Peter Vaines looks at two hot topics in his monthly tax update: HMRC's powers to require a deposit on account of tax, and the notorious EBT Loan Charge.
Security for PAYE/NIC
I have previously made reference to the power of HMRC to require security for PAYE and NIC under the Income Tax (Pay As You Earn) Regulations 2003 Part 4A and the corresponding part of the NIC Regulations. This is an awesome power. There are also analogous provisions for VAT in VATA 1994 Sch 11.
The general idea is that HMRC are entitled to seek security from the taxpayer if they think it is necessary for the protection of the Revenue – for example, if he has failed to comply with his tax obligations or HMRC have reason to believe that he might fail to do so. It is extremely serious because it is a criminal offence to continue to make taxable supplies for VAT if you have not provided the security demanded by HMRC. That means you must cease to trade if you want to avoid committing a criminal offence.
This is generous compared with the rules for PAYE and NIC. You don’t get out of this penalty by ceasing to trade. It is a strict liability criminal offence not to pay the amount of security demanded by HMRC.
Last year, I mentioned some Tribunal decisions which contained a number of curious inconsistencies on this subject. This month we have two decisions on security from the FTT.
The first relates to VAT: CNM Estates (Tolworth) Ltd v HMRC TC 6941.In this case the Tribunal took the view that on the evidence, it seemed very likely that the debt claimed by HMRC was either substantially overstated or non-existent and that the decision of HMRC to require the security was flawed because they took into account irrelevant information or at least information about which they knew very little.
Did that matter? No. The Tribunal concluded that even though HMRC’s decision was flawed, if they had approached the matter correctly, they would have still come to the same conclusion. The amount of the security was upheld.
The second case concerned PAYE and NIC: Smith v HMRC TC 6936. HMRC required Mr Smith to provide security of £31,000 in respect of PAYE and NIC. This was seriously excessive as it turned out. HMRC said that this did not matter because the Tribunal had only a supervisory jurisdiction and should confirm the Notice unless the decision was flawed at the time when the officer issued the Notice.
However, the Tribunal decided that they had jurisdiction to consider the effect of hardship on the taxpayer, deriving considerable support from the case of D-Media Communications Ltd v HMRC  where it was held that a policy for requiring security which does not have regard to the ability to pay is inconsistent with the scheme of the legislation. If the level of security required is unlikely to be provided, the giving of a notice is unlikely to provide the protection of the Revenue that the regulations are designed to secure.
“If the only likely result is that the recipient of the Notice will inevitably fail to provide the security and thus will inevitably be liable to a criminal penalty as a matter of strict liability, that in my view cannot have been the purpose of Parliament in making these regulations”.
The Tribunal acknowledged that it was a proper exercise of the powers of HMRC to require security in this case, but determined that the amount of the security should be reduced to less than £9000.
The Tribunal also confirmed that the penalty for this offence is an UNLIMITED fine – not a maximum of £5,000 which has often been suggested.
EBT Loan Charge
Many people are acutely aware that on 6th April 2019 a charge will arise where a loan from an EBT remains outstanding – the charge being the full amount of income tax and NIC which HMRC claim has been avoided.
This has been a controversial matter for some time and Parliament has called on the Treasury to revisit the position.
The Treasury have an odd stance. They say that it is only right for this charge to be imposed because the loans were taxable when they were made. Er …
If that is right, why is there going to be a tax charge imposed on 6th April. This would be a second charge on a receipt which was already taxable. Even if HMRC are right that the loans were always taxable, and some people have not paid the tax when they should, the answer cannot be to introduce a new law to tax them again.
MPs have suggested that this charge is grossly unfair having regard to its retrospective nature. One MP said that:
“It is the sort of taxation that led the Barons to rebel against King John and gave birth to Magna Carta. It is simply not acceptable for a Government to introduce a law that makes illegal something someone did years ago when that action was considered legal”.
Accordingly, Parliament has required the Treasury to assess the likely effect of the loan charge policy before it comes into force and to present a report to Parliament. by 30th March.
It will be interesting to see what they say. Whether the report by the Treasury will give rise to any meaningful change is open to question, but we shall soon see.