Private client review for April
The implementation of the latest extension to the trust registration service is delayed by IT issues. ‘Tax day’ delivered less than anticipated but it did include draft technical guidance on measures to strengthen sanctions against promoters or enablers of tax avoidance schemes, and the increase in corporation tax could reduce the attractiveness of family investment companies. HMRC is not able to charge retrospective penalties, the First-tier Tribunal finds in D&G Ditton. Land does not need to be necessary for the reasonable enjoyment of a property to qualify as a garden for SDLT purposes, finds the Upper Tribunal in Hyman.
Trust registration service: implementation delayed
HMRC has provided welcome confirmation that the proposed extension of the trust registration service (TRS) to include certain non-taxable trusts, and to require those trusts which are currently registered to provide significant additional information, will be delayed by several months.
By way of background, as part of the implementation of the Fourth Money Laundering Directive, the UK introduced the TRS in 2017, as a result of which certain express trusts with UK tax liabilities were required to register. The implementation of the Fifth Money Laundering Directive in the UK has greatly expanded the trust registration requirements, as a result of which a significantly wider pool of trusts, including certain non-tax paying trusts, will be required to register. Additionally, the scope of information required to be provided by those trusts already registered with the TRS has been expanded.
The implementing legislation provides for these additional non-tax paying trusts to register, and for the additional information in respect of already registered trusts to be provided, by 10 March 2022. However, HMRC has encountered delays in upgrading their IT system. As a result, HMRC has confirmed that the deadline for registration has been extended to at least 12 months after the IT system has been upgraded. HMRC anticipates that the IT system will be in place by the summer of 2021, meaning that the registration deadline is likely to be the summer of 2022. It should be noted that trusts required to register under the Fourth Money Laundering Directive must still do so in line with previous requirements, although the additional information required by the Fifth Money Laundering Directive in respect of those trusts will not need to be registered until the extended registration deadline.
Tax day: highlights and lowlights
The first ‘tax day’ was arguably something of a damp squib. Numerous consultations were published, but details on, or an indication of, potential future changes to inheritance tax and capital gains tax that some had expected were absent. However, it did include a consultation on the promoters of tax avoidance and draft technical guidance on Finance (No. 2) Bill 2021 measures being made to strengthen sanctions against promoters or enablers of tax avoidance schemes.
The draft guidance covers changes to anti-avoidance regimes including DOTAS, POTAS and the GAAR. It will be finalised and published when the Bill becomes law.
The key proposals include additional HMRC powers, stronger sanctions and the ability to stop business operations used by promoters. The draft guidance addresses the following in more detail:
- notices informing suspected promoters and other suppliers of a scheme that HMRC may allocate a reference number to that scheme to be provided to clients and parties to the scheme;
- stop notices which HMRC may issue to promoters of tax avoidance schemes in a wide range of circumstances (with penalties for failure to comply) in order to stop the sale of relevant schemes at source, and publication of the names of promoters and scheme details; and
- an extension of POTAS sanctions to individuals who are members of a promotion structure. The guidance discusses new provisions to address activities of promoters that aim to organise the promotion business in ways that seek to frustrate the application of POTAS. This includes splitting aspects of the promotion activity across a number of entities, and basing the promoter in a non-UK jurisdiction with UK-based intermediaries marketing or managing the schemes on its behalf.
The future of family investment companies
It is worth considering the impact of the increased corporation tax (CT) rates announced in the March Budget on family investment companies (FICs).
FICs may become less attractive in future given the increase in the headline rate of CT from 19% to 25% from 1 April 2023. The 25% rate will apply to companies with profits over £250,000, and whilst there will be a ‘small profits rate’ of 19% for companies with profits up to £50,000 this will not be available to close investment-holding companies.
An amount of marginal relief will be available for companies with profits between £50,000 and under £250,000, which will provide a gradual increase in the CT rate. However, many FICs are likely to be subject to higher CT rates from 1 April 2023.
Investors may in future be deterred from structuring investment assets through FICs. However, as most types of dividend income received by FICs from underlying investment portfolios are currently exempt from tax, the impact is likely to vary from company to company. Even with increased CT rates, investment returns held in a FIC should generally be taxed at lower rates than would be the case if they were held personally by UK residents. Further, in the event that capital gains tax rates also rise in the future, FICs may remain popular despite increased CT rates.
Finally, some may remember a Financial Times article (‘Secretive UK tax unit homes in on rich families’ (Stefan Wagstyl), 21 February 2020) that raised alarm bells over a specific HMRC team investigating FICs. This, in combination with increased CT rates, might prompt concern that FICs are in HMRC’s line of sight. However, we expect FICs will remain popular estate planning tools, at least in the short term.
HMRC pays the penalty
The recent First-tier Tribunal (FTT) decision in D & G Ditton Ltd v HMRC  UKFTT 489 (TC) supports the earlier FTT decision of Heacham Holidays Ltd v HMRC  UKFTT 406 (TC) in respect of HMRC seeking to charge retrospective penalties.
The Ditton case related to property which fell within the annual tax on enveloped dwellings (ATED) regime. The taxpayer purchased a property in 2014 which, at the time of purchase, did not fall within the scope of ATED. From 1 April 2016, the threshold for ATED was reduced, as a result of which, unbeknownst to the taxpayer, the taxpayer’s property fell within the scope of tax, and he was therefore required to file an ATED return each year.
The filing date for an ATED return is 30 April of the ATED year to which that return relates. The taxpayer’s filing date for his ATED return for the ATED year ending 31 March 2019 was therefore 30 April 2018. Unaware of his obligation to file an ATED return, the taxpayer only filed his ATED return on 21 March 2019 after becoming aware of the requirement, which was 325 days later than required. HMRC issued three separate penalties in respect of the late filing:
- On 9 December 2019, a penalty of £100 for failure to file the ATED return by the required date.
- On 23 January 2020, a notice of penalty assessment under paragraph 4, Sch. 55 FA 2009 in the amount of £900, calculated at £10 per day for 90 days, being the maximum amount of daily penalty allowed in respect of a payment which remains outstanding after a period of 3 months beginning with the penalty date.
- On 23 January 2020, a penalty of £300, as the return was still outstanding after a period of 6 months from the penalty date.
In the penalty notice of 9 December 2019, HMRC warned of daily penalties if the return had not been filed after three months; in addition, daily penalties of £10 would be chargeable if the return was not filed by 1 August 2018, being three months after the filing date.
The taxpayer sought to argue that the penalties should not be charged, on the basis that: it was unaware of the requirement to file an ATED return; there was no liability to tax in any event; and it had made a significant contribution to the UK economy and HMRC should therefore show some leniency.
The FTT explained that the burden of proof lay with HMRC to prove that the penalties were correctly calculated and charged. Once that has been established, the burden falls on the taxpayer to prove that it had a ‘reasonable excuse’ for the late filing.
In light of the facts, the FTT concluded that the taxpayer’s arguments did not constitute a reasonable excuse. HMRC stressed that ignorance of the law is not a reasonable excuse, particularly when not concerned with specialist or obscure areas of tax law. As a result, the FTT concluded that the penalties of £100 and £300 were properly charged.
In respect of the daily penalty charge, the FTT concluded that it had not been correctly issued. In particular, one of the conditions for a daily penalty to be payable is that HMRC is required to give notice, specifying the date from which the penalty is payable. In the FTT’s view, HMRC’s notice of 9 December 2019, which warned of daily penalties being applied if the return was not filed by 1 August 2018 (a year and three months before the taxpayer was given notice of the daily penalty), did not constitute the required notice. The notice of 9 December 2019 gave a ‘warning’ to the taxpayer in respect of the daily penalty. However, the notice was retrospective, as it informed the taxpayer of a daily penalty which had already accrued more than a year prior to the notice, and it did not afford the taxpayer the ability to take remedial action during the daily penalty period. As such, the daily penalty was struck down by the court.
Hyman: when is land residential for SDLT?
The Upper Tribunal (UT) case of Hyman and others v HMRC  UKUT 68 (TCC) has held that land does not need to be necessary for the reasonable enjoyment of a property (having regard to its size and nature) in order to qualify as a garden or grounds for SDLT.
The question was whether ‘extra’ land sold with a residential property forms part of its garden or grounds, and so is treated as residential property for the purpose of SDLT rates payable on purchase. The rates payable on the total purchase consideration where non-residential property is involved are lower, which explains the taxpayers’ concerns; had they won, the Hymans alone would have saved some £35,000.
The taxpayers variously contended that land including a barn, bridleway or meadow was not residential property for the purposes of FA 2003 s 116, which defines ‘residential property’ for SDLT purposes.
The FTT had already held that ‘grounds’ has a wide meaning. Grounds do not need to be used for any particular purpose and can be allowed to grow wild, whilst it is irrelevant if the gardens and grounds are separated from each other by hedges or fences or the land is crossed by public rights of way.
On appeal, the taxpayer referred to two statements of practice as well as pre-2019 sections of HMRC’s SDLT manual. The former stated that HMRC would apply a test similar to that for capital gains tax relief for main residences, and so land would include that which is needed for the reasonable enjoyment of the dwelling having regard to its size and nature. HMRC’s SDLT Manual (since updated) also stated that ‘garden or grounds’ would include such land.
However, the UT concluded that s 116 does not impose or even hint at a requirement that land can only be a garden or grounds of a dwelling if needed for its reasonable enjoyment. Further, HMRC guidance is non-statutory and enjoys no particular legal status. There is no presumption that it is correct, and ultimately a court or tribunal has to determine what the legislation means.
The UT found the pre-2019 guidance was wholly unpersuasive, and the test for main residence relief was stated in quite different terms (with, for example, an express limitation to a permitted area). It also commented on and agreed with current guidance in HMRC’s SDLT Manual at SDLTM00440 and SDLTM00455 concerning the language of s 116.
Advisers must take care with property purchases involving mixed-use rates of SDLT, and remember that HMRC guidance is just that: guidance.
This article was first published by Tax Journal.