Tax Update: A Round-Up of Recent Tax Issues - Monday 7 February 2011

1. GENERAL NEWS

1.1. New penalties to tackle offshore tax evasion

HMRC has announced new penalties for offshore non-compliance.

These new penalties come into force from 6 April 2011 and apply to Income Tax and Capital Gains Tax. The first Self Assessment returns affected will be for the 2011-12 tax year, with paper returns due to be filed by 31 October 2012, and electronic returns by 31 January 2013.

The legislation can be found in Schedule 10 of Finance Act 2010.

How it works

The new penalty is an enhancement of the penalties for

failure to notify inaccuracy on a return failure to file a return on time Under the new legislation, these penalties will be linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country will be higher.

There will be three new levels of penalty:

where the income or gain arises in a territory in 'category 1', the penalty rate will be the same as under existing legislation where the income or gain arises in a territory in 'category 2', the penalty rate will be 1.5 times that in existing legislation - up to 150 per cent of tax where the income or gain arises in a territory in 'category 3', the penalty rate will be double that in existing legislation - up to 200 per cent of tax The Treasury has laid legislation before Parliament which describes which territories are in 'category 1' and 'category 3' – see link below. All other territories (except the UK) are in 'category 2'.

www.hmrc.gov.uk/news/territories-category.htm

All existing safeguards will still apply. There will be no penalty if a person can demonstrate they have taken reasonable care to get their tax right or have a reasonable excuse for a failure to notify taxable income.

Where penalties are due, HMRC can reduce them depending on how helpful the individual is in assisting it to establish the correct amount of tax due. The largest reductions will be for unprompted disclosures. Unprompted means when you tell HMRC about a tax issue you have no reason to believe we have discovered or are about to discover it.

www.hmrc.gov.uk/news/offshore-penalties.htm

1.2. EU Consultation on taxation of cross border dividend payments

The European Commission has opened a public consultation on taxation of cross-border dividend payments to individual or portfolio investors.

Taxation of cross-border dividend payments can lead to double taxation in different ways: Juridical double taxation arises where the outbound dividend paid by a company to a foreign shareholder is subject to a withholding tax in the source state and the payment is again taxed as the shareholder's income in his state of residence. Economic double taxation arises where corporate tax has to be paid on the profit of a company and taxes are again levied on the dividend paid to the shareholder. According to ECJ case-law, both situations are not necessarily contrary to EU law. Also double tax conventions and the European Parent-Subsidiary Directive cannot completely resolve the issue as they leave many cases uncovered.

To resolve the described problems, the Commission presents seven different options:

abolition of withholding taxes on cross-border dividend payments state of residence grants full credit for withholding taxes levied in the source state net rather than gross taxation in the source member state EU-wide reduced withholding tax rate with information exchange limitation of both source and resident taxation of dividend income neither withholding tax in the State of source, nor taxation of foreign source income in the State of residence source state levies withholding tax at the tax rate of the State of residence of the recipient portfolio investor. http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/withholding_taxes/wht_public_consutation_en.pdf

2. PRIVATE CLIENTS

2.1. TC00913: Lyle Dicker Grace (First-tier Tribunal)

INCOME TAX – Appellant a British Airways pilot who was present for part of year in UK for purpose of his employment - Appellant owned and occupied two properties one in the UK and one in South Africa - whether Appellant resident and ordinarily resident in the UK

The background to the case of Mr Grace and his UK residence status has been well documented and reported on during its long process through the legal system.

Briefly, Mr Grace set up home in Cape Town while continuing his employment with British Airways and retaining a property in the UK. In 2004 HMRC issued a notice of determination, based on its view that he was ordinarily resident in the UK for the six years from 1997/98 to 2002/03 inclusive. Mr Grace appealed this determination on the grounds he had ceased to be resident in the UK from September 1997 and this appeal was accepted by the Special Commissioner in 2007. HMRC appealed this decision and the High Court concluded that the Special Commissioner had made errors of law and, further, that the only possible conclusion from the primary facts found was that Mr Grace was resident in the UK.

Mr Grace appealed this decision and the Court of Appeal unanimous judgment was that the Special Commissioner had mis-directed herself but did not agree with High Court that there was only one possible conclusion to the question of residence based on the primary facts as found at first instance. The Court of Appeal therefore remitted the case [back] to the First-tier Tribunal (Tax Chamber) which had by then replaced the Special Commissioners.

The First-tier Tribunal has now heard the case and reported its findings.

The decision explains that it was for Mr Grace to demonstrate to the Tribunal that, having been resident in the UK for some years up to September 1997, he then ceased to be resident here.

The Tribunal judge did not consider that Mr Grace had demonstrated a sufficient break. The time Mr Grace spent in the UK was a little less than half the time before September 1997 (bearing in mind that time now spent in Cape Town would before September 1997 have been spent in the UK). But this was found not enough to amount to a definite break with the UK. It was found that Mr Grace did create new ties elsewhere but he did not sever his main ties (employment and house) with the UK. Taking into account all factors, but giving greatest weight to his employment and home here in the UK and the amount of time actually spent here together with the frequency of his short visits, the Tribunal judge was in agreement with the High Court judge that in September 1997 Mr Grace went from being a person resident in one country to being a person resident in two.

The conclusion was that Mr Grace was resident in the UK for the 6 years in issue (1997-2003). It follows, as it was both conceded and as found Mr Grace did have a settled purpose to his residence in the UK, that he was also ordinarily resident here.

Further commentary will follow looking at some of the reasons behind this decision.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j5281/TC00913.doc

2.2. TC00917: A.W. Kerr...