Private client review for October
The FTT’s decision in Field provides useful insights on discovery, including that a discovery assessment is not invalidated if HMRC changes its mind as to the reasons why too little tax is borne provided the conclusion is unchanged. Sleight v Callin is a cautionary tale on potentially insolvent estates. STEP takes a different view to HMRC on the location of cryptoassets for tax purposes. In Priory London, the FTT agreed with HMRC that a valid ATED penalty notice could be given retrospectively, in contrast with Heacham Holidays. An update is expected to HMRC’s trust registration service guidance on mental capacity. HMRC ramps up its use of nudge letters.
More discoveries on discoveries
A lbert Szent-Györgyi, the Hungarian Nobel prize winner who discovered vitamin C, said that "discovery consists of seeing what everybody has seen and thinking what nobody has thought". HMRC and the tribunals continue to give us grounds for commentary on discovery assessments, albeit this time under the express powers in respect of SDLT in FA 2003 Sch 10 Part 5, especially para 28.
In GC Field & Sons Ltd and others v HMRC  UKFTT 297 (TC), the First-tier Tribunal (FTT) allowed the taxpayer’s (T’s) appeal and found that discovery assessments issued in respect of SDLT avoidance arrangements were invalid. HMRC had not discharged the burden of proving that either T or their advisers had been negligent.
The taxpayers had entered into marketed arrangements to avoid SDLT by making use of the SDLT subsale rules. FA 2013 contained measures to counteract this type of arrangement with retrospective effect; these included an obligation to submit amended SDLT returns by 30 September 2013 (around six months after the measures were announced). T did not do so, and HMRC did not open an enquiry within the relevant time limits. HMRC sought to recover the SDLT by issuing discovery assessments. The dispute turned on whether (i) HMRC had made a discovery that SDLT had been under-assessed, and (ii) the loss of SDLT had been caused by T, or a person acting for T, being negligent (Sch 10 para 30(2), which limits para 28 where a return has already been delivered).
The FTT found that HMRC had made the required discovery. The FTT ruled that HMRC changing the basis of its assessment (originally the anti-avoidance rules in FA 2003 s 75A, later in correspondence the explicit counteraction measures in FA 2013) did not change this. HMRC had discovered an insufficiency of SDLT unaffected by the change in its reasons for reaching that conclusion.
On the second condition, the FTT decided T was not negligent, because a reasonable lay taxpayer would not be expected to be aware that retrospective legislation might require them to revisit a transaction on which they had received advice and which they had disclosed to HMRC. However, negligent conduct can be imputed to T from a person acting on their behalf. The outfit marketing the scheme (ELS) had advised T on a fixed retainer that ended when the SDLT returns were submitted, other than dealing with any HMRC enquiries. HMRC had written to one of the taxpayers, but not the others, advising him of the need to submit an amended return, and ELS had responded on that taxpayer’s behalf, contending that he was not caught by the new measures. The FTT held that ELS was acting on behalf of that individual, but not the other taxpayers, who in any event had not received letters from HMRC. The focus then turned to possible negligence by ELS: HMRC did not provide any evidence as to what a reasonably competent tax adviser would have done, thus failing to discharge the burden of proof.
This case provides useful commentary on a number of points, one being to reinforce previous case law to the effect that HMRC will not invalidate a discovery assessment if it changes its mind as to the reasons why a particular transaction has borne too little tax, provided that the conclusion is unchanged. The FTT also provided some interesting elaboration on the distinction between providing a taxpayer with advice and acting on their behalf.
Certain provisions of the Insolvency Act 1986 (IA 1986) can trace their DNA back to at least a 16th century Act of Elizabeth I (Fraudulent Conveyances Act 1571): that Act notably included a purposive effect, transactions being "clearly and utterly void, frustrate, and of none effect" if intended to prejudice creditors. If anything, the onerous role of trustee may be of greater antiquity. In the case of Sleight (as trustee in bankruptcy of Holdroyd deceased) v Callin  EWHC 1050 (Ch), the two strains have combined painfully for one family. The court has held that the deceased’s daughter as sole executor should return significant assets to the estate, pursuant to a combination of IA 1986 s 284, the Administration of Insolvent Estates of Deceased Persons Order, SI 1986/1999, and (in effect) the 18th century case of Keech v Sandford  25 ER 223 enunciating the pitiless general rules on constructive trusts arising where a conflict occurs between a trustee’s position and that of the beneficiaries. The facts, beginning with an almost six-year gap between probate and the making of an insolvency order, make for anguish-inducing reading: Mrs Callin has been ordered to repay pension death benefits and life insurance lump sums passing outside the will, assets purchased under a contract etc., all deemed to be held on trust for the creditors. Arguably there is no new law here, but it will serve as a cautionary tale to executors to proceed with care and on advice.
Clarity on the situs of cryptocurrencies?
As more investors turn to cryptoassets, particularly cryptocurrencies, HMRC released its first Cryptoassets Manual which replaced and expanded earlier guidance on digital assets in April. Of particular interest to some taxpayers is the section on the location (or situs) of cryptoassets and at CRYPTO22600, HMRC confirms its view that "the location of the cryptoasset will be determined by the residency of the beneficial owner."
The question of location has already been considered by the courts, including in Fetch.ai v Persons Unknown  EWHC 2254 (Comm) which adopted the conclusions reached by Butcher J in a case in the commercial court last year, Ion Science v Persons Unknown (unreported). These are that the lex situs (or the law of the place where an object is situated) of a cryptoasset is the place where the person or company who owns it is domiciled rather than resident.
Last month, the Society of Trust and Estate Practitioners (STEP) produced its own guidance on digital assets, including a detailed guidance note on the location of cryptocurrencies – which sets out a different analysis. It suggests that as cryptocurrency can only be dealt with using a private key, "its location should be linked to the location of the private key or of the person who has control of the private key (who may or may not be the beneficial owner)". Where the private key is controlled by a custodian or a trustee for example, it would be necessary to look at their location to work out the situs of the cryptocurrency.
The note also argues that common law rules should be applied to determine residence for the purposes of determining a cryptocurrency’s location, as opposed to the UK statutory residence test (in the absence of a specific statutory provision requiring this). Whilst it might appear at first glance that the question of situs will only be relevant for non-domiciled taxpayers, it can be relevant when drafting a will, and even when considering whether the rate of any penalties should be that applicable to offshore assets. Given the value of cryptocurrencies, there will be more cases on this point, but in the meantime, clients investing in cryptoassets, and in particular cryptocurrencies, should take advice on how to hold those assets, and report any profits.
HMRC wins latest retrospective penalty case
Regular readers of this column will have noticed several cases recently on retrospective penalty notices. The latest concerns penalties in connection with the annual tax on enveloped dwellings (ATED). Under FA 2013 s 159, a taxpayer who is subject to ATED is obliged to file a tax return within 30 days starting with the first day of the chargeable period they are within the charge. The tax due must be paid no later than the filing date. ATED is included in the penalty regime set out in FA 2009 Sch 55, meaning there are penalties for late filing of returns, late payment of tax and tax geared penalties in respect of errors.
The FTT has previously held (most recently in Heacham Holidays Ltd v HMRC  UKFTT 406 (TC)) that notices of daily penalties could not be issued retrospectively. HMRC was known to disagree with this position, arguing that that there is no statutory requirement for the notice imposing daily late filing penalties under FA 2009 Sch 55 para 4 to be prospective. In Heacham Holidays, Poon J found that the purpose of the giving of a notice under Sch 55 para 4(1)(c) is to inform the taxpayer that he will be liable for a daily penalty if the failure continues during the following 90-day period, and that this purpose requires the notice to be given in advance of the commencement of the daily penalty period.
In Priory London Ltd v HMRC  UKFTT 282, the FTT agreed with HMRC that a valid notice could be given retrospectively, following HMRC v Donaldson  EWCA Civ 761. The FTT rejected the taxpayer’s arguments on proportionality and special circumstances, and declined to apply Poon J’s reasoning in Heacham Holidays. HMRC will be relieved that Heacham was not followed in this case as its impact arguably protects taxpayers from penalties when they fail to meet their filing obligations.
TRS manual and mental capacity
HMRC’s Trust Registration Service Manual is expected shortly to be updated to include revised questions about the mental capacity of the persons whose information is held on the TRS. The reason for HMRC’s concern in this field is because HMRC take the position that they cannot share an individual’s data with a third party (under the disclosure rules for the TRS) if the particular individual does not have mental capacity.
However, there is no obvious obligation in the AML rules for trustees to provide this information: in the absence of disclosure, HMRC will be forced to assume that an individual whose information is recorded on the TRS has mental capacity, unless otherwise stated. Given that conducting potentially many formal assessments of individuals’ mental capacity is the stuff of nightmares and dubiously allowed by mental capacity law, trustees are going to have to consider what they do: should they only state that an individual does not have mental capacity where there is reasonable belief that that is the case? It is hoped that there will be an option for trustees to state "I don’t know", where they would rather not for whatever reason disclose that information. It is not clear that filing on this basis will override an HMRC assumption that an individual has mental capacity unless contrary information is provided. Watch out for publication of the actual text.
Nudge letters from HMRC are becoming more frequent
Nudge letters are non-statutory letters that are part of HMRC’s toolbox to encourage taxpayers to comply with their reporting obligations, without launching a formal enquiry. The aim is to "educate, remind, or prompt" taxpayers to review their affairs. HMRC’s view is that sending out formal reminders encourages taxpayers to get their obligations right, particularly in relation to offshore structures. Nudge letters have become more frequent since 2017, when the adoption of the common reporting standard led to the exchange of information with HMRC from across the globe.
HMRC recently announced a new wave of nudge letters, where taxable benefits, salary or pension information provided to HMRC by the taxpayer does not match other information held by or provided to HMRC by third parties.
HMRC is also sending nudge letters to taxpayers who use the remittance basis, where HMRC think that the taxpayer may have omitted to report a taxable event. These letters generally relate to offshore structures. Linked to this, HMRC is sending nudge letters to non-UK domiciled individuals, who are thought by HMRC to be liable for £7.85bn in personal taxes during the 2019/20 tax year.
The principal takeaway is that these nudge letters must not be ignored. If sufficient information is not provided to HMRC following a nudge letter, it can lead to a more severe round of questioning or the launch of a formal enquiry. HMRC does follow up on these nudge letters and they are not allocated at random. They arise in scenarios where HMRC believes there is a mismatch of information and therefore a perceived increased risk of non-compliance.