News & Insights

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

Our monthly tax update 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 Made-up case law sinks a penalty appeal

The tribunal upheld a capital gains tax penalty after finding that the cases the taxpayer relied on had been invented by an AI tool.

Mrs Harber sold a property in 2018 but did not tell HMRC about the gain, and was charged a failure to notify penalty of just over £3,000. In support of her appeal she put forward summaries of nine earlier tribunal decisions, none of which existed: they had been generated by an AI system, although the tribunal accepted she did not know this. The tribunal found she had no reasonable excuse and dismissed the appeal. The lessons are simple: report gains on property sales on time, and never rely on AI-produced legal research without checking it against the original source.

Harber v HMRC [2023] UKFTT 1007 (TC)

1.2 New HMRC service for undeclared cryptoasset gains

HMRC has opened an online disclosure service for people who have underpaid tax on cryptoassets.

The service, launched on 6 December, covers both income tax and capital gains tax, for example on profits from selling or exchanging tokens, mining income, or crypto received as pay. Coming forward voluntarily usually means lower penalties than if HMRC opens an enquiry first, but interest still runs on the tax owed until it is paid. Working out gains on crypto can be complicated, particularly where several exchanges have been used, so please speak to us before making a disclosure.

1.3 HMRC hardens its view on US LLCs

Updated HMRC guidance says US limited liability companies will generally be treated as opaque for UK tax purposes.

In its December update, HMRC said it still considers that the profits of a US LLC normally belong to the LLC itself, so UK resident members are taxed on what they receive as distributions rather than on their share of profits as they arise. This narrows the scope for relying on the Supreme Court’s 2015 decision in Anson, which allowed a UK member to claim credit for US tax paid on LLC profits. The mismatch can lead to double taxation, so anyone who holds an interest in a US LLC should ask us to review how it is reported.

1.4 No more letters for Self Assessment repayments

HMRC has stopped posting notification letters when it makes a Self Assessment repayment by bank transfer.

From 7 December, repayments made by BACS are no longer confirmed by letter, and email notifications have also been paused for now. Repayments themselves are unaffected and can be checked in the HMRC online account or the HMRC app. HMRC also announced in December that it would be steering more callers towards its online services. If you are expecting a repayment and are unsure whether it has arrived, let us know and we can check for you.

2. PAYE and employment

2.1 National Insurance cuts become law

The legislation cutting employee and self-employed National Insurance received Royal Assent on 18 December.

The National Insurance Contributions (Reduction in Rates) Act 2023 reduces the main rate of employee Class 1 contributions from 12% to 10% from 6 January 2024. It also cuts the main Class 4 rate for the self-employed from 9% to 8% and removes the requirement to pay Class 2 contributions from 6 April 2024. Employers should confirm that their payroll software has been updated for the first pay day on or after 6 January; the employer rate does not change.

2.2 Car allowances: National Insurance refunds

HMRC’s December Employer Bulletin confirms that employers may be able to reclaim National Insurance paid on car allowances.

Following the Upper Tribunal’s ruling in the Laing O’Rourke and Willmott Dixon appeals, which HMRC did not challenge further, part of a car allowance can be treated as relevant motoring expenditure and so be free of National Insurance. Broadly, where employees who receive a car allowance are paid less than the approved mileage rates for business journeys, the shortfall can be set against the allowance. Claims need actual business mileage and allowance figures for each employee and period, and can go back to 6 April 2017. Employers who want to cover the 2017/18 year should make a claim, at least a protective one, before 5 April 2024.

Laing O’Rourke Services Ltd v HMRC [2023] UKUT 155 (TCC)

2.3 Payment to accept pension changes was taxable pay

The Court of Appeal has held that a lump sum paid to staff for agreeing to less generous pension terms was taxable earnings.

E.ON offered members of its defined benefit pension scheme a package, including a payment of 7.5% of salary, in return for accepting changes to the scheme. The court found that the payment was an inducement to accept new terms for future employment rather than compensation for giving up pension rights already built up, so income tax and National Insurance were due through payroll. Employers planning changes to pension or other benefits should assume that any one-off payment to secure employees’ agreement will be taxed as pay.

HMRC v E.ON UK plc [2023] EWCA Civ 1383

2.4 Owner’s gifts to staff on a sale were taxable benefits

Payments a departing owner made to employees from his own pocket were taxable because they were made by reason of employment.

After agreeing to sell the business, the group’s chairman paid around 99 UK staff sums averaging half a year’s salary, worked out by reference to pay and length of service. The tribunal accepted that the payments were acts of personal generosity rather than rewards for work, but held that they were still taxable benefits because only employees received them, and upheld HMRC’s PAYE and National Insurance claims against the employer. Owners who want to thank staff when they sell a business should take advice first, as the cost of the tax can fall on the company.

OOCL UK Branch v HMRC [2023] UKFTT 996 (TC)

3. Business tax

3.1 Corporate partners and deferred awards

The Court of Appeal rejected HMRC’s main challenge to a partnership’s use of a corporate member, but agreed the eventual awards to individuals were taxable income.

BlueCrest allocated part of its profits to a corporate partner, which paid corporation tax on them and later passed amounts to individual partners as special capital under an incentive plan. The court held that the profits allocated to the company could not be reallocated to the individuals for tax purposes, but agreed with HMRC that the final awards were a reward for the partners’ work and taxable on them as miscellaneous income. Partnerships and LLPs with corporate members should review their arrangements, as labelling an award as capital will not stop it being taxed as income.

HMRC v BlueCrest Capital Management LP and others [2023] EWCA Civ 1481

3.2 SEIS refused for ten linked start-ups

The tribunal agreed with HMRC that ten companies set up by the same director did not qualify for the Seed Enterprise Investment Scheme.

The companies raised about £1.4 million to make films and spent most of it with subcontractors connected to the director. The tribunal found they lacked genuine plans for long-term growth, so failed the risk-to-capital condition, and that splitting the project across ten companies was a disqualifying arrangement aimed at obtaining the relief. Companies seeking SEIS or EIS investment should be able to show a real growth plan, and should apply for HMRC advance assurance before taking investors’ money.

Legend of Golden Temple Ltd and others v HMRC [2023] UKFTT 988 (TC)

4. VAT and indirect taxes

4.1 VAT keeps its EU-derived principles after 1 January

The government has proposed legislation to protect established VAT and excise principles when retained EU law changes on 1 January 2024.

From the start of 2024, the Retained EU Law (Revocation and Reform) Act 2023 ends the supremacy of EU law and the general principles of EU law in the UK. The proposed provisions keep concepts such as the abuse of law doctrine and existing interpretations in place for VAT and excise, so settled positions are not reopened. Over time, however, UK courts will have more freedom to depart from earlier EU case law, so businesses with VAT disputes, or with positions based on EU judgments, should keep them under review.

4.2 Customs checks on goods from Irish ports

From 31 January 2024, many goods moving directly from Irish ports to Great Britain will face full customs controls.

HMRC has reminded businesses that goods which are not qualifying Northern Ireland goods, and certain excise goods, will need import declarations and pre-notification when moved from Ireland to Great Britain. This includes Northern Ireland goods that do not qualify and travel through Irish ports. Businesses that buy from Irish suppliers or ship this route should check with their suppliers and customs agents now that the paperwork will be ready in time.

4.3 No change to VAT on fund management

The government has decided to keep the existing list-based VAT exemption for managing investment funds.

Following a consultation that closed in February 2023, the government concluded that the current law already covers almost all funds whose management should be exempt, and it will not legislate a new definition. Instead, HMRC will review its guidance on what counts as management. Investment managers and fund vehicles can continue with their current VAT treatment but should watch for the revised guidance.

5. Key dates

These are the main tax deadlines and events from December 2023 to early February 2024.

6. And finally

6.1 A December birthday for National Insurance

National Insurance itself began with a December Royal Assent: the National Insurance Act 1911 became law on 16 December 1911. Under Lloyd George’s scheme, most insured workers paid 4d a week, their employers 3d and the state 2d, which he promoted as nine pence of cover for the price of four. Contributions were first collected in July 1912.

Almost exactly 112 years later, on 18 December 2023, another National Insurance Act received Royal Assent, this time cutting the rates. The contributions have grown somewhat since the days of fourpence a week, but the idea of sharing the cost between worker, employer and state is still recognisable.