Dealing with HMRC (and Winning)
The lockdown has been a huge change for everyone, and we’ve all had to adjust to remote working. It’s business as usual at Leathers but we’ve noticed some not-so-subtle changes in the tax landscape.
A key part of our role as tax advisers is to deal with HMRC on behalf of our clients. Given some of the recent correspondence that we’ve had with HMRC, it would appear that the lockdown is affecting them too. In the circumstances, this is completely understandable however advisers need to be extra vigilant; resources within HMRC will be stretched, and we would imagine soon (if it’s not already the case) Inspectors will be tasked with increasing their tax recoveries. Anecdotally, we’ve heard that HMRC’s responses to correspondence have been, perhaps, more inconsistent than usual, with a slightly more “aggressive” tone.
Our approach has always been to engage with HMRC as early as possible and open channels of dialogue to allow matters to be discussed sensibly (sometimes written correspondence can be inadvertently misconstrued). As HMRC offices remain closed, this is proving somewhat problematic, but it remains our approach as it is incredibly important.
Case Study: South Shields Football Club – An Extra Time Winner vs HMRC
A recent and successful example of this relates to an Enterprise Investment Scheme (EIS) Advance Assurance application for South Shields Football Club. These are detailed applications, which are often critical for clients aiming to secure external investment due to the generous tax reliefs on offer under EIS. South Shields FC has ambitious and significant plans for growth, with an aim to move towards fan ownership to the benefit of the local community; without EIS Advance Assurance, the investment proposition for fans and investors simply isn’t as attractive.
This was a particularly complex case involving a pre-transaction group restructure, various group entities undertaking different functions and potential non-qualifying activities; following the submission of a substantial Advance Assurance application, HMRC responded with a number of short queries, which we responded to in detail.
Unexpectedly, HMRC rejected the application on the grounds that a “football club trade” had been carried on longer than the permitted time period, and this same trade continued into the new venture setup when Geoff Thompson took over as owner and chairman of the club in 2015. Whilst we felt that sufficient information had been given in the original application, HMRC had given their view. Ordinarily, this would be the end of the matter and, the only way to appeal would be via a tribunal after further stages of the EIS process.
It was at this point we called the Inspector to have a discussion. We were conscious that HMRC were making assumptions, and if we were to provide further information, HMRC would understand that this was a completely new trading venture. Initially, the Inspector was reluctant to revisit the application or reverse their decision based on the information they had seen to date. However, to HMRC’s absolute credit, once it became apparent during the call we could provide further information, HMRC were more than happy to review this as part of the same application.
In order to demonstrate the commencement of a new trade, we went back to basic principles (the “badges of trade”) and applied these to the current situation; it was essential to show the difference between the historic activities and the new commercial venture. We worked closely with the club’s owner Geoff Thompson and the Managing Director Keith Finnigan to gather as much information as was possible; whilst they were not involved in the club prior to 2015, their knowledge of the commencement of the new trade helped point us in the right direction. Our research required us to analyse case law and consider the history of the group (we even took the step of purchasing the book “From Eden to Paradise: The Incredible Fall and Rise of South Shields Football Club” by Ross Gregory, which chronicled the football club’s recent history through to their famous FA Vase win of 2017).
HMRC responded within 28 days, reversing their decision and granting the Advance Assurance. A great result and a potentially incredibly valuable result to the football club, especially the current climate.
Geoff Thompson, club chairman and owner of South Shields FC was delighted with outcome:
“We’ve been working closely with the team at Leathers to help realise our plans for the club, looking towards the ultimate goal of becoming a community-based, sustainable Football League-ready club over the next 5 years.
The launch of our £1million shareholder funding round in November 2019 has received extremely positive feedback . However, it was critical that we secured EIS Advance Assurance so that we could offer investors the opportunity to benefit from tax relief. This could be the difference between turning potential interest into genuine investment in the club.
HMRC’s initial rejection of the application came as shock, but the Leathers team worked diligently, challenging HMRC and achieving a fantastic outcome. Thankfully, this has provided some comfort and certainty for the club in these difficult times.
We’ve had our setbacks, but with the incredible support of our fans and friends of the club, our message to the fans is that we are still very much committed to the growth plans. Ground improvements are progressing well and we’re engaging in new community initiatives every week. We’re already looking ahead to a time when we welcome football back to the improved Mariners Park.”
To sum up a few key takeaways from the above:
- Engage in dialogue with HMRC at the earliest opportunity and invite discussions via phone calls (and meetings eventually!)
- Challenge HMRC decisions where you have case to make and be confident in your own approach, analysis and knowledge
- Be prepared for a change in HMRC’s approach to correspondence and their appetite for recovery of tax as a consequence of the Covid-19 pandemic.
Feel free to get in touch with Barry for any tax related matters; he would be delighted to assist.