HMRC sends 'one to many' letters to those named in the Pandora Papers haul.
The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
International cooperation: Increased tax compliance has now very much earned its place on the global stage and strengthening international cooperation is critical to addressing the challenges posed by the Pandora Papers. Tax authorities worldwide have established a network of shared intelligence, joint investigations, and combined efforts of gathering evidence, to uncover complex financial arrangements and identify taxpayers involved in tax evasion.
HMRC activity: Off the back of the scandal, HMRC pledged to take swift action to tackle offshore tax evasion and their reactively appointed dedicated taskforce has presumably been very busy for a couple of years poring over the apparent treasure trove of information, investigating those individuals, corporations, and institutions implicated in the leaked data. The sophisticated technology now available to HMRC enables them to identify patterns, cross-reference data, and detect discrepancies that may pinpoint tax irregularities.
HMRC’s powers to deter and hold accountable those taxpayers found to be delinquent in their tax obligations have been steadily increasing in recent times and penalties can be imposed of up to 200% of potential lost revenue as well as HMRC having the option to initiate criminal proceedings and ultimately impose custodial sentences for deliberate non-compliance.
Nudge letters: HMRC is now actively contacting (via a scattergun approach) those it believes have additional tax liabilities to disclose, giving them 30 days to check and take steps to correct their tax position. It may be that Code of Practice 9/ contractual disclosure facility (as recently updated) route to disclosure may be appropriate in certain high profile or high risk cases as a means to afford the taxpayer protection (many structures that have prompted investigation will have been entirely legitimately established) from criminal prosecution when HMRC may assert dishonest behaviour. Making disclosures to HMRC, particularly of tax fraud and deliberate behaviour, is a specialist area.
The Pandora Papers exposé has increased public awareness of the ongoing global battle for fair and transparent worldwide taxation. HMRC is now finally taking positive enforcement action (commensurate of their strained resources) and capitalising on the opportunity to boost the public coffers, but fair and proper taxpayer representation should never be compromised.
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
Register of Overseas Entities
The ECA was fast-tracked through Parliament in March 2022 in response to the Russian invasion of Ukraine. It introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the register came into force on 1 August 2022.
Affected non-UK entities have to register the details of beneficial owners within six months from that date (ie, on or before 31 January 2023) and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since 28 February 2022, or a declaration saying that no disposition has been made.
Unexplained Wealth Orders
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
To supplement the ECA, the Economic Crime and Corporate Transparency Bill is currently passing through Parliament. Part 1 of the bill will purportedly constitute the “biggest upgrade to Companies House” since the UK introduced a register of companies in 1844, by requiring all directors as well as persons with significant control and those delivering documents to have their identities verified. Part 2 seeks more information about partners in limited partnerships and requires limited partnerships to update the Registrar of changes and submit annual statements confirming that certain information held is correct.
Trust Registration Service (TRS)
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The Retained EU Law (Revocation and Reform) Bill, presented to the House of Commons for its first reading on 22 September 2022, should not have an impact on the existence of the TRS. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline was 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. Currently, trusts are generally required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
Person of Significant Control (PSC) Register
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
Mandatory Disclosure Rules (MDR) for Common Reporting Standards (CRS)
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After a lengthy consultation which finished on 8 February 2022, the new MDR regulations were expected to come into force last summer. However, so far nothing has been said about its enactment.
It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD 1 million.
Conclusion
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with current public opinion.
But there will always be a challenge where there is continued opportunity for tax arbitrage, as each sovereign state is entirely at liberty to levy taxes at a rate and in the manner most economically suited to local economic conditions. In addition, these measures are always subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond healthy competition, and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
On a more personal level, the message to clients as regards tax transparency is very firmly to get ahead of it. Get used to increased scrutiny from a larger and more varied group of stakeholders. Proactive rather than reactive mitigation is the future. If the questions is privacy versus the greater good of prevention of financial crime then opt for integrity. As a society we must advocate respect and responsibility towards the financial ecosystem which might mean to sacrifice some form of control over confidentiality.
21 October 2022
Helen McGhee CTA TEP
Nahuel Acevedo-Pena
1 YouGov (2022) “Are taxes on the rich too high or low in Britain?”, accessed 18 October 2022.
2 The Tax Foundation (2022) “International Tax Competitiveness Index 2022”, p 30, accessed 19 October 2022.
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This article focuses on tax measures included as part of that statement.
As previously confirmed, the increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go ahead. For Income Tax, the threshold at which higher earners start to pay the 45% rate will be reduced from £150,000 to £125,140 from 6 April 2023. The government will legislate for the income tax measures in Autumn Finance Bill 2022. The other thresholds for Income Tax, as well as the thresholds for Inheritance Tax (IHT) and National Insurance will be frozen for a further two years until April 2028. This means that by 2028 the IHT nil rate band will have been frozen for 19 years.
The Dividend Allowance will be reduced from £2,000 to £1,000 next year, and £500 from April 2024, whereas the Annual Exempt Amount in Capital Gains Tax will be reduced from £12,300 to £6,000 next year and then to £3,000 from April 2024. The VAT registration and deregistration thresholds will not change for a further period of 2 years from 1 April 2024 (currently at £85,000 of annual total VAT taxable turnover). Finally, from April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%, and banks will be charged an additional 3% rate on their profits above £100 million (i.e. the Bank Corporation Tax Surcharge).
Following consultation, the government will also implement the OECD Pillar 2 rules for a Global Minimum Corporate Tax Rate, for accounting periods beginning on or after 31 December 2023. The government will:
These measures will be included in the Spring Finance Bill 2023.
From April 2023, large MNEs operating in the UK will be required to keep and retain Transfer Pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). This will give businesses certainty on the documents they need to keep in the case of an eventual investigation by HMRC.
Additionally, shares and securities in a non-UK company acquired in exchange for securities in a UK close company will be deemed to be located in the UK for Capital Gains Tax purposes. This will apply for transactions on or after 17 November 2022 and is designed to hit remittance basis users. Both measures will also be included in the Spring Finance Bill 2023.
Note that in general the Non-Dom Regime has been left alone and Jeremy Hunt has thankfully been sensible in this regard. He said that he did not agree with claims that abolishing the Non-Dom Regime will bring in more tax. On the contrary, he would rather wealthy foreigners spend their money in the UK than elsewhere.
Finally, the government is investing £79m over the next 5 years to allow HMRC to allocate further staff to deal with more cases of serious tax fraud and address tax compliance risks among rich taxpayers. The return is projected to be £725m of additional tax revenues over the next 5 years (£350m from tackling tax fraud and £375m from reducing non-compliance by wealthy taxpayers).
The Autumn Statement also says that the government is committed to reforming retained EU law, although it does not include any EU law-related measures about taxation. The Retained EU Law (Revocation and Reform) Bill is currently at committee stage, where detailed examination takes place. The Public Bill Committee is expected to conclude its consideration of the Bill on Tuesday, 22 November at 5pm.
Additionally, together with the Autumn Budget, the government published a consultation response about Solvency II, an EU Directive on insurance regulation. It noted that the Financial Services and Markets Bill, also currently at committee stage, “repeals retained EU law so that it can be replaced with an approach to regulation designed for the UK”. Albeit this is not related to taxation, it shows the government’s willingness to get rid of retained EU law when this is concluded as beneficial for the UK.
If you have any questions, please do not hesitate to contact any member of our tax team.
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
The legislation is contained in Section 87I-M TCGA 1992 in relation to potential capital gains tax (CGT) charges (the stockpiled gains legislation), Section 643I-N ITTOIA 2005 (the settlements code) and Section 733B-E ITA 2007 (the transfer of assets abroad or TOAA code) to capture income tax charges.
Going forward, where a distribution has been made (or a benefit provided) to a non-UK resident (or remittance basis user) from a non-UK trust or structure within the TOAA code which would theoretically be outside the charge to UK tax, then any gift or benefit deriving from that initial gift that is subsequently passed on to a UK resident within three years is treated as made to that UK recipient directly from the non-UK trust or structure. The ultimate UK recipient of the gift is then liable to income tax or CGT where the gift can be matched to offshore income or gains.
Although the legislation requires that there is an intention from the outset by the offshore recipient of the gift to pass it on, the prospect of using lack of intention to defeat any tax charge is scant given that Section 87I(8) TCGA 1992 creates a presumption of intention when an onward gift is made.
The burden of proof is therefore firmly on the donee to evidence that there was no intention at the time of receipt of the funds to pass them on; it is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.
In addition to taxing these “onward gifts” the new FA 2018 rules also operate to treat payments made to the “close family” (spouse/civil partner – or the unmarried equivalent – or minor child or step child) of a settlor as made to a UK-resident settlor in the event that there is income in the trust structure and the family member is either non-UK resident in the year of the payment or is a remittance basis user who keeps the payment outside the UK. The settlor then has an exercisable right to recover the tax paid from the beneficiary – it would be wise to obtain a certificate from HMRC to confirm the amount of tax paid.
Note that the settlor will not be taxed twice on the payment (although it may be that the settlor is taxed by virtue of another provision elsewhere).
The rules for determining the amount or value of the gift upon which tax becomes due varies slightly depending on which part of the legislation is invoked, ie, stockpiled gains, settlements legislation or TOAA code. For CGT purposes, complicated rules set out how a gift is split into “slices” of taxed, potentially taxed and untaxed funds which are attributed in a particular order.
The operation of the technical detail of the legislation can produce some curious results; for example, if the ultimate recipient of an onward gift is a remittance basis user then depending upon which “slice” is attributed to them, they may either not be taxed at all, or be taxed only if funds are remitted in the tax year of receipt but they may not be taxable if the funds are brought to the UK in the following tax year. Similar oddities exist for income tax purposes.
“There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties.”
The interaction with the TOAA code adds an additional layer of complexity to already complex legislation. Some onward gifts are taxable by the TOAA code in priority to and without the need to engage the new onward gifts rules. The consequence of this is that there may be situations where the original recipient (a remittance basis user) receives an income distribution from a trust (potentially taxable – but not actually taxed – on them directly) and makes an onward gift, but the onward gift rules are not actually triggered because they give way to the TOAA code.
Note that as an additional tool in their armoury, in circumstances where these targeted anti-avoidance rules might be invoked, HMRC could also seek to apply the General Anti-Abuse Rule where arrangements “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances”.
There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties. In theory, this means that a UK recipient may have a tax obligation that they know nothing about and about which they have very little power to obtain the necessary information; namely, whether any gifted funds have been provided out of funds received from trusts or offshore structures within the last three years and the residence and tax status of every individual through whom the funds have passed.
HMRC is now looking at the third year of taxpayers’ returns filed since these new rules were introduced (the 2021 returns filed in January 2022) and advisers and taxpayers can expect intense HMRC scrutiny. The rules are complicated, broadly drafted, difficult to understand and apply, and operate on the assumption that the taxpayer has perfect information, which will not match reality for most taxpayers.
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
The ECA introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the launch of the register is scheduled for 1 August 2022.
Going forward, affected non-UK entities will have to register the details of beneficial owners within six months from that date and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since February 2022, or a declaration saying that no disposition has been made.
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
"This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets."
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline is 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. After the 1 September deadline, trusts will generally be required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
“There should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.”
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After lengthy consultation, the new MDR regulations are expected to come into force in the summer of 2022. It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD1 million.
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with public opinion. But there will always be a challenge where there is continued opportunity for tax arbitrage as each independent state is entirely at liberty to levy taxes at a rate and in a manner most economically suited to local economic conditions and subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond just healthy competition and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
Video below is an exploration who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The types of non-doms most vulnerable to scrutiny:
Non-doms can protect themselves:
Finally, information requests under Schedule 36 to the Finance Act 2008:
Summary
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, this decision reinforces that:
Background
HMRC denied input tax on the basis that the relevant transactions were connected with a scheme to defraud the Revenue and that the company knew, or should have known, that this was the case. In other words, HMRC applied what is known as “the Kittel Principle”.
In addition, the Appellant was assessed by HMRC to output tax, and the company’s claim to zero rating of the relevant transactions was denied on the basis that the relevant transactions were connected with a scheme to defraud the Revenue, and the company knew, or should have known, that this was the case. In other words, HMRC applied what is known as “the Mecsek Principle”.
Both sets of assessments were considered and upheld on Review by HMRC. The company appealed to the First-tier Tribunal.
The Decision
The First-tier Tribunal allowed the taxpayer’s appeal in full. The Tribunal found that HMRC had simply raised various issues in support of the Kittel assessments and then invited the Tribunal to agree with those issues without “advancing sufficient cogent evidence” to discharge the burden of proof. Importantly, the Tribunal stated:
“We acknowledge that most of the issues listed by HMRC were matters that raised concerns and suspicions for Mr Mills and his predecessors as case officers, but in defending the assessments HMRC must go beyond concerns and suspicions, and must advance probative evidence of the issue in question. It is possible to infer relevant facts from circumstantial evidence, but that circumstantial evidence must exist and be presented in a credible and persuasive form.”
One of the “issues” relied on by HMRC was that the taxpayer had received payment for goods from a third party (rather than the company to whom the good had been supplied). The Tribunal rejected HMRC’s suggestion that this was indicative of knowledge or means of knowledge of fraud, stating:
“This is, we consider, another example of a mobile phone trade warning flag being applied without adequate explanation of why it should also apply to wholesale grocery transactions. We accept the evidence of [the taxpayer] that customers abroad paying Sterling invoices via FX bureaux was something the Company was familiar with for several customers over a period of time, and so this did not raise any suspicions when it occurred on a few of the deals covered by the Disputed Assessments.”
If you require any further information about the application of the Kittel principle, the Mecsek principle, or any other allegations by HMRC of fraud or fraudulent abuse, please do not hesitate to contact Iain MacWhannell (imacwhannell@jha.com).
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (imw@jha.com).
On July 6, 2006, the Court of Justice of the European Union (CJEU) handed down the decision in Axel Kittel v Belgium; Belgium v Recolta Recycling SPRL (Kittel).
Few could have predicted just how extensively HMRC would come to use the Kittel power to deny input VAT to taxpayers operating in a variety of sectors (mobile phones, CPUs, computer software platinum, airtime/VOIP, alcohol and, more recently, labour supply and the payroll sector).
Shortly after the CJEU’s decision, I was seconded from Chambers to the fledgling Kittel team at HMRC’s Solicitor’s Office. There I worked on some of the very first Kittel cases (which at that time largely related to mobile phones, CPUs, and computer software). Once I returned to Chambers, I began to appear regularly for HMRC in Kittel cases. Since 2012, I have acted exclusively for taxpayers in a variety of indirect tax appeals including some of the most significant Kittel cases to date (e.g. the very recent case of PTGI v HMRC [2022] UKFTT 20 (TC) where the appeal against a £19m denial of input tax was allowed in full).
Based on those 16 years of experience of litigating cases involving the Kittel principle (and other associated principles such as those in Mecsek-Gabona, Fini, Ablessio and Facet), I set out below 16 pointers that I hope will be of use to those conducting Kittel appeals. These are not meant to be an exhaustive guide on how to conduct a Kittel case. Rather, they are some of the things that you might want to think about and, where appropriate, take advice on:
Once the decision letter arrives, review it carefully. Is it only Kittel that is being relied on? Or have HMRC also relied on other grounds to deny input tax (e.g. Mecsek, Fini or inadequate evidence for zero-rating)? What VAT periods does the denial relate to? Are HMRC out of time?
Also check whether the evidence raises any new issues that have not been set out in the Statement of Case. It may be that HMRC will need to seek to amend their Statement of Case to raise these new issues (and the Appellant will need to consider whether it will object to that amendment)
“Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud…”
Accordingly, if the circumstances relied on by HMRC to demonstrate that the Appellant (knew or) should have known of the connection with fraud can be explained, that explanation should be raised in the Appellant’s witness statement (and supported by documentation where possible). By way of example, in a recent case in which I acted for the Appellant, HMRC referred to the fact that the Appellant’s sales and purchases were “back-to-back” (that is, the same volume of goods were bought and sold such as to mean that there was never a need to “hold” stock). However, the Appellant was able to adduce evidence that in its industry back-to-back trading is part of normal, legitimate trading such that it could not be said that fraud was the “only reasonable explanation”.
Kindly reprinted with the permission of David Bedenham.
The concept of “domicile” has been heavily discussed in the media in recent weeks. But what is domicile and why is it important?
In short (and losing a lot of the nuance) an individual’s domicile is the place of their permanent home. A home is more than just a place of residence. An individual’s residence is where they are currently living and this may change from year to year. Even an individual’s main residence where they spend the majority of their time is not the same as their domicile.
A person acquires a domicile at birth from their father, or if their parents are unmarried then from their mother. This is known as their “domicile of origin”. So Mr Smith born to English-domiciled parents has an English domicile of origin, irrespective of where he is born in the world.
An individual’s domicile can change over time and if it does, the individual is said to have acquired a “domicile of choice”. Two elements are required in order to establish domicile;
a) The individual must actually physically live where they intend to become domiciled, and
b) The individual must intend to reside permanently and indefinitely in that jurisdiction, with no end in sight.
For example if Mr Smith aged 30 moved from the UK to France to work for 10 or even 30 years he would not lose his English domicile as long as he does not intend to reside permanently in France. If he later decided he would like to stay in France permanently, he would lose his English domicile of origin and acquire a French domicile of choice at that stage. Alternatively, if Mr Smith intended to remain in France permanently and indefinitely from when he arrived he would obtain a French domicile of choice from the point of arrival, whether he moved aged 30 or much later in life, say to retire at 65.
Individuals who are domiciled outside of the UK (“non-doms”) have access to a number of favourable tax regimes. Among the most useful is the remittance basis of taxation, which allows a non-Dom to shelter non-UK income and capital gains from UK tax as long they are kept offshore: Tax is paid only on foreign income and capital gains brought to (or otherwise enjoyed in) the UK. In contrast an individual with a domicile in the UK is taxed on their worldwide income and gains.
Non-doms also benefit from significant inheritance tax exemptions on non-UK property, both on death (saving 40%) and on otherwise chargeable lifetime transfers such as setting up trusts (a 20% saving).
The essence of the test of a person’s domicile is easy to state, but in reality more nuanced and very difficult to prove. Unsurprisingly given the tax advantages, HMRC are vigorous in enquiring into non-doms, especially individuals born in the UK but claiming non-dom status as a consequence of their parent’s domicile, and such enquires can be intrusive, all-encompassing and lengthy to conclude. The final arbiter will, if necessary, always be the courts, but taking specialist legal advice early in the process can help to smooth and speed up the enquiry process or avoid potentially costly mistakes where planning is undertaken that is dependent upon domicile.
The tax treatment of non-doms is a substantial political and financial question. Non-doms bring in about £8bn a year of taxes; to put that into perspective the new NICs increase will raise about £6m a year.
Labour have announced that they intend to abolish the non-domicile tax regime. No details on how this will be accomplished, or what will replace it, have been announced although the party are considering a move to a shorter-term scheme for temporary residents. This could, for example, see tax benefits only available to individuals resident in the UK for no more than five years, in line with a number of other G7 countries. In 2000 Gordon Brown, then Chancellor of the governing Labour party, announced a similar review that was eventually scrapped.
The Conservatives have announced no plans to change the law around domicile or its tax benefits.
If you wish to discuss domicile or assistance with HMRC enquires, please contact your usual JHA contact or the author Tom O’Reilly at TOReilly@jha.com.
Paragraph 4A of Schedule 36 to the Finance Act (“FA”) 20081 provides HMRC with the power to obtain information and documents from financial institutions via a Financial Institution Notice (“FIN”). According to HMRC, this power was “expected to have a negligible impact on about 20 financial institutions”,2 such as banks and building societies. HMRC is expected to inform the Treasury about the number of FINs issued “as soon as reasonably practicable after the end of each financial year”.3 Whether they had a negligible impact or not will be known with certainty following that report.
The main features of this power are:
1Incorporated by s 126 of the Finance Act 2021.
2HMRC, “Amending HMRC’s Civil Information Powers” (3 March 2021).
3 FA 2021 s 126(4)(5).
