News Items – at 8th January 2007

Penalties for incorrect tax returns

HMRC consults on a new approach

In March 2006, HMRC published a consultation document entitled Modernising Powers, Deterrents and Safeguards: A consultation on the developing programme of work.  Following on from a series of workshops that were held in September and October 2006, HMRC has published a further consultation document that concentrates on one area of reform, namely the different regimes for imposing penalties for filing incorrect tax returns.

The document, A new approach to penalties for incorrect tax returns, makes proposals for bringing together the different penalty regimes for income tax self assessment, corporation tax self assessment, PAYE, NICs and VAT.

Currently, in the case of income tax, a penalty may be charged of up to 100% of the tax under-stated or over-claimed that arises as a result of a taxpayer’s negligent or fraudulent conduct, including failure to tell HMRC of a mistake without unreasonable delay.  The maximum penalty may then be reduced by the use of abatements depending on the seriousness of the offence and whether there has been co-operation and disclosure.  The abatements available are: up to 20% for disclosure, up to 40% for co-operation and up to 40% for seriousness.  A further 10% abatement is available if the disclosure was not prompted by HMRC action.  Taxpayers can appeal to the General or Special Commissioners against both the imposition of a penalty and its amount.

The proposed new approach is for penalties to relate to the underlying behaviour that gave rise to the incorrect return.  If the understatement of tax liability or an over claim of relief on a tax return is caused by a mistake or misinterpretation of fact or law and reasonable care was taken, there would be no penalty.  Otherwise penalties at three different levels would be imposed to reflect the increasing seriousness of the behaviour, i.e.

• failures to take reasonable care
• deliberate understatements or over-claims
• deliberate understatements where the behaviour is aggravated by concealment, but the offence is not to be investigated with a view to criminal prosecution.

The terms used for these categories are likely to be defined as follows:

Mistake or misinterpretation

This might encompass:

• an innocent error after taking reasonable care
• a reasonable view of the law that proves to be wrong or is not pursued
• an action or omission that does not form part of a pattern of behaviour and is untypical of the taxpayer concerned
• the adoption of a treatment for tax purposes that is clearly disclosed to HMRC in a return or accounts, even if subsequently changed by agreement or determination of a tribunal.

Failure to take reasonable care

This would incorporate the terms “negligent conduct” and “negligence” and might cover:

• a breach of a duty existing at the time when the duty should have been performed
• not doing something that the person knew or should have known ought to be done and which the person concerned had the power to do
• the absence of such care, skill and diligence as it was the duty and capacity of the person to bring to the work
• omitting to do something a reasonable person would do and the person concerned could do, or doing something a reasonable person would not do
• negligence, importing some neglect of duty in relation to facts or to interpretation of the law, provided the capacity to perform the duty is present.

Reasonable care

The term “reasonable” may be defined as reasonable in regard to the circumstances of which the person acting, called on to act reasonably, knows or ought to know.  It is a relative term and must be interpreted in the light of all the circumstances prevailing.

In deciding whether reasonable care has been taken, where possible, the pattern of behaviour would be considered as well as the particular instance.  So, if there is a history of failures, it is more likely, but not inevitable, that an incorrect return would be considered to be due to failure to take reasonable care.

Deliberate understatement

This might include an understatement arising from:

• deliberately not doing something that ought to be done
• deliberately getting something wrong.

This could be in relation to facts or to interpretation of the law.

Deliberate understatement with concealment

This might include an understatement arising from deliberately getting something wrong and systematically covering it up.  This could be in relation to facts or to interpretation of the law.  The concealment could be before or after the understatement.

Full disclosure of an irregularity

This might involve the taxpayer in:

• admission of the understatement
• active steps to quantify the understatement
• access to enable disclosure to be tested

It would be more than simply complying with HMRC requests for information.  “Disclosure” in this context would mean informing HMRC that tax irregularities have, or may have, taken place.  It would involve describing them, how long they have gone on for, and who was involved in them or was aware of them.  It would include giving an indication of the scale of the irregularities, even if precise quantification were not possible.  It would involve giving access to HMRC to check the evidence.

The proposal is for the minimum and maximum penalties to vary according to the seriousness of the behaviour categories.  The maximum penalty for deliberate understatement with concealment is likely to 100% of the amount understated, the same as the current maximum.  The minimum and maximum for deliberate understatement would be lower percentages, and even lower percentages would apply for failure to take reasonable care.  The maximum percentages would then be reduced for disclosure, with a greater reduction for unprompted disclosure.  This approach would allow for the penalty for failure to take reasonable care to be reduced to nil for unprompted disclosure, but reduction to nil would not be possible for the more serious categories.

The consultation document raises many issues and questions.  Comments and views are invited up to 13 March 2007.

Further information:
Summary of Responses: Modernising powers, deterrents and safeguards - workshops  http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile
?contentID=HMCE_PROD1_026488
Modernising powers, deterrents and safeguards: penalties for incorrect returns  http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile
?contentID=HMCE_PROD1_026481

Residence and the 91-day test

HMRC clarifies its position on the Gaines-Cooper decision

On 31 October 2006, the Special Commissioners ruled that Mr. Gaines-Cooper, who had claimed to have been domiciled in the Seychelles during the tax years 1992/93 to 2003/04, did not meet HMRC’s “91-day test” and had been resident in the UK for UK tax purposes during that period.

HMRC’s booklet IR20 Residents and non-residents: Liability to tax in the United Kingdom applies a non-statutory “91-day test”.  This states that a person who leaves the UK to work full-time abroad under a contract of employment is treated as not resident and not ordinarily resident in the UK if all of the following conditions are met:

• the absence from the UK and the employment abroad both last for at least a whole tax year, and
• during the absence, any visits made to the UK
  • total less than 183 days in any tax year, and
  • average less than 91 days a tax year (over a period of up to 4 years).

In determining the 183-day and 91-day periods, booklet IR20 states that the day a person arrives in the UK and departs from the UK are ignored in counting the days spent in the UK.  Also, time spent in the UK due to exceptional circumstances, such as for personal or family illness, would also be ignored.  According to Mr. Gaines-Cooper’s own calculations, the time he spent on average was well below 91 days each year.  HMRC, however, claimed that trips to the UK, where he arrived on one day and left on the next, should also be included, despite what the IR20 booklet says.   As the “91-day test” is HMRC guidance and not a statutory requirement, the Special Commissioners decided that the extent of Mr. Gaines-Cooper’s visits to the UK indicated that he had been resident in the UK throughout the years in question.
HMRC has now issued the following statement regarding its position over the 91-day rule and the way it is defined in the IR20 booklet:

The recently published decision of the Special Commissioners in Robert Gaines-Cooper v HMRC (SpC 568) has attracted some attention from tax practitioners and their clients.  In particular, some commentators have suggested that the decision in Gaines-Cooper means that HMRC has changed the basis on which it calculates the ‘91-day test’.  This is incorrect.

The ‘91-day test’ is set out in Chapters 2 & 3 (‘Leaving the UK’ and ‘Coming to the UK – Short term visitors’) of the booklet IR20: Residents and non-residents.  This guidance is clear that the ‘91-day test’ applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis.  Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first.  Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years.  HMRC’s normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the ’91-day test’.

In considering the issues of residence, ordinary residence and domicile in the Gaines-Cooper case, the Commissioners needed to build up a full picture of Mr Gaines-Cooper’s life.  A very important element of the picture was the pattern of his presence in the UK compared to the pattern of his presence overseas.  The Commissioners decided that, in looking at these patterns, it would be misleading to wholly disregard days of arrival and departure.  They used Mr Gaines-Cooper’s patterns of presence in the UK as part of the evidence of his lifestyle and habits during the years in question.  Based on this, and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK.  From HMRC’s perspective, therefore, the ’91-day test’ was not relevant to the Gaines-Cooper case since Mr Gaines-Cooper did not leave the UK.

HMRC can confirm that there has been no change to its practice in relation to residence and the ‘91-day test’.  HMRC will continue to:

• follow its published guidance on residence issues, and apply this guidance fairly and consistently;
• treat an individual who has not left the UK as remaining resident here;
• consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, in deciding whether or not an individual has left the UK;
• apply the ‘91-day test’ (where HMRC is satisfied that an individual has actually left the UK) as outlined in booklet IR20, normally disregarding days of arrival and departure in calculating days under this ‘test’.

The guidance provided by booklet IR20 is general in nature.  If, on the facts of the matter, a dispute arises over the application of this general guidance and the parties cannot resolve their dispute by agreement, the Commissioners will determine any appeals.  The Commissioners are bound to decide the legal issues by reference to statute and case law principles rather than HMRC guidance.  Where a dispute relates to particular facts the Commissioners will consider the evidence and make findings of fact to which they will apply the law. 

Further information:
Robert Gaines-Cooper v HMRC  http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j2797/SPC00568.doc
HMRC Briefs 01/07 – Residence  http://www.hmrc.gov.uk/briefs/brief0107.htm

Seasonal Agricultural Workers Scheme

Students and workers from Bulgaria and Romania

Bulgaria and Romania joined the European Union on 1 January 2007.  The PAYE and NICs implications for employers where students and workers from those countries apply to work in the UK under the Seasonal Agricultural Workers Scheme (SAWS) are as follows.

Places on SAWS are available to non-students from EU states, so non-students from Bulgaria and Romania may apply.  Applications from other countries remain restricted to students.  However, access to the P38(S) procedures is only available to students that meet the relevant criteria, so non-students from Bulgaria and Romania are subject to normal PAYE rules.

Normal NICs rules also apply to students and non-students from the two countries unless the individuals provide current E101 or E102 certificates, in which case no NICs are due until the certificate expires.  Students from Bulgaria and Romania working under SAWS are no longer eligible for the 52-week exemption from payment of NICs.

Employees in SAWS are not eligible for the PAYE and NICs concessions for harvest casuals.

Penalties may be imposed where businesses employ workers illegally.  New penalties were introduced from 1 January 2007 relating to Bulgarian and Romanian nationals that effect employers as well as employees. The Home Office provides guidance on the employment of migrant workers (see link below).

Further information
Changes to the Seasonal Agricultural Workers Scheme  http://www.hmrc.gov.uk/employers/saws.htm
Employing migrant workers  http://www.employingmigrantworkers.org.uk/

Jersey

Employment Forum recommends Minimum Wage for 2007

During October 2006, the Employment Forum carried out a review of the minimum wage and has now recommended the following new rates to apply from 1st April 2007.

The Social Security Minister has expressed appreciation for the work involved in producing the recommendations and has promised to give them full consideration and announce his response shortly.

Further information:
Employment Forum recommend Minimum Wage for 2007  http://www.gov.je/SocialSecurity/NewsReleases/EmpForumMinWagefor2007.htm

Payroll deadlines during the next month

January 19 – This is the deadline for payment of tax and NICs to the Accounts Office, for tax month 9 by employers who pay monthly, for tax months 7 to 9 by employers who pay quarterly, unless they make their payments electronically.

January 21 – For employers who pay their tax and NICs to the Accounts Office electronically, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by January 18 at the latest.

February 2 – This is the date by which any changes to the provision of company cars in the three months to January 5 must be reported using form P46(Car).

Payroll Tip

Tax and NICs liabilities on expenses payments

How are the tax and NICs liabilities on the payment of expenses to employees handled?

The tax and NICs liabilities on expenses payments depend principally on whether or not they relate to business expenditure by the employee, although there are a number of specific situations.  The following notes explain the general principles that apply in each case and the payroll processing and/or P11D reporting requirements.

Any expenses payments for which an employer has obtained a dispensation from the tax office are not reportable of form P11D, not are they liable for Class 1 NICs.  The following notes assume that the employer does not have a dispensation covering any of the situations described.

In the following notes, a “lower-paid employee” is an employee whose earnings rate in a tax year is less than £8,500, including the value of any benefits and expenses payments provided.  Any expenses that are reportable rather than being taxed under PAYE are reported on form P9D. 

Note that it is not possible to obtain a dispensation to avoid reporting expenses on form P9D.  However, a dispensation that is issued for P11D reporting purposes may also apply to benefits and payments that would otherwise have to be reported on form P9D, e.g. the provision of business-related vouchers.

Procedure 1. Expenses that are genuinely business-related

If expenses are business-related, incurred “wholly, exclusively and necessarily in the performance of the duties of the employment”, and, where possible, supported by receipts, the payments are reported on form P11D.  Typical examples are the reimbursement of accommodation and subsistence expenses, and entertainment expenses. 

The full amount of the payment is reported in Section N Expenses payments made to, or on behalf of, the employee, on the appropriate line, less any amount on which the employee, for whatever reason, has already paid tax under PAYE.  There is no P9D reporting requirement.  There is no Class 1 NICs liability through the payroll if the expenses are “specific and distinct” business expenses or “qualifying travel expenses”.

Reporting in this way enables employees to claim a deduction of expenses, i.e. to demonstrate to the satisfaction of the tax office that the expenses were genuinely business-related.  This is the normal situation where an employer should obtain a dispensation.

Procedure 2. Expenses that are partly business-related
If the employer is unable to determine how much of the expenses payment is business-related, perhaps because no receipts are provided, the full amount of the payment is reported on form P11D or P9D.  This method of reporting also allows the employee to claim a partial deduction of expenses.  A typical example would be the reimbursement of an employee’s home telephone bill or credit card bill, where the employee has not identified the business and private elements. 

The full amount of the payment is reported

• on form P11D, in Section N Expenses payments made to, or on behalf of, the employee, on the appropriate line, less any amount on which the employee, for whatever reason, has already paid tax under PAYE
• on form P9D, in Section A(1) Expenses payments, assuming that the total amount to be reported in that section exceeds £25.

The entire payment is subject to Class 1 NICs through the payroll.  The amount paid by the employer is added to the employee’s gross pay in the earnings period in which the payment was made, but for NICs purposes only.

To avoid the Class 1 NICs liability on such a mixed payment, employees should be expected to identify clearly that part of the payment that is business-related.  The business-related part of the payment may then be handled separately under Procedure 1, above.  The remainder would be handled under Procedure 3, below.

Procedure 3. Expenses that are not business-related

If expenses are not business-related at all, the payment cannot be paid as an expenses payment to the employee, nor is it reportable on form P11D or P9D. 
Instead, for both employees and lower-paid employees, it is paid through the payroll and is subject to both PAYE tax and Class 1 NICs.  In order to increase the employee’s net pay by the amount of the reimbursement, the payment must be grossed up for tax and NICs before it is paid.  The grossing up of the payment is similar to the procedures for PAYE Settlement Agreements, where the employer pays the tax and NICs instead of the employee.

Typical examples are reimbursement of the employee’s personal liabilities, e.g. the employee’s rent, or reimbursement of the employee’s commuting costs, e.g. when called-out to attend work.

If a payment appears not to be business-related but the employer is at all aware that the employee intends to claim a deduction for expenses in respect of all of part of the payment, it would be better to handle the payment for tax purposes under Procedure 2, above.  However, the payment is still fully liable to Class 1 NICs through the payroll.

Special situations

Exempt expenses payments - payments that are made in respect of non-business expenditure but that are exempt from a tax and NICs charge under one of the many statutory exemptions do not have to be reported on form P11D or P9D.

Round sum allowances – the total amount of the payment is handled under Procedure 3, above.  If a tax inspector approves an application to pay allowances other than under PAYE, because the allowance is no more than the reimbursement, Procedure 1 or 2 is used as directed by the inspector.

Scale rate payments – in the absence of a dispensation, they are handled as round sum allowances.

Expenses floats – advances of expenses are treated as cheap loans if the outstanding balance exceeds £1000 at any time or expenditure against the float is not accounted for regularly.  Otherwise, procedures 1, 2 or 3 are applied as appropriate.

Payment of mileage allowance payments or passenger payments – such payments in respect of the business use of an employee’s own car, van, motorcycle or cycle are not reportable if they do not exceed the statutory maximum payment for the type of vehicle.  If the limit is exceeded, the excess is reported

• on form P11D, in Section E Mileage allowance and passenger payments
• on form P9D, in Section A(1) Expenses payments, assuming that the total amount to be reported in that section exceeds £25.

For Class 1 NICs purposes, the payments are checked for each earnings period and, if the limit is exceeded, the excess is added to gross pay for NICs purposes only.

Qualifying relocation expenses – payments that exceed the statutory limit are reported on form P11D, in Section J Qualifying relocation expenses payments and benefits, and the employer pays Class 1A NICs on the reported value. 

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