January Matrimonial Finance Case Updates
Case Reviews » January 9, 2019
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 HMRCs 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
Can a Dividend Variation Reduce Child Maintenance?
The case relates to an appeal by the father to the Upper Tier Tribunal. He appealed the First Tiers Tribunal decision. The application was to vary support by the father of two qualifying children. There is extensive background to the case and in essence the appeal to the UT was allowed on the basis that the FTT came to a wrong conclusion in law, however the appeal was dismissed as the error did not affect the substance of the decision.
What is interesting about this case is the question of whether a variation of dividends can be taken into account to reduce child maintenance.
The case is as follows
- The father is a businessman and sole shareholder in a particular company. In the initial order it was decided that dividends received by him which could not be brought into account under the base order, should be the subject of a variation and included as income.
- The father re-married. He claimed to have transferred 40% of his shares in the relevant company to his new wife on 1 May 2012 and that only 60% of the dividends of the company should be treated as income from 1 May 2012.
The father wanted the child support child maintenance payments reduced to take into account 60% of the dividends and not 40%
The FTT concluded there had not been a valid transfer of shares and therefore there can be no impact on the variation. The UT found that a valid transfer of shares had taken place. Para 15 of the judgement ‘It seems to me that the First-tier Tribunal failed to draw a distinction between a transaction that is a sham and one that is a device, intended only to secure a collateral advantage but nonetheless genuine and, indeed, one that needs to be genuine in order to secure the advantage.’ However, a valid transfer of shares would not necessarily reduce the impact of the variation
Variations to an assessment of child support maintenance may be made where a case is one prescribed for the purposes of paragraph 4(1) of Schedule 4B to the Child Support Act 1991. However, Paragraphs (1A) and (4) of regulation 19 of the 2000 Regulations, cited by the Secretary of State, provide an exception.
Whilst the dividends in respect of the shares could not be taken into account through a variation under Regulation 19(1A), if the transfer was unreasonable they could be taken into account through a variation under regulation 19(4).
Clearly the father had the ability to control the amount of income he received from the company (conditions of 19(4)). Therefore, the only issue Judge Rowland considered is if the father ‘unreasonably’ reduced his income when doing so.
Para 18 of the Judgement states ‘The question of what is reasonable for the purposes of regulation 19(4) must be considered in the context of the purpose of the provision and, indeed, the purpose of the whole child support regime. It is expected that parents will support their children and regulation 19(4)….is obviously intended to prevent non-resident parents from avoiding that liability. An action that might be quite reasonable in the absence of any potential liability to support children may, for the purposes of regulation 19(4), be unreasonable if it has the effect of reducing a parent’s ability to pay child support maintenance. “
Whether a diversion was unreasonable will depend on a number of factors and is likely to be a matter of judgment. In particular, it is necessary to consider the extent to which the action that amounted to a diversion of income was purely voluntary or was forced upon the parent by circumstances and the extent to which the reasons for carrying out the action reflected what can fairly be regarded as a diminution in his ability to pay child support maintenance.
The father provided evidence that his second wife had lost her job and had began working for the company for 20 hours a week. He transferred 40% of the shares to her as he ‘thought she should have a share’. The accountant provided his approval and no cash was involved. No valuation was provided. The FTT found the evidence inconsistent and lacking in clarity. UT found the question as to whether the father’s wife had been working in the business to a significant extent was a question of fact and the First-tier Tribunal was entitled to reject such little evidence as was before it
As such as there was no reasonable explanation for the transfer of shares, in so far as the decision to divert the income was voluntary and not forced upon hence the appeal was dismissed.
Who is affected
Sole business owners who are planning to reduce their taxable income by diverting some income to their new spouse.
Recipients of maintenance orders which are based on variable income such as dividends.
Mitigation
In proceedings such as these it may be helpful to cite this case. Appeals such as these are time consuming and an unnecessary expense. There is a heavy burden on the appellant to prove that their actions in gifting or selling shares was not unreasonable.
A common reason for spouses to spilt dividend income is that is can reduce the overall tax liability of the family. Whilst this may be a reasonable decision for some, Para 19 of the Judgement states, ‘I do not consider that gaining a tax advantage can ever contribute to the reasonableness of the diversion for the purposes of regulation 19(4). It would be absurd if a non-resident parent were to be allowed to enrich himself and members of his household at the expense of other children whom he is under an obligation to support.’
The evidence provided by the father in the case was vague and inconsistent. Had there been a reasonable circumstance for the transfer of the shares it is possible the variation would have been allowed. Judge R states that the courts must consider if the action (of transferring shares) ‘was forced upon the parent by circumstances’. If a party wishes to argue this to be the case it is clear they must have evidence proving this.
More Information
The full judgement can be found 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.