lender of the loan notes.

It was contended that as the...