Tax Weekly Monthly Roundup October 2022
See our news from October 2022
Tax effective separation of trading activities and property interests
A Limited is a successful company has traded for many years designing and distributing branded home fragrance products through both wholesale and direct retail channels. The company also owned its trade premises which were valued at £10,600,000.
The directors of A Limited had received and offer from an independent third party to purchase the trading activities for approximately £10,000,000.
The prospective purchasers could not afford to buy the trade premises. Instead, they wanted to lease it from the current owners who also wished to retain the property.
It was therefore necessary to consider how to separate the trading activities from the property interests.
We suggested a return of capital demerger as an effective means of achieving a separation of the property and trading activities without a tax liability (i.e., there was no corporation tax, capital gains tax, income tax, SDLT or VAT) which achieved a considerable tax saving when compared to extracting the trade premises from the company as either a distribution in specie or as a capital disposal.
This allowed for an onward sale of a company owning the trading company for £10m and for the owners to retain a company owning the former trade premises. The owners were able to claim business asset disposal relief meaning that their first £1m of capital gains were taxed at 10% with the remainder being subject to capital gains tax at 20%.
Our work involved the following –
- Written advice explaining the tax consequences of a return of capital demerger including a detailed step plan. This letter was used to instruct the solicitors acting for the client
- Preparation of a valuation report for the trading activities and the property interests of A Limited
- Drafting an advance tax clearance application in respect of the proposed transactions and reviewing the reply received from HMRC
- Liaison with the accountant and solicitors regarding several of the suggested steps
- Drafting stamp duty adjudication letters and reviewing replies from HMRC.
If you have a client in similar position, it would be beneficial for you to speak with My VIP Tax Team about how a return of capital demerger could help.
Optimising your R&D claim and the risks
There is significant commentary regarding R&D tax claims right now. We want to respond to recent commentary and developments in the R&D claim environment, R&D claim optimisation and risk mitigation and advise on successful and unsuccessful claims in light of HMRC enquires.
VAT: What a difference a day makes
Neil Warren CTA (Fellow), ATT
Dates are very important in the world of tax – and in life generally. For example, a recent announcement following the passing of the Queen was that all football matches would be cancelled ‘until Tuesday’. This confused me: did that mean that Tuesday games were also cancelled and football started on Wednesday, or that Tuesday matches were OK? A couple of friends and I debated the meaning of the word ‘until’ but we couldn’t agree.
By my own admission, I also got confused about the dates when penalties will be triggered for paying VAT late with the new penalty regime that will take effect for periods beginning on or after 1 January 2023. I read a word in HMRC’s guidance which I wrongly interpreted but fortunately the legislation was much clearer. Read on and all will be revealed.
Basic rules of new system
I am as excited by the new penalty regime as a teenager buying an overpriced pair of designer training shoes, because it will be a massive improvement on the existing default surcharge system. This is because a business currently gets the same penalty for paying its VAT return one day late as one year. That cannot be fair.
With the new system, there will be no penalty if tax is paid – including part payments – by day 15 after the due payment date. In the first year of the new regime, there will be no penalty if tax owed on a return is fully paid within 30 days of the due date. Note the word ‘fully’ in this sentence. But let’s clarify the phrase ‘day 15’ with an example.
VAT period ends on 31 March 2023
Due date for submitting return online and paying tax – 7 May 2023
Day 15 after the due payment date is 22 May 2023. A penalty will be triggered for VAT unpaid at the end of this day. In other words, a 2% penalty will be issued for tax unpaid at the start of day 16.
The relevant legislation about the new system is contained in FA 2021, s. 117 and Sch. 26, and HMRC’s published guidance can be found at https://tinyurl.com/yckz4x2k.
So, to get back to the key theme of this article (pause for dramatic effect): what was the reason for my confusion about the 15 day deadline?
The answer is that HMRC’s guidance states that a 2% penalty would apply to tax ‘you owe at day 15 plus 2% on the VAT you owe at day 30’. In other words, the penalty rate of 2% at day 15 becomes 4% at day 30. So, we get to the start of day 15 and VAT on a return is outstanding – in my mind, the word ‘at’ means that a penalty would now be due. However, Sch. 26, Pt. 2 confirms that no penalty will be due on tax paid ‘before the end of the 15 day period’.
A 2% penalty will apply to tax unpaid ‘after the end of the 15 day period but before the end of the 30 day period’ (author emphasis). The word ‘period’ is confirmed as starting from the day after the due payment date. To quote the old song ... what a difference a day makes. The use of the word ‘end’ in the legislation is – in my view – much clearer than the word ‘at’ in HMRC’s guidance.
The same principle applies to the second penalty that will be charged for tax unpaid more than 30 days after the due date. In other words, the penalty will be issued on day 31.
VAT period ends on 31 March 2023
Due date for submitting return and paying tax – 7 May 2023
Day 30 after the due payment date is 6 June. An extra 2% penalty will be triggered for VAT unpaid at the end of this day. In other words, the penalty will be issued for tax unpaid at the start of day 31.
Note – for tax still unpaid after the end of day 30, an annualised penalty rate of 4% will be applied thereafter. And for all tax unpaid by the due payment date (7 May in my examples), interest will be charged. The rate will be 2.5% above the Bank of England’s base rate. Don’t forget that interest is not a penalty, it is commercial restitution to compensate HMRC for late payments.
Is it ‘and’ or ‘or’?
Another important point of detail to consider when reading HMRC guidance or the legislation on any VAT subject is whether the word ‘and’ or ‘or’ is relevant to a particular situation. For example, the legislation gives HMRC the power to treat two separate businesses as a single entity if they are closely connected by economic links, financial links and organisational links. The key word here is ‘and’ – in other words, HMRC need to prove that all three links are evident before they can issue a direction. One or two out of three is not good enough.
Another example of ‘and’ is the list of conditions that need to be met for a business sale to potentially qualify as a TOGC with no VAT charged on the assets being sold. In contrast, the legislation on VAT registration requires a business to register if its taxable sales have exceeded £85,000 in any rolling 12- month period or if it expects its sales to exceed that figure in the next 30 days alone.
Finally, to put you out of your suspense, the Tuesday football matches were played – perhaps not such a good thing because the local team I follow in Birmingham yet again failed to win: Walsall 1 Colchester 1.
For further commentary on the new penalties regime, see In-Depth at 197-690.
Tax and mental health
Meg Wilson, Lead Technical Writer at Croner-i Ltd on direct tax
One in four of us will experience a mental health problem. It is therefore vital that the tax system is suitably equipped to assist those affected and not to unnecessarily penalise non-compliance caused by mental health issues. This article looks at measures in place to help taxpayers, and what we can learn from cases citing mental health problems.
Some tax legislation specifically refers to a taxpayer’s mental health. For example:
- the information and inspection powers of HMRC (FA 2008, Sch. 36), Revenue Scotland (Revenue Scotland and Tax Powers Act 2014, Pt. 7) and the Welsh Revenue Authority (Tax Collection and Management (Wales) Act 2016, Pt. 4) are all subject to restrictions preventing a taxpayer from being compelled to provide information relating to their mental health; and
- before HMRC can use their powers to recover debts directly from a taxpayer’s bank account they are required to consider whether the taxpayer is disadvantaged in dealing with their tax affairs, which per HMRC’s policy paper includes considering mental health conditions (F(No. 2)A 2015, s. 51 and Sch. 8).
The HMRC Charter
HMRC’s Charter provides that HMRC will aspire to listen to a taxpayer’s worries and answer any questions clearly and concisely, and will be mindful of a taxpayer’s wider personal situation, and will give them extra support if needed.
The extra support, in the form of a phone or video appointment with HMRC’s extra support team, is however limited to questions about Child Benefit, PAYE and self-assessment.
Reasonable excuse cases
Given the high number of people with mental health problems it is no surprise that many appeals against non-compliance penalties refer to a taxpayer’s mental health as providing them with a reasonable excuse for their failure.
Both HMRC and the tribunals agree that mental health issues can be a reasonable excuse. However, as Judge Brannan recently said in the First-tier Tribunal (FTT) case of Breen  TC 08482 (which the taxpayer lost):
‘Without wishing to be prescriptive, there would in most cases need to be evidence that the mental health issue in question was such that the taxpayer cannot deal with his or her affairs to such an extent that the taxpayer cannot submit a return or perform the necessary preparation to submit a return.’
The lack of evidence is the usual reason why such appeals fail. For other examples see Atkins  TC 06439 and Baker  TC 06896.
The tribunals are sometimes more sympathetic than HMRC when considering the issue of mental health problems, especially when they are ongoing. For example, in AZ v R & C Commrs  BTC 1,777, the Upper Tribunal (UT) found that based on evidence from a psychiatrist the taxpayer had a reasonable excuse for non-compliance and this continued for longer than the FTT had allowed.
The FTT case of Hindocha  TC 05838, concerned penalties for the late filing of a tax return and the late payment of tax. HMRC argued that because the taxpayer’s anxiety and depression were ongoing he should have made arrangements for completing and sending his tax return on time. However, the FTT cancelled the penalties because it accepted that given the nature of the taxpayer’s illness he was unable to make such arrangements.
A similar decision was reached in Appellant  TC 05564, where the FTT found that the appellant’s schizophrenia provided her with a reasonable excuse for failing to deal properly with her tax affairs for many years. Judge Mosedale highlighted that while she found that the appellant’s mental health amounted to a continuing reasonable excuse for her failure to deal properly with her tax affairs, it had no relevance to her liability to file returns and pay tax, which applied to everyone, which Judge Mosedale noted was ‘a highly unsatisfactory position for both HMRC and the taxpayer’.
In the recent case of Harrison v R & C Commrs  BTC 525, the UT agreed with the FTT (and HMRC) that a taxpayer who had suffered many distressing personal and business events and who had been suffering from depression, did not have a reasonable excuse for his failure to file his return. While it was accepted that he might have had a reasonable excuse at the time of the filing deadline, it was decided that the excuse had ended and he had not submitted the return quickly enough after the excuse ended.
In my opinion worryingly, in the Harrison case the UT upheld a decision of the FTT that by a taxpayer with depression not signing and returning his return he had deliberately withheld information and was therefore subject to a tax-geared late filing penalty of over £42,000.
The UT rejected the challenge to the finding of fact, that the taxpayer had taken the initiative to ask his accountants to prepare his return, from which the FTT concluded that he ‘had the capability to take the steps required to fulfil his responsibilities’ and therefore he had deliberately intended not to file his tax return. Although the taxpayer’s evidence was that it was his accountant who had taken the initiative, the UT decided that the FTT was entitled to make this challenged finding of fact.
HMRC’s duties under the Equality Act 2010
Where a person’s mental health problem is a disability, the Equality Act 2010 gives the person protection from discrimination. Under the Act, where HMRC propose to carry out an act which may affect a person who is known to have a disability, they have a public sector equality duty to carry out an ‘open-minded conscientious enquiry’ of the potential impact of that act on that person before so acting; and a ‘duty to make adjustments’.
The duty to make adjustments comprises these three requirements:
- where a provision, criterion or practice of the person on whom the duty is imposed puts a disabled person at a substantial disadvantage in relation to a relevant matter in comparison with persons who are not disabled, to take such steps as it is reasonable to have to take to avoid the disadvantage;
- where a physical feature puts a disabled person at a substantial disadvantage in relation to a relevant matter in comparison with persons who are not disabled, to take such steps as it is reasonable to have to take to avoid the disadvantage; and
- where a disabled person would, but for the provision of an auxiliary aid, be put at a substantial disadvantage in relation to a relevant matter in comparison with persons who are not disabled, to take such steps as it is reasonable to have to take to provide the auxiliary aid.
The High Court bankruptcy petition of R & C Commrs v De Freitas  BTC 26, considered whether HMRC had met their duties under the Equality Act 2010. It was common ground that, by reason of mental health issues, the debtor had a disability within the meaning of the Equality Act 2010, s. 6(1). The Court decided that HMRC had not breached the Equality Act 2010. HMRC had considered the impact that bankruptcy proceedings would have on the debtor’s mental health before serving the petition. It was not clear that a delay by HMRC in pursuing bankruptcy proceedings would have served any useful purpose, such that HMRC’s decision to proceed with the petition amounted to a breach of the ‘duty to make adjustments’. HMRC’s Debt Management and Banking Manual (DMBM585185) provides guidance for those considering enforcement in respect of taxpayers with mental health issues.
Private hearings and anonymised decisions
In the interests of open and public justice, it is the general rule that tribunal hearings are heard in public and full decisions are published without protecting anyone’s identity. However, appeals can be heard in private and decisions can be anonymised. Given the understandable desire for many taxpayers to keep any mental health issues out of the public domain, together with the importance of publishing decisions to help us understand how tribunals apply the law, anonymising such decisions would seem a good approach. This is what happened in Appellant  TC 05564. Not doing so routinely risks discouraging others with mental health problems from appealing HMRC decisions.
It is all too easy to advise people with mental health problems to talk about their problems and to get help. In reality, for someone suffering, to reach out and find appropriate help is much more difficult. I suspect there is more that both HMRC and agents can do to identify those with mental health problems and to help them deal with their tax affairs. For those taking cases to tribunal and citing mental health as a reason for a taxpayer’s non-compliance, it is key to ensure evidence is provided as to why the taxpayer’s mental health problems prevent them from meeting their compliance obligations.
For commentary on when a person’s mental health can provide them with a reasonable excuse, see In-Depth at 197-315 and for HMRC’s guidance see CH160400.
Since this article was first published HMRC have announced that they are working with Samaritans to deliver an 18-month project to improve the emotional support available for taxpayers.
If your employees are ‘Quiet Quitting’, here’s what it means
Heather Townsend, founder of The Accountants’ Growth Club and author of How To Make Partner And Still Have A Life
What is meant by Quiet Quitting?
There is no one definition of what it means to Quiet Quit. It does not mean leaving your job. It can mean some or all of the following:
- not going the extra mile at work;
- only working the hours they are being paid for;
- setting boundaries and not taking on additional work/responsibilities;
- not subscribing to the hustle mentality to progress their career.
Given that many tax practices rely on employees to work significantly more than they are paid to do in Busy Season, this is a worrying trend. Indeed, firms have often correlated people with partner potential to those that are prepared to hustle in the early days of their career.
There is an argument that says Quiet Quitting is about reminding employees to not work to the point of burnout. It’s not necessarily about just doing the minimum amount of work required. It’s about being productive in the hours you are at work and not making work your ‘be all and end all’.
This is what is worrying about Quiet Quitting
There is a school of thought that Quiet Quitting is a reaction to Covid-19 and the Great Resignation. After a number of years of uncertainty, Quiet Quitting is a way for employees to take back control of their work and personal life. If, for whatever reason, an employee doesn’t believe they have the luxury of resigning, Quiet Quitting is the next best option.
Read any of the articles about Quiet Quitting and the ‘Quiet Quitters’ appear to be younger employees who then resign from their current roles: over the next 12–18 months they either change jobs or set up on their own. It appears, despite the many definitions of Quiet Quitting, that it is often the first step in disengaging from a role. This matches up with what Gallup found in a recent survey: 54% of employees born after 1989 are not engaged employees. This category of ‘not engaged’ employees highly correlates with Quiet Quitting.
Tax practices have always had to contend with employees, albeit a minority, who have been able to put the minimum effort in. That’s nothing new. With many more employees working remotely, it becomes much easier to float underneath the radar of senior management. It also becomes much easier to Quiet Quit without anyone in senior management realising it.
Quiet quitting can also cause conflict between employees in the workplace. After all, if not everyone on a team is pulling their weight it can quickly lead to resentment. This can prompt a situation where your top performers get disgruntled with the state of affairs and start looking for a new role in a different firm.
What can your firm do about Quiet Quitting?
If Quiet Quitting is all to do with employee engagement, then the first place to start is look at the leadership and culture of your firm.
Don’t make employees have to work full-time from the office
The older members of your firm probably are used to working long hours from an office. In fact, they may suggest the answer to the current issues with employee engagement and morale is to ‘get people back into the office’. Whilst this is tempting, it is likely to lead to a mass exodus of employees. Our sister company, The Accountants’ Recruiter, has found that the candidates they are placing are predominantly looking for flexibility where they work. They want to have their cake and eat it – i.e. they want to be able to come into an office but also have the flexibility to work at home a number of days per week. Indeed, this is backed up by numerous studies in the workplace. Deloitte found in 2020 that nearly 50% of all professionals value remote work and flexible work hours the most. In 2022, Deloitte Australia did some research which found that:
- 93% of workers surveyed say their physical, emotional and mental wellbeing is just as important as pay;
- 78% of workers who can work remotely want to work hybrid or from home.
Prioritise partners’ and senior fee earners’ self-care
Most of your senior fee earners and partners are used to putting in a full shift at the office. They may have always worked as long as was needed to get the work done, even if this was at the expense of their personal life and own well-being. If you look around your partners, how many of them have chalked up a divorce or two? Or look like they have sacrificed their liver and waistline for the cause? Is it any wonder that many of your younger employees are looking up and not aspiring to be the next partner in your firm?
The example that partners and senior fee earners set with their working hours and boundaries often dictates the culture in a team or office in a firm. Whereas if younger employees can see that senior leaders prioritise self-care, for example being properly off when on annual leave, or rarely working weekends, this will trickle down for the rest of the firm. If younger employees can see that senior management values downtime, they are less likely to need to Quiet Quit.
Respect employees’ time off
Part of this Quiet Quitting movement is about setting firm boundaries and not working long hours or working at weekends or on holidays. Therefore, if firms are to avoid Quiet Quitting, they need to minimise the requests for younger employees to ‘pull an all-nighter at work’ or give up part of their weekends to work. This means using scheduling tools so that employees don’t get e-mails that require a response at the weekend or in the evenings. It also means looking at the expectations that are routinely set for employees. Employees, whilst they need to earn their keep, are not assets to be sweated. Any firm which is routinely requiring employees to bill more than six hours a day needs to take a long hard look at its business model.
More communication and direction
Whilst hybrid working can have great benefits including increased productivity, it very quickly exposes poor management and leadership in a firm. This poor management and leadership can very quickly lead to employees feeling undervalued and that their role lacks purpose. Gallup found that many younger employees do not feel that their work has purpose. After all, this is the generation that has found that for two to three years of their formative career they have been working from home for large chunks of time. If you then add in the fact that many tax practices have a matrix structure where there are weak relationships between counselling managers and their direct reports, is it any wonder that many of our younger employees are considering Quiet Quitting?
When working in a hybrid fashion, employees need more structured and purposeful communication. After all, management by walking about just doesn’t work when people are not always in the office.
This means looking at how and when you as a firm are communicating with employees. From the top- down communication through to how assignment/project leaders and counselling managers are communicating with their team members and direct reports. After all, it’s very difficult to Quiet Quit when you believe that someone cares about you and is regularly checking in with you to see how you are getting on with your work.