UK: Contentious Tax Bulletin

What happened in July 2023

In the July bulletin, Andrew Park, Tax Investigations Partner at Price Bailey, provides an overview of the most recent and significant contentious tax news, legislative changes, updates, and relevant case decisions that occurred throughout the month.

HMRC Initiatives and New Legislation

Reboot of HMRC Code of Practice 9 ("COP 9") / the Contractual Disclosure Facility ("CDF")

HMRC's Contractual Disclosure Facility (CDF) provides individuals suspected of tax fraud with the opportunity to avoid possible criminal prosecution by making a full disclosure of tax fraud. Taxpayers can request the CDF proactively for voluntary disclosures, benefiting from lower penalties or, alternatively, HMRC may offer the CDF to individuals who it suspects committed tax fraud. COP9 represents an extensive and thorough tax investigation, it is not a routine enquiry.

However, HMRC are concerned that some taxpayers and advisors haven't taken the requirements for HMRC's flagship COP 9 / CDF civil investigation of fraud process seriously enough.

Reworded guidance spells out more strongly what is expected in return for the process's guarantee of non-prosecution. Greater emphasis is placed on the expectation that taxpayer's should pay admitted liabilities early in the process and admit all non-deliberate as well as deliberate errors at the outset.

HMRC are understood to be particularly frustrated with how many improperly advised taxpayers have made initial formal admissions of deliberately underpaying tax in order to get the protection of COP 9 / CDF only to seek to attempt to later withdraw the admissions later in the process once they are no longer quite so worried about possible prosecution.

More so now than ever, nobody should enter into the COP 9 / CDF process without instructing investigation specialists.

New Draft Legislation to Increase Maximum Sentences for Tax Fraud from 7 to 14 Years

This was expected and comes as HMRC seeks to maximise the fear and deterrence value of what it calls the "criminal underpin".

It remains to be seen if HMRC criminal investigations and prosecutions will increase significantly from their current level of c. 400 per year or how many convicted taxpayers will in future face the new longer sentences. Indeed, the main purpose appears to be as a deterrent to increase compliance or else to ensure full co-operation with HMRC's normally preferred civil COP 9 process.

Case Decisions

Class 1 National Insurance (NI) paid on company car allowances :
Laing O'Rourke Services Ltd / Willmott Dixon Holdings Ltd v HMRC – [2023] UKUT 00155 (TCC)

In a landmark decision, the Upper Tribunal has ruled that company car allowances are "relevant motoring expenditure" / "RME" and should be disregarded for Class 1 National Insurance purposes up to the relevant "qualifying amount" (i.e. 45p per mile applied to the number of business miles actually driven). In these cases, which were heard together, neither company scheme had a minimum amount of business mileage nor did either scheme contractually require a car to even be purchased with the allowance – although that was the expected and anticipated use. The Upper Tribunal found that expected or anticipated use by employees in general was sufficient for RME purposes, where claims were made in respect of employees who had done business miles.

HMRC will almost certainly seek permission to go to the Court of Appeal. However, if this stands, employers will be in a position to reclaim tax both for themselves and their employees. At the very least, employers should consider making protective claims pending the outcome of any HMRC appeal. The issue also arises over how employers should calculate employee NI deductions going forward, again, likely subject to the outcome of any appeal.

For further commentary see our article covering the case decision.

Tax position on Employee Benefit Trust (EBT) loans : M R Currell Ltd v HMRC – [2023] UKFTT 613 (TC)

In this case the First-Tier Tribunal ("FTT") concluded that a loan from an employee benefit trust ("EBT") was taxable in full as disguised remuneration on the company director who received it. This was notwithstanding that the loan was repayable.

Some of the loan had actually been repaid before the Hearing and used to fund taxed bonuses from the EBT to employees. The Judge was not persuaded by the argument that this scenario resulted in double-taxation and demonstrated why repayable loans should not be taxable. He found instead that the additional tax was simply a consequence of the arrangements the parties had chosen to enter into.

Employment related tax reliefs : Jayanth Kunjur v HMRC – [2023] UKUT 00154 (TCC)

In this case, which HMRC appealed to Upper Tribunal after the taxpayer won at the First-Tier Tribunal (FTT), a dental surgeon sought tax relief for the costs of renting a second home close to his place of work. The Upper Tribunal found that the previous FTT decision erred in law on several counts:

• the FTT had failed to make the distinction between a personal choice to incur costs and an obligation;
• the FTT was wrong to find that the costs were incurred wholly and exclusively for the purposes of the employment, since a dual purpose existed which could not be apportioned out;

the FTT had failed to understand the fundamental difference between expenditure incurred to put oneself in a position to do ones work and expenditure incurred wholly and exclusively in the performance of it.

• A useful reminder of some of the fundamental principles involved for employees seeking employment related tax relief.

Other News and Announcements

HMRC published its annual accounts for 2022/23

These make interesting reading – not least, because they are qualified for the 17^th year in a row by the National Audit Office – this time, in large part due to HMRC's ongoing difficulty in identifying, measuring and recovering billions of pounds lost in fraudulent claims for R&D relief and for personal tax credits.

R&D relief losses – Latterly, HMRC has tripled its estimate of the annual R&D loss to c. £1billion – which relates almost in its entirety to the scheme for SMEs – generally owner managed – rather than the one for large corporates.

COVID-19 support scheme fraud – HMRC continued its work to recover monies lost to COVID-19 support scheme fraud and error during the year and raised its estimate of the total losses upwards by £0.5 billion to £5 billion. HMRC expects to recover a total of £625 million before its special taskforce is returned to normal activities in September 2023. After that point, fraudulent losses will still be recoverable for up to 20 years after the end of the period concerned and for up to 6 years where due to carelessness. Further recovery will become increasingly sporadic and will increasingly become part of broader HMRC investigations into wider suspected non-compliance by the business concerned.

Offshore related non-compliance – After so much focus in previous years, HMRC was silent on its work to address offshore related non-compliance. It seems this has been deprioritised as a risk further to all the information HMRC now gets automatically from overseas tax authorities and further to all HMRC's undoubted success in eliminating most of the "low hanging fruit" of undisclosed offshore investment accounts and aggressive tax avoidance schemes using offshore trusts and entities. HM Treasury pledged last August that HMRC would release an estimate of the remaining offshore "tax gap" this year – that estimate is still awaited.

HMRC published data on Corporate Criminal Offences (CCO) investigations

These came into law in the Criminal Finances Act 2017 – since then there has been little visible activity.

The new release – which will now be updated biannually – shows that:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.