5 case studies to kick off 2011!

tax-increase-300x180Hello again, dear reader.  I fear I have been neglecting you, but I hope you had a very merry Christmas and that 2011 will be a good year for both of us.  It has certainly started in a hectic and positive manner, as some of the case studies mentioned below will hopefully demonstrate.

Case 1

A corporate client (“the Company”) had a long-running tax enquiry.  Bizarrely, HMRC seemed not to be especially interested in the tax affairs of the Company itself, but were very interested in the affairs of the Company’s controlling shareholder/director and the activities of a company to which the Company provided consultancy services under the terms of a formal agreement.  We observed to HMRC that the scope of their tax investigation was limited, by statute, to the corporation tax affairs of the Company (basically, to the items contained, or required to be contained, in the Company’s corporation tax return) and that their enquiries into other persons were, therefore, inappropriate and, indeed, unlawful.  HMRC refused to concede and so we were forced to request the Tax Tribunal to direct HMRC to issue a so-called closure notice in respect of their tax enquiry.

The Tribunal hearing was a gruelling affair, but happily sense prevailed.  Despite HMRC producing lengthy and imaginative arguments as to why they should be allowed to continue to ask the Company about matters that seemed to be quite irrelevant to its own corporation tax position, the Tribunal Judge and the Tribunal member both recognised that HMRC’s position lacked any legal credibility and HMRC were directed to issue a closure notice within 30 days from the date of the decision.

The client were initially reluctant to endorse my approach of “taking-on” HMRC, but happily they now appreciate that, with some HMRC officers, a softly-softly negotiating position simply does not work, and legal rights have to be asserted.

Case 2

A position not entirely dissimilar to Case 1 – two individuals who came to the UK to run a UK based international business, but who subsequently left the UK to work abroad (again) find themselves the subject of the attention of HMRC’s Special Investigations division.  Not a happy position to be in!  Unfortunately for HMRC, the legal basis for their enquiries is far from clear.  To make so-called discovery assessments, HMRC need actually to have discovered something before making the assessment, and enquiries cannot be made into a tax return when the enquiry “window” has closed.

Again, the clients believe a softly-softly cooperative approach will make HMRC see the error of their ways, but my experience suggests otherwise.  HMRC are invited to clarify the legal basis for their assessments and enquiries and are told that we will ask the Tax Tribunal to determine our appeals against the unlawful discovery assessments and direct the issue of closure notices in respect of their out-of-time enquiries.  In view of my success in Case 1, the clients accept that this is the correct approach – watch this space!

Case 3

Another client, another tax enquiry!  This time it’s a two pronged attack, with HMRC asking questions about the Company’s corporation tax return and also wanting to inspect the Company’s PAYE records.  It all seems to be a touch over-the-top, but the corporation tax enquiries are answered easily enough as some of the items queried have not even been claimed as being corporation tax deductible!  A detailed letter with voluminous enclosures is sent, which should satisfy the Inspector’s curiosity.

The PAYE inspectors arrive, and seem genuinely disappointed to find that the Company has robust systems in place for dealing with payroll and expenses/benefits and also has a dispensation, which relieves it of the requirement to declare most expenses on forms P11D.  The systems are fully explained in a polite and patient manner and the Inspectors are left to check matters in the usual manner.  The outcome is that the Inspectors leave rather more quickly than was initially anticipated and will write about the small number of relatively trifling queries that they had.  A good job done by the Company’s team!

Case 4

A wealthy, unmarried client is forever fretting about the potential impact of inheritance tax (“IHT”).  Other than leaving all of his wealth to charity, what, he asks, can he do to avoid the ravages of this most pernicious of taxes?  He is aware of the reliefs that apply to certain assets (business property relief and agricultural property relief), but his wealth is tied-up in investment companies and he is not inclined to take the necessary steps to make those companies qualify for BPR or APR.

Happily there is a strategy that could be made to fit the bill.  There is an IHT exemption for company shares that are transferred to trusts for the benefit of the employees of those companies.  There are many complex rules about this rather generous relief, but a crucial point is that the companies do not have to be trading companies to qualify.  An investment company will also qualify providing it carries on an “undertaking”, which it will do if it has an investment business.  Thus, shares can be bequeathed to trusts constituted for the benefit of employees in the correct manner without triggering IHT and the trick then is to make sure the right people are employees or officers of the right companies.  The IHT savings could be very substantial indeed.

Happily, the client’s charitable instincts are still well honed, and the residue of his estate will go to a selection of charities.  Slightly surprisingly (to the client), to attract the IHT exemption for gifts to charities, the charity must be established in the UK, so certain well-know European charities will not be able to benefit from his largesse.

Case 5

An interesting capital gains tax (“CGT”) conundrum – a client disposed of his shareholding in his privately owned trading company in 2009/10 and took some cash and some loan notes.  What’s the CGT exposure?

Well, the cash received is clearly chargeable to CGT and as he disposed of the right sort of shares that he had owned for long enough, the effective rate of tax will be 10% because of Entrepreneur’s Relief.  The actual rate of tax is 18%, but a deduction of four-ninths is available, so that he pays at 18% on only five-ninths of the gain.  That’s fine and dandy.

What about the loan notes?  No CGT is payable on receiving the loan notes; CGT is only triggered when the loan notes are cashed-in, which again is fine and dandy.  The client assumes that, on encashment, the gain triggered will also be taxed at 10%, as that would only be fair.  But life is not fair!  The rules were all changed by the Emergency Budget on 22 June 2010.  Now, the rate of CGT is generally 28% and that rate certainly applies to the client as he is a higher-rate taxpayer.  Because he got his loan notes before 22 June 2010, certain old rules apply to them, but not so as to give him an effective 10% tax rate.  He can claim the four-ninths deduction, but he will pay CGT at 28% on five-ninths of the gain triggered on encashment, which means an effective rate of tax of 15.55%.  He sadly observes that that is an increase of over 50%!  I observe that 15.55% is still better than 28%, and much better than income tax at 50%!

The January tax return frenzy now takes centre stage in my life – if only clients would deal with such matters in a more timely way…

… I must remember, clients are always right!

And so to bed…

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