Peter Vaines looks at Personal Service Companies and IR35, HMRC requiring security deposits against tax liabilities, and the acquisition date for CGT purposes when looking at PPR relief for the main residence.
Personal Service Companies
Hot on the heels of the decision of the Upper Tribunal in Christa Ackroyd last month, we have yet another decision on the application of the intermediaries legislation – but with an opposite result: Canal Street Productions Ltd v HMRC [2019] UKFTT 647 (TC).
This is a virtually identical case involving a contract entered into between Canal Street and ITV Breakfast Limited for the provision of the services of Helen Fospero.
Under the intermediaries legislation it is necessary to disregard the real contract between the company and the client (in this case ITV) and to assume a hypothetical contract (with different parties) and then work out what the relationship would have been, had those different parties entered into such a contract.
Accordingly, the crucial issue was whether, if the services provided by Miss Foster to ITV had been provided under a contract directly between her and ITV (rather than between ITV and her company), she would have been regarded as an employee of ITV under this hypothetical contract. Yes, Yes, I know - please don’t shoot the messenger.
I have mentioned personal service companies so many times that you may be spared any further explanation regarding the various issues involved. Suffice it to say that this case examined all the various indicators of self-employment (mainly concentrating on control and mutuality of obligation) and concluded that all the factors pointed towards Miss Fospero being regarded as self-employed and not an employee even if she had been engaged directly by ITV.
As I write, another decision on this subject appears: RALC Consulting v HMRC [2019] TC7474 although this involves an IT consultant rather than a TV presenter. Same arguments – and the same result. In a lengthy judgment the Tribunal analysed the position in great detail and again concluded that the taxpayer would have been regarded as self-employed and not an employee even if he had been engaged directly by the clients.
Will this never end – and will we ever get some clarity? Not for a while, I think.
Security for Tax Liabilities
I have previously made reference to the power of HMRC to require security for VAT or for PAYE and NIC. This is a truly awesome power.
The general idea is that HMRC are entitled to seek security from the taxpayer if they think it is necessary for the protection of the Revenue – for example, if he has failed to comply with his tax obligations in the past or there is reason to believe that he might fail to do so in the future. It is extremely serious because it is a criminal offence to continue to make taxable supplies for VAT if you have not provided the security demanded by HMRC. That means you must cease to trade if you want to avoid committing a criminal offence.
This is generous compared with the rules for PAYE and NIC. You don’t get out of this penalty by ceasing to trade. It is a strict liability criminal offence not to pay the amount of security demanded by HMRC and carries an unlimited fine.
The ability for HMRC to require the provision of security can therefore make the taxpayer criminally liable in very short order. Given the immense seriousness of the matter, it is no surprise that the Tribunals have tended to approach the matter with great sensitivity. Anybody faced with such a demand can confidently expect that it will be seriously scrutinised by the Tribunal before they are put out of business or confirmed as a criminal – or both – by a demand for security from HMRC.
In the recent case of Tower Hire and Sales Limited v HMRC [2019] TC 7423 the Tribunal again examined very carefully the security which had been demanded by HMRC.
They found that HMRC had taken into account irrelevant factors in making their decision to issue the notices for security and accordingly, their decision was unreasonable and should not have been made.
The Tribunal has a limited jurisdiction in this matter and if they had found that HMRC would inevitably have come to the same decision even if they had not considered the irrelevant matters, the security notices would have been confirmed. However, the Tribunal said that there was nothing to support a finding of inevitability and the requirement for security was invalid.
In D-Media Communications v HMRC [2016] UKFTT 430 Judge Berner held that for HMRC to demand security without regard to the ability to pay is inconsistent with the legislation. If the level of security required is unlikely to be provided, the giving of a notice for the provision of security does not provide the protection of the Revenue which is the purpose of the legislation. More specifically:
“If the only likely result is that the recipient of the Notice will inevitably fail to provide the security and thus will inevitably be liable to a criminal penalty as a matter of strict liability, that in my view cannot have been the purpose of Parliament in making these regulations”.
The recent case of Bluechipworld Sales and Marketing Ltd v HMRC [2019] UKFTT 705 (TC) expressly contradicts this approach. The Tribunal said the fact that the taxpayer does not have the means to pay is irrelevant.
This is very uncomfortable reading for anybody interested in safeguards for taxpayers. It is right that the Revenue must be protected where there is danger of loss to the Crown, but for a taxpayer to be guilty of a criminal offence (where there is no defence) at the instance of HMRC, without any right of appeal, must surely be unacceptable.
Where the security is for VAT this problem does not arise because there is a defence; the taxpayer can stop trading. However, this is not a defence to a notice for security for PAYE and NIC which is a strict liability offence of simply failing to pay.
In Bluechipworld the authority cited for this conclusion was Highlake Ltd v HMRC [2016] UKFTT 808 (TC) but in that case the judge was specifically referring to the requirement to stop trading (the VAT test) and did not address the automatic strict liability offence which applies in connection with security for PAYE.
It will be interesting to see what happens next.
CGT and Acquisition Dates
TCGA 1992 s 28 provides that for capital gains tax purposes, a person acquires an asset at the time the contract is made and not at the time that the asset is conveyed or transferred to him.
In the context of a purchase of land, the contract will generally be made when contracts are exchanged, not when it is completed. This can give rise to difficulties – and did so in the case of Higgins v HMRC which has recently been heard by the Court of Appeal: D Higgins v HMRC [2019] EWCA Civ 1860 .
In October 2006 Mr Higgins entered into a contract for the purchase of a flat, off plan, with completion taking place when the building had been finished. Completion occurred in January 2010 and Mr Higgins moved in and used the property as his main residence. He subsequently sold the flat and claimed the main residence exemption under TCGA 1992 s 222.
That seems all straightforward. However, that HMRC argued that his period of ownership started on the date of exchange in October 2006, but as he did not move in until January 2010, this period could not qualify for the exemption because the property was not his residence.
HMRC seemed to have a seriously powerful case. At the date of exchange, the purchaser acquired at least an equitable interest in the property and his period of ownership looks like it must have started on that date. (One would need to overlook that at the date of exchange, the property did not actually exist but don’t let’s worry about that).
However, the Court of Appeal drew attention to the fact that such an interpretation did not make sense in the context of a property transaction. Exchange and completion rarely take place on the same day and on this interpretation, the exemption from capital gains tax would never exempt all the gain in the typical case. The period from exchange to completion could never qualify for relief and would always be chargeable to capital gains tax – and Parliament could not have intended to deny complete relief from capital gains tax for this reason.
The Court of Appeal said this reasoning strongly suggested that the interpretation put forward by HMRC was wrong. They said that as a matter of ordinary language, a purchaser would be described as the “owner” only once the purchase had been completed. And it is the “period of ownership” which is the test for the exemption.
The Court of Appeal referred to a number of circumstances where the Courts have limited the application of Section 28. They mentioned Chaney v Watkis [1986] STC 89 and Jerome v Kelly [2004] UKHL 25 (to which I would add Campbell Connolly v Bartlett 66 TC 380.) This case is another one and the Court of Appeal explained that:
“The fact that using section 28 to fix a “period of ownership” for the purposes of sections 222 and 223 would neither afford total CGT relief in the paradigm case, nor sit comfortably with the ordinary meaning of the words “period of ownership”, indicates that the provision should not be applied in that context”.
Accordingly, Mr Higgins’ period of ownership was regarded as commencing when he moved in on completion with the result that full relief was available.
Although the result is clearly how the relief ought to apply, it does not sit comfortably with the words of Section 28 which are obviously in need of some revision. I would suggest that it is no more acceptable for a relief to be given by squeezing the wording of the legislation into a more desirable shape than it is to impose a charge to tax by the same process (with which we are more familiar).
Allowing reliefs in difficult circumstances used to be dealt with by Extra Statutory Concessions so that the problems of interpretation could be acknowledged, whilst allowing fairness to be achieved by the concession. But sadly, we are not allowed to have those any more.
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