Private client Christmas round-up: 2023 Review
Christmas cracker, Brussels sprout or a turkey? A festive appraisal of some key case decisions affecting the taxation of private clients in 2023.
Christmas is of course a time for celebration, but also for ruminating on the year that has nearly passed. In a festive and yet reflective spirit, we will be taking a handful of personal tax decisions published over the course of the year and appraising, or in some cases, reappraising them. We will be adopting a sophisticated and nuanced marking system:
- Cracker: An important decision which has brought welcome clarification of the law, and perhaps a faint whiff of gunpowder.
- Brussels sprout: An interesting, divisive decision which will appeal to some readers, but which others may find hard to swallow.
- Turkey: A decision where, in our completely unbiased view, the relevant court or tribunal got itself all trussed up. Without further ado, save for the dutiful donning of paper hats, we begin with the Upper Tribunal judgment in HMRC v A Taxpayer. The facts of this case were, it must be acknowledged, not very festive; and the tribunal’s decision might be characterised as Scrooge-like.
HMRC v A Taxpayer
Case rating: Turkey.
This is the only reported case so far on the exceptional circumstances relief in the statutory residence test (SRT) (FA 2013 Sch 45 para 22(3)–(6)). Under that relief, when determining an individual’s residence status in a tax year, days of presence in the UK may be disregarded (up to a maximum of 60 days) if they were days on which the individual was present in the UK due to exceptional circumstances beyond his control, which prevented him from leaving the UK. The case concerned an individual residing in the Republic of Ireland who had flown into the UK to look after her alcoholic, depressed sister, and the latter’s children. It was argued that the sister’s illness, combined with the fact that her children were being neglected and required care, rendered the circumstances exceptional, and that those circumstances prevented the taxpayer from leaving the UK for the duration of her stay.
That argument succeeded before the First-tier Tribunal (FTT). The latter accepted that an ‘obligation of conscience’ can qualify as exceptional circumstances, and indicated that whether an individual is prevented from leaving the UK may to some degree be a subjective question. While it would theoretically have been possible for the taxpayer to make day trips from the Republic of Ireland to visit her sister, the FTT considered that the severe impracticality of this option meant that, in practice, the taxpayer was prevented from leaving the UK.
However, the UT disagreed (HMRC v A Taxpayer [2023] UKUT 182 (TCC)). It held that the circumstances experienced by the taxpayer were not exceptional. Nor, in its assessment, did those circumstances prevent the taxpayer from leaving the UK. The UT held that the question of whether circumstances are exceptional is ‘entirely objective’ (para 54), and exceptional circumstances only prevent an individual from leaving the UK if those circumstances make it impossible for the individual to leave, rather than merely causing an obstacle or hindrance (para 68).
Our feeling is that the UT has construed the relief too narrowly ... That cannot have been Parliament’s intention
Furthermore, the concept of exceptional circumstances should, in the UT’s view, be narrowly construed. It was stated that ‘Serious illness and death are, themselves, not “exceptional”; the former is commonplace and the latter universal … Objectively commonplace circumstances, such as serious illness, cannot be converted into exceptional circumstances by adding a moral obligation’ (para 73; c.f. paras 78 and 117).
In reaching its decision, especially regarding the meaning of exceptional circumstances, the UT appears to have dispensed with both compassion and common sense. Serious illness and death are obviously not exceptional on a global macro-level, but neither are wars or natural disasters, or any of the other examples of exceptional circumstances that are referred to in FA 2013 Sch 45 para 22(5). All these things are common occurrences across human society viewed as a whole, but at least in the modern western world, any individual affected by them is likely to perceive them as exceptional.
Common sense suggests there must be a degree of subjectivity when considering whether a given individual’s circumstances at a particular time count as exceptional. That question must be answered in the context of the individual’s life, viewed in the round, and measured against the circumstances in which the individual normally finds himself. Indeed, the UT acknowledged that being stuck in the UK due to a broken leg, clearly not an intrinsically unusual injury, could satisfy the exceptional circumstances rule (para 89). It is hard to see how this can be squared with the UT’s view that serious illness is not exceptional.
There must also be cases where exceptional circumstances do not make leaving the UK a physical impossibility, but do make it highly inadvisable. It is implausible that Parliament would have intended the exceptional circumstances rule to be construed in such a narrow manner that taxpayers may, for example, feel compelled to take risks with their health to ensure that they do not become UK resident.
In conclusion, our feeling is that the UT has construed the relief too narrowly. The concern is that HMRC will seize on the UT’s judgment, viewing it as a licence to treat the relief as having a vanishingly small ambit. That cannot have been Parliament’s intention when the SRT was enacted.
Gould v HMRC
Case rating: Christmas cracker.
The facts of Gould v HMRC [2022] UKFTT 431 (TC) were quite straightforward. The directors of an English company resolved that the company should pay an interim dividend to its shareholders. Simplifying the facts slightly, there were two such shareholders with equal numbers of shares, so 50% of the dividend was payable to one of them and 50% to the other.
One of the shareholders was UK resident at all relevant times, and received payment of his share of the dividend soon after the board resolution. However, the appellant was peripatetic, spending time in both the UK and Jamaica. He was UK resident (or at least, potentially UK resident) when the resolution was passed. However, he did not receive payment of his 50% share until the following tax year, when he was certainly non-UK resident. HMRC had sought to assess him to income tax on receipt of the dividend, the basis being that he became entitled to the dividend in the tax year in which the board resolution occurred (para 39).
However, the FTT held that for tax purposes, the appellant received his dividend in the tax year of payment, not the tax year in which the board resolved to pay it. As the dividend was declared by the board using the interim dividend procedure, instead of being approved by the shareholders using the final dividend procedure, the declaration of the dividend did not create a debt due from the company which the appellant could have enforced (para 71; see Potel v CIR (1970) 46 TC 658). Moreover, if under company law the appellant had a right to payment of his share of the dividend at the same time as the other shareholder, the FTT considered that there must have been an implied waiver of that right – the consideration for such waiver being the company’s implied agreement to pay the appellant’s share of the dividend to him in the following tax year (para 114).
HMRC are understood to dislike tax-motivated arrangements whereby taxpayers waive or defer receipt of dividends. It will be interesting to see whether this case is appealed. However, the chances of HMRC seizing victory from the jaws of this particular defeat seem low. In our assessment, the FTT’s decision was clearly right. And a cracker.
Having said this, it might be useful for a higher court to re-examine some of the issues that were ventilated in Gould. In particular, we are doubtful whether, in a tax context, it is relevant for the timing of receipt of a dividend whether the dividend was a final dividend, creating an enforceable debt due from the company, or an interim dividend. Jurisprudence in relation to interest payments provides reasons to believe that, for tax purposes, a dividend is not received until money is credited to the shareholder’s account or the shareholder receives valuable property, other than mere indebtedness of the company.
Strachan v HMRC
Case rating: Brussels sprout.
Strachan v HMRC [2023] UKFTT 617 (TC) was the last of a trio of domicile cases heard in 2023, following Coller v HMRC [2023] UKFTT 212 (TC) and Shah v HMRC [2023] UKFTT 539 (TC) earlier in the year. In all three cases, the FTT was persuaded that the taxpayer was domiciled in England at the relevant time, continuing HMRC’s long winning streak in domicile litigation.
Mr Strachan had an English domicile of origin, but had relied, ambitiously, on an alleged domicile of choice in Massachusetts in the relevant tax years. For that to have been tenable, there would need to have been a period in which Massachusetts was his sole or chief residence. The FTT found that this was never the case.
However, the more interesting aspect of Strachan, by far, concerns the tax administration code. HMRC were seeking to make discovery assessments, by virtue of which they would (on their stated case) be entitled to collect tax liabilities going back to 2011/12. To make such assessments, HMRC needed to establish that the extended time limit for careless behaviour in TMA 1970 s 36(1) applied. This turned on whether the loss of tax was brought about carelessly by Mr Strachan. This could be broken into two sub-issues, namely (1) whether in taking the position that he was non-UK domiciled, Mr Strachan had been careless, and (2) if so, whether that carelessness had ‘brought about’ the loss.
Mr Strachan had filed the relevant tax returns without the benefit of any recent professional advice on his domicile (the last advice on this topic having been delivered to him in 1987). However, much later, in 2018, Mr Strachan obtained an opinion from a QC which, rather surprisingly, supported his putative Massachusetts domicile.
There was little doubt that when filing returns for 2011/12 and ensuing years, Mr Strachan was careless, in relying on vintage advice on his domicile which would not have reflected changes of circumstances in the intervening years, or indeed any relevant changes in jurisprudence. However, the beguiling argument advanced on behalf of Mr Strachan was that: (1) even if he was guilty of carelessness, for the extended time limit in s 36(1) to apply it would need to be the case that the carelessness ‘brought about’ (i.e. caused) the loss of tax; and (2) the burden of showing that must rest with HMRC. The fact that the much later tax opinion from the QC agreed that Mr Strachan was domiciled in Massachusetts showed that such view, even if it was now considered wrong by the FTT, was not considered untenable by an apparently competent adviser in 2018. It was perfectly possible – the argument ran – that if Mr Strachan had sought advice on his domicile when filing his 2011/12 return, he would have received substantially the same advice as he got from the QC. Accordingly, it was not shown that the carelessness caused the loss of tax.
The FTT agreed with the taxpayer, finding that HMRC had not demonstrated the requisite causation. The FTT accepted that if Mr Strachan had taken advice before filing his returns for 2011/12 and later years, that advice might have supported the taxpayer’s belief regarding his domicile. In reaching its decision, the FTT relied on Bella Figura Ltd v HMRC [2020] UKUT 120 (TCC), in which the Upper Tribunal said (at para 61(2)) that s 36 is concerned with the question of whether a failure to take reasonable care causes a loss of tax’ (our italics).
Strachan and Bella Figura imply that HMRC cannot proceed on the basis that extended time limits for careless behaviour apply, or that the conduct condition in TMA 1970 s 29(4) is met, where a taxpayer has carelessly taken a filing position without professional advice but has later received advice supporting the position that was previously taken. Indeed, the cases imply that HMRC will be unable to establish the required causation of loss in any case where, if (hypothetically) the taxpayer had obtained professional advice on his situation, there is a possibility that such advice would have supported the filing position that the taxpayer actually took – regardless of whether such advice was in fact sought.
However, these conclusions seem surprising, and HMRC can be expected to fight against them, tooth and nail. Indeed, the FTT decision in Strachan has been appealed.
Mr Strachan’s partial victory on the time limits point could prove as ephemeral as goodwill over a Christmas game of Monopoly. A possible outcome of the appeal is that the deeming provision in TMA 1970 s 118(5) is judged to eliminate any requirement for HMRC to show actual causation. Section 118(5) provides that a person is deemed to have brought about a situation or loss of tax carelessly if he has failed to take reasonable care to avoid bringing about that situation or loss of tax. It would be open to HMRC to argue that where a person fails to take reasonable care to avoid bringing about a loss of tax, for example by failing to take advice, s 118(5) deems any actual loss of tax to have been brought about by such carelessness, even if there is no causal link between the failure to take reasonable care and the loss of tax. So, a taxpayer who has acted carelessly when preparing a tax return could be deemed to have brought about any under-assessment of income or gains which were omitted from such return, even if he might have submitted a return in the same terms had he acted with due care and obtained professional advice before filing.
Fisher v HMRC
Case rating: Could have been a cracker. In the final analysis, a turkey.
In late November, the long running saga of Fisher v HMRC finally reached the Supreme Court ([2023] UKSC 44). The court granted the Fishers an early Christmas present by upholding their appeals.
The facts of the case will be familiar to many readers.
The Fishers had built up a betting business over a number of years, which was run through a UK company (SJA) from 1988. Around the turn of the millennium, SJA transferred its business operations to a new Gibraltarian company (SJG), which prospered. HMRC sought to assess the Fishers by reference to the profits of SJG under the transfer of assets abroad code (TOAA code). Such assessment could only succeed if the Fishers were ‘transferors’ for the purposes of that code.
The key issue considered by the court was what is sometimes called the ‘quasi-transferor’ issue – the question of whether, for the purposes of the TOAA code, shareholders in a company can be treated as transferors, within the charging provision in ICTA 1988, s 739 (now ITA 2007, s 720) where the company has made a transfer of assets which has resulted in income being received by a person abroad. The court held, unanimously, that shareholders could not be so treated, regardless of whether they hold minority or majority stakes in the company, and regardless of whether they are also directors of the company. They held that the actions of SJA in transferring assets to SJG could not be imputed to the Fishers as ‘quasi-transferors’. The court therefore concluded that the Fishers could not be assessed under ICTA 1988 s 739.
The court was clearly determined to shed some light on the ‘transferor’ concept. It was uncomfortable with the billowing clouds of uncertainty surrounding the notion of a ‘quasi-transferor’, and HMRC’s inability to provide a clear explanation of the circumstances in which a shareholder could be treated as such. Counsel for HMRC was reprimanded for implying that this uncertainty was a ‘positive virtue of the drafting’, and the court agreed with counsel for the taxpayers that ‘the law cannot be left in some unclear state “just to scare people”’ (para 76).
It is pleasing to see a senior court taking a robust approach to nebulous tax legislation, which could have implications for other anti-avoidance provisions. Equally, it is pleasing that the quasi-transferor spectre has at last been dispatched. However, we fear that, on closer inspection, the decision in Fisher is far less comforting, and far less satisfactory, than might appear.
For some reason, HMRC seems to have misstated the arguments in its favour throughout the course of the Fisher litigation, focusing solely on the transfer of the betting business by SJA to SJG. All the tribunals and courts which have heard this case, including the Supreme Court, have in turn restricted themselves to considering that transfer, rather than stepping back from the detail of the arguments presented and applying the legislation to the facts viewed synoptically.
It seems to us that the Fishers, or at least some of them, surely were transferors, albeit not on the basis put forward by HMRC. An oft misunderstood feature of the TOAA code, perpetuated by the title of the legislation, is that the original transfer of assets does not need to be in favour of a person abroad. All that is required is for the original transfer, either alone or in conjunction with associated operations, to result in income becoming payable to a person abroad. There is no requirement that this be an immediate or inevitable consequence of the original transfer.
It is bizarre, and objectively disappointing, that this litigation went all the way from the FTT to the Supreme Court without any of these judicial bodies managing to seize the correct end of the stick
The Fishers, or at least those family members who created the original business, must surely have transferred some assets to SJA, the UK company, in 1988. The betting business, which was transferred to SJG a decade later, must surely have grown out of these assets. The concept of an associated operation is exceptionally broad. HMRC could therefore have argued that the original transfer of assets was the funding of SJA, and the subsequent transfer of assets to SJG was an associated operation in relation to that original transfer. The questions for the tribunals and courts would then have been whether that associated operation caused the motive defence to be forfeited; and, if on a literal reading of the legislation it did, whether the taxable attribution of SJG’s profits to the Fishers breached EU law.
It will be important for taxpayers to bear this alternative analysis in mind when considering their own affairs. The Fisher judgment makes clear that shareholders who have not provided funding to the company (eg individuals who have purchased second-hand shares) cannot be taxed as transferors in relation to income arising to a person abroad, if the company transfers assets to such a person (eg a non-UK resident subsidiary) and income is received by that person. This is so even if the shareholders have, in some sense, procured the latter transfer. But this does not mean that liability under ITA 2007, s 720 can be avoided by a taxpayer transferring assets to a UK company, which then makes an onward transfer to a non-UK company or trust.
Ultimately, the Supreme Court decision in Fisher was a real missed opportunity. This should have been the case which confirmed the views of many practitioners that, literally construed, the TOAA code infringed EU law provisions on the free movement of capital, with the result that the TOAA code needed to be given a ‘conforming construction’. Instead, the important EU law argument has been swept under the carpet.
It is bizarre, and objectively disappointing, that this litigation went all the way from the FTT to the Supreme Court without any of these judicial bodies managing to seize the correct end of the stick. But for the Fisher family, Christmas definitely came early.
This article was first published to Tax Journal on 15 December 2023.
