HMRC statistics for WDF disclosures
HMRC released its latest statistics on the usage of its Worldwide Disclosure Facility (WDF) for the 2022/23 tax year, which provides an opportunity for UK taxpayers to disclose unreported offshore income and gains.
There was a 41 percent decline (-3,207) in the number of WDF disclosures received by HMRC during 2022/23 (4,627) compared to the previous tax year (2021/22 – 7,834). Disclosure figures have historically shown year-on-year fluctuations, making it challenging to draw firm conclusions from this data alone.
However, HMRC’s success in receiving WDF disclosures and boosting the UK’s tax receipts (£73.9m collected in interest, tax and penalties in 2022/23) would appear to have a link to the issuance of “nudge” letters by HMRC to taxpayers. This targeted approach is supported by the UK’s participation in the Common Reporting Standard (CRS), where more than 100 countries have committed to exchange banking data.
Tax advisers should be aware that once individuals receive such a letter, the option for wholly voluntary/unprompted disclosures is forfeited, resulting in possible Failure to Correct penalties (for years up to 2015/16) of at least 150 percent. Lower penalties can apply for later years, but the minimum for a prompted disclosure may be as high as 110 percent, depending on the circumstances.
Domicile of a long-term UK resident
The First-Tier Tribunal (FTT) came to a somewhat unsurprising conclusion, given the lack of substantial evidence presented by the appellant. They upheld HMRC’s assertion that the deceased had a domicile of choice in the UK at the time of his death (Shah (as executor of the estate of Anantrai Maneklal Shah (deceased) v Revenue and Customs Commissioners).
The appellant argued that the deceased had every intention of returning to India, his presumed place of domicile, but had died before realising his ambition. However, the FTT considered that the deceased had no significant connections to India.
There was no evidence to show he had made serious plans to retire there or efforts to obtain Indian citizenship; nor had he set up a bank account in India. Instead, the deceased pursued overseas citizen status which the judge considered as ‘not a firm commitment to leaving and placed no obligation on him to go to India’.
Consequently, the FTT ruled that the deceased had settled and intended to remain in England permanently.
This case highlights the need for taxpayers to support their stated intentions with evidence and, most importantly, by their actions.
Information notices
The First Tier Tribunal (FTT) dismissed a non-UK resident taxpayer’s appeal against an information notice relating to property transactions in the UK (Foreign National v HMRC). He had applied for approval under the non-resident landlord scheme.
The taxpayer had argued that the information HMRC had requested amounted to a “fishing expedition” as he believed the queries went beyond what is ‘reasonably required’ to make an accurate conclusion, arguing that HMRC’s overriding intention was to gather information about his family.
However, the FTT ultimately concluded that HMRC did not ask “indiscriminately for everything available” and they had carefully formulated a list of questions focusing on ”areas of doubt and uncertainty”. The FTT stated that, ‘inevitably, whenever HMRC ask for information from a taxpayer that relates to their dealings with another person, they will learn something about that other person’.
Double tax treaty interpretation
In an interesting double tax treaty interpretation case (Royal Bank of Canada (RBC) v CRC), the Court of Appeal ruled against HMRC’s argument and overturned the decision of both the First Tier Tribunal and Upper Tribunal. The dispute concerned whether payments made to RBC, a non-UK resident company, based on the volume and price of oil extracted from the UK continental shelf should be classified as income from immovable property under Article 6 of the UK-Canada Double Taxation Treaty, subject to UK Corporation Tax as a “ring fence” trade applicable to oil-related activities.
RBC had become entitled to these payments as they had previously made loans through its Canadian head office to a Canadian oil company to fund exploration in the UK continental shelf. That company later sold its interest in exchange for various sums, including an entitlement to royalty payments on production from the oil field. After going into receivership, the oil company’s right to future payments were assigned to RBC.
The judge concluded that Article 6(2), namely “rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources” was confined to rights to payments held by a person who has a continuing interest in the land in question to which the rights can be attributed. The arrangement for RBC to receive such payments did not indicate any interest in the oil field. Therefore, it could not be argued that RBC was subject to UK tax on these payments under the provisions of the treaty article.
Mutual wills
Yet more evidence of the robustness of mutual wills in the courts has been revealed (Colicci v Grinberg) . This family dispute centred around the allocation of owner shares upon death. The judge held that a subsequently signed shareholder’s agreement did not supersede the terms of a deed providing for mutual wills that had been signed in 2016.
The deed had created a ‘binding obligation’ on the testators, establishing “testamentary obligations” that removed the testators’ ‘freedom’ to dispose of their shares in death. While the later signed shareholder’s agreement addressed the “rights and obligations of the parties as shareholders”, it did not seek to revoke the terms of the deed, consequently the obligation on the testators remained.
The ruling serves as a warning for individuals who are considering the use of mutual wills to resolve family issues upon death, as they prove difficult to overcome should one of the testators change their minds.
Making Tax Digital
The National Audit Office (NAO) has published a damaging report into HMRC’s progress with making tax digital (MTD). Amongst other noteworthy key findings, the NAO reported that HMRC were at least eight years behind the original timetable for MTD in Self-Assessment and had not resolved important elements of its design. The Public Accounts Committee announced an inquiry based on the NAO’s report.
Tax schemes and counsel’s opinions
Dan Neidle, who describes himself as founder of Tax Policy Associates and tax realist, uncovered uncomfortable findings regarding the role of senior counsel in advising promoters of tax avoidance schemes. Mr Neidle emphasised the need for counsel to uphold the rule of law but highlighted the lack of scrutiny they face when incorrect opinions are provided on such schemes.
In these circumstances, counsel are not exposed to the risk of being sued by the taxpayer since there is no formal engagement between the counsel and end user of the scheme. This absence of liability creates an incentive for counsel to align with the interests of the promoter who instructs them.
In an article for Tax Policy Associates, Mr Neidle publicly ‘named and shamed’ a tax KC who approved a scheme that was later found to be fraudulent. The director behind the scheme subsequently admitted the scheme was fraudulent. Mr Neidle previously commented that it was “so blatant, and so doomed, that it took my breath away”.
Code of Practice 9
HMRC recently released updated guidance and documentation regarding its use of Code of Practice 9 (COP 9), which serves as HMRC’s primary civil investigation tool for fraud cases. The updated document aims to enhance the understanding of those individuals undergoing investigation under COP 9 and to clarify that COP 9 can cover fraud in respect of HMRC functions not involving tax. Additionally, HMRC also chose to provide further detail on the their work under COP 9, in the hope of increasing the public’s confidence about its approach to tax fraud.
When can you rely on HMRC guidance?
HMRC recently updated its statement on when taxpayers can rely on the guidance provided by HMRC. The updated guidance made reference to what types of communications may constitute advice or information from HMRC. Furthermore, HMRC has expanded on the situations in which they may be bound by incorrect advice or information they have given. However, it is important to note that HMRC will require evidence that their advice was relied upon.