Weekly Tax Update - Monday 13 January 2014

1 GENERAL NEWS

1.1 Reasonable excuse case - with 'special circumstances'

The First-tier Tribunal has recently considered the case of Derren Urwin.

This case considered an appeal against a surcharge of £429.78 levied by HMRC for the late payment of income tax of £8,595.79 for the year ending 5 April 2010, which arose due to an unusual and unexpected PAYE underpayment. Interestingly, not only was the appeal allowed on the grounds of reasonable excuse because it was impossible for the taxpayer to pay on time, the tribunal stated that had they not overturned the case on these grounds then they would have overturned it on that basis that there were special circumstances. The tribunal commented that the law relating to the particular circumstances is complex and may be deficient.

As stated in the decision, paragraphs 15 to 17:

'15. In the Tribunal's view it was understandable that the appellant did not realise that the PAYE deductions by his employer had created a shortfall that could not be collected by adjustment of his tax code. In previous years it had always been possible to collect any shortfall by adjustment of his tax code. When he was sent a return to complete the deadline dates advised on it had already passed. The law on when payment is due in such circumstances is so complex that HMRC have quoted two different dates. In fact it may be that the law is deficient in not adequately covering the situation that the appellant was in. The appellant was thus in a position that it was impossible for him to pay on time. Therefore in the Tribunal's view the appellant has established that he had reasonable excuse for the late payment of the tax due.

16. For all the above reasons the appeal is allowed.

17. Paragraph 9 of Schedule 56 of the Finance Act 2009 (Special Reduction) provides HMRC with discretion to reduce any penalty if they think it right to do so because of special circumstances. On the information held in this case HMRC did not consider there were any special circumstances which would allow them to reduce the penalty. In the Tribunal's view had their not been other reasons by which the appeal was allowed they would have overturned that decision. The Tribunal considers that there were special circumstances that applied. A tax return was not issued to the appellant until 22 August 2012 which is well after the deadline date for payment of tax for the year ending 5 April 2010 and so the guidance in respect of deadline dates would not have assisted the appellant. In effect it was advising him that even if he was extraordinarily diligent and completed the return and sent it back by return he was already late. No alternative date was provided to him. The law is complex in this area and may be deficient in not making provision for the circumstances the appellant was in. Therefore the Tribunal considers that there were special circumstances in this case.'

www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKFTT/TC/2014/TC03145.html&query=DERREN+and+URWIN&method=boolean

2 PRIVATE CLIENT

2.1 Inheritance Tax BPR and LLPs

The CIOT, ICAEW and STEP have produced some guidance, agreed with HMRC, relating to the availability of IHT business property relief on:

interests in partnerships and limited liability partnerships; and holdings of surplus cash by trading companies. This is available on the CIOT website at the following link:

www.tax.org.uk/tax-policy/newsdesk/2014/TaxGuide_IHT_BPR_LLP.

The guidance addresses the availability of BPR where company shares are held through a partnership or LLP, where relief would be available if held directly by an individual.

The possibility that BPR is not due, if correct, would appear to be at variance with the policy rationale behind the introduction of BPR, and ICAEW, CIOT and STEP consider that this issue should be addressed. It is assumed that this anomaly has arisen because BPR legislation has not yet been reviewed despite partnerships and LLPs becoming more widely accepted commercial alternatives to a corporation which was the main holding vehicle used when the Inheritance Tax Act was introduced.'

3 IHT AND TRUSTS

3.1 IHT and Excepted Estates Regulations

HMRC has published for information and external comment a draft Statutory Instrument making amendments to the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004.

The changes in the draft Statutory Instrument make consequential amendments to the regulations to ensure that the treatment of liabilities is consistent with provisions introduced by FA 2013 which restrict the deduction of liabilities for Inheritance Tax purposes in some circumstances.

The FA 2013 provisions restrict the extent to which liabilities may be deducted in arriving at the value transferred in a number of circumstances. A deduction for a liability will be disallowed if the borrowed money has been used to acquire 'excluded property' (broadly, property which is situated outside the UK and which belongs to, or was settled by, a non- UK domiciled individual so is not chargeable to IHT), or if the liability has not been repaid out of the assets in the estate, unless certain conditions apply. In addition, restrictions apply where the debt has been incurred to acquire assets on which an IHT relief such as business, agricultural property and woodlands relief is due.

The Excepted Estates Regulations broadly exempt estates from having to deliver an IHT account where there is no IHT to pay because the gross value of the estate including certain specified transfers and exempt transfers does not exceed £1 million, and the net chargeable value of the estate after deducting liabilities and the exemption for transfers to a spouse, civil partner or charity does not exceed the IHT threshold. The regulations however contain a formula, which includes a reference to the total liabilities of the estate ('C' in Regulation 4), for calculating the amount which has to be below the threshold for the estate to qualify as an exempt estate.

To ensure that the treatment of liabilities for the purposes of the Excepted Estates Regulations is consistent with the provisions introduced by FA 2013, it is proposed that a liability should not be included in the total liabilities of the estate (amount 'C' in the formula in Regulation 4) to the extent that it is disallowed as a deduction by those new provisions.

www.hmrc.gov.uk/drafts/iht-draftsi.htm

4 PAYE AND EMPLOYMENT MATTERS

4.1 HMRC's Employment Related Securities Bulletin

In addition to requesting input on the draft legislation for Finance Bill 2014 concerning various share scheme arrangements, HMRC's December 2013 Employment Related Securities Bulletin covers the following points:

Transition...