Tax Bites - July 2023

Welcome to the latest edition of RPC's Tax Bites - providing monthly bite-sized updates from the tax world.

News

Umbrella company market consultation

HM Treasury has published a summary of responses received in respect of the November 2021 call for evidence on the umbrella company market.

The original consultation requested views from stakeholders on the role that umbrella companies play in the labour market and how they interact with tax and employment rights.

Responses from workers outlined disadvantages of being engaged via an umbrella company and called for regulation of the amount an umbrella company can charge a worker for services (such as processing their pay), payslips, employment businesses directing workers to use umbrella companies in which they hold an interest and the enforcement of employment rights.

In relation to tax, non-compliance was flagged as a concern in the umbrella company market given the use of preferred suppliers and the lack of transparency with the process of accreditation, and the difficulty with conducting effective due diligence.

HMRC announces 'nudge' letter campaign targeting UK residents named in the Pandora Papers

In October 2021, the International Consortium of Investigative Journalists began publishing 11.9 million leaked files of a number of offshore financial service providers who specialise in companies, trusts, and foundations in low, or no tax, jurisdictions. The files contained details of offshore structures created on behalf of wealthy individuals. The files became known as the 'Pandora Papers'.

Perhaps not surprisingly, HMRC took a keen interest in the files and are now in the process of sending 'nudge letters' (recently rebranded by HMRC as 'one to many letters') to UK residents whose names were leaked in the Pandora Papers.

HMRC are encouraging recipients of these letters to report to HMRC all their overseas income or gains on which they may owe UK tax by making use of one of two disclosure facilities: the Contractual Disclosure Facility and the Worldwide Disclosure Facility. If a recipient fails to make an appropriate disclosure, and HMRC later find that tax is due, they could face penalties of up to 200%, or indeed criminal prosecution.

In many cases the structures will have been entered into for perfectly legitimate reasons. If that is the case, or if HMRC has sent the letter in error, it should be possible to correct the position by prompt engagement with HMRC. Equally, if it emerges that corrective action is required, open and early communication with HMRC will minimise the risk of HMRC escalating matters and/or imposing penal sanctions for the alleged wrongdoing.

Potential new voluntary standard for customs intermediaries

HMRC has issued a consultation requesting ideas and information relating to a potential new voluntary standard for customs intermediaries. The consultation specifically looks at the following:

• the objectives of a voluntary standard, and what format it could take;
• how a voluntary standard could be designed and implemented;
• the potential content of a voluntary standard; and
• training and educational offerings for the intermediary sector, which would support the introduction of a voluntary standard.

HMRC Code of Practice 9 Guidance updated

Code of Practice 9 (COP9) gives taxpayers the opportunity to admit tax fraud and pay tax they owe, plus interest and any related penalties. In return, HMRC will not pursue a criminal investigation into the behaviour the taxpayer discloses.

HMRC has updated its COP9 Guidance as part of a wider push to re-establish COP9 as HMRC’s primary civil investigation tool in tackling tax fraud. The Guidance:

• clarifies that HMRC may also use COP9 in connection with its non-tax functions;
• states that disclosures must cover any non-deliberate behaviour that has led to irregularities in the tax affairs of others; and
• sets out the circumstances when a COP9 case can escalate to a criminal investigation and ultimately to prosecution, for example, failure to comply with
• the terms of a contractual disclosure facility contract and failure to give proper disclosure.

Case reports

When is a 'tunnel' not a tunnel, for capital allowances purposes?

In HMRC v SSE Generation Ltd [2023] UKSC 17, the Supreme Court (SC) confirmed that capital allowances are available in respect of parts of a hydroelectric power station. The dispute in this case concerned the availability of capital allowances in respect of the Glendoe scheme, a large hydroelectric project at Fort Augustus, in Scotland, which was constructed and operated by SSE Generation Ltd.

The result of this decision is that capital allowances are available in respect of a major piece of national infrastructure (indeed, the SC commented that the hydro-electric scheme at Glendoe is the only large-scale hydro-electric power scheme of its type built in the UK in the last 50 years). No tax depreciation would otherwise have been available, due to the gap in time between the abolition of the old Industrial Buildings Allowance in 2008 and the entry into force of the (relatively) new Structures and Buildings Allowance, which applies only for expenditure incurred on or after 29 October 2018.

Our comment on the decision can be read here.

Interest in possession trust was ineffective in avoiding inheritance tax charge

In James Charles Pride (as trustee of the estate of the late Geraldine Jill Pride) v HMRC [2023] UKFTT 00316 (TC), the First-tier Tribunal (FTT) determined that the assets of a property trust were beneficially held by the principal beneficiary and formed part of her estate for inheritance tax purposes.

This decision emphasises the importance of careful estate planning, particularly where complex trust arrangements are involved, and highlights the significant tax liabilities that can arise where that planning is ineffective. Subject to any appeal to the Upper Tribunal, the FTT's decision would appear to render so-called 'double trust' arrangements ineffective when seeking to avoid a charge to inheritance tax.

Our comment on the decision can be read here.

HMRC's attempt to strike out appeal fails

In Phu Hung Ltd v HMRC [2023] UKFTT 00224 (TC), the FTT rejected HMRC's application to strike out the taxpayer's appeal as HMRC had failed to demonstrate that the taxpayer had no reasonable prospects of success in its appeal.

This decision is a reminder that when considering a strike out application, the FTT will not conduct a 'mini-trial'. It is for the applicant (in this case HMRC) to demonstrate that the other party has no prospect of success. Where the dispute would involve determination of facts and the examination of documentary and/or witness evidence, an application to strike out is unlikely to succeed if proceedings are not advanced enough for the parties to have had the opportunity to provide documentary and/or witness evidence, or at the very least confirm that no such evidence is to be adduced.

Our comment on the decision can be read here.

And finally...
RPC's Adam Craggs, Michelle Sloane and Alice Kemp recently gave a talk on the key regulatory developments that businesses need to be aware of. This touched on the new 'failure to prevent fraud' offence, Companies House and Limited Partnership reforms, the Economic Crime Levy, and changes in the AML and regulatory landscape. The team provided practical tips that businesses need to be aware of. The webinar is available to watch here.