Donaldson and Doherty confirm the wide extent of HMRC’s jurisdiction to impose daily penalties for late filing and penalties for omissions even where a professional advisor is instructed. The decision in DLIP Amin draws a distinction between the sale of an asset of the business and the sale of a part of the business itself in the context of entrepreneur’s relief. Finally, Hardy confirms that a forfeited deposit on an aborted property purchase will not be a deductible capital loss.
Andrew Goldstone and Katie Doyle (Mishcon de Reya) review the latest tax developments affecting private clients.
In Donaldson v HMRC [2016] EWCA Civ 761, the taxpayer filed his paper tax return more than six months after the 31 October 2011 filing deadline. The tribunal considered whether HMRC had appropriately discharged its duty to inform the taxpayer that penalties would be charged on a daily basis and whether HMRC had considered the relevant factors when exercising its power to charge daily penalties.
The taxpayer was informed in writing that the return was late, a £100 penalty had been charged, and daily penalties would start from 31 January 2012, three months after the filing deadline. The taxpayer contested the £1,100 penalty he was finally charged on the grounds that HMRC did not comply with the provisions of FA 2009 Sch 55. He contended that HMRC’s power was discretionary and it should consider, when exercising it, the circumstances on a case by case basis by following through in chronological order the conditions contained in Sch 55 para 4 which stipulates that a taxpayer is only liable to a daily penalty where:
He argued that the reminder letters sent to him did not give the proper notice in breach of para 4(1)(c) as they only stated that daily penalties ‘might’ be applied, and, in breach of para 18(1)(c), HMRC did not confirm the period to which the penalty related.
All three arguments were dismissed: the first on the basis that there was no indication in the Schedule that the conditions should be applied in chronological order and this was highly unlikely to have been Parliament’s intention when setting out the conditions on which HMRC may exercise their discretion; the second on the basis that it was wrong to view the notices as having confirmed only that daily penalties ‘might’ be payable when the context confirmed the value of the penalties that would be chargeable and the frequency of them (i.e. daily); and, the third on the basis that while it was true that the period to which the penalties applied was not expressly stated (although it might be inferred from the phrase: ‘period in respect of which the penalty is assessed’), the relevant period could be deduced easily from the notice and reminders which together were a sufficient discharge of HMRC’s duty by virtue of TMA 1970 s 114(1).
Why it matters: While there are clear conditions placed on HMRC’s right to apply daily penalties, the taxpayer cannot challenge penalties on the basis of omissions of form over substance. Provided the notices are clear – stating the amount payable and the frequency at which penalties will accrue – and, essentially, the taxpayer has enough information to render the penalty charge compliant with the statute, it is well within HMRC’s jurisdiction to penalise the late filing of returns.
The case of Doherty [2016] UKFTT 0455 (TC) provides an assessment of a taxpayer’s responsibility to check the accuracy of their tax return when signing it where professionals have prepared it.
The taxpayer was charged a penalty of £1,483 for failing to declare £24,000 of interest in her 2010/11 return on account of her own carelessness. While the charge of carelessness was reduced from the original charge of a ‘deliberate, but not concealed’ action, the case confirmed that a taxpayer’s obligation to take reasonable care to provide an accurate account of one’s financial affairs is not discharged by taking reasonable care to submit accurate and sufficient information to a professional advisor. Nor is it discharged by delegating to a professional advisor where the taxpayer takes reasonable care in assessing the suitability of the appointment. Instead, the taxpayer must discharge their responsibilities by taking reasonable care in reviewing the prepared tax return itself. The decision specifically noted that the value of the omission was high enough that the taxpayer should have reasonably spotted it, which suggests that where values are smaller, HMRC may be more lenient.
Why it matters: The decision rebuts any presumption a taxpayer might have when delegating their tax compliance paperwork to a professional adviser that, provided the appointment is made with reasonable care and the relevant information is provided to the advisor, there is a simultaneous delegation of the duty of care to provide an accurate and full report to HMRC. While that delegation, if appropriate, might serve as a defence to carelessness resulting in omission, or at least be a factor to consider, the decision suggests that here the delegation resulted in a sharing of the duty between taxpayer and advisor, rather than a discharge of the taxpayer’s duty. Ultimate responsibility for declaring a full and correct account to HMRC rests with the taxpayer, particularly where the sums in question are substantial.
In Amin v HMRC [2016] UKFTT 0515 (TC), following a sole practitioner accountant’s sale of 50% of his interest in the premises to the trustees of his pension scheme, the taxpayer separately sold the goodwill of the practice to another firm although he continued to advise his clients on an ad hoc basis. He claimed entrepreneur’s relief on the property sale on the basis that there had been a sale of part of the business. HMRC denied the claim, arguing that the sale was of a building used by the business, but there had been no required sale of any part of the business itself, given the business had not ceased.
The FTT rejected his appeal on the grounds that entrepreneur’s relief is not applicable where part-premises are disposed of and there is a separate disposal of a business asset (namely the goodwill), rather than the business itself. In this case the two disposals were unconnected transactions.
Why it matters: This is yet another case showing the difficulties of claiming entrepreneur’s relief on the sale of an asset used in the business where it is not clear that there is an accompanying sale of all or part of the business itself. Taxpayers should take great care in such situations otherwise entrepreneur’s relief can be lost in its entirety.
In Hardy v HMRC [2016] UKUT 0332, the Upper Tribunal found that the contractual rights acquired at the time of entering into a purchase contract for a property do not comprise an asset and so, on rescission of the contract, there was no disposal of an asset from which an allowable loss, in this case the forfeited deposit, can arise.
The taxpayer, having exchanged contracts, failed to complete and forfeited his deposit as a result. His claim to offset the deposit as a loss against other gains was disallowed and the FTT agreed with HMRC. The UT dismissed his appeal on the basis that, while contractual rights do fall within the definition of an asset for the purposes of TCGA 1992 s 21(1) (‘options, debts and incorporeal property generally’), the acquisition of the right by contract to compel a vendor to fulfil his contractual obligations, does not indisputably constitute the acquisition of a disposable asset. In this instance, the vendor’s obligations were contingent on the taxpayer first satisfying his contractual obligations. These included taking the necessary steps to complete, which he failed to do.
While the UT denied the taxpayer’s claim by dismissing his first argument (that the contractual rights were an asset), it did also consider his second and third contentions: that the rescission of the contract was a disposal under the TCGA 1992, and that forfeiture of the deposit was an allowable loss. The UT found that the taxpayer ‘abandoned’ the purchase option, meaning he had ‘not exercised’ it – the court having concluded that ‘abandonment’ equates to a ‘failure to exercise’ pursuant to TCGA 1992 s 144. This section excludes abandonment from the definition of disposal and so there was no disposal even if the taxpayer were treated as having acquired an asset. Finally, the UT deemed the deposit paid to be a part-payment of the purchase price rather than payment for the contractual rights and was not therefore a deductible expense for CGT purposes.
Why it matters: At face value the case confirms that a forfeited deposit is not a deductible loss. The case clarifies the definition of an asset and an allowable loss, and the nature of pre-completion proprietary rights for CGT purposes. This may actually assist taxpayers who make a gain on sub-sale. Such an assignment of rights, according to the Hardy analysis, should not be treated as the disposal of an asset for CGT purposes.
Donaldson and Doherty confirm the wide extent of HMRC’s jurisdiction to impose daily penalties for late filing and penalties for omissions even where a professional advisor is instructed. The decision in DLIP Amin draws a distinction between the sale of an asset of the business and the sale of a part of the business itself in the context of entrepreneur’s relief. Finally, Hardy confirms that a forfeited deposit on an aborted property purchase will not be a deductible capital loss.
Andrew Goldstone and Katie Doyle (Mishcon de Reya) review the latest tax developments affecting private clients.
In Donaldson v HMRC [2016] EWCA Civ 761, the taxpayer filed his paper tax return more than six months after the 31 October 2011 filing deadline. The tribunal considered whether HMRC had appropriately discharged its duty to inform the taxpayer that penalties would be charged on a daily basis and whether HMRC had considered the relevant factors when exercising its power to charge daily penalties.
The taxpayer was informed in writing that the return was late, a £100 penalty had been charged, and daily penalties would start from 31 January 2012, three months after the filing deadline. The taxpayer contested the £1,100 penalty he was finally charged on the grounds that HMRC did not comply with the provisions of FA 2009 Sch 55. He contended that HMRC’s power was discretionary and it should consider, when exercising it, the circumstances on a case by case basis by following through in chronological order the conditions contained in Sch 55 para 4 which stipulates that a taxpayer is only liable to a daily penalty where:
He argued that the reminder letters sent to him did not give the proper notice in breach of para 4(1)(c) as they only stated that daily penalties ‘might’ be applied, and, in breach of para 18(1)(c), HMRC did not confirm the period to which the penalty related.
All three arguments were dismissed: the first on the basis that there was no indication in the Schedule that the conditions should be applied in chronological order and this was highly unlikely to have been Parliament’s intention when setting out the conditions on which HMRC may exercise their discretion; the second on the basis that it was wrong to view the notices as having confirmed only that daily penalties ‘might’ be payable when the context confirmed the value of the penalties that would be chargeable and the frequency of them (i.e. daily); and, the third on the basis that while it was true that the period to which the penalties applied was not expressly stated (although it might be inferred from the phrase: ‘period in respect of which the penalty is assessed’), the relevant period could be deduced easily from the notice and reminders which together were a sufficient discharge of HMRC’s duty by virtue of TMA 1970 s 114(1).
Why it matters: While there are clear conditions placed on HMRC’s right to apply daily penalties, the taxpayer cannot challenge penalties on the basis of omissions of form over substance. Provided the notices are clear – stating the amount payable and the frequency at which penalties will accrue – and, essentially, the taxpayer has enough information to render the penalty charge compliant with the statute, it is well within HMRC’s jurisdiction to penalise the late filing of returns.
The case of Doherty [2016] UKFTT 0455 (TC) provides an assessment of a taxpayer’s responsibility to check the accuracy of their tax return when signing it where professionals have prepared it.
The taxpayer was charged a penalty of £1,483 for failing to declare £24,000 of interest in her 2010/11 return on account of her own carelessness. While the charge of carelessness was reduced from the original charge of a ‘deliberate, but not concealed’ action, the case confirmed that a taxpayer’s obligation to take reasonable care to provide an accurate account of one’s financial affairs is not discharged by taking reasonable care to submit accurate and sufficient information to a professional advisor. Nor is it discharged by delegating to a professional advisor where the taxpayer takes reasonable care in assessing the suitability of the appointment. Instead, the taxpayer must discharge their responsibilities by taking reasonable care in reviewing the prepared tax return itself. The decision specifically noted that the value of the omission was high enough that the taxpayer should have reasonably spotted it, which suggests that where values are smaller, HMRC may be more lenient.
Why it matters: The decision rebuts any presumption a taxpayer might have when delegating their tax compliance paperwork to a professional adviser that, provided the appointment is made with reasonable care and the relevant information is provided to the advisor, there is a simultaneous delegation of the duty of care to provide an accurate and full report to HMRC. While that delegation, if appropriate, might serve as a defence to carelessness resulting in omission, or at least be a factor to consider, the decision suggests that here the delegation resulted in a sharing of the duty between taxpayer and advisor, rather than a discharge of the taxpayer’s duty. Ultimate responsibility for declaring a full and correct account to HMRC rests with the taxpayer, particularly where the sums in question are substantial.
In Amin v HMRC [2016] UKFTT 0515 (TC), following a sole practitioner accountant’s sale of 50% of his interest in the premises to the trustees of his pension scheme, the taxpayer separately sold the goodwill of the practice to another firm although he continued to advise his clients on an ad hoc basis. He claimed entrepreneur’s relief on the property sale on the basis that there had been a sale of part of the business. HMRC denied the claim, arguing that the sale was of a building used by the business, but there had been no required sale of any part of the business itself, given the business had not ceased.
The FTT rejected his appeal on the grounds that entrepreneur’s relief is not applicable where part-premises are disposed of and there is a separate disposal of a business asset (namely the goodwill), rather than the business itself. In this case the two disposals were unconnected transactions.
Why it matters: This is yet another case showing the difficulties of claiming entrepreneur’s relief on the sale of an asset used in the business where it is not clear that there is an accompanying sale of all or part of the business itself. Taxpayers should take great care in such situations otherwise entrepreneur’s relief can be lost in its entirety.
In Hardy v HMRC [2016] UKUT 0332, the Upper Tribunal found that the contractual rights acquired at the time of entering into a purchase contract for a property do not comprise an asset and so, on rescission of the contract, there was no disposal of an asset from which an allowable loss, in this case the forfeited deposit, can arise.
The taxpayer, having exchanged contracts, failed to complete and forfeited his deposit as a result. His claim to offset the deposit as a loss against other gains was disallowed and the FTT agreed with HMRC. The UT dismissed his appeal on the basis that, while contractual rights do fall within the definition of an asset for the purposes of TCGA 1992 s 21(1) (‘options, debts and incorporeal property generally’), the acquisition of the right by contract to compel a vendor to fulfil his contractual obligations, does not indisputably constitute the acquisition of a disposable asset. In this instance, the vendor’s obligations were contingent on the taxpayer first satisfying his contractual obligations. These included taking the necessary steps to complete, which he failed to do.
While the UT denied the taxpayer’s claim by dismissing his first argument (that the contractual rights were an asset), it did also consider his second and third contentions: that the rescission of the contract was a disposal under the TCGA 1992, and that forfeiture of the deposit was an allowable loss. The UT found that the taxpayer ‘abandoned’ the purchase option, meaning he had ‘not exercised’ it – the court having concluded that ‘abandonment’ equates to a ‘failure to exercise’ pursuant to TCGA 1992 s 144. This section excludes abandonment from the definition of disposal and so there was no disposal even if the taxpayer were treated as having acquired an asset. Finally, the UT deemed the deposit paid to be a part-payment of the purchase price rather than payment for the contractual rights and was not therefore a deductible expense for CGT purposes.
Why it matters: At face value the case confirms that a forfeited deposit is not a deductible loss. The case clarifies the definition of an asset and an allowable loss, and the nature of pre-completion proprietary rights for CGT purposes. This may actually assist taxpayers who make a gain on sub-sale. Such an assignment of rights, according to the Hardy analysis, should not be treated as the disposal of an asset for CGT purposes.
