The difficulties suffered by the appellant during and following the prolonged illness and eventual death of her parents constituted a reasonable excuse for the purposes of an appeal against a penalty for the late filing of her tax return.

HM Revenue and Customs (HMRC) issued a notice on 6 April 2011 for the appellant,  a  self-employed therapist, and counselor, to file her tax return for 2010/11. The appellant failed to submit her tax return until 17 September 2012 and HMRC imposed late filing penalties (under FA 2009, Sch 55) amounting to £1,300.

The appellant appealed. In January 2013, the appellant’s agent wrote to HMRC. His letter stated that the appellant approached him in June 2012 to bring her tax affairs up to date, after caring in the previous four years for her two elderly parents in their terminal decline.

The agent’s letter to HMRC was accompanied by a letter of appeal from the appellant dated 10 December 2012. The appellant explained that (among other things) her mother had suffered a succession of strokes, and spent the last 15 months in the hospital prior to her death. Furthermore, the appellant’s father was diagnosed with terminal cancer and she had provided care to him.

The appellant’s mother died in April 2010, and her father died in September 2010. The appellant then had to deal with their affairs. Her letter pointed out that probate on her father’s estate was about to be granted. However, HMRC dismissed her appeal on the grounds that it was out of time.

The First-tier Tribunal (FTT) found it difficult to understand why HMRC considered that the appellant’s letter did not lead them to conclude that the conditions for a reasonable excuse for failing to submit the tax return on time had not been met, to enable them to accept the late appeal. The FTT’s impression was that HMRC issued a standard response letter to out of time appeals, without properly considering the appeal letter.

The FTT considered that the appellant had clearly gone through a prolonged period of difficulty, and it was understandable that during this period the appellant omitted to give proper attention to her tax affairs. HMRC argued that the appellant was able to continue her business, so there was no reasonable excuse or special circumstances. However, the FTT disagreed and stated that the appellant had to work to support herself and pay the everyday expenses of keeping her home. The FTT held that the appellant had established a reasonable excuse for the late submission of her tax return for 2010/11. The appellant’s appeal was allowed.

McDonald v Revenue and Customs [2017] UKFTT 265 (TC)

A partnership’s ‘paper’ (i.e. non-electronic) tax return was held to have been submitted before the  statutory filing deadline, despite HM Revenue and Customs contending that the return had been filed late  and seeking penalties for its late submission.

The appellant partnership’s tax return for 2010/11 was filed non-electronically. It was received by HM Revenue and Customs (HMRC) on 11 September 2012 and processed on 19 September 2012.

HMRC issued late filing penalties (under FA 2009, Sch 55), on the basis that the appellant’s tax return for 2010/11 was required to have been filed on 31 October 2011. The appellant appealed, on the basis, it was not accepted that the return had been filed late.

The First-tier Tribunal (FTT) noted that the return was dated 26 October 2011. The FTT accepted, on the balance of probabilities, that it had been filed non­ electronically before 31 October 2011. A copy of the return, certified by the appellant’s agents and verified as delivered to HMRC on 26 October 2011, was submitted as evidence, which the FTT accepted.

The FTT noted that there had been a dispute between the appellant and HMRC concerning the late filing of the partnership’s tax return for the tax years 2008/09 and 2009/10. Copies of the completed returns, bearing the stamp of the agents, were produced by the appellant. The return for 2008/09 was completed non-electronically and dated 30 October 2009. The return for 2009/10 was also completed non-electronically and dated 27 October 2010. The return for each of those earlier years appeared to the FTT to have been accepted by HMRC.

The FTT decided it was highly improbable that the appellant’s agents would have failed to submit the partnership’s tax returns for 2008/09, 2009/10 and 2010/11, particularly when the firm had confirmed to the appellant that each return had been filed by the due date. Furthermore, there was evidence, in the opinion of the FTT, that the appellant had questioned the agents about the filing of each return at the relevant time, and that the agents had sufficient time to file by the due date.

In addition, the FTT was not satisfied that HMRC had demonstrated that its procedures for recording receipt of a return were sufficiently robust to prevent an administrative failure in processing the partnership tax return for 2010/11. The appellant’s appeal was allowed.

Englefield (t/a Englefield Carpenters) v Revenue and Customs [2017] UKFTT 247 (TC)

Changes to the taxation of dividends have reduced the tax advantages associated with operating as a company. Add into the mix the additional burdens imposed on companies – such as the need to file accounts and an annual confirmation statement at Companies House – and it is easy to see why the question of whether it would now be better to operate as an unincorporated business may arise. However, while it is relatively easy to incorporate a business and reliefs are available to smooth the way, going from a company to an unincorporated business is less straightforward, and may trigger unwanted tax charges.

Enter disincorporation relief

Disincorporation relief allows a company to transfer certain types of assets to its shareholders who continue to operate the business in an unincorporated form, without the company incurring a corporation tax charge on the disposal of the assets.

Without the benefit of the relief, transferring assets to shareholders may trigger a corporation tax charge. A transfer between a company and its shareholders is one between connected persons, and as such, the transfer is deemed to be at market value, regardless of the actual money, if any, which changes hands. If the market value is more than the original cost or tax written down value, this will trigger a corporation tax charge.

Disincorporation relief essentially delays the charge and passes it to the shareholders, who agree to use the transfer value as the cost of working out any gain on a subsequent disposal of the asset.

Eligibility

Disincorporation relief is only available where:

• the company transfers its business to some or all of its shareholders;
• the transfer is a `qualifying transfer’; and
• the transfer date is on or after 1 April 2013 and on or before 31 March 2018.

The business must be transferred to individuals or to individuals who are in partnership (but not to a limited liability partnership), and they must continue to run the business afterward. The relief must be claimed jointly by the company and its shareholders.

Qualifying transfer

The relief is only available for a qualifying transfer. This is a transfer where all the following conditions are met:

• the business is transferred as a going concern;
• the business is transferred together with all the assets of the business, or together with all the assets of the business apart from cash;
• the total market value of the business at the time of the transfer is £100,000 or less;
• the shareholders to whom the business is transferred are individuals (including individuals in partnership); and
• the shareholders holding shares in the company throughout the 12 months before the transfer.

Qualifying assets are an interest in land (other than land held as trading stock) and goodwill (though an adjustment may apply if the goodwill relates to a business started on or after 1 April 2002 or acquired from an unrelated third party on or after that date).

Final curtain

At its introduction, disincorporation relief only applied to transfers occurring within a five-year window – 1 April 2013 to 31 March 2018. It was announced at the time of the Autumn 2017 Budget that the end-date will not be extended, and as such disincorporation relief will not be available for transfers after 31 March 2013. The transfer date is normally the date that the business is transferred but may be a different date for a disposal under contract.

Where the intention is to disincorporate, the clock is running on the availability of disincorporation relief.