Some tax enquiry cases…

Tax Investigation

Tax Enquiry Investigation

Client A had been in a 4 year running battle with HMRC.The client was keen to finalise matters but at a reasonable compromise based on the facts and circumstances. HMRC were asking for approximately £200,000 and the previous accountant and insurers were not able to reduce this figure.

Shipleys were then appointed at this late stage and discovered flaws in HMRC’s argument. We supplied irrefutable evidence and successfully negotiated tax down to £30,000.

Comment: This is unfortunately a typical case where HMRC officers tend to hastily take a defensive position and refuse to move. Our legal backgrounds are invaluable in dealing with these type of enquiries.

Serious Tax Fraud

Client B had a 15 year back duty case, the tax assessed was approximately £300,000. Shipleys managed this stressful process from start to finish and achieved a good result both on time and reduced overall duty payable and secured a sensible time to pay plan.

Comment: HMRC are much more aggressive now with collecting tax with these kind of formal tax cases on the increase; it is thus essential that the client has proper representation by experienced advisers in order to achieve the desired outcome.

Latest news & blogs…

Receiver’s fee and litigation expenses not allowed

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Deductibility of receiver’s and legal fees

In a recent case the First-tier Tribunal (FTT) has held that the fees of a receiver appointed to sell properties forming part of a letting business and legal fees in challenging the receivership and claiming against the bank for their actions in relation to the loan were not allowable expenditure under TCGA 1992, s. 38.

The FTT found that both a receiver’s fee and legal fees effectively paid by the taxpayers on the forced disposal of properties were not deductible for capital gains tax (CGT) purposes.

Background

The taxpayers owned ten properties, nine of which were let out. It was decided to consolidate the various related loans in place into a single loan with one bank.

Two of the properties were sold, with the bank’s permission. The taxpayers intended to use the proceeds to reduce the loan. However, the bank did not do this. It claimed that the taxpayers were in breach of the terms of the loan as the reduced rental income dropped to less than a predetermined percentage of the interest.

A receiver was appointed who subsequently arranged sale of the remaining eight properties. The taxpayers incurred various legal fees to prevent the forced sale and subsequently to claim against the bank. The bank also deducted the receiver’s fees from the sale proceeds.

Outcome

The FTT found that the receiver’s fee on the forced sale of the properties was not wholly and exclusively in relation to the sale as the receiver carried out other tasks. This was therefore not deductible. This follows the decision in the recent case of O’Donnell v HMRC [2017] UKFTT 347 (TC).

The taxpayers argued that the legal fees fell within TCGA 1992 s.38(1)(b) and were incurred wholly and exclusively in establishing, preserving or defending title to, or a right over, the asset. The FTT disagreed; the work to prevent the forced sale and the litigation with the bank were concerned with their rights and liabilities under the loan agreement with the bank. The expenses were not allowable. The FTT suggested that the fees were all in fact of an income nature.

If you need advice with capital gains tax on properties please contact us on info@shipleystax.com or call 0114 275 62 92 and ask for a tax consultation.

 

UK Inheritance Tax – Changes which affect Non residents

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From 6 April 2017 a UK residential property will now be subject to UK Inheritance Tax regardless of ownership structure and residence or domicile status of the ultimate owner.

Who will be affected?

The new rules will affect all non-UK domiciliaries and the trustees of trusts they have established who hold an interest in an offshore structure which derives its value from:

  • a UK residential property;
  • loans (is provision applies to all loans not just those between connected parties) used to acquire, maintain or improve UK residential property; or
  • collateral for such loans or who have thereunder made or provided collateral for such loans.

    Which assets are relevant?

    The new legislation imposes an inheritance tax charge on three categories of property:

    Interests (e.g. loans or shares) in closely held companies which derive, directly or indirectly, their value from UK residential property. The interest in the parent company will still be caught even if there is a chain of companies underneath before you get to the residential property. However, if any of the companies is widely held (for example a real estate fund), this will not be caught.

    An interest in a partnership, the value of which is directly or indirectly attributable to UK residential property. Unlike companies, it does not make any difference how many partners there are and whether or not they are connected. A real estate fund which is structured as a partnership will therefore fall within the new rules.

    The benefit of loans made to enable an individual, trustees or a partnership to acquire, maintain or improve a UK residential property or to invest in a close company or a partnership which uses the money to acquire, maintain or improve UK residential property.

To avoid back-to-back lending arrangements, assets used as collateral for such a loan will also be subject to inheritance tax under the new rules.

An interest in a close company, or a partnership which holds the benefit of the debt or the assets which are used as collateral, are also caught.

UK residential property

The rules will apply where the shares’ (or other interest’s) value is attributable to any UK residential property, whether that property is occupied or let and whatever the property’s value (subject to limited exceptions such as care homes). A property which is being constructed or adapted for residential use will be treated as UK residential property.

The rules will not apply to the extent that the asset’s value is derived from commercial property. It is to be welcomed that previous proposals to include a property which had had a residential use at any time in the last two years have been dropped. Rather, it will simply be the use of the property at the time that the IHT charge arises that will be relevant.

Legislation is still awaited for properties used for both residential and non-residential purposes. Based on the 2016 consultation paper this will be on an apportionment basis.

Value subject to IHT and debts

Where an IHT charge arises on shares etc. under the new rules, the IHT liability will be calculated on the open market value of the shares (or other interest) to the extent that their value is attributable to UK residential property. In determining the value of an interest in a close company, the liabilities of the close company will be attributed to all of its property pro rata. The liabilities attributable to the residential property will be deductible in determining the value within the scope of IHT.

Under the original proposals, debts that related exclusively to the property were to be deductible when calculating the value for IHT purposes, unless the borrowing was from a connected party. In response to concerns that this could result in a double IHT charge, the Government’s solution contained in the legislation and other documentation published on 5 December 2016 is to treat any debt used to finance the acquisition, maintenance or repair of UK residential property as an asset subject to IHT in the hands of the lender, with look through provisions where the lender is itself a non-UK close company or partnership. Similarly, any security or collateral for such a debt will be within the scope of IHT in the estate of the provider of the security.

Whilst this removes the potential for double counting, it would appear to defeat certain IHT mitigation options which the Government previously appeared to accept when the provisions relating to debts were revised in 2013. The application of these rules to debts, whenever created, seems unduly harsh and a restriction to debts created after 19 August 2016 (when an iteration of the provision was first announced), if not to commencement date, would be welcomed.

Two year tail

Newly included in the 5 December 2016 draft legislation are provisions such that following sale of close company shares or partnership interests which would have been within the scope of the new IHT rules, or indeed repayment of a lender’s loan, the consideration received (or anything which represents it) will continue to be subject to IHT for a two year period following the sale or repayment. This appears to be a provision introduced to combat specific anticipated avoidance. However it will, as drafted, have a wider effect and give rise to an IHT charge in normal commercial situations even where UK residential property is no longer held.

Targeted anti-avoidance rule

Any arrangements whose whole or main purpose is to avoid or reduce the IHT charge on UK residential property will be disregarded. This anti-avoidance provision is extremely widely drawn.

If you are affected by any of the above and for advice and guidance on what actions you should take next please contact us on iht@shipleystax.com or 0114 275 6292.

The above is not intended to be advice, we strongly recommend professional advice is sought before taking any action.

Taxman’s spy computer checks your Facebook posts

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What with cyber-snooping being all the rage these days it seems the taxman is getting in on the act too.

HM Revenue & Customs has now fully unleashed its super-computer, costing over £100m and many years to make, to identify those who may have paid too little tax.

The powerful system, benignly dubbed “Connect”, now automatically gathers information from a myriad of government and corporate sources to create a detailed profile of each taxpayer’s financial position. Where this differs from the information provided by the taxpayer, the account is flagged up and subject to further possible investigation.

Connect now automatically collects information from over 30 databases, covering details of taxpayers’ salaries, bank accounts, loans, property and car ownership..

 The system’s data-hoarding does not just stop at the income people have received from work and investment. It also amasses data from the digital footprint left by taxpayers online.

 It collates data from diverse sources such as Airbnb and eBay, as well as obtaining anonymised information on all Visa and Mastercard transactions, enabling it to identify areas of likely underpayments which it can then target further.

HMRC also has powers to request one-off bulk data from third parties where there may be particular cause for concern. Insurance companies, hospitals and dentists supplied information to assist with the Tax Health Plan, for instance.

For those with investment properties, it can also access Land Registry records to see houses purchased/sold to check against information on a tax return. In addition, further sources enable it to determine if properties are being rented out and whether that income has been declared. Crucially, it can also determine if someone is likely to be able to afford such properties, or whether they are suspected of having used previously undeclared income or savings.

Particularly striking is the gathering of information from social media. HMRC are now monitoring online posts about holidays, parties and purchases. They may wish to ask questions where they do not feel lifestyle fits with an individual’s reported income.

The tax profession has raised concerns that HMRCs growing reliance on automated systems could mean an increasing number of innocent taxpayers facing investigation. Whilst many of the leads generated by Connect’s data collection maybe worth following up, a proportion will be unfounded causing unnecessary stress and anxiety to those targeted. A surface analysis of data or online information could quite easily lead to misinterpretation. An exaggeration over twitter or Facebook, for example, could paint a highly inaccurate picture resulting in false leads.

Shipleys Tax has many years of protecting taxpayers and succeeding in tax investigations with HMRC, if you need help please contact us 0114 275 6292 or email info@shipleystax.com.

 

What HMRC can find out about you

  • UK & overseas bank accounts, pensions: From 2017 HMRC will receive information from banks in more than 60 countries.
  • Web browsing and email records: Under the ‘Snoopers Charter’ HMRC will be able to access individual’s digital information
  • Property sites -adverts on the internet e.g. Rightmove and Zoopla
  • Land Registry records: To determine properties purchased, stamp duty paid and capital gains tax
  • Earnings: From any employer, including those you have worked for casually, or on an ad-hoc basis. This includes any company benefits received. It can also access child benefit and maintenance payments through the child support agency
  • Internal tax documents: Systems show council tax paid, relevant VAT registration, previous tax investigations, last year’s tax return (or absence of one)
  • Visa and Mastercard transactions: Anonymised information on all payments
  • DVLA: Details of cars purchased and owned by individuals
  • Online marketplaces: Websites such as eBay and Gumtree can be accessed to weed out regular traders
  • Social media: The Connect system can also look at public social media account information, including from Twitter, Facebook and Instagram

 Connect cross-references information from many other UK government databases, including:

  • Council tax
  • Companies House
  • DWP (former Benefits Agency)
  • The electoral roll
  • Gas Safe Register
  • Insurance companies

HMRC also independently looks at Google Earth.

 

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