Weekly Tax Update - Monday 6 February 2012

1. GENERAL NEWS

   1.1. Conditions to be satisfied for a discovery assessment to be valid

   Anthony While succeeded in overturning a discovery assessment made by HMRC, arising from his receipt of a substantial award for damages from his former employer for an incorrect reference and wrongful dismissal.

   When Mr While was a director of an insurance company he ran up debts with HMRC in excess of £150,000, but agreed a repayment plan to settle the liability. This was interrupted in 1992 when he was dismissed. As a result of an Industrial Tribunal hearing and then a High Court claim, Mr While received in excess of £354,000 as compensation and damages. The High Court decision stated that the amount to be received by Mr While was net of all taxes. However the Court (and the advisers to the Court who prepared the schedule of loss) had omitted to take account of the fact that the award in excess of £30,000 should be subject to income tax. The award had not been declared on Mr While's 1998/99 tax return.

   Mr While's 1998/99 was enquired into and a written record of an April 2000 meeting between Mr While, his accountants and an HMRC officer was prepared evidencing discussion of the fact that Mr While had received a large award and how those funds had been spent. The enquiry was closed in January 2001, but HMRC issued a discovery assessment in respect of income tax on the damages (exceeding £94,000) in January 2005.

   It was accepted that Mr While was held not to be fraudulent. It was also accepted (the case-law background to this issue being set out in Charlton and others v HMRC [2011] UKFTT 467 (TC)), that HMRC could raise a discovery assessment where a new inspector reviewed a case and made a different decision from the earlier inspector, without the need for any new evidence.

   Mr While had sent a copy of the newspaper cutting of the outcome of the High Court case to HMRC enforcement office, but there was no evidence that this was passed on to the officer undertaking the enquiry into the 1998/99 return. The note to the April 2000 meeting was held to be evidence of which HMRC was already aware, but the newspaper cutting was not. In Mr While's circumstances the Tribunal noted that the impact of the £30,000 income tax exemption limit had been overlooked by a number of professionals and that it was reasonable for Mr Wild to understand from the High Court's comment that the damages were determined "net of all deductions" that there would be no tax to pay. However the Tribunal concluded that the hypothetical reasonable inspector would have been aware of sufficient information regarding the award and the £30,000 income tax exemption limit, so as to be able to raise an assessment within the normal enquiry window.

   Mr While's accountant prepared his tax return and it could therefore have been held that the return was negligently filed for the purposes of TMA s29(4) as a result of someone acting on Mr While's behalf. Although Mr While's accountant was aware of the awarded damages, Mr While had not advised him that any part of those damages represented taxable income. The accountant submitted that if he had been made so aware, then he would have included the income on the tax return. The Tribunal agreed with this view and found that the accountant was not negligent in preparing the return on behalf of Mr While.

   The Tribunal therefore concluded that as Mr While had not been fraudulent or negligent in submitting his return, and as the necessary information to raise the assessment was in HMRCs possession within the normal enquiry window, the requirements for making a discovery assessment were not met.

   www.bailii.org/uk/cases/UKFTT/TC/2012/TC01755.html

   1.2. Amending a tax return

   Since April 2010, once the normal period for amending a tax return has passed, HMRC is under no obligation to correct a claim or mistake in a tax return (TMA Sch1AB para2(2) and FA1998 Sch18 para51(A)2). Neither can an application to amend a claim be made once the return is under enquiry.

   However when an enquiry is closed, it may be possible to make, revoke or vary a claim, election or notice that could have originally been made, in order to mitigate the amount of any extra tax arising out of the enquiry, if the claim is made within 12 months of the cessation of the enquiry (TMA s42A – s42C) or 12 months of the end of the accounting period in with the closure notice was issued (FA1998 Sch18 paras 61-64).

   1.3. Implementation & related work on HMRC powers, deterrents and safeguards

   HMRC has updated its table setting out the implementation of legislation and related work on HMRC powers deterrents and safeguards.

   www.hmrc.gov.uk/about/road-map.pdf

   1.4. Official rate of interest

   The official rate that has applied since 6 April 2010 is 4.00%. HMRC has announced that this rate is unchanged for the 2012-13 tax year, subject to review in the event of significant rate changes.

2. PRIVATE CLIENTS

   2.1. CGT Entrepreneurs' Relief

   ICAEW Tax Faculty has issued a Taxguide covering a number of technical queries on the operation of ER that were put to HMRC through the Capital Gains Tax Liaison Group. It is understood that the HMRC guidance on ER (which can be found at CG63950 et seq of the HMRC Capital Gains Manual) will be extended to cover most, if not all, of the issues raised in this guidance.

   As further queries are raised and clarified, Tax Faculty will issue updates.

   2.2. Reminder of time limits for EIS claims

   The time limit for an EIS investor to claim relief has not been affected by the reduction to the general time limit for making claims. The time limit therefore remains as five years from the 31 January following the tax year in which either the subscription was made, or the company has traded for four months, whichever is later. This time limit for a claim for EIS relief is specifically prescribed in the legislation (under ITA 2007, s 202), which has not been changed and therefore is not affected by the general time limit for making claims having reduced from five years and 11 months to four years.

   In 2010 we queried the position regarding the time limit for a claim for deferring a capital gain on the back of an EIS investment. The then recently issued HMRC helpsheet referred to the latest time for making a deferral relief claim as four years after the tax year in which the shares are issued. The correct time limit is given in the current version of Helpsheet HS297, namely no later than the fifth anniversary of the normal filing date for the tax year in which the shares are issued.

   Please note however that for claims in respect of VCT relief the investor must claim relief within four years from the end of the tax year in which the investment was made.

3. PAYE AND EMPLOYMENT MATTERS

   3.1. Kuehne & Nagel Drinks Logistics Ltd and compensation for loss of pension rights

   Kuehne & Nagel Drinks Logistics Ltd has lost its appeal against the Upper Tribunal's decision that the £4,800 they gave to each of 2,000 employees as part of TUPE arrangement for them to transfer their employment contracts to the new company. The Court of Appeal held that the Upper Tribunal had correctly determined the payments were remuneration subject to tax (as they related to a payment to compensate for reduced pension rights and were made as part of a bargain for the employees not to take strike action) and not exempt termination payments. The Upper Tribunal case was covered in item 4.6 of Informal of 10 January 2011.

   www.bailii.org/ew/cases/EWCA/Civ/2012/34.html

   3.2. NIC rates and thresholds for 2012/13

   HMRC has published draft regulations and an order setting out the National Insurance contributions rates, thresholds and limits for the 2012/13 tax year. From 2012/13 the basis for indexation of certain national insurance contribution (NICs) rates, limits and thresholds will be in line with the Consumer Price Index (CPI) instead of the Retail Price Index (RPI).

   www.hmrc.gov.uk/tiin/nics-rerating.pdf

   www.hmrc.gov.uk/drafts/index.htm

   3.3. Integrating the operation of income tax and NICs

   HM Treasury has published the minutes of meetings held in December 2011 by the working groups set up to consider various aspects of the planned integration of the operation of income tax and NICs.

   Working group 1 is considering options to remove misalignments between the treatment of earnings and in their latest meeting they considered business expenses, benefits in kind, pension contributions, termination payments, pecuniary liabilities, payroll giving, thresholds, salary sacrifice and tips.

   www.hm-treasury.gov.uk/d/condoc_it_nics_wg1_minutes151211.pdf

   Working group 2 is considering options to make the calculation and operation of NICs more like income tax.

   www.hm-treasury.gov.uk/d/condoc_it_nics_wg2_minutes141211.pdf

4. BUSINESS TAX

   4.1. EIS property development and whether funds raised were employed in time

   The First Tier Tribunal has rejected a claim from The Benson Partnership Limited against HMRC's withdrawal of EIS relief. The case is of interest for assessing where the boundary lies between what is and is not a property development business excluded from EIS relief, and also on whether the funds have been committed or earmarked and therefore employed in the business within the required timescale.

   The company was incorporated on 17 December 2002 to provide consultancy and advisory...