Spotlight - Issue Two

SPOTLIGHT Issue two

Removing penalties without key evidence.

Impossible, right?

buzzacott.co.uk

Is remote ADR mediation the (only) way forward?

Electronic Sales Suppression - New HMRC powers

In this edition Welcome from Mark Taylor...........................3 Electronic Sales Suppression (ESS) - New HMRC powers......................................................4 Is remote ADR mediation the (only) way forward?................................................................. 6 Removing penalties without key evidence.

Impossible, right?................................................8 The Verdict...........................................................10 Cryptocurrency – could you require an HMRC disclosure?............................................12 High Income Child Benefit Charge and HMRC’s assessing position............................14 What the Pandora Papers mean for HMRC tax investigations...............................16 Crown Prosecution Service reports in criminal cases.....................................................18

02 |

| SPOTLIGHT | AUTUMN / WINTER 2021

Welcome Welcome to the second edition of Spotlight. Designed to assist advisers, accountants, lawyers and clients who may find themselves under HMRC’s spotlight, this edition will provide insightful updates, opinions, and experiences from my team.

In this packed second issue: Barbara Bento, CEDR Accredited Mediator, gives her opinion on remote Alternative Dispute Resolution mediations; and Laurent Sykes QC kindly provides his thoughts on the latest tax cases that could impact tax investigations going forward.

We also have fascinating articles on new HMRC powers; how cryptocurrency should be treated in respect of your position; High Income Child Benefit Charge and HMRC’s assessing position; and what the Pandora Papers mean for HMRC tax investigations.

Additionally, we share an interesting case study that my team has tackled over the past year, including how we removed penalties without key evidence that was withheld by a former friend.

Mark Taylor Partner Head of Tax Investigations & Dispute Resolution

Enjoy!

| SPOTLIGHT | AUTUMN / WINTER 2021 | 03

Electronic Sales Suppression (ESS) - New HMRC powers E

SS is the fabrication of electronic sales data to facilitate the understatement of taxable sales. The UK government committed to take steps to discourage the use of ESS tools in the October 2018 Budget though it has only recently published draft legislation. Here, we summarise the rules and touch on the issues that might arise.

Policy intent and overview of powers Historically, businesses taking large cash sales were deemed high risk by HMRC due to the scope for understating untraceable sales. But the decline of cash throughout the years has led to the proliferation of ESS tools. An ESS tool is any physical device, software, code, digital data or any other tool that can suppress “relevant electronic sales” records. An example might be a piece of till software that only ‘records’ one in every three sales.

The business will receive payment for all three sales, but when the sales records are collated, two thirds of sales will not be accurately recorded.

During COVID-19, HMRC became aware of businesses using ESS tools to commit CJRS fraud by showing that sales had been negatively affected as a result of the pandemic. The government acted decisively to disincentivise the use of ESS tools. It skipped the standard consulting process and instead, legislated swiftly by introducing the ESS Bill.

The ESS Bill allows HMRC to charge penalties to anyone

04 |

| SPOTLIGHT | AUTUMN / WINTER 2021

making or selling the ESS tools. While the legislation also allows HMRC to charge the end users of the tools a financial penalty, it’s clear, given the respective maximum penalties HMRC can assess, that its focus will be on the distributors of the tools.

Inspection powers are provided by extending the scope of existing powers to obtain documents and inspect premises, for the purpose of determining ESS penalties, understanding the operation of an ESS tool and identifying any person who may be liable to an ESS penalty. Notably, the ESS Bill also gives HMRC the power to change the maximum penalty assessable using a statutory instrument. This suggests that this is a longterm weapon in the government’s fight against economic crime.

Makers, suppliers, and promoters A person who makes/modifies, supplies or promotes an ESS tools is liable to a maximum penalty of £50,000.

The total penalties cannot exceed this even if a person is liable under multiple categories – for example, making and supplying.

For promoters, liability arises on each occasion of promoting the use of the ESS tool, which is defined as communicating information about the tool to another person with a view to someone using it as an ESS tool.

No penalty applies for supplying if the person satisfies HMRC that they were unaware they supplied an ESS

tool, therefore, a promoter who is unaware will not be culpable.

What about possession?

A person in possession of (including accessing) an ESS tool is liable to a maximum initial penalty of £1,000, regardless of actual use. Daily penalties of up to £75 per day (capped at £50,000) apply for continued usage.

No penalty will be charged if a person satisfies HMRC, within 30 days of receiving the penalty notice, that they never had, or no longer have, possession/access to the ESS tool. It will be critical to understand how HMRC intend to consider these applications including the extent of evidence they expect to receive. A person will not be able to make this application if they have received a prior ESS penalty in the last five years. This is a harsh stance and will mean those caught out previously will need to be extremely diligent when purchasing future electronic sales equipment.

General protections Double jeopardy - no penalty will apply if a person has been convicted of a criminal offence. While this is hardly a surprising revelation, it serves as a timely reminder that HMRC may elect to pursue a criminal prosecution when it identifies ESS in action. Therefore, individuals involved may wish to consider seeking immunity from criminal prosecution by making a disclosure under the CDF. See our article here.

HMRC may reduce penalties in “special circumstances” and stay them, including under a compromise agreement where appropriate. “Special circumstances” specifically exclude inability to pay but do not cover anything else. This follows the treatment for penalties for incorrect returns.

There is a standard statutory right of appeal (to HMRC or the tribunal) against a penalty (including amount). The usual 30-day deadline applies for this.

How can we help?

The new legislation is scheduled to be enacted in early 2022 so there is limited time to correct issues. If you or someone you know has been using an ESS tool, and would like to regularise their affairs with HMRC, please do not hesitate to give us a call on +44 (0)20 7710 3389.

All discussions are confidential and on a no-obligation basis.

About the author Mark is the Partner and Head of Buzzacott’s award-winning Tax Investigations & Dispute Resolution team. He’s a former HMRC inspector serving in all of HMRC’s elite civil and criminal investigation offices. Mark is a distinguished and recognised expert in all HMRC civil and criminal tax investigation and dispute matters.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 05

its shortcomings. As an example, I recently acted as a joint mediator with HMRC during a virtual ADR and parties did not reach a settlement on the day. I believe the outcome would have been different had the ADR mediation taken place F2F. ADR mediations can take several hours and parties can often become discouraged and tired. Part of the role of the mediator, through a set of mediations skills, is to ensure everyone attending mediation is motivated throughout the day and remain determined to settle. In order to promote this, it is crucial for the mediator to be able to observe behaviours and action cues involving positive and uplifting discussions during F2F private meetings. Retaining momentum through a computer screen, when parties are exhausted and frustrated, is considerably more challenging and can result in parties becoming even more entrenched in their opening positions.

Is remote ADR mediation the (only) way forward?

As a mediator and tax investigations specialist myself, I believe the best and most effective way to service my clients is through F2F advice and support. My hope is that HMRC also understands the value of these interactions and, at the very least, considers each case on its own merits. My suggestion would be, that during the preparation stage of ADR mediation, mediators assess which cases are more likely to be settled at a F2F mediation. This could be achieved by carefully considering the facts, the issues at dispute, the parties’ convictions and personalities during the preparation stage, rather than making a judgement at the outset, based purely on the size and perceived complexity of the case.

I

I’m aware that HMRC is considering technical and procedural changes to the ADR process, with a view to simplifying the process and the rules of engagement within ADR for all parties. Regrettably, the proposed changes do not give any indication that HMRC is also willing to consider the impact of denying taxpayers a chance to resolve their dispute F2F.

n response to the COVID-19 pandemic, Alternative Dispute Resolution (ADR) mediations were switched from face-to-face (F2F) meetings to being held remotely by video link. The introduction of remote mediations was a sensible alternative to ensure ‘business as usual’ during lockdown, but has HMRC become a little too comfortable with this new way of working? Barbara Bento, Buzzacott’s CEDR Accredited Mediator, provides her thoughts.

HMRC’s Stance on ADR For those of you who have participated in successful ADR mediations, either while representing your clients or as mediators, I’m sure you recognise the value of the ADR process as a cost-effective method of resolving tax disputes. Additionally, following the latest changes to the ADR process whereby ADR applications can now be made at any stage of tribunal proceedings (motivated, no doubt, by the backlog of cases caused by the pandemic), ADR is, more than ever, a viable and cheaper alternative to litigation.

HMRC recently announced its longer-term approach to

06 |

| SPOTLIGHT | AUTUMN / WINTER 2021

the ADR process whereby mediations are only to take place F2F when dealing with large or complex cases.

In taking this blanket approach, HMRC are failing to consider the merits of F2F meetings on individual cases which may, in turn, impact the potential success of ADR. The risks of virtual mediations Factors such as body language and eye contact/ movement, which enable the mediators to make judgements and intervene at the appropriate time creating momentum, are harder to assess virtually.

Whereas we primarily use words to communicate, ‘nonverbal’ messages provide valuable insight with regards to what people are really trying to convey. Holding discussions in a virtual environment sacrifices this key benefit that would be available in F2F mediations.

While I recognise some of the benefits of virtual mediations, such as being able to meet with parties in different geographic locations, less logistics with regards to time and space, it’s undoubtedly more difficult to mind map ideas, have in-depth discussions, exchange information and ensure that there are no confidentiality

breaches. Parties regularly enter into mediation due to a break down in relationships, and often after a series of protracted correspondence through email exchanges and meetings. F2F ADR mediations change the whole dynamic and create opportunities to hold without prejudice and explorative discussions that gives both parties the sense of a full and fair hearing. Therefore the importance of F2F discussions to the potential success of any mediation cannot be overstated.

Given that HMRC’s change in policy has not yet had time to bed in, it may be too soon for HMRC to assess whether the success rate of virtual ADR mediations is comparable to when discussions are held F2F. However, my own experiences would render me extremely surprised if the success rate of ADR hasn’t dropped somehow.

Whereas I was initially sceptical about remote ADR mediations, I can now appreciate some of the benefits, having had the opportunity to mediate a number of cases remotely. However, I still hold the view that the marginal benefits of remote mediation do not outweigh

About the author Barbara is a Director in Buzzacott’s awardwinning Tax Investigations & Dispute Resolution team. She is a CEDR Accredited Mediator with a proven track record of successfully settling disputes through ADR mediation.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 07

Removing penalties without key evidence.

Impossible, right?

This case demonstrates how we helped a client reduce his tax assessments, as well as completely remove penalties owed to HMRC, all without the use of key supporting evidence withheld by a former friend.

Deliberately failing to declare In March of this year, Buzzacott were approached by George*, who was desperately in need of professional assistance. He had jointly owned several investment properties with a friend. Over the years, they had renovated and extended the properties, incurring thousands of pounds of improvement expenditure in the process. When the properties were eventually sold, George and his friend both made sizable gains, which they had failed to declare to HMRC. HMRC opened an investigation into George’s tax affairs and discovered his failure to declare the chargeable gains, issuing tax assessments amounting to more than £200,000. Furthermore, he had received a letter from HMRC indicating that it considered his behaviour to be deliberate and that it intended to charge a penalty worth more than £100,000.

George advised Buzzacott that he accepted his behaviour was deliberate. However, he disputed HMRC’s calculation of the gains. Unfortunately, as George’s friend had managed the improvement projects, he did not have copies of the invoices/receipts that could have been used to evidence the improvement expenditure. Having fallen out with his former friend, George was simply unable to supply HMRC with evidence of the costs.

While HMRC accepted that there would have been some improvement expenditure, without supporting evidence, HMRC was only prepared to allow a deduction for improvement expenditure that was equal to 10% of the disposal price. George felt that this significantly understated the actual costs and resulted in a significant overstatement of the gain.

A robust recalculation of the tax In recent years, Buzzacott have received instructions from several individuals who have disposed of property for a gain, but did not have evidence of their improvement expenditure. Strictly speaking, in order to 08 |

| SPOTLIGHT | AUTUMN / WINTER 2021

claim a deduction for expenditure, a taxpayer is required to evidence that expenditure. Therefore, HMRC will often state that in the absence of supporting evidence, it will not allow a deduction.

In reality, when HMRC raises an assessment, in order for the assessment to be validly made, it must be made in accordance with best judgement. Therefore, HMRC’s assessments must factor in a level of improvement expenditure that is consistent with the increase in a property’s value, during the period of ownership.

Buzzacott’s Tax Investigations team have devised a formula for calculating allowable property expenditure in the absence of supporting documentation. Our formula is so robustly designed that HMRC has never even attempted to challenge it. In George’s case, this resulted in tax assessments originally worth more than £200,000, being reduced to less than £40,000.

HMRC’s failure to follow their own guidance results in no penalty Whenever HMRC discovers irregularities in a person’s tax affairs, it’s obligated to consider charging an appropriate financial penalty. In this case, George had acknowledged his behaviour was deliberate, and therefore HMRC had advised that it intended to charge a deliberate penalty.

However as financial penalties, even in civil cases, are criminal sanctions, it’s incumbent on HMRC to make taxpayers aware of their rights under Article 6 of the Human Rights Act. The appropriate time for HMRC to do so is when it first discovers an irregularity in a person’s tax affairs. HMRC has issued guidance to its caseworkers, confirming that officers should issue taxpayers with two factsheets – one on penalties, and one on Human Rights, as soon as an irregularity is discovered. However, in this case, HMRC failed to issue either factsheet at the appropriate time.

When George approached Buzzacott, we conducted a full review of the case papers and identified that HMRC had failed to issue the relevant factsheets at the appropriate time. Crucially, George had continued to cooperate with HMRC after the irregularities had first been discovered. This meant, he had effectively incriminated himself without fair warning of his right to not self-incriminate.

In our response to HMRC, Buzzacott explained that HMRC had not only calculated the tax liabilities incorrectly but had also allowed an unrepresented taxpayer to incriminate himself without fair warning.

We cited various pieces of case-law, as well as HMRC’s own guidance to support our view that despite George’s acknowledgement of deliberate behaviour, HMRC could not legally charge a financial penalty.

very professional manner. Joe explained everything to me in a clear and comprehensible way. My phone calls and correspondences were answered promptly, and I would like to say that he and the team were exceptionally helpful and I would highly recommend them. Thank you for everything you did for me and my family.”

This case is just one example of the significant savings we have made for our clients in recent months. For a completely free, no obligation discussion as to how Buzzacott might be able to assist your clients, please do not hesitate to contact us on +44 (0)20 7710 3389. *Clients name changed to protect his confidentiality

After careful consideration, HMRC confirmed that it had breached George’s human rights and, therefore, would not be charging a penalty.

Another happy client This case demonstrates the value that a specialist tax investigations team can offer, even at a very late stage of an investigation. Had George not sought a second opinion, he would have ended up paying more than £300,000 to HMRC. Within just four months of appointing Buzzacott, his case had been settled for £38,000 – a saving of more than 87%.

Here’s what George had to say “From my very first conversation with Joe Burns, he conducted himself in a

About the author Joe is a Senior Manager in Buzzacott’s Tax Investigations & Dispute Resolution team.

As a former HMRC inspector, he has in-depth knowledge of HMRC’s statutory powers and how these are used in practice. Joe uses his unique experience to help minimise his clients’ potential exposure to unnecessary tax and penalties.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 09

The Verdict Laurent Sykes QC gives his view on some recent tax cases, and how they will impact tax investigations going forward.

Tooth In HMRC v Tooth [2021] UKSC 17 the Supreme Court overturned the finding of the Court of Appeal that a discovery can become “stale” if an assessment is made too long after the suspicion or realisation by the HMRC inspector that tax has been underpaid has first arisen.

It was contended by the taxpayer that a discovery assessment required an element of newness, and this was eroded over time. Lord Briggs and Lord Sales, giving the single judgment of the court, overturned this in the strongest possible terms saying “there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time”.

The result of this is that HMRC have a wider discretion and ability to delay in making assessments, something that will no doubt frustrate taxpayers who have to face the financial and psychological pressures of these delays.

The only comfort will be the statutory time limits for assessments: and indeed the Supreme Court found that these time limits protected Mr Tooth. HMRC had submitted that they could rely on the longer 20-year time limit for “deliberate” inaccuracies but the court set a high bar for deliberate behaviour —that the taxpayer “knew that the relevant statements were inaccurate and intended thereby to mislead the Revenue”—and so they held that Mr Tooth’s return was not deliberately inaccurate, if indeed it was inaccurate.

Marlborough The First-tier Tax Tribunal, in the recent case of Marlborough DP Limited v HMRC [2021] UKFTT 0304 (TC), found that trust contributions and loans made as part of a “Baxendale Walker” scheme were not earnings as a reward for employment but instead should be treated as distributions from the taxpayer’s shareholding.

In the absence of the scheme the payments would likely have been extracted as dividends, and in Marlborough it was made clear that it cannot be assumed that money 10 |

| SPOTLIGHT | AUTUMN / WINTER 2021

coming out of a company through a scheme should necessarily be employment income if the scheme does not work. The case is helpful generally in showing owner-managers can take money out of their company as dividends or earnings. Judge Morgan said “We note that there is nothing to prevent the sole owner and director of a company from arranging for the profits of the company’s business to be extracted in the form of salary and as dividends/distributions in such proportions as he or she may wish.” Such a split, she went on to say, would not be ineffective for tax purposes even if the amount of salary did not reflect the fair value of the work done as an employee or director. HMRC’s general desire to categorise all such payments as earnings should therefore not go unchallenged.

Khan and Dunsby Two recent cases show how diametrically opposed arguments can be employed by HMRC in different cases depending on what suits them. In Dunsby v HMRC [2020] UKFTT 271 the Revenue sought to rely on the Ramsay principle of interpretation in arguing that payments made to Mr Dunsby where he received value from a company should be treated as dividend payments.

He did not formally receive dividends in company law sense, but HMRC submitted that this did not matter. On their view the arrangements, when taken together and viewed realistically, had the same effect of transferring value to him from the company and so the court should treat it as if a dividend had been paid to him directly, ignoring the inserted steps in the middle of the chain.

Although HMRC succeeded in defeating the appeal on other grounds, the Tribunal Judge disagreed with HMRC’s analysis and held that a distribution must be “in respect of shares” and whether a payment is a distribution is “informed by the company law procedures by which the payment is made”. Ramsay could only get HMRC so far on this point, and not far enough. HMRC have appealed.

Bostan Khan v HMRC [2021] EWCA Civ 624, was an unusual case where the taxpayer relied on Ramsay principles of interpretation. In this case Mr Khan assisted in the winding down of a company, purchasing its entire share capital of 99 shares for c. £1.968m before the company bought back 98 of those shares for £1.95m.

Mr Khan passed the £1.95m straight to the selling shareholders on the same day, which was also the day he acquired the shares. Mr Khan understood that the transaction, when taken as a whole, meant that he had purchased the company for c.£18,000 and expected that it would be taxed accordingly. The £1.95m buyback proceeds were never his – rather than they were the selling shareholders’, and they, not he, should be taxed on these. Those funds simply passed in and out of his bank account over which he had surrendered control for the purposes of the transaction. This was the Ramsay argument put before the Court of Appeal: that the transaction should be viewed realistically as a whole. The Revenue, in arguing that the transaction should not be viewed as a whole, were adopting the taxpayer’s line in Dunsby.

The Court of Appeal disagreed with the taxpayer, holding that even when viewing the transaction as a whole it was not possible for them to ignore Mr Khan’s role in the transaction. That judgment, which contains some unorthodox statements on the limitations of Ramsay, is

under appeal. If the appeal succeeds, this will be the first time Ramsay has been used for the taxpayer. There is no conceptual reason why it should not apply and that, at least, was confirmed by the Court of Appeal.

About the author Laurent Sykes QC has a wide ranging practice that encompasses many areas of the tax code, particularly business and employment tax-related matters as well as issues affecting private clients.

He also advises on tax-related pensions matters and tax-related commercial disputes.

In the past, Laurent qualified as a chartered accountant, which provides useful background knowledge in dealing with tax questions with an accounting perspective.

Litigation (usually for the taxpayer and where necessary) is an important part of his work and has taken him to the Tax Tribunal, the High Court and the Court of Appeal.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 11

Cryptocurrency – could you require an HMRC disclosure?

H

MRC released its guidance on how cryptocurrency should be taxed in December 2018 and has now enshrined that guidance in its manuals. However, this will have come too late for many individuals who had received, mined, or exchanged cryptocurrency before the 2017/18 tax year.

We have outlined below how cryptocurrency should be treated for tax purposes, but we are aware of individuals who have already been contacted by HMRC in relation to their cryptocurrency transactions. HMRC has confirmed it has been approaching exchanges for information on their users’ activities, and will shortly begin sending ‘educational’ letters to individuals that have held cryptocurrency.

Furthermore, it has been reported that the Organisation for Economic Co-operation and Development is considering adding cryptocurrency exchanges to the list of institutions that must report information under the Common Reporting Standards. With the use of cryptocurrency increasing, this seems a certainty, and is likely to apply from 2022.

We would, therefore, urge any individual that has bought, sold or exchanged cryptocurrency, mined it, or received it in exchange for services, to contact a professional adviser to review their affairs and consider whether a disclosure is required.

Approaching HMRC first is the best way to minimise, or even completely negate, any penalties that may be imposed for filing an incorrect tax return or failing to file at all.

Cryptocurrency received for services (earnings) Currency received in exchange for services is taxable as income. The method of taxation; however, and the availability of relief for any expenses differs depending on whether you’re engaged in employment, or self-employment.

12 |

| SPOTLIGHT | AUTUMN / WINTER 2021

Employment In the vast majority of cases, cryptocurrency will be considered a readily convertible asset, as markets exist for the cryptocurrency to be sold. Payment in readily convertible assets is taxable when paid to an employee, at the value on that date, and the employer should deduct and pay income tax and National Insurance Contributions (NIC) through the PAYE system.

Employed individuals should, therefore, have had their tax obligations met by their employer, even if they were paid in cryptocurrency. Any employers that have not correctly accounted for their employee’s tax obligations, through the PAYE system, may be guilty of an offence, and should get in touch to consider whether a disclosure needs to be made, and the content of that disclosure.

Self-employment Self-employed individuals, however, will be responsible for declaring and paying their own tax and NIC, and this is done through the Self-Assessment regime. In most cases, the value of the cryptocurrency, for the purpose of tax and NIC, will be the market value when it was received.

To file a tax return, individuals require a Unique Tax Reference number, which can be applied for online. Tax returns are then required to be filed online by 31 January, following the end of the tax year.

For the self-employed, costs incurred wholly and exclusively for the purpose of their trade can be deducted when calculating their taxable income.

Employed individuals cannot deduct such expenses (subject to certain exceptions).

It’s possible to be considered self-employed by virtue of your cryptocurrency trading activity, but HMRC has confirmed that individuals will only be treated as trading in cryptocurrency in very limited circumstances. The majority of individuals will, therefore, only pay income tax on cryptocurrency if they have received the tokens in exchange for work carried out.

Trading in cryptocurrency The benefit of ‘trading’ is that any losses would be considered trading losses. Broadly speaking, such losses can be set against other income to obtain income tax relief for any fall in value of the cryptocurrency, rather than just making a claim for capital loss relief. This would mean recovering 20/40/45% of the loss rather than just 10/20% (rates of tax for income vs capital gains).

The downside, however, is that any profits made from trading in cryptocurrency would then be subject to those higher rates of tax. Any benefit, therefore, may soon be outweighed by tax on profits made in subsequent years.

To make a trading loss claim, you would need to demonstrate you meet the ‘badges of trade’. The most relevant ones to cryptocurrency are as follows: • Engaging in systematic and repeated transactions, with the intention to realise a profit; • Purchasing ‘stock’ with borrowed funds, so that you have to sell the asset to repay the loan; • Selling the asset in such a way that is typical of trading, rather than to raise funds for another reason; • Buying and selling quickly, as you would expect in a trading business; and • Purchasing the asset, rather than receiving it as part of an inheritance, or as a gift.

Deciding whether you’re trading can be complicated. I strongly recommend getting in contact before making any claim for trading losses in relation to cryptocurrency.

Cryptocurrency purchased, sold or exchanged The majority of individuals who buy, or otherwise receive, cryptocurrency will be considered to have acquired a capital asset.

Where the cryptocurrency is sold, or exchanged for another asset (including another type of cryptocurrency), and a profit is made, capital gains tax will be due on any gains over and above the Annual Exemption amount for the relevant tax year. If the disposal realises a loss, relief can be claimed against capital gains of the same year, or subsequent years.

Calculation of the gain (or loss) is calculated by reference to the ‘pooled’ cost of the currency. This is essentially the cost of all of that specific currency, divided by the amount of that currency. For example, if you purchased two Bitcoin for £100 each, and then later purchased another four Bitcoin for £200 each, the total cost of your Bitcoin would be £1,000.

This total cost is then split amongst the six Bitcoin, and so if you sold one Bitcoin, the cost of that Bitcoin for capital gains tax purposes would be £166.66.

There are special ‘bed and breakfasting’ rules that apply where cryptocurrency is purchased within 30 days of selling cryptocurrency of the same type. Essentially, those tokens acquired within 30 days are treated as having already been disposed of (earliest disposal first).

Negligible value claim Where the value of cryptocurrency has fallen to such an extent that it’s of ‘negligible value’, it’s possible to make a negligible value claim. This generally occurs where the asset is worthless, or of such a low value it cannot be sold, usually because no-one will buy it. The claim allows you to treat the asset as being disposed of, and then reacquired at the current value.

Negligible value claims, or relief for capital losses made, can be set against subsequent capital gains. This treatment applies even where the cryptocurrency was received for services. The base cost in that instance would be the value of the cryptocurrency when it was received.

Problems with calculating capital gains Some individuals will complete a high volume of transactions every day, often utilising special software for the purpose. Given the pooling and bed and breakfasting rules outlined above, accurately calculating taxable gains in these circumstances may be impossible for any individual.

There are, however, programs available that will calculate all gains by reference to HMRC’s guidance, simply by allowing them access to your data. Such programs can now be used to correct past filings, or file disclosures for years where no tax returns have been filed.

As noted above, HMRC has already started targeting users of cryptocurrency, and we would urge anyone who has made a profit from cryptocurrency to speak to a member of our team to determine whether you have tax liabilities that need to be disclosed, before HMRC come knocking.

For a completely free, no obligation discussion as to how Buzzacott might be able to assist your clients, please do not hesitate to contact us on +44 (0)20 7710 3389.

About the author Antony is a Manager in Buzzacott’s Tax Investigations & Dispute Resolution team. He is ATT/CTA qualified with extensive knowledge in making disclosures to HMRC as well as successfully challenging and mitigating any penalties that may be charged to clients.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 13

High Income Child Benefit Charge and HMRC’s assessing position What is the High Income Child Benefit Charge?

The High Income Child Benefit Charge (HICBC) was first introduced in January 2013 as a tax charge designed to claw back child benefit where an individual, or their partner, receives adjusted net income over £50,000.

The HICBC has been widely criticised for various reasons, most notably due to the lack of publicity surrounding the charge. As a consequence, many taxpayers are completely unaware of their liability to the charge until they are presented with discovery assessments, raised by HMRC, seeking to recover the unpaid HICBC. HMRC have issued thousands of discovery assessments in an attempt to recover HICBC from taxpayers who have failed to declare the charge since its introduction, almost nine years ago. HMRC has frequently argued that individuals who were entirely unaware of the HICBC had been careless or negligent, thus allowing HMRC to issue discovery assessments and collect unpaid HICBC, beyond statutory ordinary time limit of four years. However, a recent tax tribunal case has casted some doubt on whether it was lawful for HMRC to issue discovery assessments in cases where a taxpayer had failed to declare the charge.

14 |

income tax’, and the HICBC was a free-standing charge, not income.

Both tax tribunals found in Mr Wilkes’ favour and decided that the HICBC was out of the scope of HMRC’s discovery powers. The Upper Tier Tribunal (UTT) held that HMRC should have been issuing revenue determinations to assess any lost revenue arising from the HICBC, rather than discovery assessments.

Revenue Determination vs Discovery Assessment – What is the difference?

The significance of the decision in HMRC v Wilkes lies with the main distinction between revenue determinations and discovery assessments - the timeframe in which HMRC can assess lost revenue.

When issuing revenue determinations, HMRC can only recover sums that first fell due within the four year period preceding the issue of the determination.

Was it lawful to issue discovery assessments?

The recent tax case of HMRC v Jason Wilkes [2021] UKUT 150 (TCC) considered whether the HICBC is within the scope of HMRC’s discovery powers. While the appeal was only in relation to a small amount of revenue, the decision of the tax tribunal has had huge repercussions.

However, discovery assessments provide HMRC with the power to recover tax from much longer ago. For example, in cases where taxpayers have failed to notify HMRC of their liability to the HICBC, unless the taxpayer can demonstrate that they had a reasonable excuse for failing to notify HMRC of their liability to the HICBC, HMRC can raise assessments to recover tax from up to 20 years prior to the current tax year. Therefore, discovery assessments allow HMRC to collect HICBC going back to the very introduction of the charge, or for however long the taxpayer has been liable.

In summary, HMRC issued Jason Wilkes with a discovery assessment for failing to notify his chargeability to the HICBC. Mr Wilkes appealed against the charge on the basis that the discovery assessment was unlawful. He argued that HMRC’s discovery powers can only be used to assess ‘income which ought to have been assessed to

Consequently, the UTT’s ruling in the Wilkes case had far reaching consequences for HMRC and its ability to recover the HICBC. Furthermore, any HICBC that had been recovered, incorrectly, by way of discovery assessments was potentially owed back to taxpayers.

The decision in Wilkes was of monumental significance

| SPOTLIGHT | AUTUMN / WINTER 2021

and was likely to result in HMRC not only having to repay millions of pounds, but also lower its expectations on future recoverability of the HICBC. HMRC’s reaction Following the UTT decision, HMRC paused all work on HICBC cases and has applied to appeal the landmark decision in the Court of Appeal.

Furthermore, in the Autumn 2021 Budget, the Chancellor announced new legislation to be included in the Finance Bill 2021, designed to clear up any uncertainty regarding HMRC’s assessing position on the HICBC and other tax charges. The new legislation provides for HMRC to use discovery assessments to recover tax charges as well as income.

Most controversially, the legislation will have an immediate and retrospective effect. The legislation is not yet enacted, but when it is, it will be treated as having applied from 30 June 2021. We are, therefore, currently in a time warp, whereby HMRC does not yet have the power to use discovery assessments to recover the HICBC, but knows it will do shortly. We are, therefore, experiencing the calm before a storm of HMRC discovery assessments to collect the HICBC. Inevitably, when this storm hits it will be blowing in HMRC officers seeking to charge innocent, and entirely oblivious taxpayers with financial penalties. In many cases, these penalties simply will not be legally due, and taxpayers should seek assistance from specialists to help reduce their exposure. Buzzacott anticipate a huge number of discovery assessments being issued next year, and would encourage affected individuals to utilise our experience and expertise in protecting taxpayers from these penalties.

Get in touch For a completely free, no obligation discussion as to how Buzzacott might be able to assist your clients, please do not hesitate to contact us on +44 (0)20 7710 3389.

About the author Paige is a Tax Consultant in Buzzacott’s Tax Investigations & Dispute Resolution team. She is a recent law graduate and is currently working towards becoming ATT/CTA qualified. Paige uses her up to date knowledge of the UK tax system to provide assistance to senior members of the team.

| SPOTLIGHT | AUTUMN / WINTER 2021 | 15

What the Pandora Papers mean for HMRC tax investigations T

he Pandora Papers is the fifth largescale leak of offshore documents by the International Consortium of Investigative Journalist (ICIJ) over the last decade. You could be forgiven if this latest leak failed to deliver the ‘shock factor’ of the past, however, you can be assured that HMRC will not be ignoring the data.

What is in the Pandora Papers?

The data can be traced to 14 different multi-office offshore service providers. This is unlike the previous two leaks, which were confined to a single firm - Mossack Fonseca in the Panama Papers of 2016 and Appleby in the Paradise Papers in 2017.

Therefore, the range of data in the Pandora Papers is unprecedented. The ICIJ said that the Pandora Papers identified more than twice the number of ultimate beneficial owners than the Panama Papers even if the raw data size is similar (11.9m files vis-a-vis 13.4m files).

This is significant given the importance of beneficial ownership for UK tax purposes.

The data includes company incorporation records, real estate contracts, due-diligence questionnaires, copies of passports, bank statements and tax declarations – i.e., documents that HMRC typically request in enquiries.

Can HMRC see the leaked data?

When questioned by journalists from Sky, Chancellor of the Exchequer, Rishi Sunak said, “…and of course HMRC

16 |

| SPOTLIGHT | AUTUMN / WINTER 2021

will look through those to see if there’s anything we can learn.”

This is unsurprising, as the database of documents is publicly available on the ICIJ website as it was for prior leaks. It’s known that HMRC’s £100m Connect Software can search this and we can expect HMRC to set up a dedicated taskforce to investigate, as they did in 2016 with the Panama Papers.

What does it mean for HMRC enquiries?

The enquiry landscape has changed since the Panama Papers. As a result, leaked data can be used by HMRC in new ways and with new consequences for taxpayers.

Some of the key changes are summarised below.

1. In 2017, the UK joined the Common Reporting Standard (CRS), resulting in huge volumes of data on offshore accounts automatically flowing to HMRC annually via overseas tax authorities. This has enabled HMRC to identify taxpayers with irregularities on a mass scale. Generic ‘nudge letters’ are sent to such taxpayers under HMRC’s One-toMany (OTM) campaigns. See our article on the let property campaign for further information here.

2. The Requirement to Correct (RTC) closed on 30 September 2018 and since then, HMRC cannot offer favourable penalty rates. New legislation gave HMRC longer to assess tax on offshore assets. See

our article Offshore assets and foreign income for further details here.

3. In the Spending Review of November 2020, HMRC were given an additional £268m for technology upgrades. This is part of a drive towards making tax digital (MTD) which started with VAT in 2019 and will expand to other taxes in the next 5 years. The new data can be used by HMRC investigators alongside leaked data to uncover irregularities.

4. In the Budget of March 2021, HMRC were given an extra £100m to hire 1,200 investigators to tackle COVID-19 related fraud – see our article. It is not uncommon for fraudsters to use offshore entities to conceal proceeds.

5. From June 2021, HMRC can issue a Financial Institution Notice (FIN), which requires financial institutions (banks, credit card providers etc.) to provide HMRC with information about taxpayers for UK or overseas tax enquiries, without taxpayer or tribunal approval – see our article here for further details. Critically, under international information exchange agreements, HMRC can now ask an overseas tax authority to use their equivalent powers to assist HMRC’s own enquiries. The leaked data will give HMRC further reason to make such requests.

How can we help?

HMRC will need some time to process the leaked data but the message remains clear - any taxpayer who is worried about an offshore irregularity should seek advice promptly and should not wait for HMRC to contact them before correcting their affairs.

If you or someone you know would benefit from a noobligation, confidential discussion about correcting an offshore tax issue, please do not hesitate to give us a call on +44(0)20 7710 3389.

Contact details Barbara Bento, Director E bentob@buzzacott.co.uk T +44 (0)20 3972 6606

| SPOTLIGHT | AUTUMN / WINTER 2021 | 17

Crown Prosecution Service reports in criminal cases I

f your client is under criminal investigation and their case is going to the Crown Prosecution Service (CPS), you may not realise that there’s something you can do to mitigate the risks of it going to trial. Joe Burns shares how a CPS report from Buzzacott can help.

While the majority of HMRC investigations are conducted on a civil basis, HMRC also possesses the power to conduct criminal investigations. As a rule of thumb, HMRC will only conduct a criminal investigation when it believes that: 1. There is evidence of tax evasion; and 2. Criminal prosecution would be in the public interest.

Once HMRC has conducted its investigations, if it concludes that it has sufficient evidence to support a prosecution, it will send its case to the CPS. It’s ultimately the CPS who make the decision to proceed with prosecution and take the case to trial. Invariably, the CPS

18 |

| SPOTLIGHT | AUTUMN / WINTER 2021

makes its decision on whether to proceed having only reviewed the evidence presented by HMRC. If this feels a little one-sided, it’s because it is!

As anyone who has ever worked in justice will know, going to trial can be extremely expensive and the eventual outcome, often uncertain. Recently, Buzzacott have been engaged by several leading firms of solicitors who have sought to reduce the risk of high costs and unpredictable nature of going to trial, by taking proactive steps to persuade the CPS that the case does not merit being taken to trial.

Buzzacott’s Head of Tax Investigations & Dispute Resolution team, Mark Taylor, has recently received instructions from solicitors to review the technical and behavioural merits of HMRC’s case, before delivering a report to the CPS, providing Mark’s own view on the strength of HMRC’s position. For 20 years of his career, Mark worked for HMRC where he served as

a fully trained Senior Inspector of Taxes, a Criminal Investigator and a Parts 2, 4 & 8 Proceeds of Crime Act Accredited Financial Investigator. His credentials speak for themselves, and whenever the CPS receive a report with Mark’s name on it, they’re forced to re-evaluate whether HMRC’s case is as robust as has been presented

by HMRC itself.

In the last two years, Buzzacott have been engaged by solicitor’s to prepare reports for the CPS in respect of HMRC criminal investigations into 10 separate individuals. The CPS has elected not to proceed with prosecution in respect of 8 of those 10 individuals. Our report for the remaining two was sent to the CPS in September of this year, and it’s anticipated that the CPS will not confirm its decision until 2022.

us. The earlier we get involved, the more time we have to identify the flaws in HMRC’s case, and to present a robust report, which gives your clients the best, most costeffective opportunity to maintain their liberty.

For a completely free, no obligation discussion as to how Buzzacott might be able to assist your clients, please do not hesitate to contact us on +44 (0)20 7710 3389.

Contact details Joe Burns, Senior Manager E burnsj@buzzacott.co.uk T +44 (0)20 7710 2602

Buzzacott is extremely proud of our 100% record with our reports to the CPS. If you have a client who is facing criminal prosecution, please do not hesitate to contact

| SPOTLIGHT | AUTUMN / WINTER 2021 | 19

Directory About us

People trust Buzzacott. We blend pragmatism with the insightful knowledge of an industry leader, driven by attention to detail. We’re big enough to display deep knowledge over a broad range of specialisms and small enough to understand the power of personal connections. The values we identify with, the consistency of our advice and our ability to tailor-make solutions means that Buzzacott can be trusted to do the right thing.

Contact details

www.buzzacott.co.uk Email enquiries@buzzacott.co.uk Phone +44 (0)20 7556 1200 LinkedIn: www.linkedin.com/company/buzzacott Twitter: @BuzzacottLLP

Office address

Buzzacott LLP 130 Wood Street London EC2V 6DL This document is prepared to keep readers abreast of current developments, but is not intended to be a comprehensive statement of law or current practice.

Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from. No liability is accepted for the opinions it contains, or for any errors or omissions. Buzzacott LLP is a limited liability partnership and is registered in England and Wales with registered number OC329687. Registered office is 130 Wood Street, London EC2V 6DL.. © Buzzacott LLP 2021. All rights reserved

20 |

| SPOTLIGHT | AUTUMN / WINTER 2021

| SPOTLIGHT | AUTUMN / WINTER 2021 | 21