News & Insights

The latest tax developments and VAT round-up for the month.

Silverthrone tax digest covers the developments most likely to affect individuals, trusts, estates and businesses. If you would like to discuss anything here in more detail, please get in touch with your usual contact.

1. Private client

1.1 Executor loses domicile argument after 43 years in England

The tribunal held that a man who lived in England for more than four decades had acquired an English domicile of choice, so his worldwide estate was within the scope of inheritance tax.

The deceased was born in Karachi, spent around 19 years in Tanzania and settled in the UK in the early 1970s, where he lived until his death in 2016. His executor argued that he had always intended to retire to India, but the tribunal found his ties to modern India were limited and that he had made England his permanent home. Domicile disputes turn on detailed evidence of intention, so anyone relying on a non-UK domicile should keep a clear, contemporaneous record of their connections and plans, and executors should expect HMRC to test any such claim closely.

Shah (executor of A M Shah deceased) v HMRC [2023] UKFTT 539 (TC)

1.2 Child benefit charge: act promptly once HMRC writes

Two decisions this month show that not knowing about the high income child benefit charge can be a reasonable excuse, but only until HMRC sends a reminder letter.

In one case the taxpayer had his failure to notify penalties cancelled because he dealt with the matter promptly after receiving HMRC’s so-called nudge letter. In the other, the taxpayer also received a nudge letter but did not engage properly for more than 18 months, and her penalties and assessments were upheld. Anyone whose adjusted net income exceeded £50,000 in a year when they or their partner received child benefit should check their position, and any letter from HMRC on the subject should be answered straight away.

Ashe v HMRC [2023] UKFTT 538 (TC); Hussain v HMRC [2023] UKFTT 545 (TC)

1.3 Litigation was not a reasonable excuse for paying late

The Court of Appeal upheld surcharges of around £1.4 million on a taxpayer who delayed paying tax while he challenged HMRC’s closure notices in judicial review proceedings.

The taxpayer argued that his ongoing legal challenge gave him a reasonable excuse for not paying, but the court held that a responsible taxpayer intending to comply would not have held back payment for the whole period, particularly after his challenge had failed. Disputing a tax bill does not by itself suspend the obligation to pay it. Where a liability is under dispute, it is usually sensible to agree any postponement with HMRC formally, or to pay and seek repayment later, to limit interest and surcharge exposure.

Archer v HMRC [2023] EWCA Civ 626

1.4 HMRC interest rates rise again

Following the Bank of England’s increase in base rate to 5% on 22 June, HMRC’s late payment interest rate rises to 7.5% and its repayment rate to 4%.

The new rates apply from 3 July 2023 for corporation tax quarterly instalment payments and from 11 July 2023 for other taxes. Late payment interest is now at its highest level for many years, which makes paying on time, and settling any arrears quickly, more valuable than it has been for some time. Clients with Self Assessment balances outstanding, or with payments on account due on 31 July, should plan their cash flow accordingly.

2. PAYE and employment

2.1 Furlough claims fail where staff were missing from RTI by 19 March 2020

The tribunal has again confirmed that the Coronavirus Job Retention Scheme required employees to appear on an RTI return made by 19 March 2020, with no exception for software or timing problems.

In one case the employer’s payroll software had remained in test mode after an upgrade, so its submissions never reached HMRC; in another the relevant return arrived a few days after the cut-off date. In both cases HMRC’s recovery assessments were upheld, as the tribunal had no power to relax the rules on grounds of fairness. Employers who received furlough payments for staff who were not on an RTI return by 19 March 2020 should review their position, as HMRC continues to check these claims.

Raystra Healthcare Ltd v HMRC [2023] UKFTT 496 (TC); Sentinel Fire and Security Systems Ltd v HMRC [2023] UKFTT 550 (TC)

2.2 Part of a termination payment exempt as made on account of disability

The tribunal held that most of a severance payment to an employee who left work because of ill health was exempt, rejecting HMRC’s view that the exemption applied all or nothing.

The employee received a payment of around £93,000 when her employment ended on grounds of medical incapacity, and HMRC treated it all as taxable, which also brought her within the high income child benefit charge. The tribunal found that the evidence supported apportioning the payment, and around £84,000 was exempt as paid on account of disability. Employers and employees agreeing ill-health exits should document clearly why each element of a payment is being made, as this can make a real difference to the tax due.

Howard-Ravenspine v HMRC [2023] UKFTT 471 (TC)

2.3 Government consults on umbrella company non-compliance

A consultation published on 6 June sets out options for regulating umbrella companies and making others in the labour supply chain responsible for compliance.

The proposals include defining umbrella companies in law and requiring recruitment agencies and end clients to carry out due diligence, with possible penalties where they fail to do so. The consultation runs until 29 August 2023. Businesses that engage temporary workers through agencies and umbrella companies should review who sits in their supply chains and consider responding to the consultation.

2.4 P11D deadline approaching

HMRC’s June Employer Bulletin reminds employers that P11D and P11D(b) forms for 2022-23 are due by 6 July 2023.

Class 1A National Insurance on benefits in kind is then payable by 22 July (19 July if paying by cheque), and the bulletin also asks employers to take care when recording diesel company cars, as the fuel type affects the benefit charge. Employee share scheme returns are due by the same 6 July deadline. If you would like us to prepare or check your returns, please let us have the information as soon as possible.

3. Business tax

3.1 Loss carry-back claim could not be enlarged after profits increased

The Court of Appeal held that a company could not increase a trading loss carry-back claim after HMRC found additional profits in the earlier year.

The company had carried a loss back against the profits it believed it had made in the previous year, and HMRC later found further income in that year. Because the claim was made after the deadline for amending the earlier return, it was a freestanding claim governed by separate rules and could not later be enlarged to absorb more of the loss. Companies making loss relief claims should get the timing and the amount right at the outset, and should take advice before a claim is finalised where the earlier year is under enquiry.

Civic Environmental Systems Ltd v HMRC [2023] EWCA Civ 722

3.2 North Sea oil royalties not taxable in the UK under the Canadian treaty

The Court of Appeal held that payments received by a Canadian bank linked to oil production from a North Sea field were not taxable in the UK as income from immovable property.

The bank had acquired the right to receive payments that varied with the oil price, but had never held an interest in the oil field itself. The court decided that the relevant treaty article only applies to someone holding a continuing interest in the land concerned, so the UK could not tax the payments. The decision is a reminder that double tax treaties need to be read as a whole, and that overseas businesses receiving UK-related income should take advice on whether a treaty protects them.

Royal Bank of Canada v HMRC [2023] EWCA Civ 695

3.3 No second chance to argue for capital allowances

The tribunal struck out a car hire partnership’s attempt to reopen assessments that had already been decided in an earlier appeal.

HMRC had disallowed the cost of vehicles claimed as revenue expenses, and the partnership lost its appeal in 2016. It later tried to argue that it should have received capital allowances instead, but the tribunal held that this point should have been raised the first time and could not be litigated again. When appealing, businesses should put forward every alternative argument in the original appeal, including fallback claims for allowances or reliefs.

Waterloo Car Hire (a partnership) v HMRC [2023] UKFTT 549 (TC)

4. VAT and indirect taxes

4.1 Aesthetic treatments were not VAT-exempt medical care

The tribunal held that a clinic’s Botox, dermal filler and similar treatments were standard-rated because their main purpose was cosmetic rather than medical.

The clinic argued that the treatments were exempt medical care because they were provided by a registered doctor, but the tribunal found they were not based on diagnosis and were not aimed at treating or preventing a health condition. Being supplied by a qualified practitioner is not enough on its own for the exemption to apply. Aesthetic and wellbeing businesses should review their VAT position, particularly as their turnover approaches the registration threshold.

Illuminate Skin Clinics Ltd v HMRC [2023] UKFTT 547 (TC)

4.2 HMRC could not backdate withdrawal of the flat rate scheme

The tribunal held that HMRC acted unreasonably in withdrawing an online seller’s flat rate scheme authorisation with retrospective effect.

The seller, based in France and selling through Amazon from UK warehouses, did not dispute that VAT was due, but HMRC had recalculated it at the full standard rate after cancelling his flat rate scheme with backdated effect. The tribunal found that retrospective withdrawal was only justified where needed to protect the revenue against abuse, not where there had simply been compliance failures, so the tax must be recalculated at the flat rate. Businesses using the scheme should still check regularly that they remain eligible.

Divisia v HMRC [2023] UKFTT 543 (TC)

4.3 Digital newspapers before May 2020 were standard-rated

Revenue and Customs Brief 6 (2023), published on 15 June, confirms HMRC’s position following the Supreme Court’s decision in the News Corp case.

Digital newspapers and similar e-publications supplied before 1 May 2020 were standard-rated, and HMRC is writing to businesses that made repayment claims to ask whether they intend to pursue them. The zero rate for qualifying e-publications from 1 May 2020 is unaffected. Publishers with outstanding claims or appeals should consider their next steps when HMRC makes contact.

4.4 Cash flow problems and failed direct debits were not reasonable excuses

Two default surcharge decisions confirm that businesses must contact HMRC before the due date if they cannot pay their VAT on time.

A construction company that paid late because customers had paid it late lost its appeal against a surcharge of over £20,000, as it had not asked HMRC for time to pay before the deadline. A car dealer that relied on a direct debit, despite a previous failed collection, also lost. Although default surcharges are being replaced by the new points-based penalties for VAT periods starting on or after 1 January 2023, the same principle applies: if VAT cannot be paid on time, speak to HMRC before the due date.

Polyteck Building Services Ltd v HMRC [2023] UKFTT 575 (TC); Spirit Motor Company Ltd v HMRC [2023] UKFTT 614 (TC)

5. Key dates

The main tax deadlines and events from June to August 2023.

6. And finally

6.1 Taxation by consent, since June 1215

On 15 June 1215 King John agreed to Magna Carta at Runnymede. Among its clauses was a promise that scutage, the payment barons made in place of military service, and most general aids would not be imposed without the common counsel of the kingdom. The idea that taxes need the consent of those who pay them, later developed through Parliament, has shaped British tax law ever since.

More than 800 years later, that principle still explains this month’s cases. Whether the issue was furlough claims, the child benefit charge or loss relief, the courts and tribunals applied the rules as Parliament wrote them and made clear that they cannot set them aside simply because the result feels harsh. Consent to taxation is given through Parliament, which is why getting the detail right, and asking HMRC early when things go wrong, matters so much.