In May the Government announced the extension of its Job Retention Scheme until at least mid-October 2020. In so doing, more than one million employers will continue to receive direct support from the Treasury which will meet 80% of furloughed employees’ salaries (subject to a £2,500 per month cap). Eligible workers under the Self-Employment Income Support Scheme (SEISS) will also be able to claim a second and final grant in August. The grant will be worth up to 70% of their average monthly trading profits, paid out in a single instalment covering three months’ worth of profits, and capped at £6,570 in total.
Further measures were announced recently to provide additional financial assistance to businesses through changes to the corporation tax regime; specifically, regarding claims for the repayment of corporation tax in anticipation of losses.
The changes, which are already reflected in HMRC’s Company Taxation Manual, will allow companies to make claims for the repayment of corporation tax for a prior accounting period based on expected losses for the succeeding period, before computations have been finalised. Claimants should, however, expect claims to be properly considered by HMRC staff before being given the green light. It is suggested, therefore, that any claims which are to be made under the new rules are carefully prepared and robustly supported.
Before the above changes were announced, companies caught by the quarterly instalment payments regulations (QIPs) have long been able to claim repayments of “current year” payments of corporation tax. Such claims are not uncommon, for example where a company’s performance is impacted by worsening trading conditions causing downward pressure on profit projections.
Any tax paid before the first instalment date for the accounting period is repayable up until that date without any pre-conditions. Thereafter, companies wishing to secure tax repayments in-year (or at least before profits / losses for an accounting period have been finalised) will need to make a so-called REG6 claim.
Broadly, REG6 claims are comparable to claims by non-QIPs companies for repayment of corporation tax in advance of final liabilities being established (under s59DA TMA 1970). The main difference is that companies may only make section 59DA claims after the normal due date for corporation tax, i.e. following a period of nine months and one day after the end of the accounting period. In contrast, REG6 claims in relation to quarterly instalment payments can be made before the due date.
Claimant companies are required to state the amount of tax which is believed to have been overpaid and the grounds leading to the overpayment.
HMRC officers are instructed to consider each case based on its own circumstances. However, where claims are not accepted, the HMRC manual directs officers to initiate enquiries into the rejected claim under the provisions of Schedule 1A TMA70.
Claims where losses are anticipated
The changes to HMRC’s operating procedures mean that, with immediate effect, officers will now also be able to sanction repayments of corporation tax for previous accounting periods based on the expectation of losses in later periods.
For example, a company will be able to claim the repayment of corporation tax for an accounting period (AP1) on the basis that it expects to generate losses in its next accounting period (AP2). Such a claim can be made before the end of AP2 and in any event before computations are finalised.
Clearly, the new measures are designed to provide much needed cash flow assistance to companies hit hard by the Coronavirus pandemic. It will be interesting in the years to come to see if these changes become permanent rather than a temporary relief.
However, companies will need to prepare claims carefully as it is expected that HMRC officers will review claims very closely on a case-by-case basis. Particular scrutiny should be expected where claims are made early in AP2 where there remains significant scope within the accounting period for companies to improve their financial performance.
It is recommended that all claims are accompanied by as much supporting evidence as possible to assist HMRC’s understanding of a company’s position, thereby increasing the likelihood of acceptance. The following evidence, whilst not an exhaustive list, is likely to be relevant;
• Management accounts including cash flow forecasts;
• Revised corporation tax forecasts, including explanations of any particular factors underpinning them;
• Data illustrating seasonal trends;
• Confirmation that the company is not anticipating any exceptional gains or other taxable amounts in the remainder of the accounting period.
Again, where no or insufficient evidence is provided, companies should not only expect HMRC to reject their claims but also instigate enquiries.
There is no doubt that the new guidelines for corporation tax repayment claims represent a further welcome measure which (hopefully) will assist with the recovery of the UK economy. However, companies should ensure that their claims are well considered and properly supported. HMRC’s guidance requires officers to review claims with considerable diligence and to reject unsupported claims.
Companies should also bear in mind that, where repayment claims are accepted by HMRC but which turn out to be excessive (for example by the overstatement of a trading loss in AP2), further adverse consequences could result in the form of tax geared penalties.
Finance Act 2007 introduced the concept of potential lost revenue (PLR) when computing penalties for errors. PLR includes incorrect claims to loss relief. Therefore, companies will be well advised to retain clear records documenting how forecast losses are quantified. Provided a company can evidence that it demonstrated an appropriate degree of care and diligence in preparing a repayment claim, it should be possible to avoid penalties even if it transpires the claim is excessive.
It has now been over two months since life as we knew it changed fundamentally and terms such as “lockdown” and “social distancing” have become common parlance. Few of us would have anticipated the dreadful reach of a flu-like virus on our nation’s health, nor indeed our economy.
The Government’s introduction of measures to alleviate the financial burden on individuals and businesses (e.g. the Job Retention Scheme) has led to the re-deployment of many HMRC staff. Because of this and HMRC’s appreciation of the pressures caused by the epidemic, HMRC has slowed down its activities insofar as its interventions are concerned (i.e. enquiries and investigations). Some taxpayers have even received letters from HMRC advising that “a temporary hold” has been placed on ongoing enquiries, albeit recipients are invited to get in touch with named officers if they would rather continue.
Our experience is that HMRC’s offer to put matters on hold has been welcomed by some clients. Some, however, have been keen to retain momentum and push on to bring enquiries to a conclusion. Such a view is not uncommon where, for example, enquiries have already been ongoing for a long time.
Where our clients are committed to continuing correspondence with HMRC we have seen some very positive outcomes during lockdown. In several cases, home isolated inspectors have been receptive to settlement proposals and we have been able to conclude a number of interventions over the last few months. There is no suggestion of a relaxation to HMRC’s Litigation and Settlement Strategy, but perhaps the circumstances have allowed space and time to allow agreements to be reached away from the normality of settlement negotiations.
We have seen in the last few weeks, some of our WDF (Worldwide Disclosure Facility) client cases being accepted and settled within a calendar month of HMRC receiving disclosures, i.e. significantly sooner than the 90-day turnaround times which are still being quoted.
We have also been able to secure some excellent penalty mitigations where our clients have instructed us to press on with a view to concluding enquiries. Of course, whilst it is anticipated that increased leniency should be available where taxpayer cooperation has been halted or slowed because of the epidemic, it should not be taken for granted that it will automatically be forthcoming in every circumstance. It is important, therefore, to remain alive to the telling, helping and giving reductions where penalties are in point.
Our experience is that inspectors managing more serious enquiries under Codes of Practice 8 and 9 have also been prepared to pause existing enquiries. At the same time, new cases have not been registered.
As signs emerge that lockdown measures are starting to be relaxed, we are informed that HMRC intervention activity is slowly picking up again as new enquiries begin to be taken up by HMRC. However, it is likely to be some time before we can say that things are “back to normal” (whatever that may look like). What is for sure, however, is that open enquiries and disputes with HMRC will not simply be forgotten or just disappear. They will be waiting for us to emerge from an historic period spent in isolation. Therefore, clients where their health or the health of their families is not impacted directly by this horrible disease, may wish to bite the bullet and re-engage with HMRC now and put troublesome enquiries behind them once and for all.
The Future Fund, which is to launch in May, will provide loans of between £125,000 and £5 million, subject to matched funding from private investors.
While further details of the scheme, to be operated in partnership with the British Business Bank, are awaited, the published term sheet for the funding suggests that the current shareholders will need to be pretty confident about their ability to rise with the anticipated post-coronavirus recovery of the economy. If they are not able to sell or list their company within 3 years, then what the Government is offering is a loan at over 40% interest, with onerous terms.
The scheme will apply to companies which don’t have historic profits to enable them to access the Coronavirus business loans. If the company is urgently seeking funding, it’s a reasonable assumption that if it is profitable its 2020 profits are not going to be high. It would need to have sufficient growth in its 2021 and 2022 EBITDA to allow it to sell or float by mid-2023. Every other company that has taken the HM Treasury funding will be under pressure to sell by the same deadline, so there may be plenty of competition for buyers’ attention.
The published term sheet shows that HM Treasury will be charging 8% interest, but the key point is that the loan is a fixed-term loan for 3 years, and if the lender chooses not to convert the loan to shares, and if there is no sale or IPO by the end of the term, then the lender has the right to demand repayment with a 100% premium. That is, HM Treasury gets its money back and then the same amount again, so to repay a £1,000,000 loan will require £2,224,000.
If the Treasury does decide to convert its loan to shares, the loan will convert to shares with a minimum discount of 20% at the next funding round: the number of shares it receives is computed by charging it only 80% of the price paid per share by other investors.
There has been comment that the Treasury has taken advice so that the funding represents market terms. It would be interesting to know whether the timing of the recovery has been brought into that consideration. It seems that a company seeking funding might want to move its accounting date to show its post-recovery growth in accounts to, say, 31st May 2023.
Those investors who are being asked to match HM Treasury funding to allow a company to access this scheme might also consider whether they are prepared to invest more so that the company doesn’t need to access the government scheme, as otherwise they risk their investment effectively being used to fund the 100% premium to the Treasury.
This is particularly the case if the investor wants Enterprise Investment Scheme (“EIS”) or Seed SEIS (“SEIS”) relief, because if the matched funding has to be structured as a convertible loan identical to the Treasury funding, then it won’t qualify for EIS/SEIS relief. It should also be noted that once an investor has made an investment in a company which doesn’t qualify for EIS/SEIS, no subsequent investment can ever qualify for the relief.
Suppose instead that a prospective investor provides funding now via an advanced subscription agreement which qualifies for EIS, with the intention to issue the shares in 2021, and suppose that he has income in 2020/21 sufficient to use the relief and gains in 2019/20 that he can claim deferral against. He can claim EIS income tax relief worth 30% of the amount invested against his income for 2020/21 and thus his payment on account due on 31st July 2020, and CGT deferral relief worth 20% against his gain, effective on 31st January 2021.
In those circumstances, the investor has managed to get HM Treasury to “donate” funding of 50% of his investment to him by giving the tax reliefs available; HM Treasury has matched half of his investment, with considerably less downside and considerably less hassle.
From the perspective of the shareholders in the high-growth company, including the founders, there is flexibility to sell or float at a time of their choosing, the risk of the 40% interest rate is avoided, and the potential practical problems of having a government shareholder is avoided. They may well be prepared to offer a significant discount to the angel they know to get his funding instead.
Obtaining EIS relief is not a simple matter and is a subject on which we advise frequently. If you would like to discuss this, please contact us.
Below we highlight some of the potential implications for property owners and property businesses. These may not have immediate impact, but could significantly increase the amount of tax due in future.
Non-UK residents and the disposal of UK main residence
Non-UK residents are liable to UK capital gains tax on the disposal of UK residential properties. If the disposal is of their main residence, gains in relation to any tax years for which they occupied the property (or other UK homes) for 90 days or more may benefit from principal private residence relief.
Given the extent of worldwide restrictions on travel, the owner may fail to meet the 90 day requirement for 2020/21, which results in a proportion of the gains arising on disposal of the property not attracting the relief.
Furnished holiday lets
Furnished holiday lets attract some tax advantages over other buy-to-let properties including, as the activity is deemed to be a trade rather than investment activity, the ability to claim Entrepreneurs’ Relief (“ER”) on disposal so that the gains arising are taxed at the reduced rate of 10% rather than residential property rate of 28%. A property has the status of a furnished holiday let for a tax year, so in order to meet the 2-year requirement for ER, it may be necessary to qualify for the status in 3 separate tax years.
A property in the EEA can qualify as a furnished holiday let, so the impact of the virus in other countries may impact on the treatment.
To qualify as a furnished holiday let the property must meet several conditions in respect of the number of days that the property is available to let and the number of days it is in fact let in a tax year.
The legislation does however provide certain “grace periods” where a property fails to qualify if it is not actually occupied for the requisite 105 days in a tax year due to unforeseen circumstances but there is a genuine intention to let it. A taxpayer needs to elect for this treatment and would need to be aware of this before the deadline of 31st January 2022, in order to preserve their entitlement to relief for the tax year 2020/21.
It might be the case that by delaying a sale past 5th April in a future tax year, or by offering the accommodation cheaply for some nights in a future tax year, the 18% tax saving can still be achieved, but an owner would need to be fully informed of the consequences of his choices in order to navigate this.
Divorce, separation and capital gains tax on the family home
The COVID-19 crisis is anticipated to result in a surge in divorce applications, but delays caused by the virus could result in a tax liability where an interest in the family home is transferred to a spouse.
If a couple separate in April 2020, then unless they either complete the transfer before 5th April 2021, the end of the tax year of separation, or wait until after the divorce is finalized, such a transfer is not a no-gain no-loss transfer, but takes place at market value even if no consideration is given. Thus, unless any gain is fully covered by Principal Private Residence relief, bad timing could give rise to a tax liability.
Higher rate SDLT and properties available to the public
Acquisitions of residential properties for £1.5m by a company are subject to stamp duty land tax at the 15% higher threshold rate. However, among the potential exemptions applying are where the property is acquired as part of a trade and it will be made available to the public for at least 28 days, e.g. a residential dwelling acquired for use as a wedding venue might benefit from this exemption.
Relief is clawed back if the condition is not satisfied at any time in the three years from acquisition. If such a business closed its doors because of the COVID-19 crisis and failed to satisfy the 28-day condition within the three years since its acquisition, the relief could be clawed back.
Owners of certain heritage properties benefit from conditional exemption from inheritance tax and capital gains tax, subject to undertakings given to HMRC. Typically, these undertakings include making available the property to the public for 28 days or more in a year. Unlike in the case of the higher rate threshold for SDLT, the minimum 28 days is not specified in statute but is HMRC established practice. In light of COVID-19, HMRC has recently issued guidance confirming that undertakings will not be considered breached if the properties remain closed.
De-enveloping residential properties held in corporate structures
The government have advised that house sales should not go ahead unless essential and so it will be hard to value properties and any valuation is likely to be reduced.
This may provide an opportunity for some who hold residential properties in structures which are no longer advantageous for UK taxation purposes to “de-envelope” those properties without incurring non-resident capital gains tax charges that applies to gains relating to the period from April 2015 to date.
Restricted international mobility, plunging exchange rates and impending recession arising from the COVID-19 crisis throw up significant tax implications.
We have already discussed the implications of the statutory residence test for individuals trapped in the UK because of the crisis in another article (link here).
As illustrated below, the ramifications for businesses are extensive and include potential unanticipated tax charges which would be especially unwelcome given current pressure on cash flow.
Many UK companies will be looking for funding from wherever possible, so tax will be a secondary issue but this is still worth understanding.
Loans from overseas group companies
If a UK company borrows from a non-UK group company, it is necessary to consider whether the borrower has an obligation to deduct withholding tax from payments of interest. The determining factor here is whether the interest is “short” (no withholding) or “annual” (obligation to withhold). A loan which is intended to last for less than 12 months is short, but an issue which is likely to arise is that a UK borrower may not be able to repay on time, so the loan may be rolled over. This is addressed in the HMRC Savings and Investment Manual at SAIM9076, which states that without clear evidence that the intention was for the loan to be less than 12 months, HMRC “will be unable to accept” that this was the case, in which case withholding tax is due. This is clearly worth addressing.
It may also be appropriate to consider whether the interest can be paid gross under the relevant Double Tax Treaty. The UK borrower needs agreement from HMRC before making the payment of interest, which requires the overseas lender to apply and complete the appropriate form. In the current circumstances, it may take some time to get this approval, and so applying as soon as the loan is made may be sensible.
Exempt distributions from overseas subsidiaries
Subject to conditions, distributions received by a UK parent from an overseas subsidiary are exempt from UK corporation tax. Paying a dividend up to the UK from an overseas subsidiary might be a response to cash flow problems in the UK. However, a reduction in employee headcount could have implications if it results in a group becoming “small”.
The conditions determining whether the distribution exemption applies depend on whether the company is small or large, a small company for these purposes being one with 50 or fewer employees and less than €10 million turnover or less than €10 million gross balance sheet assets.
Giving the differing condition applying to large and small companies, it is possible for a dividend that would be exempt if received by a large company to be taxable on a small company, in particular if the paying company is located in a non-qualifying territory. In our view, furloughing an employee should not reduce the headcount for this purpose. However, part-time employees are treated as a fraction of a person for this test, and so reducing employee hours can reduce the headcount.
The 50 employee threshold would have to be missed for two consecutive accounting periods for a group to move from being medium-sized to being small. This may therefore not be an immediate problem but a failure to identify this issue could mean that a cash injection from a subsidiary is reduced by a 19% tax charge.
Travel restrictions could have implications for company residence. HMRC have commented on the issues where board meetings are held in the UK, but there are also issues for certain companies if board meetings are held outside the UK.
Where a non-UK domiciled individual sets up a company, he may use a non-UK incorporated company so that the shares are excluded property for UK inheritance tax.
For such non-UK incorporated companies, if management and control is exercised from the UK, for example if board meetings take place in the UK, the company will be treated as UK tax resident, and within the UK corporation tax net.
If the directors of a non-UK incorporated but already UK resident company were to now hold board meetings outside the UK, for example because of travel restrictions, the company would be treated as having migrated from the UK, giving rise to a potential corporation tax exit charge as its assets would be treated as having been disposed of and reacquired at their market value. Such a “dry” UK corporation tax charge could have a very unhelpful impact on cash flow.
Exchange rate-related gains in investment companies
From the UK perspective, sterling has weakened significantly against the dollar. Dollar denominated assets might therefore give rise to a sterling gain significantly greater than the face value of the gain in dollars.
While this is difficult to avoid in the instance of individuals and trustees, some investment companies might be able to mitigate the impact by electing for the US dollar rather than sterling to be the company’s functional currency prior to realising dollar denominated gains.
Entrepreneurs’ Relief, Substantial Shareholding Exemption and trading losses
Reliefs such as Entrepreneurs’ Relief, and the Substantial Shareholding Exemption are premised on non-trading activities of a company or group falling below a threshold.
For example, Entrepreneurs’ Relief on the disposal of shares requires that the company is a trading company, or the holding company of a trading group. A trading company is one whose activities does not to a substantial extent include non-trading activities. HMRC practice takes “substantial” in this context to mean more than 20%, taking into consideration income from non-trading activities, the asset base of the company, expense incurred and time spent by the employees on various activities, the company’s history, and considers these indicators in the round.
Many companies or groups will include an element of non-trading activity. Where trading activity has diminished significantly because of the COVID-19 crisis, it may be that the non-trading activities become “substantial” in comparison with the result that the qualifying conditions for these reliefs might not be met.
If companies propose to reduce their activities temporarily, they should ensure that the evidence their intention to recommence operations once they are able to. This should bolster the argument that company assets continue to be trading assets for the purposes of the substantial non-trading activities tests.
Evidencing that company continues to trade is also important to ensure that crisis-related trading losses can be set against future profits of the same trade rather than being treated as losses of a trade that had ceased. Furloughing employees rather than making them redundant should provide evidence that the trade continues.
Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS)
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme provide income tax and capital gains tax reliefs for investors into early stage companies. Both reliefs are subject to qualifying conditions for the investor and the investee company including time limits.
For example, money raised by a new EIS share issue must be spent within two years of the investment or, if later, the date that the trade started, on the qualifying business activity only. Given the downturn in activity, for existing investments, spending the money appropriately in that two-year window may be more difficult.
There are also rules which clawback or restrict relief where value is received by an investor, and so any situation where the company meets a cost of an investor, or makes a payment to him, in a difficult time, could have a high cost in lost tax relief.
Where an EIS company needs money but a funding round is not possible, an existing investor might consider making a loan to the company, but care is needed because the repayment of a loan can trigger a clawback of relief.
Statutory clearances in respect of transaction including share exchanges, share buybacks, demergers and transactions in securities require HMRC to provide a substantive response within 30 days.
Given the current circumstances which impact HMRC employees too, it is not clear how the 30-day timetable will be adhered to. Of course, clearance applications are not compulsory. The reliefs at stake apply automatically provided the relevant conditions are satisfied. However, clearances do provide certainty to taxpayers and in the absence of such certainty, particularly for more complex transactions, taxpayers may be reluctant to proceed.
These examples illustrate the wide-ranging implications and highlight the importance of not taking anything for granted considering the crisis: time limits, the availability of reliefs and proposed transactions should be reviewed afresh.
We appreciate that the current climate is challenging for everyone, including businesses. We are keen to support you whenever we can in this period and all our staff are set up to work remotely to enable us to do that. All calls are being diverted to our mobile phones. You can also contact us using our Enquiry Form .
The legislation in the statutory residence test allows for some days to be ignored in applying certain of the statutory residence tests where the “exceptional circumstances” condition is met.
We approached HMRC as we had a client who did not expect to be UK resident for 2019/20, as he expected to be here for less than 90 days, but who is now unable to leave and will therefore go over the 90 day limit.
They’ve pointed us to their updated advice, (updated 17th March), unfortunately it has not been well-publicised, hence this article.
“Whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case.
However, if you:
• are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus
• find yourself advised by official Government advice not to travel from the UK as a result of the virus
• are unable to leave the UK as a result of the closure of international borders, or
• are asked by your employer to return to the UK temporarily as a result of the virus
the circumstances are considered as exceptional.”
This applies for some of the day counting tests but not all, see RDRM 13230
If an individual spends 90 days or more in the UK in 2019/20 (for example as a consequence of COVID-19), then this may not in itself make them UK tax resident for 2019/20 (their ties may allow them to stay here for 120 days) but it does mean that they will then have the “90 day tie” for 2020/21 and 2021/22. Therefore, this guidance may also be relevant for individuals who are not UK tax resident for 2019/20, but want to know what the impact of extra days spent in the UK will be on their tax residence status for 2020/21 and 2021/22.
It is worth noting that the number of days in a tax year which can be disregarded is always limited to 60. This would take us to 5th June 2020; after that, a day spent in the UK as a consequence of the virus would count for all the statutory residence tests as things stand. However, if travel bans continue that prevent individuals leaving the UK we would hope that the government amend the 60 day limit in the interests of fairness.
For individuals who are not UK domiciled, they may wish to claim the remittance basis for 2020/21 if they do become UK tax resident. We would be happy to advise on planning to be undertaken before 5th April for individuals to establish appropriate clean capital arrangements and manage remittances.
The statutory residence tests are complex and we can advise on individual circumstances.
This tax year HMRC has introduced rules that seek to bring almost all non-resident owners of UK land within the scope of UK tax on their gains. Under the new regime, effective from 06 April 2019, where a seller (regardless of their tax residence) generates a gain from the disposal of UK property then:
• individuals and trustees are subject to capital gains tax (NRCGT, at up to 28% for residential property and up to 20% for commercial property); and
• companies are subject to corporation tax (currently at 19%).
Certain non-residents also for the first time became liable to UK tax on gains generated from the disposal of shares in “property rich entities”. This new charge applies to sales of shares in companies that derive at least 75% of their value from UK property.
The new regime also includes targeted anti-avoidance provisions to counteract amongst other issues attempts to restructure property holdings to artificially defeat the property rich test. There has also this year been a targeted campaign of “nudge letters” undertaken by HMRC against non-resident property owners and their tenants, as well as the introduction of accelerated submission and payment dates for CGT returns from April.
In contrast, rebasing allowances were introduced for both residential and commercial property holdings of non-residents which can provide the ability to ring fence and exclude some historical gains.
The general direction of travel in recent years has seen an increase in the tax and compliance burden on existing UK property structures and in this light, investors and their professional advisers must review and determine the suitability of existing vehicles and structures. The scrapping of the scheduled Corporation Tax rate reduction and the rebasing opportunities available currently means that there exists currently a narrowing window of opportunity.
At Trident Tax we will be considering some of the above issues further at the next session of our regular Breakfast Tax Club held in Bedford Square WC1, following our last event which focused on some of IHT issues arising for overseas property investors in the UK. At our next event we will also discuss our diagnostic service which is intended to assist in navigating some of the practical client issues currently being faced when determining the suitability of existing UK property structures.
If you would like to receive an invitation to the next session of the Breakfast Tax Club once announced or receive further information on our anonymous diagnostic service then please email firstname.lastname@example.org or contact Stephen Davies directly on 07710 319690.
In our December and January Newsletters we considered some of the main issues arising out of the Government’s changes to the “loan charge” legislation which were announced following publication in December of the independent review by Sir Amyas Morse.
An, as yet, unanswered question asked in our January Newsletter, was whether HMRC would change its approach, as a creditor for disguised remuneration liabilities, in cases where the employer company is now insolvent. It seems likely to us, based on the current backlog of open enquiries into disguised remuneration schemes that a significant number of cases will need to be brought before the courts, by the liquidator or administrator of now insolvent employer companies, if HMRC wish to pursue their claims for unpaid PAYE and National Insurance Contributions (“NICs”) against the former directors, in such cases.
One of the first decisions of the courts in such cases was the October 2019 judgment handed down in Toone & Ors v Ross & Anor, re Implement Consulting Ltd  EWHC 2855 (Ch.). In that case, Judge Briggs deciding in favour of the joint liquidators held that payments made by the insolvent company under 3 disguised remuneration schemes covering the period from 2009 to 2013, were unlawful distributions under Company Law and, therefore, the shareholders were legally obliged to repay those distributions to the company.
The case is perhaps an unusual one, in so much that the liquidators had claimed that payments made under the disguised remuneration schemes by the company were distributions to Mr Ross and Mr Bell in their capacity as shareholders, rather than remuneration paid to them as directors. It is also important to note that the case was not a tax appeal, but a claim made against the directors/shareholders by the liquidators on behalf of the company and the decision has no direct bearing on the tax treatment of the underlying disguised remuneration schemes.
There were specific facts found in the case which supported the decision made by Judge Briggs, in particular the fact that payments were made pro rata to the relative amount of the shareholdings of Mr Ross and Mr Bell in the company and also an acknowledgement, in Mr Bell’s oral evidence in the hearing, that he and Mr Ross “were interested in the tax planning as a way of … providing a return to shareholders in the most tax efficient manner”. Such a fact pattern may not have been replicated in the disguised remuneration schemes used by many other companies.
However, that is not the end of the story in Toone v Ross, as Judge Briggs also accepted an alternative claim made by the liquidators, that the directors had breached their fiduciary duties to the Company in making the payment under the final disguised remuneration scheme in 2013. The judge held that at that point in time the Company was insolvent taking into account, as it should have done, the contingent tax liabilities which HMRC had claimed were due under the 2 earlier disguised remuneration schemes.
Whether HMRC will modify its approach in insolvency cases in consequence of the Morse Review, or if, alternatively, it will be emboldened by the judgment in Toone v Ross, only time will tell.
In our view, any former director or shareholder who is, potentially, facing personal liability for unpaid PAYE and/or NIC liabilities, in respect of historic disguised remuneration schemes, should now consider taking specific professional advice on both the tax and insolvency aspects of HMRC’s claim or potential claim against them. Each case needs to be considered on its own merits and establishing all of the relevant facts and circumstances will always be the starting point in providing such advice.
If you would like more information on any of the points covered in this Newsletter, or you would like to discuss any of the issues arising from it, or from the loan charge changes which were the subject of our December and January publications, please do not hesitate to contact us for an initial, confidential discussion.
Recent figures published by HMRC show the number of settlements under the Contractual Disclosure Facility (CDF), also known as the Code of Practice 9 (COP9) procedure, has fallen by almost 20% in the two years to March 2019.
It might be thought that the huge amounts of information received by HMRC from over 100 countries under the Common Reporting Standard (CRS) since October 2017 means they have no need to offer the CDF to taxpayers and can pick off the cases they like for prosecution.
However, the reality is more likely to be a little different. HMRC appears to have used CRS information relatively sparingly until the deadline for Requirement to Correct (RTC) offshore tax issues expired on 30 September 2018, waiting to see how much tax could be collected from voluntary disclosures by taxpayers.
However, in the last 12 months we have seen an upsurge in the use of “nudge letters” where HMRC indicates it has received information about offshore income or gains and invites the taxpayer to consider a voluntary disclosure. In some cases, the amounts are large and the issues are complex and this may result in an application for the COP 9 CDF procedure being made by the taxpayer.
In smaller and simpler cases, using the Worldwide Disclosure Facility (WDF) may be a more appropriate route.
However, in cases which HMRC believes very large amounts of tax are at stake and where it suspects serious tax fraud, the CRS report may prompt further research by HMRC’s Fraud Investigation Service (FIS) that leads to a registration of the case for investigation under COP9 or, in some cases, criminal investigation. In recent years, HMRC has been criticised for the absence of criminal prosecutions in corporate cases, particularly larger companies, and we would also expect increased effort from HMRC in targeting larger cases for criminal prosecution.
In conclusion, it seems likely that a reversal of the recent downturn in the number of COP9 cases will be seen in the near future, as the increased use of CRS information by HMRC translates to settlements under the CDF and proactive applications for COP9 CDF by well-advised taxpayers in advance of any HMRC intervention; proactive disclosures result in lower penalties.
HMRC will want to increase the number of tax fraud prosecutions by using CRS data but it simply does not have the resources to make criminal investigation the normal route. Therefore, when significant amounts of tax are at stake it will make sense for both taxpayers and HMRC to make appropriate use of the COP9 CDF procedure.
The team at Trident Tax has many years of experience in COP9 cases, including time spent as HMRC investigators. If you would like to discuss the COP9 CDF procedure, please contact us.