The Supreme Court has ruled in favour of HMRC in a case involving a claim to carry back an employment related loss and the jurisdiction of the County Court to consider the claim. The First-tier Tribunal has ruled that parts of an engagement letter were subject to legal professional privilege. A proposal to allow claims against estates of foreign domiciled individuals has been dropped. A registry of the beneficial owners of shares in UK companies is to be established. The ‘Hastings-Bass rule’ has been put on a statutory footing in Jersey.
Wendy Walton and Miranda Chamberlain review recent changes affecting private client advisers, including the Cotter decision, a case on legal professional privilege, the UK share registry plan, an update on claims against foreign estates, and the retrospective application of the Hastings-Bass principle in Jersey.
Recent developments affecting those advising on the taxation of private clients are as follows.
In Cotter v HMRC [2013] UKSC 69, the five Supreme Court judges unanimously ruled that HMRC was right not to give effect to a claim to carry back an employment-related loss from 2008/09 when collecting a taxpayer’s 2007/08 liability, reversing the earlier Court of Appeal decision. The case raised interesting questions about the jurisdiction of the County Court and the correct circumstances under which an enquiry under TMA 1970 Sch 1A can be raised.
The facts were that Mr Cotter submitted his 2007/08 return to HMRC in October 2008 and asked HMRC to calculate his tax bill. In December 2008, HMRC sent a tax calculation to Mr Cotter showing a liability of £211,927.77. On 29 January 2009, Mr Cotter’s accountants sent a letter with amended tax return pages, stating that he had suffered an employment related loss in 2008/09 which he wished to carry back and claim relief in 2007/08 under ITA 2007 s 128, resulting in the tax previously assessed no longer being due. In March 2009, HMRC stated that it would be enquiring into the loss under TMA 1970 Sch 1A, allowing it to postpone any credit for the loss until the enquiry was complete.
In June 2009, HMRC initiated legal proceedings to collect the £211,927.77 debt through the County Court. The taxpayer claimed that HMRC should have opened its enquiry under TMA 1970 s 9A, under which tax is not payable until the enquiry has been completed, and that the First-tier Tribunal had exclusive jurisdiction to determine whether effect should be given to the loss claim.
Central to the case was the fact that ITA 2007 s 128 loss claims are subject to TMA 1970 Sch 1B para 2, which specifies that carried back relief does not alter the tax calculation of the earlier year, and the claim is given effect by repayment or set-off in the later year.
Lord Hodge found that HMRC was right to open the enquiry under TMA 1970 Sch 1A, which deals with any claim which ‘is made otherwise than by being included in a return under ss 8, 8A or 12AA’, on the basis that the amendments submitted in January 2009 were not ‘an amendment of his return’, mainly because his accountants did not submit a self-assessment calculation together with the amended pages. Lord Hodge went on to say that he felt ‘matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return’. Lord Hodge was clear that if this had been the case, then a s 9A enquiry would have been the correct course of action by HMRC, potentially giving effect to a claim until the conclusion of the enquiry.
Lord Hodge also confirmed that the First-tier Tribunal did have exclusive jurisdiction to hear taxpayers’ appeals against assessments to tax, but this case concerned a claim for relief, not an assessment to tax. HMRC was right to raise its enquiry under Sch 1A and elect not to give effect to the claim; therefore there was no postponement of tax. HMRC was entitled, in the normal way, to collect tax through the County Court, and the County Court had jurisdiction to determine whether a loss claim constituted a defence against HMRC’s claim for immediate payment.
Why it matters
In finding for HMRC, Lord Hodge made it clear that the fact that Mr Cotter had asked HMRC to calculate his tax bill in October, and the manner in which the amendment was made in January, were key to his decision, which has important implications for taxpayers and advisers. Lord Hodge highlighted that a taxpayer could, in effect, ‘delay payment of tax by claims which turn out to be unfounded if he completes the assessment calculating the tax which he is due to pay’. This is because the calculation would constitute a ‘return’ under s 9A, and HMRC would then either have to amend the return under s 9ZB or raise an enquiry under s 9A.
The Edward C Behague case (TC02983 – 21 October 2013) concerned the taxpayer’s claim of legal professional privilege (LPP) over two documents, following an enquiry opened by HMRC into his 2005 tax return. The two documents were an engagement letter between Mr Behague and his solicitors and a report produced by the solicitors in relation to trust arrangements.
It is well established that communications between a client and his legal advisers for the purpose of giving or obtaining legal advice are subject to LPP.
As part of his defence, the taxpayer submitted that engagement letters are ‘by their nature’ subject to LPP. However, the judge ruled that an engagement letter between a solicitor and a client is not privileged, on the basis that it merely sets out the terms on which the solicitor will act.
The parts of the letter dealing with the terms of engagement were therefore not subject to LPP, but other parts of the letter which contained legal advice were privileged.
With regard to the trust report, although HMRC argued that the solicitors were in fact acting ‘as financial or wealth management advisers’ in producing the report, the tribunal found that the report did comprise legal advice and was therefore also subject to LPP.
Why it matters
The case is a reminder that an engagement letter would not normally qualify as a legally privileged document, but there can be carve-outs to this where elements of the letter contain legal advice.
On 31 October 2013, the prime minister announced his commitment to establish a central registry which will reveal the ultimate beneficial owners of UK companies where individuals hold more than a 25% interest through ‘nominees’. Furthermore, the registry will be accessible by the public, probably via reporting requirements similar to those used at Companies House. Mr Cameron said: ‘We need to know who really owns and controls our companies. Not just who owns them legally, but who really benefits financially from their existence’.
Why it matters
This will affect holders of bearer shares, corporate directors and anyone who uses a nominee to hold the legal title to company shares while retaining beneficial ownership. Many individuals use nominees to hold their shares for reasons of confidentiality, security and other reasons. Although the announcement indicated that there would be a limited exception for individuals whose safety could be put at risk, no details are known at this stage.
A controversial measure in the Inheritance and Trustees’ Powers Bill, which would have allowed ‘reasonable provision’ claims to be brought in the courts against the estates of people domiciled outside of England and Wales, has been dropped by the government. It had proposed an amendment to the Inheritance (Provisions for Family and Dependents) Act 1975, which only allows claims on the estates of individuals domiciled in England and Wales. The opposition had claimed that the courts would have been left to make unenforceable orders affecting overseas property and it could have adversely affected inheritance rights in Scotland, as well as in jurisdictions outside the UK.
Justice minister Lord McNally, who introduced the Bill, acknowledged: ‘I do not now believe that it is possible to engineer a compromise on this point that would answer these concerns and retain the benefits of our original proposals.’
Why it matters
This was a controversial proposal which could have imposed a UK court ruling on the inheritance rules of other countries. When considering an individual’s death estate, it is important to be aware of cross-jurisdictional issues.
The ‘Hastings-Bass rule’, under which actions by trustees can be set aside in certain circumstances, has been put on a statutory footing in Jersey, with retrospective effect. The Trusts (Amendment No. 6) (Jersey) Law 2013 also now gives statutory relief for mistakes made by settlors and other persons in relation to transfers of property to a trust. The new legislation provides that the courts can set aside:
In each case, it is a condition that the transfer or exercise of the power would not have been made but for the mistake or failure in question.
Importantly, where actions by trustees are concerned, it does not matter whether there was a lack of care or any other fault on the part of the trustees or anyone who advised them. A mistake is also widely defined, including a mistake as to fact or the law (including foreign laws), and a mistake as to the effect, consequences or advantages of the transfer or exercise of power in question.
In the UK, in the Re Futter case ([2013] UKSC 26), the Supreme Court considerably restricted the scope of the Hastings-Bass rule, ruling that it only applies where there has been a breach of duty on the part of the trustees.
Why it matters
The Hastings-Bass rule provides an element of protection, particularly in an environment of ever more complex tax legislation. The new Jersey legislation is therefore a welcome development for both trustees and beneficiaries of Jersey trusts. It potentially reduces the need for lengthy and expensive proceedings against trustees for negligence, and is seen as enhancing the attractiveness of Jersey as a jurisdiction in which to establish trusts.
The Supreme Court has ruled in favour of HMRC in a case involving a claim to carry back an employment related loss and the jurisdiction of the County Court to consider the claim. The First-tier Tribunal has ruled that parts of an engagement letter were subject to legal professional privilege. A proposal to allow claims against estates of foreign domiciled individuals has been dropped. A registry of the beneficial owners of shares in UK companies is to be established. The ‘Hastings-Bass rule’ has been put on a statutory footing in Jersey.
Wendy Walton and Miranda Chamberlain review recent changes affecting private client advisers, including the Cotter decision, a case on legal professional privilege, the UK share registry plan, an update on claims against foreign estates, and the retrospective application of the Hastings-Bass principle in Jersey.
Recent developments affecting those advising on the taxation of private clients are as follows.
In Cotter v HMRC [2013] UKSC 69, the five Supreme Court judges unanimously ruled that HMRC was right not to give effect to a claim to carry back an employment-related loss from 2008/09 when collecting a taxpayer’s 2007/08 liability, reversing the earlier Court of Appeal decision. The case raised interesting questions about the jurisdiction of the County Court and the correct circumstances under which an enquiry under TMA 1970 Sch 1A can be raised.
The facts were that Mr Cotter submitted his 2007/08 return to HMRC in October 2008 and asked HMRC to calculate his tax bill. In December 2008, HMRC sent a tax calculation to Mr Cotter showing a liability of £211,927.77. On 29 January 2009, Mr Cotter’s accountants sent a letter with amended tax return pages, stating that he had suffered an employment related loss in 2008/09 which he wished to carry back and claim relief in 2007/08 under ITA 2007 s 128, resulting in the tax previously assessed no longer being due. In March 2009, HMRC stated that it would be enquiring into the loss under TMA 1970 Sch 1A, allowing it to postpone any credit for the loss until the enquiry was complete.
In June 2009, HMRC initiated legal proceedings to collect the £211,927.77 debt through the County Court. The taxpayer claimed that HMRC should have opened its enquiry under TMA 1970 s 9A, under which tax is not payable until the enquiry has been completed, and that the First-tier Tribunal had exclusive jurisdiction to determine whether effect should be given to the loss claim.
Central to the case was the fact that ITA 2007 s 128 loss claims are subject to TMA 1970 Sch 1B para 2, which specifies that carried back relief does not alter the tax calculation of the earlier year, and the claim is given effect by repayment or set-off in the later year.
Lord Hodge found that HMRC was right to open the enquiry under TMA 1970 Sch 1A, which deals with any claim which ‘is made otherwise than by being included in a return under ss 8, 8A or 12AA’, on the basis that the amendments submitted in January 2009 were not ‘an amendment of his return’, mainly because his accountants did not submit a self-assessment calculation together with the amended pages. Lord Hodge went on to say that he felt ‘matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return’. Lord Hodge was clear that if this had been the case, then a s 9A enquiry would have been the correct course of action by HMRC, potentially giving effect to a claim until the conclusion of the enquiry.
Lord Hodge also confirmed that the First-tier Tribunal did have exclusive jurisdiction to hear taxpayers’ appeals against assessments to tax, but this case concerned a claim for relief, not an assessment to tax. HMRC was right to raise its enquiry under Sch 1A and elect not to give effect to the claim; therefore there was no postponement of tax. HMRC was entitled, in the normal way, to collect tax through the County Court, and the County Court had jurisdiction to determine whether a loss claim constituted a defence against HMRC’s claim for immediate payment.
Why it matters
In finding for HMRC, Lord Hodge made it clear that the fact that Mr Cotter had asked HMRC to calculate his tax bill in October, and the manner in which the amendment was made in January, were key to his decision, which has important implications for taxpayers and advisers. Lord Hodge highlighted that a taxpayer could, in effect, ‘delay payment of tax by claims which turn out to be unfounded if he completes the assessment calculating the tax which he is due to pay’. This is because the calculation would constitute a ‘return’ under s 9A, and HMRC would then either have to amend the return under s 9ZB or raise an enquiry under s 9A.
The Edward C Behague case (TC02983 – 21 October 2013) concerned the taxpayer’s claim of legal professional privilege (LPP) over two documents, following an enquiry opened by HMRC into his 2005 tax return. The two documents were an engagement letter between Mr Behague and his solicitors and a report produced by the solicitors in relation to trust arrangements.
It is well established that communications between a client and his legal advisers for the purpose of giving or obtaining legal advice are subject to LPP.
As part of his defence, the taxpayer submitted that engagement letters are ‘by their nature’ subject to LPP. However, the judge ruled that an engagement letter between a solicitor and a client is not privileged, on the basis that it merely sets out the terms on which the solicitor will act.
The parts of the letter dealing with the terms of engagement were therefore not subject to LPP, but other parts of the letter which contained legal advice were privileged.
With regard to the trust report, although HMRC argued that the solicitors were in fact acting ‘as financial or wealth management advisers’ in producing the report, the tribunal found that the report did comprise legal advice and was therefore also subject to LPP.
Why it matters
The case is a reminder that an engagement letter would not normally qualify as a legally privileged document, but there can be carve-outs to this where elements of the letter contain legal advice.
On 31 October 2013, the prime minister announced his commitment to establish a central registry which will reveal the ultimate beneficial owners of UK companies where individuals hold more than a 25% interest through ‘nominees’. Furthermore, the registry will be accessible by the public, probably via reporting requirements similar to those used at Companies House. Mr Cameron said: ‘We need to know who really owns and controls our companies. Not just who owns them legally, but who really benefits financially from their existence’.
Why it matters
This will affect holders of bearer shares, corporate directors and anyone who uses a nominee to hold the legal title to company shares while retaining beneficial ownership. Many individuals use nominees to hold their shares for reasons of confidentiality, security and other reasons. Although the announcement indicated that there would be a limited exception for individuals whose safety could be put at risk, no details are known at this stage.
A controversial measure in the Inheritance and Trustees’ Powers Bill, which would have allowed ‘reasonable provision’ claims to be brought in the courts against the estates of people domiciled outside of England and Wales, has been dropped by the government. It had proposed an amendment to the Inheritance (Provisions for Family and Dependents) Act 1975, which only allows claims on the estates of individuals domiciled in England and Wales. The opposition had claimed that the courts would have been left to make unenforceable orders affecting overseas property and it could have adversely affected inheritance rights in Scotland, as well as in jurisdictions outside the UK.
Justice minister Lord McNally, who introduced the Bill, acknowledged: ‘I do not now believe that it is possible to engineer a compromise on this point that would answer these concerns and retain the benefits of our original proposals.’
Why it matters
This was a controversial proposal which could have imposed a UK court ruling on the inheritance rules of other countries. When considering an individual’s death estate, it is important to be aware of cross-jurisdictional issues.
The ‘Hastings-Bass rule’, under which actions by trustees can be set aside in certain circumstances, has been put on a statutory footing in Jersey, with retrospective effect. The Trusts (Amendment No. 6) (Jersey) Law 2013 also now gives statutory relief for mistakes made by settlors and other persons in relation to transfers of property to a trust. The new legislation provides that the courts can set aside:
In each case, it is a condition that the transfer or exercise of the power would not have been made but for the mistake or failure in question.
Importantly, where actions by trustees are concerned, it does not matter whether there was a lack of care or any other fault on the part of the trustees or anyone who advised them. A mistake is also widely defined, including a mistake as to fact or the law (including foreign laws), and a mistake as to the effect, consequences or advantages of the transfer or exercise of power in question.
In the UK, in the Re Futter case ([2013] UKSC 26), the Supreme Court considerably restricted the scope of the Hastings-Bass rule, ruling that it only applies where there has been a breach of duty on the part of the trustees.
Why it matters
The Hastings-Bass rule provides an element of protection, particularly in an environment of ever more complex tax legislation. The new Jersey legislation is therefore a welcome development for both trustees and beneficiaries of Jersey trusts. It potentially reduces the need for lengthy and expensive proceedings against trustees for negligence, and is seen as enhancing the attractiveness of Jersey as a jurisdiction in which to establish trusts.
