Private client review for November 2021

02 December 2021

In this article, the November monthly update review for Tax Journal, Edward Reed and Georgia Rawlinson look at a number of private client developments.

Recent cases considered in this month’s review are: the Court of Appeal’s decision in Fisher, which has significant ramifications for all professionals advising in relation to the transfer of assets abroad (TOAA) regime; Mattu concerning tax-related penalties which has some interesting views on the ambit of the settlements code and when the motive defence under the TOAA may not be available; Puttock, a helpful reminder of the quirk in penalties for late submission between paper and online filings; and the Upper Tribunal decision in Mitchell, which confirms that documents provided to HMRC concerning one taxpayer could be disclosed to another taxpayer to assist their appeal, provided they could be relevant. In Budget news, legislation is to be introduced to counter the effect of Wilkes on discovery assessments and the HICBC, and a consultation was announced on corporate redomiciliation.

Fisher: transfer of assets abroad

Last month, the Court of Appeal handed down its judgment in the long-running case of HMRC v Fisher [2021] EWCA Civ 1438 which has significant ramifications for those advising on the transfer of assets abroad (TOAA) regime (ITA 2007 Part 13 Chapter 2). The case involves three members of the Fisher family and the movement of their telebetting business to Gibraltar in the late 1990s in the context of changing UK gambling regulatory rules.

The TOAA regime aims to counteract tax avoidance achieved by means of a "relevant transaction", whereby income becomes payable to a "person abroad" by virtue of a "transfer of assets" (whether or not taken together with one or more ‘associated operations’). The regime can operate to treat income arising to the person abroad as belonging for UK tax purposes to any UK resident individual responsible for the original transfer of assets to a non-UK person.

The Court of Appeal’s decision, which overturned the March 2020 decision of the Upper Tribunal, considers six key areas: the quasi-transferor issue; the actual avoidance issue; the motive defence issue; the EU law issue; the remoteness issue; and the discovery issue. In doing so, the following key points were made:

  • an individual can be caught by the TOAA regime by virtue of being a "quasi-transferor". In other words, there is no need for the individual to make a direct transfer to be caught by the rules, provided they "procured" the transfer. In this case, this included a minority shareholder who, along with other shareholders, procured the transfer abroad by a UK company. The consequence of this is that a quasi-transferor could be within the scope of the TOAA regime where a UK company transfers assets to a non-UK company;
  • to "procure" a transfer abroad involves an element of positive action on the part of the individual; passively allowing an action will not be sufficient. Similarly, an individual will not have procured a transfer by virtue of being in a position to prevent a transfer (for example, as controlling shareholder) but failing to do so;
  • the TOAA regime will not apply to a director with no shares in the company making the transfer: they will not be a quasi-transferor for these purposes, as they will have acted exclusively as a company officer, not for themselves;
  • the motive defence (which applies where the transfer has no tax avoidance purpose) may not be available to a transferor with no tax avoidance motive if there is a joint transferor who does have a tax avoidance purpose; and
  • Phillips LJ gave an important dissenting judgment, stating that it is wrong in principle to say that a minority shareholder can procure a transfer by the company simply by voting in favour of (or otherwise supporting) the relevant transfer. On their own, a minority shareholder has no power to procure an outcome by the company.

Given the important consequences of this case and the history of this litigation to date, it is likely that the decision will be appealed to the Supreme Court.

Mattu: how reasonable was HMRC?

HMRC v S Mattu [2021] UKUT 245 (TCC) concerned an application by HMRC to apply a tax-related penalty under FA 2008 Sch 36 para 50 on Mr Mattu for alleged failure to comply with an information notice.

Under para 50, the burden is on HMRC to demonstrate that the statutory conditions for the imposition of the penalty have been met. The taxpayer argued that they had not.

The UT agreed with all of HMRC’s arguments and granted a penalty under para 50. The following points are worth noting, some of which may come as a surprise to many practitioners:

  • the UT was satisfied that the respondent had possession, access or de facto control of the documents and information sought by HMRC in the information notice, and had failed to provide this information to HMRC. This extended to information held by the professional trustee of the relevant trust in question where the respondent had the ability to obtain documents from the trustee;
  • where a discovery assessment is raised against a taxpayer and they did not originally claim the benefit of the remittance basis for the chargeable period in question, the taxpayer cannot subsequently claim the benefit of the remittance basis. This is because the rules that allow a taxpayer to benefit from the usual reliefs and allowances in the context of a discovery assessment do not apply to the remittance basis;
  • the settlements code (ITTOIA 2005 Part 5 Chapter 5) applies to income of a settlement. For these purposes, income of a settlement can include income directly and indirectly received by the settlement. This means that the settlements code can apply both to trust-level income and income of underlying companies that the trustees own; and
  • although the individual was non-UK resident when the trust in question was created, given his history of UK residence and ties to the UK it was reasonable to infer that the individual had been motivated by UK tax considerations when creating the trust. So, he would not be able to benefit from the motive defence for the purposes of the TOAA regime (ITA 2007 Part 13 Chapter 2).

The UT’s decision is not a definitive ruling on the facts; it simply ruled that the HMRC officer in question was reasonable to take the views set out above in determining that the respondent’s failure to comply with the information notice resulted in the amount of tax the respondent paid (or is likely to pay) being significantly less than it would otherwise have been. The UT was not, however, determining that these views were necessarily correct, which may be something that the First-tier Tribunal (FTT) is likely to have to answer in due course.

Discoveries in the Budget

Whilst no news in the tax sphere is more often than not good news in a Budget, sometimes the published papers reveal developments which don’t merit front page treatment in a tabloid but are worth noting, if nothing else because they highlight HMRC’s ambivalent attitude towards the courts. Our recent articles have focused on a stream of discovery assessment decisions, including the UT’s June 2021 decision in Wilkes against HMRC on the topic of the high income child benefit charge (HICBC). The UT held both that TMA 1970 s 29(1)(a) did not permit HICBC charges to be the subject of a discovery and that s 29 could not be read purposively to correct that. HMRC have appealed the decision to the Appeal Court. The Budget papers reveal that HMRC regard the UT’s decision as being wrong; HMRC is concerned with the ramifications relating to similar charges, such as those designed to correct over-claimed gift aid and certain analogous pension-related charges. The Finance Bill includes a retroactive ‘technical clarification’ to implement what HMRC says s 29 meant all along; in addition to amending ITA 2007 s 30, it will also change the rules on notification of chargeability in TMA 1970 s 7. Appeals already filed will be heard in the normal way, but otherwise the purpose of the change is to neutralise any unresolved cases and kill off any costs of litigation.

Consultation on redomiciling companies to the UK

Currently, a non-UK company wishing to become domiciled in the UK cannot change its governing law to UK company law, nor can it end the oversight of its old jurisdiction whilst retaining continuity of corporate identity. Instead, it must create a new UK entity to which it transfers assets, or establish a new UK holding company which then acquires shares in the non-UK company. Such reorganisations can involve substantial cost and complexity for the non-UK company and its shareholders.

As a workaround, a foreign company can become UK tax resident by exercising central management and control here. But this can result in dual-resident companies which are subject to tax and legal requirements in two jurisdictions: the UK and their original jurisdiction of incorporation. In some cases, a tax treaty between the UK and the other jurisdiction can help to eliminate double taxation that might otherwise arise, but this can result in some complexity from a compliance perspective.

As announced in the Budget, the government has published a consultation on changing UK law to allow for corporate redomiciliation. Such a change would bring the UK in line with several other common law jurisdictions, including Canada, New Zealand, Australia, Singapore, and a number of US states. A redomiciliation is a simpler and more complete means of relocating a company. It would enable a foreign-incorporated company to change its place of incorporation to the UK (and cease to be governed by the laws of its original home state) while maintaining its legal identity as a corporate body. The lack of this feature in UK law arguably represents a competitive disadvantage, so it is encouraging to see the government looking seriously at addressing this. Responses to the consultation are invited by 7 January 2022. 

Puttock: late filing penalties reduced due to HMRC failure

This recent case of Puttock v HMRC [2021] UKFTT 349 (TC) is a reminder of the easily overlooked quirk that HMRC penalties are calculated depending on whether the taxpayer filed their return electronically or by paper return. The due date for filing is 31 October (for a paper return) or 31 January (for an electronic return) following the tax year.

In this case, the taxpayer contacted HMRC, having discovered that penalties were being charged. He requested an additional copy of the tax return, and HMRC sent a paper return which the taxpayer filed nine days later. The HMRC adviser had not suggested that the taxpayer file an electronic return instead to reduce penalties, nor informed him of the difference in penalty calculation.

The FTT adjusted the penalties to put the taxpayer in the position they would have been in had they filed an electronic return on the same date they filed the paper return. The taxpayer’s other reasons for late filing (which included difficulty in obtaining information and reliance on their agent) were not taken as reasonable excuses.

Mitchell: disclosure of documents

In Mitchell and another v HMRC [2021] UKUT 250 (TCC), the UT upheld the FTT’s decision that documents provided to HMRC concerning one taxpayer could be disclosed to another taxpayer to assist their appeal, provided they could be relevant. HMRC’s COP 9 guidance makes clear it can use information a taxpayer provides in appeal proceedings or disclose it to other organisations where appropriate and lawful. The UT decision demonstrates the broad application of these powers.

HMRC had issued personal liability notices to two shareholders (M and B), on the basis that they were responsible for deliberate inaccuracies in their companies’ tax affairs. HMRC’s statement of case referred to previous investigations into M’s tax affairs. B asked HMRC to disclose to him documents relating to these, but M objected. HMRC applied to the FTT for a direction permitting them to disclose the documents to B. M applied asking for the documents to be excluded from evidence. The parties had agreed to classify the documents as various levels of confidentiality. The FTT allowed both applications in relation to some documents, but not others. M and B both appealed, but the UT upheld the FTT decision.

The UT struck a balance between privacy and relevance, as only some documents were disclosed: irrelevant documents were excluded. Of the relevant evidence, some was excluded where the relevant material came with significant irrelevant and prejudicial material.