Orchid Properties (a partnership) v Revenue & Customs [2010] UKFTT 329 (TC)

FTT-Tax
Orchid Properties (a partnership) v Revenue & Customs
[2010] UKFTT 329 (TC) · 2010-07-09
[1]This is an application by the Appellant, under rule 8 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, for a direction that HMRC be barred from taking part in that part of the proceedings that relates to its case that, in circumstances I shall describe, taper relief from capital gains tax should be restricted.[2]Alun James appeared for the Appellant. HMRC were represented by Kim Sukul of the Appeals and Reviews Unit. Background[3]The Appellant is a partnership. In 1996 it acquired a property at 1 Turret Lane, Ipswich. It sold that property in December 2002. In its self-assessment return for the tax year ended 5 April 2003 the Appellant included a capital gain in respect of the sale, which it calculated on the basis that the chargeable gain was eligible for business asset taper relief.[4]On 14 January 2005, HMRC opened an enquiry into the 2003 partnership return. On 13 October 2006 a closure notice was issued under section 28B(1) and (2) of the Taxes Management Act 1970 (“TMA”). The closure notice stated:
“I have now completed my enquiry into your Partnership Tax Return for the year ended 5 April 2003. My conclusion is that Turnover should be increased by £1,150,002 and Expenses should be increased by £3,900. The Capital Gains should be reduced to Nil. I am amending your Return to reflect this … My amendment Your return is amended as follows: The partnership profit before my enquiry was £42,839.00. My amendment results in a £1,146,102.00 increase in profit. The amended partnership profit is now £1,188,941.00. ”
[5]A partnership statement was issued in respect of the same period, showing the adjustments to the partnership totals to reflect the closure notice conclusion and the amendments. That recorded “Profit from Trade” at £1,188,941, and the figure for “Disposal of Assets” at “£0.00”.[6]The Appellant appealed to HMRC against the closure notice. There followed a review by HMRC which concluded with a letter dated 29 October 2009 stating that the decision in the closure notice should be upheld. That letter set out the point at issue in the following terms:
“ Point at issue Whether the purchase and sale of the property at Turret Mills Ipswich was part of the partnership’s trading activities or was by way of an investment. If the transactions were part of a trade, the profit falls to be taxed under the Case I rules in Schedule D. If the purchase and sale were by way of investment, the gain on the sale of the property would give rise to a gain, which would be taxed under the capital gains tax rules. HMRC have indicated that, should the Tribunal find that the transaction was by way of an investment, they would argue that, because the land was not a trading asset, taper relief should be restricted. Your agent has argued that HMRC are precluded by a recent High Court decision from advancing this alternative argument at Tribunal.”
[7]The Appellant notified its appeal to the tribunal on 25 November 2009. The issue on this application[8]By its application the Appellant effectively seeks to strike out that part of HMRC’s case that relates to the restriction of taper relief from CGT. It does so on the basis that the tribunal has no jurisdiction to hear that part of the case. The tribunal’s jurisdiction derives from section 50(6) and (7) TMA which provide that if the tribunal decides that the appellant is overcharged or, on the other hand, undercharged, by a self-assessment, or decides that any amounts contained in a partnership statement are excessive or are insufficient, those assessments or amounts shall be reduced or, as the case may be, reduced accordingly. The Appellant says that the closure notice contained no reference to the taper relief restriction now sought to be argued, and that accordingly HMRC are precluded from raising those arguments. Discussion[9]The question of the extent to which the conclusion stated in the closure notice and the appeal against that conclusion limits the jurisdiction of the tribunal was considered by the Court of Appeal in Tower MCashback LLP 1 and another v Revenue and Customs Commissioners [2010] STC 809 . On this issue the Court held, by a majority (Moses and Scott Baker LJJ, Arden LJ dissenting), that an appeal under section 31(1)(b) TMA against the conclusion stated in a closure notice is confined to the subject matter of the enquiry and of the conclusions. However, the jurisdiction of the tribunal is not limited to the issue whether the reason for the conclusion was correct. Any evidence or legal argument can be entertained by the tribunal subject only to its obligation to ensure a fair hearing.[10]In delivering the leading judgment of the majority, Moses LJ took the view, agreeing in this respect with Henderson J in the High Court, that an appeal against a closure notice did not permit a general roving enquiry into the return. The subject matter of the appeal is defined by the subject matter of the enquiry and the subject matter of the conclusions which close that enquiry. He recognised, however, that questions would arise as to the boundaries of the subject matter of the conclusions. This application raises such questions.

Lord Justice Moses said (at [37], [38]):

“ [37] Parliament has not chosen to identify some legal principle defining the limitations on the scope and subject matter of an enquiry and consequently an appeal. In those circumstances, I think it would be wrong for the court to attempt to do so. Any statement of principle is likely to condemn both taxpayer and the Revenue to too rigid a straitjacket. It might prevent a taxpayer from advancing a legitimate factual or legal argument which had hitherto escaped him or deprive, on the other hand, the public of the tax to which it is entitled. [38] With those nebulous observations, I would leave it to the commissioners and now the First-tier Tribunal to identify the subject matter of the enquiry and thus the subject matter of the conclusions. In doing so, the First-tier Tribunal will have to balance the need to preserve the statutory protection for the taxpayer afforded by notification that the inspector has completed his enquiries and the need to ensure that the public are not wrongly deprived of contributions to the fisc.”
[11]Tower MCashback concerned a claim for first-year capital allowances under section 45 of the Capital Allowances Act 2001 in respect of qualifying expenditure on completion of software licence agreements. Following an HMRC enquiry a closure notice was issued in which the conclusion stated was that “The claim for relief under s 45 CAA 2001 is excessive.” The inspector wrote to the appellants’ accountants that he was satisfied that the scheme failed on the section 45(4) point alone. HMRC having abandoned their contention under section 45(4), the court held that the Special Commissioner had been right to conclude that he had jurisdiction to consider further grounds for denying the appellants’ claims, namely that the appellants had not incurred expenditure in buying the software licences because the members of the appellant LLPs had borrowed 75% of the funds against security provided by the vendor on uncommercial terms.[12]Mr James argued that in Tower MCashback the new arguments raised were within the scope of the conclusions in the closure notice, and certainly specific to the same tax as was the subject of the amendment to that partnership return. No possible wider scope was contemplated by either side, or by the Court of Appeal itself. He argued that to widen the scope would rob the taxpayer of precisely the sort of protection which, it had been recognised, the self assessment regime is designed to avoid. Mr James submitted that this present case is very different from the circumstances of Tower MCashback . Here the closure notice concludes that there was an adventure in the nature of a trade and makes amendments to increase the assessable income figure and reduces the chargeable gain to nil. There is no conclusion or amendment as regards CGT being due in the alternative without business asset taper relief. There is therefore, he argues, no conclusion or amendment to appeal against in this respect, and nothing for the Tribunal to hear. He submitted that this is a much clearer case that Tower MCashback .[13]The task for me is to determine the subject matter of the enquiry and of the conclusions stated in the closure notice. I do not consider that I can derive any assistance from the facts of Tower MCashback or any other case. Each such case will depend on its own facts and circumstances. Lord Justice Moses made it clear that there was no legal principle defining the limitations on the scope and subject matter of an enquiry or an appeal. Still less can any principle be discerned from the facts of a particular case. As the Special Commissioner (Dr John Avery Jones CBE) said in D’Arcy v Revenue and Customs Commissioners [2006] STC (SCD) 543 (at [11]):
“The scope of an appeal against a conclusion or amendment made by a closure notice will depend on the facts. If the conclusion is that the officer does not believe that the records of the trading profit are complete and he fixes the profit at an estimated amount, the scope of the appeal may be wide enough to include any matters that make up the trading profit. If, on the other hand, the conclusion were that some item in the computation of the trading profit was non-deductible the appeal is restricted to whether or not it is deductible.”
[14]As Moses LJ makes clear in Tower MCashback , the question to be considered does not concern the reasons that underlie the conclusion in the closure notice. Nor is it confined to the conclusion itself. What must be established is the subject matter of the enquiry and the subject matter of the conclusion. There are, as Moses LJ identified, boundary issues in making this determination. Mr James argued that HMRC’s argument on taper relief was effectively a new conclusion, and that the subject matter of the original conclusion ought to be confined to whether the sale of the property was an adventure in the nature of a trade.[15]For HMRC, Ms Sukul argued that the question of the application of taper relief from CGT is clearly within the scope of the subject matter of the appeal. HMRC’s argument merely addresses the consequence of a tribunal finding against HMRC on the trading, or Case I, issue. Ms Sukul referred to the decision of the Special Commissioner (again Dr Avery Jones) in Chappell v Revenue and Customs Commissioners [2009] STC (SCD) 11 where, as the appellant in that case was unrepresented, the Special Commissioner had considered, in the light of the High Court judgment in Tower MCashback [2008] STC 3366 , whether HMRC were entitled to raise an argument that taper relief from CGT was not available, as well as an argument that income tax under Schedule D, Case I or Case VI was applicable. The Special Commissioner held that the issue was the relevant receipt and that since the taper relief contentions were different arguments of law on the same factual background, those arguments were permitted.[16]In my view, although HMRC’s conclusion and their amendments reflected the trading issue, the subject matter of the enquiry, and of the conclusion, was the purchase and sale of the property. Accordingly, I consider that the purchase and sale is the scope of the appeal over which the Tribunal has jurisdiction. The arguments of HMRC as regards the calculation of a chargeable gain, in the event that their trading argument does not succeed, and the appropriate application of taper relief, is within the scope of the subject matter of the conclusion and the scope of the appeal. The consequence of HMRC’s conclusion on the trading issue was not only an amendment of the partnership return to increase the trading profit; it also had the consequence of reducing the capital gains computation to zero. If the tribunal were to find for the Appellant on the trading profits point, the result would be to restore the Appellant’s self-assessment for capital gains. Simply to restore the Appellant’s calculation, including the application of business asset taper relief, would not be consistent with the duty of the tribunal to determine the amount of tax payable under section 50(6) and (7) TMA. As Moses LJ said in Tower MCashback at [42], “[p]rotection of the public revenue requires, at the least, that other issues arising from the subject matter of the enquiry ought to be considered”.[17]As regards the argument of Mr James that such a determination would deprive the Appellant of the protection against roving enquiries, I do not agree. Nor do I accept his submission that to allow HMRC to raise the taper relief issue would enable them to sidestep the time limits in the self-assessment system, and the conditions in section 29 TMA. It is clearly the case that the subject matter of an enquiry and its conclusion must be limited so as not to permit the kind of roving enquiry referred to in Tower MCashback, where it was accepted that the jurisdiction of what is now the tribunal is not unconfined and does not extend to determining a figure irrespective of whether it has any relationship to the conclusion or amendment. But I do not regard a determination that the subject matter of the conclusion in the closure notice was the purchase and sale of the property as giving rise to, or permitting, any form of roving enquiry. The enquiry remains confined to issues around the purchase and sale. Issues not related to that particular subject matter remain outside the scope of the appeal, and time limits and limitations on discovery assessments would apply to those issues.[18]Mr James argued that the issue of taper relief did not arise out of precisely the same facts as those applicable to the trading profits question. I accept that may be so, since although the factual contexts will no doubt overlap, there might be facts specific to the issue whether the property was used, wholly or partly, for the purposes of a trade, and these may well be different from the facts applicable to whether the property is a trading asset. However, factual context is not the determining factor. It would be wrong, as Moses LJ made clear in Tower MCashback (at [37]), to attempt to identify a legal principle, such as factual context, in defining the subject matter of the appeal. The scope of the factual enquiry needed to determine the issues regarded as falling within the scope of the appeal is relevant, but not in my view to determine the scope of the appeal. As Moses LJ also makes clear (at [42]), factual as well as legal issues may be introduced, provided they arise out of the subject matter of the enquiry. Once such an issue has been identified, the relevance of the need for further factual enquiry goes to the question whether it would be fair in the circumstances, as a matter of case management, to admit the issue.[19]I have referred already to certain comments of the Special Commissioner in D’Arcy. Mr James took me in particular to paragraph [12] of that decision, where the Special Commissioner said:
“I should add that, contrary to Mr Furness's [counsel for HMRC’s] contention I see no reason why alternative conclusions should not be stated in a closure notice with the amendment necessarily giving effect to the Revenue's preferred conclusion. Indeed, if they considered that an individual was liable either to income tax on a trading profit or to capital gains tax, it would seem to be essential that they could keep both options open. There is no need for the appeal system to allow scope for such alternative contentions when they are not stated in the closure notice.”
[20]The Special Commissioner’s decision in D’Arcy of course pre-dated Tower MCashback , both in the High Court and in particular in the Court of Appeal. It is the principles set out by the majority in the Court of Appeal that I must now apply. I do not regard D’Arcy as material to my decision here. The Special Commissioner was, in the passage referred to, responding to an argument on behalf of HMRC that it was not possible, under section 28A TMA, to have alternative amendments to a self-assessment in the way the Revenue used to be able to make alternative assessments. The context was the Special Commissioner’s view that it was “inherent in the appeal system that the tribunal must form its own view on the law without being restricted to what the Revenue state in their conclusion or the taxpayer states in the notice of appeal” (paragraph [13]). In Tower MCashback , as I have already alluded, Moses LJ saw no reason to confine that view to legal issues. He said (at [42]):
“Provided a party can be protected from ambush, the only limitation on issues which might be entertained by the special commissioner is that those issues must arise out of the subject matter of the enquiry and consequently its conclusion, and be subject to the case management powers to which I have referred.”
[21]In my view it would be wrong to seek to derive any principle from the remarks in D’Arcy . The Special Commissioner was referring to a particular example of possible circumstances that are not the same as those in this appeal. In any event, it appears that the same Special Commissioner did not feel constrained by his own comments in D’Arcy from finding as he did in Chappell .[22]Mr James sought also to distinguish Chappell . He argued that the facts of Chappell suggested that there might have been a conclusion in the closure notice in that case (if not an amendment) that no taper relief was available. Secondly, he argued that in this case, in contrast to what had been found in Chappell , the arguments on trading and on taper relief were not simply arguments on the same facts. Thirdly, his argument was that, again unlike Chappell , the subject matter of this appeal should be confined to the conclusion that income tax is due on the adventure in the nature of a trade and the consequent amended self-assessment to income tax.[23]I have already considered, and rejected, Mr James’ arguments on factual background, and I have concluded against him on the subject matter of the appeal. I place no reliance on Chappell , and consequently do not need to consider whether it can be distinguished on its facts in the way Mr James suggests.[24]That leaves me to consider whether, in exercise of the tribunal’s case management powers, there is any reason why, in the interests of fairness and justice, I should not allow HMRC to introduce the taper relief issue and should effectively strike out that part of HMRC’s case. Mr James argued that the taper relief issue would add significantly to the length and cost of the hearing, because it raises new factual and legal issues. He said that there may well be difficulties for the Appellant in assembling evidence at this stage, such is the delay since the events actually occurred. However, I received no evidence of any such difficulty, and no specific problems were identified to me.[25]In considering this, my starting point is that the interests of justice point squarely to my allowing all relevant issues, within the scope of the subject matter of the conclusion in the closure notice, to be heard, in order that the tribunal may perform its statutory duty of determining the proper amount of tax payable. I do not consider that it would be unfair to the Appellant in this case to allow the taper relief issue to form part of HMRC’s case. There was no evidence of actual prejudice, and it is clear to me that this is not a case where the Appellant can claim to have been ambushed. The taper relief issue became known to the Appellant at the latest during the course of the HMRC review of the appeal made to them against the closure notice and amendment, and it was referred to in HMRC’s review letter of 29 October 2009, prior to this appeal being notified to the tribunal. The Appellant itself self-assessed for capital gains tax for the relevant tax year on the basis of the application of business asset taper relief, and so it is reasonable to assume that it did so on the basis of evidence of fact then at its disposal. Decision[26]For these reasons, I refuse the Appellant’s application. I make no order for costs. Future conduct of appeal[27]The parties are invited to agree directions for the future conduct of the appeal in the light of this decision, failing which there is liberty to apply. ROGER BERNER TRIBUNAL JUDGE RELEASE DATE: 13 July 2010