Private Client January Case Review

Private Client January Case Review

HMRC ‘wholly incorrect’ to seek client data from Law Firms

HMRC issued Wilsons Solicitors a notice under their data gathering powers (FA 2011 Sch 23). The notice required Wilsons as a ‘relevant data’ holder to provide ‘relevant data’. The information requested was

  • Details of beneficial owners of offshore companies and;
  • persons who have beneficial interests in offshore partnerships, trusts and other like entities…where you, or an agent acting on your behalf, have or has provided services related to 25 the formation of offshore companies, trusts and other entities or the creation of beneficial interests or the settling of funds in them

Wilsons appealed against the notice under Sch. 23, para. 28, on the grounds that:

•it was not a relevant data-holder (per Sch. 23, para. 17); and

•the data requested was not relevant data (per the Data-Gathering Powers (Relevant Data) Regulations 2012 (SI 2012/847), reg 15).

The tribunal considered the meaning of various words in the data-gathering powers legislation and the money laundering regulations and in particular the meaning of ‘records’. ‘register’ and ‘maintained’. 

The FTT found that records held under MLR obligations did not amount to ‘relevant data’ and that HMRC’s notice and its interpretation ‘requires violation to be done to the wording and meaning of the legislation.

Who this affects

During the case it transpired that HMRC had issued these requests to 9 other law firms, 7 of them complied and one made a nil return, another appealed to HMRC on the basis given in this case.

This is another example demonstrating how important it is not to blindly comply with a request just because it has come from HMRC.  There must be careful consideration of legal obligations to both HMRC and the client.

This affects any law firm that receives or has received one of these notices. Or another kind of unqualified notice or request for information from HMRC.

Mitigation

The best mitigation in cases such as these is to be aware of such cases and seek advice from a tax adviser/accountant early on in the process.

HMRC has a continuing strategic focus on tackling offshore avoidance and it is prepared to send out batches of notices to endeavour to obtain information – even if the legislation does not provide for this.

Case Reference

[2018] UKFTT 0627 (TC) TC06678 Appeal Number TC/17/5726

OTS’s report on IHT simplification

The office of Tax Simplification (OTS) is the independent adviser to the government on simplifying the UK tax system. In Jan 2018 they were asked by the government to carry out a review of Inheritance Tax to make recommendations on simplification and to make the experience of those who interact with it as smooth as possible.

The report comments that whilst the headline rate of IHT is 40% the effective rate that most estates pay is 20%. With estates of between 3-8 million pay the highest effective rates of tax.  One of the main reasons the average effective tax rate does not reach 40% is the application of the spouse exemption and other reliefs

 

Higher value estates have a lower average effective tax rate because a greater proportion of their assets are likely to be covered by a relief. On average over 70% of the value of an estate worth over 10 million is covered by an IHT exemption/relief. Lower value estates mostly consist of cash and residential property which do not commonly attract relief from IHT. 

The OTS has identified the following areas for comment

Nil Rate Band – this is well understood by people

Residence Nil Rate Band – this is less well understood and disproportionately disadvantages those without children

Lifetime gifts – gift rules are complex and confusing, financial limits for exemptions are out of date with inflation, it is hard to maintain records of lifetime gifts

Businesses and Farms – broadly well understood and working well. There had been some speculation that changes would be made to BPR and APR – from the report it seems as though these may remain untouched. 

Other areas:

-practical application of the reduced rate of IHT

– Administration of life insurance products and pensions

– Technical aspects of trusts

– Gifts with reservations of benefit 

This reports talks mainly about the administering of the estates – a further detailed reports is due in Spring where we can hope for some further information on the more technical aspects of IHT.

This reports Key Recommendation  The government should implement a fully integrated digital system for inheritance tax, ideally including the ability to complete and submit a probate application. 

You can read the full report here.

HMRC have published their long awaited guidance on the taxation of cryptocurrencies.

There has been no change in the tax law and HMRCs guidance is their interpretation of the tax law and it seems their interpretation has changed since March 2014.

In the report HMRC confirms that:

  • Most investors will be subject to CGT on gains and losses.
  • S104 pooling applies, subject to the 30 day rule for ‘bed and breakfasting’.
  • It will be rare for investment in cryptoassets to be regarded as trading, although ‘mining’ is likely to indicate a trading activity.
  • A capital loss may be claimed in the event that a cryptoasset becomes of a negligible value. Evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.

This is a different position to what was set out in their 2014 report and whilst the guidance is silent on whether it applies retrospectively one could assume it will only apply to transactions going forward from the date of the guidance.

Who will this affect?

This will affect any parties who have Cryptoassets.

Mitigation

HMRC’s orthodox approach when it discovers an error in its guidance or publications is generally not to seek to apply the change retrospectively.  In 2016 for instance, HMRC changed its policy in respect of mixed partnerships and the CGT incorporation relief (TCGA 1992, s 162). Its previously publicised 2014 view was reversed prospectively, thus only applying to incorporations from 30 April 2016.

A similar approach is adopted where HMRC identifies Extra-Statutory Concessions which fall outside the scope of its managerial discretion. HMRC does not seek to remove the concession with immediate effect, but rather provides a window in which taxpayers can rearrange their affairs.

You can read the full report here.

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