Private client review for February
The OECD has published new guidance on the interpretation of double tax treaties in the context of lockdown restrictions, followed by updated HMRC guidance on ‘exceptional’ days. Bitcoin owners looking to realise gains following the recent surge in values are reminded that the location of bitcoins for tax purposes matches the residence of the owner. In Fastklean, the FTT confirmed that open justice principles may be relied upon to grant a barrister access to previously unseen HMRC internal guidance. In Kennedy, HMRC successfully challenged a claim for entrepreneurs’ relief on the basis that the taxpayer was not an offcer or employee of the company or the trading group in question in the period leading up to the disposal.
Covid-19 travel restrictions and UK residence issues for overseas workday relief
Practitioners concerned about the multifaceted impact of the covid-19 lockdown restrictions on residence, taxation and compliance greeted with some relief the publication on 3 April 2020 of the measured OECD Secretariat guidance on the interpretation of double tax treaties in the context of lockdown restrictions. As those restrictions remain in place nearly a year later and as the individual guidance of different revenue authorities locally has proved less than sympathetic to various unusual, cross-border fact patterns that have emerged, the publication of a refreshed piece of guidance by the OECD Secretariat on 21 January 2021 is to be welcomed.
The tone of the 2020 guidance is perhaps best summed up by paragraph 36, which reads ‘because the covid-19 crisis is a period of major changes and an exceptional circumstance, in the short term tax administrations and competent authorities will have to consider a more normal period of time when assessing a person’s resident status’. In the real world of local tax compliance and where revenue raising has become critical, however, things are perhaps less straightforward: whilst a generalisation, it is not unfair to note that the greater emphasis from HMRC and its fellow authorities is on whether the taxpayer has (technically) been effectively ‘stranded’ (which until recently has been a comparatively rare occurrence).
The blog introducing the new guidance is promisingly titled ‘Towards increasing certainty in uncertain times: revising tax treaty guidance’. The guidance notes the unprecedented level of ‘dislocation’ in the lives of individuals and that such temporary disruption can have tax consequences for the individuals and the businesses for which they work.
Whilst the guidance is plainly aimed at how the treaties work as local situations evolve, the tone remains on the whole similar to April 2020 and largely constructive.
This January 2021 paper is badged as ‘updated’ guidance, clearly based on and designed to replace its predecessor. It considers a number of additional fact patterns that were not addressed in the early publication. In addition, it provides a welcome reference point for local guidance issued by a number of tax authorities in jurisdictions around the world. The abstract contains a careful warning to the effect that it is not trying to create double non-taxation and cannot replace the judgement of local tax administrations in determining factual circumstances. Regrettably, as a result, any taxpayer looking to find comfort in relation to issues such as teleworking from abroad is going to find cold comfort in this guidance.
Shortly after the OECD release, HMRC published updated guidance in its Residence, Domicile and Remittance Basis Manual at RDRM11005 and RDRM13200 et seq. These repay careful study, as they resume the theme of insisting on compulsion as a feature of an ‘exceptional’ day. The new guidance takes the trouble to remind taxpayers that the maximum number of days which can be excepted is 60; the text reiterates that this is ‘a limit, not an allowance or entitlement’ and sets out helpfully where the days can be discounted and where they cannot (for example, the work tie).
There are a number of (occasionally perhaps deliberately far-fetched) worked examples, a note on the impact of FCDO advice and an arguably pointed enumeration of what will normally not count as exceptional, such as weather or immigration driven delays, ‘life events’ and elective medical treatment.
Locating bitcoin and other cryptocurrencies
One bitcoin is currently worth approximately £34,000, several times more than its value of approximately £7,600 one year ago, and many investors will be looking to crystallise these stellar gains. The recent surge in value and consequent latent gains have highlighted the increasingly urgent need for tax authorities around the world to form a firmer view on where bitcoin and other cryptocurrencies are located for tax purposes.
Cryptocurrencies form an intangible asset class, which only came into existence in 2009 and can be held in a multitude of ways. They are viewed as a unique chose in action and are not currency or money.
HMRC’s guidance, Cryptoassets: tax for individuals (updated in December 2019), makes clear its position that the situs of cryptocurrencies will match the residence of the owner: ‘throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK’. However, HMRC does also acknowledge the lack of certainty around this position, saying: ‘Our views may evolve further as the sector develops.’
Many tax professionals dispute HMRC’s current view on situs, that ‘a residence basis most accurately fits the majority of transactions’. For example, where cryptocurrencies are held through an exchange or custody platform, in practice the real rights are against the individual or entity running the platform and there is a good argument that the asset in this scenario should be located where that individual or entity is resident, rather than vary unpredictably with the residence of its disparate clients.
Other possible alternatives are to treat cryptocurrencies as located either where the private key is located or where the holder of the key is located (on the basis that this is where the bitcoin can be dealt with or controlled).
Given the values now involved in ‘real world’ assets, it seems likely that a case will be brought before the First-tier Tribunal soon, which it is hoped would give more clarity to investors.
In the meantime, UK resident individuals will need to report capital gains on any disposals of cryptocurrency and UK resident, and non-domiciled individuals should note that the current guidance effectively prevents them from claiming the remittance basis on any gains that have arisen on cryptocurrency they own.
Fastklean: third party access
Tax advisers often comment that HMRC can appear to take inconsistent or contradictory approaches to cases that on their face appear quite similar. In addition to the published parts of the manuals, HMRC has its own internal guidance that will influence its approach, but which taxpayers may not have the opportunity to see. A recent entirely procedural case (Fastklean Ltd v HMRC & K Gordon  UKFTT 511 (TC)) is a reminder that the principle of open justice is a powerful tool for advisers. It confirms that open justice principles may be relied upon to obtain HMRC internal guidance (in this case, an email of 15 May 2019 on the procedure for issuing penalties in issue in the primary Fastklean case,  UKFTT 289 (TC)) that has been disclosed in and referred to in an FTT decision.
This was an application brought by tax barrister Keith Gordon in December. Mr Gordon discovered the existence of the 15 May 2019 email containing HMRC guidance which had been referred to in proceedings but not directly quoted in the FTT’s February 2020 decision. Mr Gordon applied to the FTT for a copy of the email. The application was granted, subject to appeal.
The FTT quoted Judge Sinfield in Hasting Insurance Services v HMRC  UKFTT 478 and Lady Hale more recently in Cape Intermediate Holdings Ltd v Dring (Asbestos Victims Support Group)  UKSC 38. The key principles are:
- In normal civil litigation, the principle is that the court may give non-parties access to certain documents whilst others they can obtain as of right.
- Notwithstanding that the tribunals are creatures of statute, they have inherent jurisdiction which enables them to apply the principle of open justice which is derived from the common law and applies in court.
- The principle of open justice requires that the public should, as a default position, be allowed access to all documents placed before a court or tribunal and referred to at a hearing.
- A member of the public later seeking access to a document must obtain permission from the court or tribunal, and demonstrate a legitimate interest, which the court must balance against any risk of harm. The legitimate interest bar is perhaps not very high; at any rate, it is not confined to investigative journalism. In this case, Mr Gordon’s legitimate interest was grounded in his role as a professional tax adviser with an interest in the TMA 1970. He did not need to demonstrate that the HMRC guidance might be relevant to an active case or connected litigation with which he was involved.
HMRC declined to participate in this application and neither supported nor opposed it.
Whilst the 23 December decision may have been something of a Christmas present, Mr Gordon will not receive a copy of the HMRC internal guidance until late February at the earliest. To avoid prejudicing an appeal, the judge stipulated that the email must be withheld from Mr Gordon until a 60-day period has expired, during which the parties to the litigation may appeal the decision if they wish to. However, in the circumstances, an appeal would seem unlikely.
So, be careful what you disclose in evidence bundles: inquisitive tax barristers may get their hands on it.
Kennedy and entrepreneur’s relief: substance matters
The recent FTT decision in Kennedy v HMRC  UKFTT 3 (TC) is an important reminder that claims for entrepreneurs’ relief, now business asset disposal relief (BADR), are not available for any successful entrepreneur: instead, they are sensitive to the factual circumstances of the disposal in question (note that the 2020 Budget reduced the lifetime allowance from £10m to £1m).
The reliefs arise from TCGA 1992 s 169H. The criterion subject to scrutiny in this case was whether the taxpayer was an officer or employee of the company or the trading group in question for a period leading up to the disposal. The reliefs enable a taxpayer to benefit from the lower 10% CGT rate in respect of qualifying disposals up to the value of the lifetime allowance.
HMRC successfully challenged the two claims for entrepreneurs’ relief, on share disposals of £2,766,589 and £460,497 respectively. Mr Kennedy’s accountants had claimed the relief for transactions in 2014 and 2015. However, he had left his role of executive chairman in 2013 (as confirmed in a white space declaration). Mr Kennedy had been an employee of the business, and at various times had held officer roles. Curiously, owing to an internal dispute, there was a live question as to whether his contract was ever formally terminated. The FTT looked beyond the questions over a formal termination and instead, somewhat predictably, looked at the substance of the issue: the fact was that Mr Kennedy had remained a substantial shareholder but had not held a formal role at the company for some time prior to either disposal.
What other lessons arise from this? First, tax planning matters. Had Mr Kennedy considered the application of ER as part of bringing to an end his formal roles, one wonders whether he could have accelerated his disposals to make use of the relief (or delayed his departure). Second, HMRC will scrutinise and challenge claims for relief: they should not be made lightly. Third, the retrospective process of claiming a relief, HMRC challenge and subsequent litigation to resolve the issue are an expensive and time-consuming exercise. No doubt much anxiety and inconvenience for all concerned could have been avoided if these issues had been carefully considered years ago. Hindsight – the bane of the PII insurer.
HMRC has announced that self-assessment taxpayers who did not file their tax returns by 31 January 2021 will not receive the traditional late filing penalty if they submit the return by 28 February. Last month, HMRC announced that covid-19 disruption will be accepted as grounds for a reasonable excuse for a delay: this grace period may be designed to forestall a flood of reasonable excuse applications. Bear in mind, however, that any tax due was still due for payment by 31 January 2021 and interest will be charged on any outstanding liabilities. Late payment penalties will apply after the payment has been outstanding for 30 days.
This article was first published by Tax Journal.