Private client review for May
The potential impact of the covid-19 pandemic on tax receipts in the UK is shown in data released by HMRC for 2020/21: the overall tax take is down, but there is in increase in IHT. In Ball Europe Ltd, the tribunal finds that HMRC can’t raise a discovery assessment where it should have spotted a substantial transaction missing from the taxpayer’s return. Bennedy’s Developments is another tribunal decision on penalties that went against HMRC. The OTS joins the debate on the status of HMRC guidance and whether it can be relied on by taxpayers.
Reduced 2020/21 tax take overall but increase in IHT
HMRC has released data regarding its tax receipts for the (recently concluded) 2020/2021 tax year. HMRC’s total receipts for the 2020/21 tax year were £584.3bn, a fall of £49.1bn from the previous year.
The detractors were VAT (down £28.8bn), corporation tax (down £11.4bn), hydrocarbon oils (down £6.7bn), stamp taxes (down £2.9bn) and air passenger duty (down £3.1bn).
These falls were largely attributable to the pandemic. A couple of particular points to highlight are:
- The reduction in VAT take is attributed to the payment deferral policy and the temporary reduced rate of 5% for hospitality, holiday accommodation and attractions, both introduced as a result of the pandemic.
- The fall in receipts for stamp taxes is largely attributed to a reduction in property sales from market uncertainty and the stamp duty holiday introduced as a result of the pandemic. However, March 2021 was somewhat of an anomaly, since it represented the highest month for receipts from both stamp duty land tax and shares, presumably at least in part due to the expected end of the stamp duty holiday.
On the other hand, HMRC’s inheritance tax receipts for the 2020/21 tax year were £5.3bn, up £0.2bn from the 2019/2020 tax year. HMRC suspects, although has not yet been able to verify, that higher receipts in October 2020, November 2020 and March 2021 are due to a greater number of deaths than usual during the covid-19 pandemic.
Discovery assessment and the ‘hypothetical officer’
The First-tier Tax Tribunal (FTT) has ruled in favour of the taxpayer in Ball Europe Ltd v HMRC  UKFTT 23 (TC), holding that HMRC cannot raise a discovery assessment against Ball Europe Ltd (BEL) because HMRC should have noticed a £10.8m transaction referred to in BEL’s accounts that did not appear in its tax return.
The background can briefly be summarised. The tax return in question was for the year ended 31 December 2003. BEL had received a loan note in 2003 from a subsidiary in respect of an interest payment on an intra-group loan which it had accounted for as an unrealised gain (in its statement of recognised gains and losses).The gain was not included as taxable income on BEL’s 2003 tax return. The statutory period for HMRC to raise an enquiry into BEL’s tax return for the year ended 31 December 2003 expired on 31 January 2006, with no enquiry being raised in this period. Instead, a discovery assessment was issued by HMRC on 12 July 2006.
There was no question of the discovery being ‘stale’ (a concept since rejected by the recent Supreme Court judgment in Tooth  UKSC 17).
Instead, the case effectively turned on whether HMRC met the requirement that a hypothetical HMRC officer ‘could not have been reasonably expected, on the basis of the information made available to them before [31 January 2006], to be aware of the situation’ in order to raise a discovery assessment.
There was some complexity around the tax treatment of the gain, but the FTT agreed with BEL that:
- The hypothetical officer does not need to understand the detailed specifics of the head of charge.
- The hypothetical officer does not have to resolve every question of law, particularly in complex cases.
- The information provided has to be enough to allow the hypothetical officer to make a decision that an amount is taxable, but that decision does not need to be a completely correct or absolutely certain technical analysis.
Notwithstanding the limited information in BEL’s accounts, the court held that it was nevertheless sufficient for a hypothetical HMRC officer to identify that a large gain had been recorded in the accounts which had not been charged to tax, and that a hypothetical HMRC officer had sufficient information to decide whether to raise an assessment on at least one of three relatively straightforward heads of charge.
HMRC is expected to appeal this decision, but the case nonetheless highlights the importance for advisers of being aware of the requirements for HMRC to raise a discovery assessment and in checking that HMRC has followed procedure when raising assessments.
Daily penalties under the ATED regime
In Bennedy’s Developments Ltd v HMRC  UKFTT 21 (TC), the FTT confirmed the application of daily penalties in relation to the annual tax on enveloped dwellings (“ATED”) regime (under FA 2009 Sch 55 para 4), despite not giving the taxpayer prior written notice.
In this case, the taxpayer was within the scope of the ATED regime for the year ended 31 March 2019. Even though no tax was due, the taxpayer had to file a return by 30 April 2018. The taxpayer did not file an ATED return until 28 March 2019. On 9 December 2019, HMRC issued an initial late filing penalty of £100. The taxpayer paid this penalty promptly. On 18 February 2020, HMRC issued daily penalties (totalling £900). The taxpayer appealed.
Under Sch 55 para 4, HMRC is entitled to charge daily penalties for the late filing of an ATED return, if the return is still outstanding three months after the initial due date. However, HMRC may only impose penalties if it gives the taxpayer notice of the date from which the penalty is payable.
The FTT considered when HMRC could first be said to have given the taxpayer notice of its liability to daily penalties and concluded it was on 9 December 2019, when it issued the fixed penalty notice of £100. In that notice, HMRC explained that ‘If your return is more than 3 months late, we’ll charge you a penalty of £10 for each day it remains outstanding for a maximum of 90 days starting from 1 August 2018’.
The FTT held that, as the notice was issued after the expiry of the period of 90 days starting with 1 August 2018, it was not valid. The FTT considered the case of D&G Thames Ditton Ltd v HMRC  UKFTT 489 (TC) (which we considered in last month’s private client review; see Tax Journal, 23 April 2021) and held that a taxpayer is only liable to a daily penalty under Sch 55 para 4 if HMRC gives valid notice beforehand. Valid notice cannot be given retrospectively. As HMRC did not send the taxpayer notice prior to the expiry of the 90-day period from which it claimed daily penalties were due, the taxpayer was not liable to pay those penalties.
In following D&G Thames Ditton, the FTT endorsed the view that the purpose of giving advance notice under the daily penalty regime is to ensure the taxpayer may ‘take remedial action at any time during the daily penalty period’. This is a useful reminder that the purpose of the daily penalty regime is to encourage rectification. Further, the case is helpful confirmation that the application of daily penalties in relation to the ATED regime is the same as for non-resident capital gains tax.
Given some of the delays in HMRC’s correspondence caused by the pandemic, it may be that a number of taxpayers have received insufficient notice in relation to daily penalties. Time will tell whether this prompts a number of taxpayers to reassess their liability to pay daily penalties under the ATED regime.
OTS review of HMRC’s guidance
In last month’s update, we reported on the decision in Hyman and others v HMRC  UKUT 68 where HMRC resiled from its own SDLT guidance and the court stated that non-statutory guidance ‘does not differ from a statement by an academic author in a text book or an article and it does not enjoy any particular legal status; there is no presumption that the guidance is correct.’ Now the Office of Tax Simplification (OTS) is getting in on the act: the OTS published its latest guidance update paper on 19 April 2021. It follows the previous guidance published in October 2018. The recently published guidance notes that HMRC has committed significant resource to its guidance team and has made clear progress on implementing the new guidance model, and also makes further recommendations.
The OTS recognised that HMRC’s guidance has three distinct audiences: mainstream taxpayers; more sophisticated taxpayers and businesses; and HMRC’s manuals which are aimed at specialist advisers. The OTS highlighted the inherent tension that comes with trying to cater for these audiences, by trying to ensure that the guidance is easy to understand while also being technically accurate.
With this aim of catering to multiple audiences in mind, the OTS made various recommendations, including:
- that HMRC could discuss and agree protocols with professional and industry bodies willing to contribute to guidance;
- ensuring that examples were used for appropriate areas in which improved guidance could be more helpful for taxpayers;
- amending manuals swiftly to take account of a change in the law; and
- ensuring there is an HMRC contact for the relevant policy areas.
The review also suggested that HMRC should be more explicit in its guidance when expressing an opinion, compared to stating something which HMRC ‘considers to be generally accepted’.
This last recommendation is particularly interesting in light of the decision in R (on the application of Aozora GMAC Investment Ltd) v HMRC  EWCA Civ 1643, where the Court of Appeal considered the status of HMRC’s guidance. In that case, the court held that there are two categories of statement which HMRC may make in its manuals. The first is HMRC’s opinion on the legal position. The second is more than a mere expression of HMRC’s opinion and is instead an explanation of how HMRC will apply the statute in practice where the language is uncertain.
In Aozora, the court upheld that HMRC is in a privileged position when making statements in the second category, but not when making statements falling under the first category. The accepted view, following the Court of Appeal’s decision, is that HMRC is in a similar position to other tax advisers when making statements of opinion as to the legal position, as it is recognised that both HMRC and tax advisers have considerable specialist knowledge in the relevant subject.
The OTS’s guidance seems to reflect a pragmatic change in approach following the Aozora judgment. The fact that the OTS has recommended that HMRC is more explicit when it is expressing a legal opinion is a helpful development. It will provide both taxpayers and tax advisers with a clearer indication of when HMRC’s guidance may be relied upon (because it is a statement falling into the second category in Aozora); and when HMRC’s guidance may simply be taken into account, as a statement of opinion as to the legal position.
This article was first published by Tax Journal.