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Where Taxpayers and Advisers Meet
Brass Tax - Points of Practice
01/08/2008, by BKL, Tax Articles - Business Tax
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BKL Tax look at the burden of proof in tax investigations, and highlight changes in company law from 1 October 2008 following Companies Act 2006.   

Crime and Punishment

Clients who are under investigation by HMRC sometimes complain that they are made to feel like criminals.  OK, as a matter of fact some of them may be: but the conventions of client management tend to suggest that it's not always wise to say so, particularly since the vast majority of tax misbehaviour is settled under the civil code even where strictly speaking there may be some case for saying that a criminal offence has been committed.
One of the many areas where the difference between the criminal and the civil code matters, is in regard to the standard of proof.  In a civil matter the question is generally where does the balance of probabilities lie?  If a contentious case is to be taken before Commissioners the client must understand that the appeal body will decide any matter of fact (Were sales understated?  Was some particular unvouched expense actually incurred?  What were the owner's living expenses?) simply on the basis of which explanation of the facts is considered more likely to be true.  That explanation may be the one put forward by HMRC: it may be the one put forward by the client: or it may be one that is different from both of these. 
By contrast, in a criminal matter, the higher standard of "beyond reasonable doubt" applies.  
This is important when fines and penalties come to be imposed.  If the penalty has the flavour of a criminal sanction, the criminal standard of proof applies.  If on the other hand it is more akin to a civil matter, the civil standard of proof applies.  So the crucial test is - when does a penalty become a criminal sanction?
This is ultimately a question for the courts.  And in a recent case (HMRC v Khawaja) the courts have held that the penalty under s95(1) for the negligent delivery of an incorrect personal tax return  - the main penalty provision underpinning tax investigations - is indeed a civil matter as HMRC contended.  HMRC needed to show only that it was more likely than not that an incorrect return had been negligently submitted: and that in applying the criminal standard of proof the General Commissioners had misled themselves.

Companies Act changes

 This is a reminder that on 1 October 2008 another tranche of the changes wrought by Companies Act 2006 will come into force.  In particular there are two which may make re-organisations of private companies a little less fraught:

  • They won’t need to follow the whitewash procedure in order to provide financial assistance on the acquisition of their shares; and
  • They will be able to reduce their share capital by a much simpler process than the present rigmarole of application to the Court.

As to the second, a private limited company will be able to reduce its capital as follows:

  • The company’s articles must allow it to do so;
  • The company must still have at least one member holding shares after the reduction;
  • The directors will make a solvency statement as to the ability of the company to pay or discharge all its liabilities (including contingent liabilities) after the reduction and for the ensuing 12 months (similar to the old whitewash statutory declaration);
  • A special resolution of the company will need to be passed;
  • The resolution, solvency statement and a memorandum (detailing the share capital of the company as after the reduction) are to be filed at Companies House and the reduction thereupon becomes effective

As with the current "whitewash" statutory declaration the penalties on the directors for making a solvency statement without having reasonable grounds for the opinion expressed in it are a fine, imprisonment or both.

The new Act continues of course to provide for company repurchase of shares either out of distributable reserves or (in the absence of adequate reserves) out of capital.

BKL Tax is a division of Berg Kaprow Lewis LLP. For information about BKL Tax Consultancy Services, visit or call 020 8922 9222 for telephone support.

Brass Tax is intended for general guidance only and no liability is accepted for actions taken in reliance upon these notes. Where appropriate professional advice should be taken. Such advice is available under the terms of the BrassTax®Plus service. See the BKL Tax website for details.

BKL Tax, 35 Ballards Lane, London N3 1XW
T 020 8922 9222
F 020 8922 9223

About The Author

BKL is a business name of Berg Kaprow Lewis LLP, Chartered Accountants and Tax Advisers, a limited liability partnership registered in England and Wales.

The information in this article is intended for guidance only. It is based upon our understanding of current legislation and is correct at the time of publication. No liability is accepted by Berg Kaprow Lewis LLP for actions taken in reliance upon the information given and it is recommended that appropriate professional advice should be taken.

35 Ballards Lane
N3 1XW
(T) 020 8922 9222 

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