House of Lords report criticises HMRC’s treatment of taxpayers

HMRCThe House of Lords Economic Affairs Committee has found that HMRC is failing to guarantee fairness for taxpayers by failing to differentiate between users of sophisticated tax avoidance schemes and ordinary citizens who break the law through uninformed or naive actions.

In its report, The Powers of HMRC: Treating Taxpayers Fairly (PDF), the committee found that declining resources had left HMRC unable to tackle tax avoidance and evasion whilst ensuring taxpayers are treated fairly. Highlighting a number of areas where the HMRC’s conduct appeared disproportionate, the committee recommended further work take place to ensure there is sufficient oversight of the department.

The report heavily criticised the process HMRC uses to introduce new powers, noting that too often specific solutions were identified by the department before any consultation on the wider objectives. The committee recommended that HMRC listen more carefully to the views of tax and business experts during future consultations, to ensure new legislation is properly targeted.

The committee said new measures on offshore time limits should be withdrawn, pending further discussions between HMRC and tax professionals. The plans would require those with offshore elements to their tax affairs to keep records for up to 12 years to deal with HMRC questions. Any new legislation should be more proportionate and targeted than the current plans allow.

There was heavy criticism for proposed new civil information powers, which would allow HMRC to seek information from third parties without the agreement of the tax tribunal, or the relevant taxpayer. The committee said HMRC had failed to offer a convincing rationale for the change, and recommended it be withdrawn ahead of further consultation.

The committee also noted that the government has a responsibility to give HMRC sufficient funding to be fair to taxpayers. The Treasury is recommended to assess whether the department is adequately resourced as part of the 2019 Spending Review.

The next stage in the process is for the government to respond to the committee’s findings. STEP will monitor the situation and provide updates on any further developments.

Daniel Nesbitt, Policy Executive, STEP 

OTS report supports STEP’s calls for simplification

Simon HodgesThe UK Office of Tax Simplification (OTS) has published its first report of its review into inheritance tax (IHT).  The report, in which STEP is widely quoted, finds that the process for completing IHT forms is too complex and old fashioned, and that too many people are having to fill them in unnecessarily.

The OTS is undertaking this two-part review of IHT in response to the request from the Chancellor of the Exchequer in January 2018. Since the review was announced, STEP has been in regular contact with the OTS. STEP’s response to the consultation was one of more than 3,500 to be submitted to the OTS, with the overwhelming majority seemingly negative about the IHT process.

The report concentrates on the concerns and administrative issues facing the public and professional advisors when confronted with the IHT process and related forms. It includes a number of positive recommendations, such as potentially reducing or removing the requirement to submit forms for smaller or simpler estates, especially where there is no tax to pay; having standardised requirements; and automating the system by bringing it online.

STEP has long argued that the IHT system is too complex, and that any moves to simplify the process, particularly through the implementation of a digital system, will be beneficial for bereaved families.

The Chancellor will now review the OTS recommendations before deciding whether to implement or ignore them. The key recommendation from the OTS, that ‘The government should implement a fully integrated digital system for inheritance tax, ideally including the ability to complete and submit a probate application,’ will be the mostly keenly watched, not least by STEP members.

As the report notes, inheritance tax and probate are closely linked, so it is timely that the OTS recommends that HMRC and HM Courts and Tribunals Service (HMCTS) liaise on streamlining the payment and probate process. As has been widely reported, legislation currently before the UK parliament would see a radical change to the probate fee system in England and Wales, and will mean an increase in fees for the vast majority of families. This approach has already been criticised in the House of Lords, and this latest OTS report further highlights the need to simplify the tax system surrounding death, rather than complicate it further.

We will keep members updated.

Simon Hodges is Director of Policy at STEP

UK trust taxation under review

Simon HodgesOn 7 November, the UK government launched its review into the taxation of trusts, almost a year after announcing it in the 2017 Autumn Budget.

The consultation, which will run until 30 January 2019, focuses on the principles of transparency, fairness and neutrality, and simplicity. The government’s stated aim is to ensure that the many people who use trusts will benefit from a ‘clear and transparent regime that is easy to understand’.

STEP welcomes the review, which provides an opportunity to address some of the complexities that exist around the current system of trust taxation and to suggest changes to the taxation of trusts that would be positive for both practitioners and their clients. It will also enable us to address any misconceptions around the uses of trusts.

Media around the consultation has, in many cases, focused on the issue of improving transparency in relation to trusts to prevent them being used for tax avoidance purposes. However, transparency is only one of the aims of this review, and the government acknowledges in the consultation document that there is already a large amount of ongoing activity in relation to trust transparency, and suggests that any new activity must take into account that the vast number of trusts are used legitimately.

STEP has already formed a working group to help respond to this important review, which includes senior members drawn from both the UK Technical and UK Practice committees. We have been in contact with HMRC since the review was announced, and will continue to engage as we develop our response further. We will keep members updated of further news in this area over the coming months.

Simon Hodges is Director of Policy at STEP

Do UK money laundering regs extend to trusts in other jurisdictions?

departure board europeanSTEP’s Isle of Man branch has flagged potential issues raised by the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (the Regulations) which give effect to the requirement of the EU Fourth Anti-Money Laundering Directive to have a central register of trusts, and reporting obligations on trustees.

The branch has queried whether the Regulations (Part 5, the trusts register) only apply to persons acting in the course of a business carried on by them in the UK (Regulation 8(1)). If this is the case, then Part 5 would not apply to trustees in the Isle of Man and elsewhere outside the UK.

As the Regulations are not part of the domestic law in jurisdictions outside the UK, it is unclear whether trustees in these jurisdictions have a ‘legal obligation’ to comply with Regulation 45. If there is a legal obligation for them to report, then conflicting data-protection issues may be generated under the domestic law.

In addition, the Regulations contain sanctions (fines and imprisonment) for non-compliance that HMRC, which manages the UK’s central register of trusts, may be able to enforce against trustees who do not comply.

STEP has raised these ambiguous points with HM Treasury (HMT), which laid the relevant Regulations, in order to gain some clarity. HMT has confirmed that its interpretation is that the definition of ‘non-UK trust’ within Part 5 of the Regulations extends to all express trusts that receive income from a source in the UK, or have assets in the UK on which they are liable to pay a relevant UK tax, regardless of whether they are established outside of the UK.

In these circumstances, HMT asserts that the trustees will indeed be required to comply with the record-keeping and, where relevant, registration requirements within Part 5 of the Regulations.

STEP will keep members informed on any further developments.

Emily Deane TEP is STEP Technical Counsel

What’s been happening at STEP in England and Wales?

Rita Bhargava TEPIt’s been a busy few months at STEP.

Our public-facing website advisingfamilies.org marked its first birthday on 22 May. Launched as part of a wider campaign to raise public awareness of STEP and TEPs, the site has clocked up over 130,000 visits, and over 700 followers on social media. Members and their firms have done much to contribute to the 74 articles posted, and we are always looking for more.

In recent months we launched a new global member recruitment campaign, Grow with STEP. It focuses on the benefits of STEP membership for your career and your business. The campaign follows the introduction in February of three globally consistent routes to membership: exam, essay and expertise. If you help spread the word and grow STEP’s network by referring a colleague, you will be entered into a draw to win an iPad.

GDPR had been on many people’s minds long before its 25 May introduction, and you’ll have received an email from STEP about your own data. STEP is working hard to ensure its systems and processes are robust and fully compliant.

GDPR has thrown up some interesting and complex question for practitioners, in particular regarding firms’ responsibilities to notify beneficiaries of trusts and wills about the information held on file. The Data Protection Act 2018, which recently passed through parliament, is also in the spotlight, as unlike its predecessors, it removes the legal advice exemption. STEP is looking to assemble a working group that can examine this and other issues in this area. If you are interested in being involved, please let us know at standards@step.org.

Many members have voiced their concern over HMRC’s online Trust Registration Service (TRS), which was introduced in late 2017 to implement the requirements of the EU Fourth Anti-Money Laundering Directive. All trusts and complex estates which generate a UK tax consequence are required to register, and then update information on an annual basis. Following initial teething problems, HMRC has confirmed it will take a ‘pragmatic and risk based approach to charging penalties’ for trust registrations made after the 5 March 2018 deadline, particularly where trustees or their agents have made reasonable efforts to meet their obligations under the regulations.

The European Council formally adopted the Fifth Anti-Money Laundering Directive in May, bringing in further changes to trust registration. 5MLD will extend the TRS to all UK express trusts and non-EU trusts that own UK real estate or have a business relationship with a UK Obliged Entity. The new Directive will require HMRC to share the trust data with Obliged Entities and anyone with a ‘legitimate interest’ – a term yet to be defined in full. You can read more about the latest developments with the TRS in an earlier STEP Blog post. STEP is liaising with HM Treasury on this, so watch out for further updates in the UK News Digest.

Finally we have a packed autumn ahead. The UK Tax, Trusts and Estates Conference series starts in Manchester on 4 September, moving to London on 21 September, York on 2 October and finishing in Bristol on 16 October. And for those of you looking to network with members from across the world, our third Global Congress is in Vancouver on 13-14 September.

Back in London, the Private Client Awards are being held later than usual on 7 November at the Park Plaza Westminster Bridge. We were delighted to receive more than 250 entries from 23 countries, and the finalists were announced on 6 August. Good luck to all of you who have entered, and don’t forget to book your place at the event before it sells out.

Rita Bhargava TEP, Chair, STEP England & Wales Regional Committee

The future of the Trust Registration Service

Emily Deane TEPUpdate: 4 September 2018

HMRC would like to notify members regarding a mismatch problem with the SA950 Trust and Estates Tax Return Guide and the SA900 2017/18. The original guidance notes indicated that untaxed interest could be declared at boxes 9.2 to 9.4 when in fact, if box 9.3 is populated with ‘0’, automatic capture of the return will fail. This has caused a backlog of rejected returns requiring manual capture and, therefore, significant delays. The correct action is that all untaxed interest should be declared at box 9.1 instead. The SA950 guidance notes were updated on 24th August to reflect this. HMRC’s Software Developers Support Team has been in touch with commercial software suppliers to alert them of the change.

The next issue of HMRC’s Agent Update due for publication 17 October 2018 will also highlight this issue.

Original blog:

STEP attended a meeting with HM Revenue & Customs (HMRC) and HM Treasury (HMT) last month to discuss the operation of the Trust Registration Service (TRS) and its progress, and the implementation of the EU’s Fifth Anti-Money Laundering Directive (5MLD). The following feedback was provided.

Operation of TRS

The TRS GOV.UK guidance should be published by the end of June 2018. The 22 November FAQs (hosted on STEP’s website) will not be updated in the meantime.

HMRC has allocated a 15-month timeframe to enhance the online functionality and make it more efficient for future service. It will be seeking volunteers to assist with piloting the new system shortly.

In situations where non-resident trustees have bought a UK property (and paid Stamp Duty Land Tax – SDLT), but have no UK income tax or capital gains, they should not be receiving demands for four years’ tax returns from HMRC. This will be addressed.

Named beneficiaries must be identified on the TRS, which is part of the EU Directive, and HMRC is constrained on this point.

HMRC is aware of the issue where the system requires the Unique Tax Reference (UTR), trust name or postcode to be matched to HMRC’s records, and access is being denied.

Delays to UTRs being received following registration of trusts and complex estates are being investigated.

HMRC will endeavour to produce more guidance on complex estates in the GOV.UK guidance.

The paper and online system will be amalgamated as soon as is practical.

HMRC is aware of the widespread dissatisfaction around the penalties, and has confirmed that it will take a soft approach this year.

HMRC introduced dummy variables to enable registration to proceed on the TRS, but will no longer accept them.

There will be no more trust registration deadline extensions in 2018.

HMRC is considering changing the March deadline to align with the Self-Assessment deadline, 31 March or 5 April.

The 28-day period to save and return data will be reviewed, and possibly extended.

The functionality is still not available to complete Q20 on the SA900, which should be left blank.

EU 5MLD

The EU’s 5MLD will extend the TRS to all UK express trusts and non-EU trusts that own UK real estate or have a business relationship with a UK Obliged Entity. The new Directive will require HMRC to share the trust data with Obliged Entities and anyone with a ‘legitimate interest’ – the latter term will be defined in full in due course. STEP is liaising with HMT on this.

HMT is planning to publish a policy consultation in winter 2018/19* that will last for eight weeks, followed by a consultation on draft legislation in spring 2019* that will last for four weeks.

5MLD is expected to come into law at EU level later in June 2018, with a transposition deadline of around December 2019, and an implementation deadline of around February 2020.

STEP will keep members apprised of any further developments.

*corrected date

Emily Deane TEP is STEP Technical Counsel

The Gift Aid tax gap

Emily Deane TEPSTEP is working with HMRC on a Gift Aid working group set up to explore options to maximise the amount of Gift Aid that charities can claim on donations, together with ways of increasing customer understanding of the system and how it works. HMRC is also investigating opportunities to improve the way that Higher Rate Relief is claimed; and whether it works as intended, is future-proof and provides the relief in the best way possible.

HMRC began the process by instructing an external research company to look into charitable giving and the use of Gift Aid. Its specific objectives were to estimate the value of the Gift Aid tax gap and unclaimed Gift Aid, and develop an understanding of correct and incorrect behaviours among donors.

The report has found that 25 per cent of the value of donations made in the 12 months prior to interview did not have Gift Aid added to them where the donor was eligible, contributing up to GBP560 million to the value of unclaimed Gift Aid. This represents potential missed income for charities and is generated by eligible donors who only sometimes (30 per cent), or never (18 per cent), add Gift Aid to their donations. It is mostly driven by a lack of opportunity for donors to add Gift Aid, and to a lesser degree, by failing to understand what Gift Aid is, or where they are eligible to add it.

The report also finds that 8 per cent of the value of donations had Gift Aid incorrectly added to them by ineligible donors, generating a Gift Aid tax gap of up to GBP180 million. This is caused by ineligible donors who always (5 per cent) or sometimes (10 per cent) add Gift Aid, partly where they do not understand the relief, and partly where they misunderstand what it means to be a taxpayer. This has resulted in donors who are not taxpayers attempting to add Gift Aid, where they are not eligible to do so.

Better understanding of these issues would lead to a drop in Gift Aid claims among ineligible donors, and a rise in claims among eligible donors. It was recommended to provide information about (1) Gift Aid eligibility criteria (ie clarifying what it means to be a UK taxpayer, and that the donor must be one to add Gift Aid to their donation) at every opportunity, and (2) the benefits of Gift Aid at the point of donation; to help effect the change.

The report, Charitable giving and Gift Aid research, is published today, accompanied by a press release issued by HM Treasury and HMRC.

If you have any questions or suggestions please email STEP’s Technical Counsel – Emily.Deane@step.org.

Emily Deane TEP is STEP Technical Counsel

HMRC announces trustees, NOT agents, will be liable for penalties

HMRCUpdate 23 March: HMRC has updated its guidance to clarify that if a penalty is payable for late registration, it will be the burden of the lead trustee and not the agent.

We received the following communication from HMRC on 5 March 2018:

‘On 8 December 2017, HMRC announced that while the 31 January 2018 deadline for making a Trust Registration Service (TRS) return would remain in place, we would not charge a penalty if the lead trustees failed to register their trust on the TRS before 31 January 2018 but no later than 5 March 2018.

HMRC will not automatically charge penalties for late TRS returns. Instead we will take a pragmatic and risk-based approach to charging penalties, particularly where it is clear that trustees have made every reasonable effort to meet their obligations under the regulations. We will also take into account that this is the first year in which trustees have had to meet the registration obligations.

While our information suggests that most TRS returns have been filed, if you have not yet completed your TRS registration(s), you should do so as soon as possible.

When penalties can be issued

Penalties can be charged for administrative offences relating to a relevant requirement.

These are:

• a requirement to register using the TRS by the due date of 31 January after the end of the tax year in which the trustees pay tax on trust assets or income and
• a requirement to notify any change of information by the due date of 31 January after the end of the tax year in which the trustees pay tax on trust assets or income.

The administrative offences penalty

HMRC will charge a fixed penalty to reflect the period of delay:
• Registration made up to three months from the due date – £100 penalty
• Registration made three to six months after the due date – £200 penalty
• Registration more than six months late – either 5% of the tax liability or £300 penalty, whichever is the greater sum.

There is currently no facility to notify HMRC of any change of information online and, as such, we will not charge penalties for a contravention of this requirement until the online function is available.

A penalty will not be payable if we are satisfied you took reasonable steps to comply with the regulations.

HMRC also has the power to apply a penalty for money laundering offences under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692.

These offences are more serious than administrative offences. HMRC will not bring these penalties in immediately. HMRC will consult on the structure of these penalties later this year, to ensure the penalty regime is fair and proportionate whilst cracking down on money laundering offences.’

It had been unclear, following this communication, whether the penalties would apply to the person dealing with the trust’s registration affairs, whether that be the lead trustee or the agent. HMRC has now confirmed that the lead trustee will become liable for the penalty, and not the agent.

HMRC has also confirmed to STEP that in scenarios where trusts have an income tax or CGT liability for previous years but are not registered for self-assessment then trustees do not need a Unique Tax Reference for this process, and HMRC recommends that the trustees submit an IHT100 as soon as possible.

Emily Deane TEP is STEP Technical Counsel

HMRC message regarding SA900 forms

Simon HodgesUpdate: 18 January

Further to the post last week alerting members to an issue with SA900 forms, HMRC has issued the following update:

‘In December 2017, we advised of an issue affecting a small number of SA900 forms filed electronically which resulted in some inaccurate calculations where there is a capital gain liability. The problem has now been resolved and calculations should now be correct for returns filed from 16 January 2018.

As previously advised, you should pay the tax that you calculated as being due by the payment deadline of 31 January. If you have already filed, your return will be checked and corrective action taken where necessary.’

Original blog:

STEP has been alerted by a member to an issue affecting the calculation of tax by HMRC of those who have submitted SA900 forms electronically. The issue was first spotted just before Christmas, when it appeared that the HMRC systems had been incorrectly calculating capital gains tax. The member was informed that the records would be amended within three working days.

Having contacted HMRC, STEP has been asked to disseminate the following message from HMRC to our members:

• We are aware of an issue affecting a small number of SA900 forms filed electronically. This is resulting in inaccurate calculations being issued in self-calculation cases where there is a capital gain liability. We are fixing this problem and expect it to be resolved very soon, and will update you when the matter has been resolved.

• If you have opted to self-calculate the liability due on your SA900, we ask you to use your self-calculated amount when you make a payment against your SA account by the due date.

• We are sorry for any inconvenience.

We will keep our members informed of progress.

Simon Hodges is Director of Policy at STEP.

Update: TRS now open to agents

Simon HodgesUpdate: 19 October

HMRC has asked us to disseminate the following:

‘The new TRS is now available for agents to use. As part of this online process, agents will be taken through the steps to create an Agent Services account before they can register on behalf of trustees.

Agents use the link from www.gov.uk/trusts-taxes/trustees-tax-responsibilities to register a trust. As part of that journey, the agent will be asked to create an Agent Services account, and the agents will be directed to request access to the Trust Registration Service by email. The agent will receive a response from HMRC giving them access to Agent Services and some guidance on what to do next. Once they have created an Agent Services account they will be directed to the Trusts Registration iform.

In registering for an Agent Services Account they will have been identified as seeking to access the TRS, and will not be offered the option of linking existing government gateway IDs and client relationships. This is only undertaken by agents participating in the controlled go live of MTDfB.’

We are aware, however, that there are reports that Agent Services – and, therefore, TRS – will not be fully live for agents until the end of October or the beginning of November, though this may be subject to change. We will update members as and when we get more information. In the meantime, we have reported on the TRS issues in today’s Industry News: UK Online Trust Registration Service now available to agents.

Original blog

HMRC has confirmed that, from last night (17 October), the Trust Registration Service (TRS) is now available to agents filing on behalf of trustees. This follows last week’s announcement, that due to technical errors, there were delays in allowing agents access to the system.

HMRC has also confirmed that there will be no penalty imposed where registration is completed after 5 October 2017 but before 5 December 2017. STEP has inquired with HMRC whether there is any potential flexibility in that deadline, and we will update members on the outcome of those discussions. However, at the time of writing, the deadline of 5 December remains.

HMRC’s statement in full:

‘From today, the Trust Registration Service (TRS) is available to agents filing on behalf of trustees. Please see the following link for further details on how to gain access to the TRS: www.gov.uk/trusts-taxes/trustees-tax-responsibilities.

The new TRS allows agents, acting on behalf of trustees, to register trusts and complex estates online and to provide information on the beneficial owners of those trusts or complex estates. The new service, which was launched in July 2017 for lead trustees, replaces the 41G (Trust) paper form, which was withdrawn at the end of April 2017. This is now the only way that trusts and complex estates can obtain their SA Unique Taxpayer Reference. As part of this online process, agents will be taken through the steps to create an Agent Services account before they can register on behalf of trustees.

In this first year of TRS, to allow sufficient time to complete the registration of a trust or complex estate for SA and provide beneficial ownership information, there will be no penalty imposed where registration is completed after 5 October 2017 but before 5 December 2017.

For both UK and non-UK express trusts which are either already registered for SA or do not require SA registration, but incur a liability to relevant UK taxes, the trustees are required to provide beneficial ownership information about the trust, using the TRS, by 31 January following the end of tax year. This means, if the trustees of a UK or non-UK express trust incurred a liability to any of the relevant UK taxes in tax year 2016-17, in relation to trust income or assets, then the trustees or their agent need to register that trust on TRS by no later than 31 January 2018.

The relevant taxes are:
• income tax
• capital gains tax
• inheritance tax
• stamp duty land tax
• stamp duty reserve tax
• land and buildings transaction tax (Scotland).

The new service will provide a single online service for trusts to comply with their registration obligations. This will improve the processes for the administration of trusts and allow HMRC to collect, hold and retrieve information in a central electronic register.

More information is available in HMRC’s September Trusts & Estates Newsletter.

Finally, on Monday 9 October we published our guidance in the form of an FAQ note to help our customers understand the TRS requirements.’

Simon Hodges is Director of Policy at STEP.