Archives for posts with tag: HMRC

Main Residence Problem?

After a winter break we’re going to look at recent developments we ought to be aware of.  The first of these relates back to an earlier podcast in November 2011 when I looked at the very important main residence relief for capital gains tax purposes.

It is noticeable that over the last few years the revenue have been looking at taxpayers trying to claim the benefit of this exemption and challenging their entitlement.  In many of these cases it is quite clear that the taxpayer had never genuinely occupied the property as a residence and so the revenue were quite right to deny the relief.

However in one recent case it seems that a taxpayer who, I believe, should have been given the benefit of the relief was denied it – and that is a worrying development.

In the earlier podcast  I explained that to be able to claim that a property is your residence you need to reside in it, obviously enough and also pointed out that the courts often looked at a comment made by the judge in the Curtis v Goodwin case which is one of the most significant judgements in this area – the judge commented – “the principle is that in order to qualify for the relief a taxpayer must provide evidence that his residence at a property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

That podcast looked at the position of two taxpayers, a Mr Favell and a Mr Metcalfe, both of whom had signally failed to show that they had resided in the properties in respect of which claims were being made by them.  Favell claimed that he had separated from his partner and so moved into another property that he owned for a period of eleven months.

Although the tribunal judge was quite happy that eleven months was a sufficient period of time to constitute a residence there was no evidence that Favell had genuinely lived there – the claim was rejected.

Metcalfe claimed to have bought a flat ‘off-plan’ which he sold 4 months later – he claimed that his girlfriend didn’t like the property and although he moved in he sold it shortly afterwards having already placed the property on the market.  Again there was little evidence that he had ever occupied the property as his residence, he had no phone connection, no TV license either and the utility bills were suspiciously low.

Neither Favell nor Metcalfe made the election discussed in my December 2011 podcast to determine which property was the main residence, so the Tribunal had to judge whether a property was the main or only residence in fact.

Now we come to the recent case which concerns a woman called Susan Bradley [Bradley v HMRC –].  Be careful not to confuse this with an earlier case reported in January 2011 concerning a woman called Alexandra Bradley – no relative I think – who I also referred to in the earlier podcast.

Susan was married but the relationship with her husband was getting worse and so in August 2007 she decided to leave him and seek a divorce after two years separation.  She owned, in her own right, two properties, one a semi-detached house in Exning Road and another small flat in Weston Way, both were normally let.  At the time she decided to leave her husband the Weston way property was vacant and so she moved into it.

Bear in mind she has moved from a marital home into a property which the tribunal judge described as “a small bedsit-type flat”.

The evidence presented to the tribunal was partly through a personal appearance by Mrs Bradley who was represented by her accountants, a revenue officer called Mr Hall and a bundle of agreed documents.  It is not clear from the Tribunal report whether legal representations were made on behalf of Mrs Bradley but the lack of any reference to them suggests that the evidence presented may have related solely to Mrs Bradley’s condition at the time of the events.

She was suffering from depression which required medical treatment and as a result, it was claimed, did not change her mailing address although she did claim single person discount for council tax purposes.  Her 16 year-old daughter, who continued to live with the husband brought her post over to her.  She continued to have a joint account with her husband but also had two bank accounts of her own which she used on a daily basis, one being used for the property business, the other her own personal money.

Then the Exning Road property became vacant and she decided to move into it – not surprising given that she was living in a ‘bed-sit’ – but made her fundamental and fatal mistake.  Although she moved into the property in April 2008 a couple of weeks earlier, on 20 March 2008 she had instructed estate agents to sell Exning Road.  No offers were received at that time, she continued to live in the property, and, said the Tribunal Judge  “even though Mrs Bradley told us that she was resigned to living permanently at Exning Road”, she never took the property off the market.  She redecorated the property at this time to make it ‘more a home’ as having been tenanted it was in poor decorative condition.

During the autumn of 2008 she became reconciled with her husband and she moved back to live with him in November of 2008.

The Tribunal Judge adds, without further detail, that Exning Road was then sold in January 2009.

Now it strikes me that we have an extended period of residing (for that is surely what, on the scant evidence quoted by the Tribunal Judge we have) in both the Weston Way property (from August 2007 to April 2008) and the Exning Road property (from April 2008 to November 2008) when compared to the bare 5 weeks of residence that was held insufficient in the Curtis v Goodwin case.

However the Tribunal Judge decides that Mrs Bradley did not intend to reside at Exning Road with a sufficient degree of permanence because it remained on the market and was, eventually, sold.  In this he claims to be supported by the Metcalfe case where there is, to be frank, no evidence that Metcalfe really did reside in the property at all, given the very low utility bills.

Now let us consider again what the judge said in Curtis v Goodwin – there needs to be “some degree of permanence, some degree of continuity or some expectation of continuity”.

Now even if there is, on the facts as determined with the benefit of hindsight, no degree of permanence, the judgement in that case refers to “some degree” of permanence and, perhaps more significantly, “some degree of continuity”.  It seems from the evdence that having moved into the Exning Road property she did not stay elsewhere on occasion, she stayed continuously at that address, and on her own evidence which the Tribunal Judge evidently accepted, she was “resigned to live permanently at Exning Road” which would seem clearly to comply with the required “expectation of continuity”.

It would seem that the only factor that prevented the property qualifying was the mistake of having placed the property on the market and not having then instructed the estate agent to take the property off the market again when it seemed clear it would not sell, no offers having been received.  Had the property not been placed on the market at all would the Tribunal Judge have come to the same conclusion?

Does this mean that whenever a taxpayer places the house that they live in on the market on a speculative basis it ceases to be their residence?  Surely not.

It seems to me that Nicholas Alexsander, the Tribunal Judge, has erred in law in placing too great an emphasis on the word permanence and far too little on the word ‘degree’; in seeming to ignore the concept of continuity, although it seemed clearly to be present, and the expectation of some degree of continuity. He stated “it was always only ever going to be a temporary home, and therefore it was never her residence” – but surely a temporary home may still be a residence, particularly if the taxpayer has no other residence – where did Susan Bradley reside after she had separated from her husband?  A separation that lasted for more than a year and which the Tribunal Judge accepted as being itself likely to prove permanent.

The Tribunal Judge in the Favell case, Guy Brannan, pointed out that the facts in the Curtis v Goodwin case were extreme, that the 5 week occupation of the property was merely temporary, in the words of Lord Justice Millett – a ‘stop gap’.  That is hardly the case here.  Had Favell been able to show occupation of the property for the 11 month period he would, he said, “have been minded to accept that the occupation would have amounted to residence” even though Favell admitted, in evidence produced by the revenue, that he claimed to have moved out without any intention that it should be a permanent move, he moved out because of “difficulties at home”.

I do not know whether the taxpayer will wish to appeal to the Upper Tier, I hope she does as this seems to me to be the wrong decision.  Of course the Tribunal Judge’s summary does not indicate all that transpired or indeed all of the evidence that was presented, but if allowed to stand it moves the boundary of what may be considered to be or not to be accepted as  ‘residence’ a very long way from the ‘stop-gap’ referred to by Millett, and creates a degree of concern for any taxpayer who wishes to move, when appropriate, from property to property, to ascend the property ladder.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of this podcast can be read at my site For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next month, or maybe even sooner!…


A19 – What about the vulnerable?

Not every taxpayer is professionally represented and I’d like us to spare a thought for one particular group of taxpayers who might be characterised as being vulnerable.

A proposal is being consulted on by HMRC at present which could massively disadvantage these vulnerable people under the guise of making an existing extra-statutory concession more ‘user-friendly’ – the reality is likely to be the opposite for the vulnerable.

The concession is the one known as A19 and it rose to particular prominence a couple of years ago when HMRC were first able to reconcile taxpayer records and discovered that many people, hundreds of thousands, had paid too little tax.

Newspapers led a campaign encouraging taxpayers to take advantage of this extra-statutory concession – whether they were entitled to benefit from it or not – and this is where the problem started.

A19 says, in a nutshell, that if HMRC have failed to make timely use of information provided to them, and they then try to recover tax more than a year later from taxpayers who have reason to believe that their tax affairs are in order – then there is a discretion under which the tax due is not collected.

Now in some ways the most significant part of that is the bit about belief that your affairs are in order – if you are professionally represented and you have paid too little tax you cannot really try to claim the benefit of this provision that’s why practitioners would rarely see it unless approached by a taxpayer with substantial tax demands.

However a vulnerable taxpayer is much more likely, because of their disadvantage, to have that belief and so be able to benefit from this provision – so who might we consider to be vulnerable?

One group, obviously, would be the elderly, another perhaps those who have been recently widowed where the deceased spouse may have had sole responsibility for dealing with financial matters.  Another would be those members of our society who suffer from learning disabilities of all kinds, or those suffering from a mental or physical incapacity, whether permanent or because of illness.

So what do HMRC propose and why is it a problem – and what should we, as tax professionals do about it?

They intend to remove the requirement for reasonable belief and replace it with a more objective test which recognises revenue and taxpayer responsibilities instead.

The responsibilities undertaken by HMRC are no more than what they already do, or should do, but taxpayers are expected to take an interest in and have certain responsibilities for their own taxation affairs – and it is here that the major disadvantage for the vulnerable is introduced as there is no discretion left for those who are not easily able to be involved in their own affairs.

At present the reasonable belief discretion can be applied subjectively based on the taxpayer’s personal circumstances but this cannot be done where there are objective responsibilities.

However the problems with the new proposed A19 don’t stop there.  The revenue propose time limits so that a taxpayer is expected to inform HMRC of the problem, following the issue of a P800 tax statement, within the same tax year, before the new coding is applied to collect the underpayment in the following year.

Now whilst convenient for the revenue administratively, the example they give is of a taxpayer who is issued with a statement in June and is expected to advise HMRC of the problem before the following April – seems reasonable – however as they themselves point out these documents are issued throughout the whole of the year and if one is issued in March a taxpayer may have only days to react.

Furthermore the vulnerable may not appreciate the document’s significance until the tax deduction commences in the following year, under the new rules this is too late and would deny that person the benefit of the concession.

Although the original A19 operated where at least a year’s delay in using information had occurred it also provided for exceptional circumstances and in one recent case concerning a Mr Clark the Tribunal judge observed that he had received 14 separate coding notices which were confusing and difficult to understand – even though he had been notified within the same year the Tribunal judge ruled that exceptional circumstances could be considered in isolation from the one year rule .

The new ESC A19 proposes to remove the provision concerning exceptional circumstances altogether and clearly vulnerable taxpayers will be hit by this as well.

It further proposes not to apply to CGT on the reasoning that this is operated through self assessment but it does not recognise that non self assessment taxpayers might attempt to advise HMRC of a gain, as happened in a case concerning an elderly married couple, the Henkes, some years ago.  They filled in repayment claim forms R40 and attempted on this form to notify the revenue – at that time the form R40 advised that if there was a gain to report the revenue would send a form R40(CG) – although this had ceased to exist with the introduction of self assessment.

The local district sent them a self assessment capital gains form SA108 as a standalone document which was not acceptable unless accompanied by a return.  The tribunal ruled with reluctance that no return had been made so that a discovery assessment could be raised.  But this would be a situation where revenue discretion could be applied – not any longer!

Practitioners may not feel that this is very relevant to them but in the interests of the vulnerable I think we should ALL of us take part in this consultation and make it clear to the revenue  how unacceptable it is not to make adequate provision for the vulnerable – because the vulnerable will not be able to make these representations themselves.

Mind you this isn’t the only mean-spirited announcement by the revenue recently – they have just announced the interest rates that may be applied to Save As You Earn Share Option Schemes – these used to be a very popular way of employees saving with a tax-free return that was in total better than a PEP or an ISA which could be used, if the employee chose, to take up share options which employers could issue at a discount of up to 20%.  It was risk-free because if the shares went down in value there was no obligation to take up the options simply benefit from the tax-free savings rate.

For some time now shorter term contracts – those for three years and five years  – offered a zero return but the seven year contract offered a bonus of 1.6 times a monthly payment, equivalent to an interest rate of 0.58% – from 1 August 2012 this becomes – ZERO as well.

ESC C16 & BVC 17

Hello – I’m Paul Soper and this is an extra edition in the series of Podcasts as usual intended primarily for practitioners – especially small practitioners, but, as ever, if you are a reasonably financially literate taxpayer or an accounting student you should enjoy it too – if enjoy is the right word! You can read the text of this podcast at my website http://www.Taxationpodcasts all one

There has been a considerable amount of confusion in the last couple of weeks over changes to two Extra-statutory Concessions – one, BVC17 being withdrawn, and the other ESC C16 being translated into legislation with significant new restrictions being attached.  The concessions came from different government departments and as they are both concerned with the same basic situation it is probably not surprising that this confusion has occurred.

First of all here are a couple of examples of situations where the concessions might be relevant.

John is a computer consultant and has worked for the last 10 years through a company.  He now wishes to retire.  The Company has two £1 shares in issue, both owned by John.  The company has accumulated reserves amounting to £55,000 and all outstanding debts have now been paid.

Fred has a small technology company which he started 10 years ago with a friend, and he has recently accepted a very well paid offer to work for a multinational, one of the conditions of which is that he works exclusively for them.  He wants, with the consent of his friend, to extract the reserves that he has built up in the company, currently amounting to £140,000 in total.  There are 10,000 £1 shares in issue, 8,000 owned by John and 2,000 by the friend. No claim had been made under the Enterprise Investment scheme.

Both John and Fred could appoint a liquidator to bring their companies to an end, and the sums that they extract will be treated as part-disposals from a Capital Gains Tax perspective, both will be entitled to Entrepreneurs’ Relief and these gains will be chargeable at 10%.  The problem is that liquidation does not come cheap – the liquidator assumes a personal liability in the winding up and so must make quite detailed investigations before distributing what is left.  In recent years government estimates of the cost of a straightforward liquidation have been made in the region of £4,000 to £7,500.

But there is an alternative course of action that John and Fred could have used to get the money out of their companies – it is called ESC C16 and is a revenue concession, at the moment, which recognises the cost of liquidation and allows the taxpayer who applies for the relief, provided they give certain assurances to the revenue, to pay a dividend, which would normally be taxable as income, but treat it instead as though it was a liquidators’ distribution which would only be subject to CGT at the Entrepreneurs’ relief rate of 10%.

They have to assure the revenue, amongst other things, that the company is ceasing to trade and will not carry on a business in future, that all outstanding debts have been or will be paid, that the information required by the revenue to determine the outstanding corporation tax liability will be provided and that the shareholders will accept the CGT liability.  Increasingly HMRC have also been asking for assurances that the trade is not going to continue inside another company or group.  Oh – and one more thing – the company must allow itself or present itself to be struck off by the Registrar of Companies under (in the words of the concession) section 652 or 652A of the Companies Act of 1986.

The most recent company legislation is found in the Companies Act of 2006, this became fully operational in late 2008, and the equivalent provisions are sections 1000 and 1003 of this later Act.  The published revenue concession has not been updated for the change in statutory references.

So both John and Fred could use this mechanism, even though Fred’s company has considerably more to distribute, but there is one fly in the ointment.  For John it is not very important as there are only two shares in issue but for Fred it is more of a problem.  C16 depends on the payment of a dividend, and a dividend cannot legally exceed the distributable reserves of the two companies, in John’s case this will leave £2 inside the company, hardly a concern, but in Fred’s case £10,000 – share capital in a limited company is not distributable.  To get this out would have required a formal liquidation – that is until October of 2011.

First let’s consider what would have happened before October to Fred’s money.  He could have walked away from the company leaving £10,000 inside it and it would then have become the property of the Crown under the Bona Vacantia principle, Bona Vacantia is also the name of a department of the Treasury Solicitor’s Office which deals with ownerless property.

Fred could have paid a dividend of the whole of the company’s reserves including the share capital but the excess of £10,000 would have been an illegal dividend and the same Bona Vacantia department would have the right to pursue Fred and his friend for that money on behalf of the Crown.

A couple of years ago the Bona Vacantia department tried to help out by reaching an agreement with the accounting bodies that an amount not exceeding the cost of a straightforward liquidation, which they estimated at £4,000, could be extracted and they would not pursue the Crown’s rights if the company had permission under ESC C16.  This was contained in an extra statutory concession document called BVC17 and available on their website.

At the time they also pointed out that as a result of the Companies Act 2006 there were other courses of action open which would avoid the problem anyway.

Fred couldn’t use BVC17 because his sum exceeded £4,000 but he could make a declaration of solvency under the 2006 Act and reduce his share capital to a figure of less than £4,000 and then apply for C16 approval.  He could apply to have his company reregistered as an unlimited company in which case all of it’s reserves would become distributable – non-distributability is the price paid for limited liability.

Even if he had, in error, walked away from the company and had allowed it to be struck off the 2006 Act allows a company to be resurrected within 6 years (previously 12 months only) and so put this right and legally extract the money.

Bona Vacantia clearly then thought long and hard about the ease with which a legal distribution could be engineered and in October 2011 announced that they were withdrawing the concession BVC17 with immediate effect because it was no longer necessary – as they made clear in a frequently-asked-questions section of their website they were no longer going to pursue these sums on behalf of the Crown regardless of the amount involved, £4,000 or £4,000,000 it didn’t matter.  So good news for Fred.

However the revenue were also thinking about their concession C16 and the necessity to make it a legislative provision because of a House Of Lords decision in the Wilkinson case suggesting that these concessions were not within the revenue’s power except in cases where they had care or management of the tax system.  Recently the Supreme Court have ameliorated this ruling in the Gaines-Cooper case and indicated that concessions can be made if they increase the potential sums accruing to the exchequer.

In December of 2010 HMRC announced that a number of concessions would be made law including C16, however they designed the legislation so that the amount that could be extracted in this way would be limited to £4,000 – coincidentally the same as the BVC17 limit.

Implementation of this was then postponed because of objections made which required reconsideration but on 6 December 2011, at the same time as they released draft legislation for inclusion in Finance Bill 2012, the revenue announced that the legislation of C16 would go ahead but with a limit of £25,000 rather than £4,000 and this would take effect from 1 March 2012 – it was to be introduced by delegated legislation under powers conferred on them a couple of years ago.  If the distribution exceeded £25,000 the WHOLE amount would now be taxed as income not gain.

Now this will cause problems for both John and Fred.  John’s problem is greater than Fred’s because he has less money locked up inside his company and this is the patently unfair aspect of the proposal, it affects smaller taxpayers proportionately greater than it does taxpayers with greater sums to extract.

If John goes ahead after 1 March and extracts the whole of the amount available as a distribution he will be liable to income tax, not CGT at all.  To the extent that he is a basic rate taxpayer this is an advantage as the dividend will carry a tax credit which will extinguish his basic rate tax liability.  However, to the extent that he is a higher rate taxpayer, he will be liable to income tax at a rate of effectively 25% on the amount extracted – a 15% surcharge on top of the CGT liability which would have been further reduced by his annual CGT exemption of £10,600.  He could pay an initial dividend sufficient to bring his reserves down to £25,000 and then proceed using the new rules, but that would still be a 15% surcharge on £30,000 worth of reserves – a cost of £4,500.

In the document explaining what they proposed to do HMRC comment that they believe the cost of a straightforward liquidation to be £7,500 so John would not have the luxury of using a liquidator to extract his money as capital because it would be even more expensive.  If Bona Vacantia are right and the cost is closer to £4,000 (or even less as some commentators have suggested) he is still being required to incur a cost which before March 2012 he would not be required to bear at all.

Fred on the other hand has a much larger sum to deal with but although he is better placed to afford the services of a liquidator he will still be suffering additional expense which before March 2012 he would also not be required to incur but the effect on him is less.

Normally when HMRC legislate for concessions they undertake that the effect of the legislation is not to change the rules and when the draft legislation was put before parliament a year ago that is exactly what parliament was told – but that is clearly not the case.

 This is a fundamental change, and one that affects less well-off taxpayers to a greater extent than richer ones – this cannot be fair can it?

What’s the rationale behind the change?  HMRC claim that C16 was being used for avoidance or even evasion purposes – but a much greater problem according to Richard Murphy of Tax Research UK is companies being struck off without having made any returns or approaches to HMRC at all, a problem he estimates to be costing the Treasury BILLIONS!

HMRC will have the advantage of making this a self-assessment procedure as they will no longer have to consider applications under C16 but surely this will simply lead to more disgruntled taxpayers presenting empty shell companies for striking off and simply walking off with the cash without having paid either CGT or income tax on the distribution?

It is not too late to affect this proposal, write to the revenue pointing out how unfair this is for less well-off taxpayers, write to your MP who may object to the statutory instrument so that parliament has to debate the proposal, register your disapproval using my online petition at – if you make your voice heard it may do some good, if you do not many of your smaller clients will be adversely affected by this proposal when they retire or cease trading.

Is there a solution?  Surely, other than abandoning the proposal, which is not realistic, raising the limit to a point at which the tax surcharge equated with cost of liquidation would be a first step – if the cost of liquidating is £7,500 then that would equal reserves of £75,000 not £25,000, perhaps increasing it to say £100,000 would allow a little extra advantage.

It cannot be to the revenue’s advantage in the long run to encourage yet more taxpayers to extract money and avoid all liability on it because the alternative is to deny them the benefit of a relief, entrepreneurs’ relief, which parliament has already decided should apply to taxpayers with lifetime gains of up to £10million.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

My next podcast, available next week, continues the examination of the Main Residence Exemption available for home-owners and some, I stress some, landlords.