Service company question BLOG

Keith M Gordon MA(Oxon) FCA CTA(Fellow)

Sharkey v Wernher - was Parliament misled?

5 February 2010

The Treasury has responded to me. They say that Parliament was not misled. However, they fail to explain why the Minister claimed (wrongly) that the rules had been requested by trade associations and the legal and accountancy professions. See http://www.publications.parliament.uk/pa/cm200708/cmpublic/finance/080520/am/80520s04.htm, column 311.

13 January 2010

A brief background: I am concerned that Parliament was misled during the committee stages of the Finance Act 2008 when the rule in Sharkey v Wernher was legislated.

Eventually, I made a formal complaint on 22 February 2009. That and a chaser in March were ignored. In April 2009, I asked the Treasury (under the Freedom of Information Act) how many other such complaints have been ignored. That request at least generated a response: I was told that my 22 February letter would be responded to "shortly".

Well today, I have been given an assurance that the response will be with me by 5 February 2010 - a mere 49 weeks after my complaint was made.

Equitable liability

12 November 2009

The Treasury announces that the practice will be retained and codified as soon as possible. Very many thanks to all who have supported this campaign.

"I am delighted and relieved that common sense has prevailed. I particularly commend those within HMRC and the Treasury who have listened to the many representations from the tax community and acted upon them."

5 November 2009

The e-petition notches up its 700th signature.

7 October 2009

The e-petition gets a plug in Taxation and on Andrew Brooks' blog helping it to exceed the 600 mark. Thank you especially to Andrew Brooks and to Taxation's editor, Mike Truman for their support.

29 July 2009

The e-petition exceeds the 500 mark. Thank you to all who have signed so far.

25 July 2009

The campaign gets picked up in the weekend's Financial Times.

14 July 2009

There are now 400 signatures. Apparently, the petition gets acknowledged by 10 Downing Street, albeit by e-mail, if we reach 500. So we are 80% of the way to generating some form of response.

12 July 2009

There are now 392 signatures, mainly from members of the tax community. Is there anyone outside HMRC who honestly believes that there is a justification in not retaining equitable liability?

11 July 2009

The campaign is picked up by the TaxationWeb. Again, its readers are urged to sign the equitable liability petition and to document real-life cases where equitable liability has proven a valuable relief.

10 July 2009

The campaign is covered by TaxTrust.net whose readers are urged to sign the equitable liability petition.

9 July 2009

Taxation features equitable liability in its Comment piece by Mike Truman. Mike refers readers to the equitable liability petition and this blog.

6 July 2009

The issue is featured in CCH's Taxes - the weekly tax news. The link to the equitable liability petition generates further signatures.

1 July 2009

Equitable liability and the campaign for its retention gets two mentions in the July issue of Tax Adviser. It gets featured in the President's column and in ATT News.

18 June 2009

HMRC's response is almost immediate. It is unrepentant: "We are not intending to retain the concession". It appears that the campaign must continue.

17 June 2009

I have now received an invitation from HMRC to discuss this at a meeting. They say that they wish to discuss " impact of the withdrawal of this concession". Does this mean that, if the impact is too severe, they would consider reversing their plans? It is not clear, because earlier in their letter, they tell me that they " recognise that some taxpayers and their representatives, and particularly those working in the insolvency arena, may have to make changes to take account of the withdrawal" and it is for this reason they are giving " a notice period of almost 12 months before ending the concessionary treatment for claims to relief under equitable liability".

I therefore asked HMRC for clarification of their position.

16 June 2009

After just 24 hours the responses are staggering. Thank you to all. It is only HMRC who seem unmoved.

15 June 2009

As the service company question issue has to go on the back burner pending the completion of my tax return, I have stumbled across a new matter that is getting me hot under the collar. The Government's proposals are, in my words, immoral and outrageous. Another leading commentator has suggested "monstrous".

It relates to the Government's proposals to abolish the equitable liability practice. My thoughts are set out in an article on Accounting Web and also an e-petition at 10 Downing Street. I would urge you to read the former and sign the latter.

Appealing against that service company question

September 2009

My return has now been submitted with the question explicitly unanswered. My white space declares the question ultra vires.

Update 14 May 2009 - we have a result!

Day 30. I have now received a response from the Appeals and Reviews Unit, which I reproduce below.

Thank you for your letter of 14 April which has been forwarded here.

I have to inform you however that the service companies question within the 2009 self asssessment tax return does not constitute a notice under Schedule 36 Finance Act 2008. This being the case, no right of appeal arises under paragraph 29 of Schedule 36 and section 49A TMA 1970 does not apply.

HMRC consider that the service companies question is intra vires Section 8 TMA 1970.

The normal time limit will apply for the submission of your return.

So, we are back to where we were last year. Assuming that HMRC will honour the contents of the letter they sent me in every other taxpayer's case (and it would seem most unreasonable if they didn't), we can be assured that non-completion of the service company question will not give rise to an automatic £300 penalty.

For the reasons set out in my article in Taxation, 18 September 2008, I remain firmly of the view that the question is not a lawful tax return question and need not be answered. Unless someone persuades me otherwise, I do not propose to answer it (and will state the fact on the return itself).

Should HMRC deem my return incomplete and seek to penalise me, I will be prepared to defend myself.

I will naturally keep everyone informed of developments. In the meantime, thank you to everyone who expressed their support. Common sense has prevailed and we didn't need to recruit Joanna Lumley.

Update 13 May 2009

Still no response from HMRC. But they do have until tomorrow. Or even longer if they consider it reasonable to take the extra time. However, one person has told me that his appeal letter had been received and "sent to a more experienced officer to review".

Update 3 May 2009

I have had considerable feedback since first announcing my appeal - on the whole it has been positive. The only questionable comment was from a former colleague (a senior HMRC official) who told me that he and his colleagues had had "a good laugh" when reading this blog. Perhaps, he was merely telling me that there are some people at HMRC who appreciate witty and well-written articles on tax practice.

I had omitted to tell readers what they ought to write if they were intending to appeal the purported information notice. So the following link to a copy of my own letter should help: http://www.taxationweb.co.uk/tax-news/personal-taxes/tax-barrister-appeals-against-service-company-question.html. Other possible objections to the question include the fact that (being in the form of a tax return question), if the boxes are left blank, it is impossible for HMRC to know whether the question has been answered in the negative or simply ignored. In my view this reinforces the arguments that the question is not a valid use of the new information powers.

Anyway, no official response from HMRC to my appeal. But 19 days is not that long in the circumstances.

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Early 2009

My sources confirmed that the service question that caused so much confusion last year would be repeated on individuals' 2009 returns. Fearing a backlog of work in April, I penned a draft letter of appeal which I filed away pending the issue of my 2009 return.

A bit later in 2009

After consulting my diary, I realised that my tax return might not get the prompt attention I would have hoped to give it. After all, it would ordinarily be issued on 6 April (a Monday this year) but I was going to be travelling on the Wednesday to spend the Easter Bank Holiday weekend with my in-laws and would then be travelling to Manchester to take a VAT case at the First-tier Tribunal there.

It would not be unheard of for the issue of the tax return to be delayed because of software difficulties, yet I wanted my appeal to be looked at without any delay.

8 April 2009

The sun was shining on me that morning and the postman delivered a brown envelope that would send shivers down the spines of most ordinary people. However, in between my packing and further preparations for the case in Manchester, I was able to revisit my draft appeal letter.

As many readers will be aware, I am firmly of the view that a tax return should be designed so as to include only questions that are statutorily permitted: in the main, this means the questions on the return should be directly relevant the calculation of an individual's tax liability for the year under review.

To put it another way, a return is not incomplete if no answer is provided to a question that does not go to the heart of establishing a person's tax liability for the year.

Or to put it a third way, HMRC do not have the right to ask additional questions merely on the grounds that it is administratively convenient (for them) for such questions to be addressed.

(Those readers who are familiar with the contents of the tax return might think of other questions that would fall within this category – for example, the questions that ask non-residents for the number of days that they spent in the UK or the question that asks for the number of one-off charitable donations in the year Whilst the latter question has some sort of justification (it ensures that an employee's PAYE code reflects only the employee's regular charitable giving), the former is designed merely to give HMRC fuel for any subsequent enquiry.)

This year, however, things are slightly different. Whilst the rules governing the content of a tax return are the same as in previous years, HMRC have new powers that came into force on 1 April 2009. In short, they permit HMRC to ask any taxpayer for any information "reasonably required by [HMRC] for the purpose of checking the taxpayer's tax position" (FA 2008, Schedule 36, para 1). To use old (i.e. pre-1 April 2009) terminology, Schedule 36 gives HMRC extended rights of enquiry, sometimes referred to as the 'Martini provisions': "any time, any place, anywhere".

Arguably, therefore, HMRC can justify asking me about the nature and sources of my income, although such requests must be reasonable. What is totally unclear, however, is whether an information notice under Schedule 36 can be embedded inside a tax return. Similarly, it strikes me as wholly unreasonable for every recipient of a personal return to have to address the issue.

Failure to respond to an information notice will give rise to a penalty of £300 (paragraph 39(1)(a), (2)), with daily penalties of up to £60 thereafter. In my mind, those penalties are a good enough reason to focus one's mind on the legality of the question. Furthermore, whilst it would be possible to raise some objections to the question at any penalty appeal hearing, the safer course of action would be to deal with the issue at an early stage, by appealing against the purported information notice itself under appeal provisions located in paragraph 29.

Such appeals must be made within 30 days of the purported information notice being given. Assuming that most tax returns would have arrived on 8 April 2009, this means that appeals ought to be made by 7 May 2009, although cautious taxpayers might aim for 5 May to be safe.

14 April 2009

Noting that my tax affairs are dealt with by a tax office in Manchester, I hand delivered my notice of appeal at the tax enquiry counter at Albert Bridge House, about 200 yards away from the tribunal which I was attending. I shall leave it to readers to decide whether or not that little distraction jeopardizes my claim for a deduction in respect of my travelling expenses on the grounds that I might have breached the "wholly and exclusively" test.

My appeal is a protective appeal on the basis that I do not believe that the question forms a valid request under Schedule 36. In fact, HMRC have not formally suggested that it is such a request. However, if they are to assert that the question is justified because of Schedule 36, then my letter stands as an appeal under the provisions of that Schedule.

Being a reasonable individual, I have not yet exercised my option to have the matter directed to the First-tier Tribunal. Instead, I have taken advantage of the new procedures that require an independent part of HMRC to review the case (sections 49A and 49B of the Taxes Management Act 1970).

The waiting period

The ball is now firmly in HMRC's court. Under section 49B(2) and (5), HMRC must set out and notify me of their view of the matter by 13 May 2009, or such longer period as is reasonable. The review must then be completed within 45 days of me being notified of HMRC's initial view (section 49E(6), (7)).

I will then have 30 days (should I so wish) to notify the First-tier Tribunal that I wish to have the matter determined by them (section 49G(2), (5)(a)). (If I apply to the Tribunal out of time, I might still be able to have the case heard but I would then have to ask the Tribunal's permission first. It is best not to go down that route if I can at all avoid it.)

When I hear any more, I shall let readers know.

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Year of Call: 2003

Keith M Gordon MA(Oxon) FCA CTA(Fellow)

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