Extracts from Peter Vaines' monthly tax update, this time covering the location of crypto assets, (or at least where HMRC thinks they exist - no prizes for guessing), the "tax avoidance motive" test for Transactions in Securities, a reminder that CGT and residential property disposals are going to get a lot more urgent and complicated, CGT loss claims on off-plan building projects, and the last word on the validity of automated penalty notices?
HMRC has published guidance for indivudals and guidance for businesses in relation to crypto assets They have now provided further information about their views on where crypto assets should be located which is relevant for Capital Gains Tax and Inheritance Tax.
No news yet about how HMRC can find out about them in the absence of voluntary disclosure by the taxpayer, but I am sure that will be forthcoming in due course.
The approach adopted by HMRC is that crypto assets will be treated as located in the UK if the beneficial owner is resident in the UK. So, no protection for non doms.
They say that this treatment will apply only to exchange tokens and not to other types of crypto assets (don’t ask).
This is all a bit difficult because there is no law on the subject – these are just the views of HMRC. The best they can say is that a residence basis most accurately fits the majority of transactions. They might be right – but maybe not. It is going to be interesting when a dispute arises.
This looks like an excessively pragmatic conclusion. The crypto asset is obviously not actually in the UK (goodness knows where it is – although clearly not here) but the person who possesses the access code is in the UK so he is therefore taxable on this UK situs asset. Um.?
I wonder if this reasoning applies to my safety deposit box in Switzerland where (confidentially, just between us) I secrete items of staggering value. I carry the key on my person – or I memorise the number. If I am resident in the UK does that mean the contents of the safety deposit box is a UK asset? I don’t think so.
Transactions in Securities and the Motive Test
One of the difficulties involved in claiming relief or undertaking a transaction is that you are sometimes faced with a motive test – that is to say, the relief you are claiming, or the tax treatment you are expecting, will be denied if its main purpose was the avoidance of tax.
Unfortunately, not all the motive tests are the same (why on Earth not, would be a very good question) and although they do not all have the same meaning, there is a broad theme – there must be an intention to avoid tax.
Nowhere is this more important than in the Transactions in Securities legislation in ITA 2007 s 682 et seq., which can effectively turn a capital receipt on which the tax might be 10% (or maybe zero) into an income receipt chargeable to Income Tax at somewhat higher rates.
Section 684 provides that these provisions will not apply if:
“the main purpose or one of the main purposes of the transaction in securities … is to obtain an income tax advantage”
The application of this motive test was examined in the recent case of Allam v HMRC  UKFTT 0026 (TC). Dr Allam sold some shares in a company to another company under his control. This is the paradigm case of a transaction in securities. The issue was whether the main purpose or one of the main purposes of the transaction was to obtain an Income Tax advantage. Dr Allam was able to persuade the Tribunal that it was not.
Of course, the conclusion was inevitably special to its facts, but some of the arguments before the Tribunal are of much wider application.
A central element of the arguments of HMRC was that Dr Allam could have structured his transaction in a way which would have given rise to more tax – therefore he must have had the obtaining of an Income Tax advantage as one of his main purposes.
This is an horrific argument. Any course of action necessarily involves the rejection of all other alternative courses of action and their consequences (consciously or otherwise). I could have flown to Paris this morning instead of coming to work and I therefore avoided the air passenger duty on the flight. Should I therefore be charged the tax which I have avoided? And what about that new Porsche that I did not buy and the £25,000 tax which would have arisen on the purchase. Or what about the 100 new Porsches I did not buy ….
This is obviously bonkers, but it is not a new argument – and the argument does not get any better by being repeated. Anyway, the Tribunal rejected it – which is helpful because it clearly has a significance to other taxing provisions where a tax avoidance motive is relevant.
The Tribunal referred to the celebrated case of IRC v Brebner  2 AC 18 in which it was said:
“When the question of carrying out a general commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out – one by paying the maximum amount of tax the other paying no or much less tax – it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is for the purposes of the section the avoidance of tax.”
I had thought that the developments in the law relating to tax avoidance since 1967 had meant that Brebner had kind of got lost, so it is a comfort to see this principle confirmed.
CGT: Payment Date
On 6th April 2020, the new rules come into force concerning the reporting and payment of Capital Gains Tax on the disposal of UK residential property. Thereafter, a new online return must be filed together with a payment on account of the Capital Gains Tax, within 30 days of completion. (This is all quite separate from the continuing obligations on non residents and the NRCGT returns).
This is going to involve some neat footwork to calculate the Capital Gains Tax on time. There are special rules to deal with losses, and assumptions about the income levels likely in the current year. However, unlike the position with non residents, no new return will be required if there is no tax payable on the disposal.
HMRC have confirmed that these new rules only apply to gains arising on disposals after 5th April 2020. The relevant date for disposal will be the normal rule in TCGA 1992 s 28 – that is the date of exchange of contracts where the contracts are unconditional or the date when a conditional contract becomes unconditional.
Disposals of UK residential property prior to the end of this tax year are to be disclosed in the 2019/20 self-assessment returns in the normal way.
I suppose we will get used to it – but I can see a whole new series of appeals to the FTT in respect of penalties arising under these new rules.
CGT: Losses on Off-Plan Property
A recent case hit the headlines regarding a loss made by Lord and Lady Lloyd-Webber who entered into contracts to buy two villas in a proposed development in Barbados. The developers got into difficulties and in the end, Lord and Lady Lloyd-Webber were unable to recover the amounts they had paid which amounted to approximately £6 million. (No information, or press comment, seems to be available in respect of other investors in this development who must similarly have lost significant amounts of money).
Lord and Lady Lloyd-Webber claimed this £6 million as a capital loss against their other capital gains but HMRC disallowed the loss on the grounds that the money was spent on an asset which was never acquired. The only asset that the taxpayers acquired were the rights under the contracts.
HMRC argued that the rights under the contracts were not assets for CGT purposes. This followed the decision of the Upper Tribunal in Hardy v HMRC  UKUT 0332 which held that the taxpayer did not acquire an asset when he paid a deposit to buy a property which was never acquired. However, during the course of the hearing both parties agreed that Hardy was wrongly decided.
The taxpayers argued that they were entitled to relief as they satisfied TCGA 1992 s 38; they incurred expenditure on the acquisition of the rights and those rights were an asset for Capital Gains Tax purposes. When those rights were disposed of or became of negligible value, a loss on that asset crystallised.
However, HMRC argued that the payments were made to acquire an estate in land which was the ultimate subject matter of the contracts, and not for the purposes of acquiring the contractual rights as distinct assets.
The Tribunal concluded that although Lord and Lady Lloyd-Webber entered into the contracts with the intention of ultimately acquiring the completed villas, the payments under the contracts were for the acquisition of contractual rights, the only assets they actually acquired. They made a loss on those assets and accordingly, the losses were allowed.
This has been referred to as a triumph for common sense, but I would suggest that, more significantly, it is a triumph of a sound legal analysis.
(See also BKL's commentary on the Lloyd-Webber case - here.)
Penalties: Automatic Notices
Last year there was a series of decisions by the First Tier Tribunal to the effect that notices sent out automatically by HMRC were invalid – for example notices to file tax returns under TMA 1970 s 8.
One such example was the case of Shaw v HMRC  UKFTT 0381 which decided that notices sent to taxpayers automatically by computer without any human intervention, did not satisfy the requirements for a valid notice under TMA 1970 s 8. It followed that any penalties for failing to comply with such a notice was also invalid.
Having regard to the sheer volume of tax returns and other notices which need to be sent to taxpayers by HMRC, this decision was likely to cause severe logistical difficulties. It must be acknowledged that HMRC really ought to be entitled to send these things out automatically as that is the most obvious thing to do. However, at the moment, it may not be convenient, and it may not be very efficient, but if that is the law, HMRC need to abide by it, however irksome it may be.
HMRC complained that making individual decisions on individual cases is impractical and resource intensive. Well yes, but complying with the law is often resource intensive which is a factor experienced daily by taxpayers - and HMRC is never very sympathetic when the taxpayer fails to comply with the law.
Fortunately for HMRC, they have the opportunity to get the law changed if they find it inconvenient and they announced a little while ago that the next Finance Bill will provide authority for large scale automated processes to serve certain statutory notices. However, this may have been overtaken by the Upper Tribunal’s decision in HMRC v Rogers and Shaw  UKUT 0406 in which the Upper Tribunal decided that the notices were valid, after all.
HMRC were unable to provide evidence to establish that a specific identified HMRC officer took the decision to send the section 8 notices, but the Upper Tribunal decided that TMA 1970 s 8 does not require a specific officer to be identified. There was sufficient evidence that HMRC officers had decided that a taxpayer should receive a section 8 notice, leaving the implementation of that decision to administrative staff (and presumably to computers).