Howell v Revenue & Customs [2011] UKFTT 179 (TC)

FTT-Tax
Howell v Revenue & Customs
[2011] UKFTT 179 (TC) · 2011-03-16
[1]This was an appeal against a decision made on review and communicated to the Appellant by letter from the Respondent dated 20 January 2010. The decision confirmed discovery assessments for income tax raised by the Respondents under the provisions of section 29 Taxes Management Act (“TMA”) 1970 against the Appellant for the years from and including 1996/97 to and including 2003/04. The amount in dispute between the parties as stated in the Appellant’s Notice of Appeal is £11,595.27. Background to the appeal[2]The history of this appeal can be simply stated. The Appellant, David Howell, entered into a business arrangement with one Bradley Clive Wood (“Mr Wood”) and his wife Mary Margaret Hazel Wood (“Mrs Wood”) on or about 1 April 1995. The parties subsequently executed a formal partnership deed on 10 May 1996 which was said to be effective from 1 April 1995. The business was concerned with the sale and maintenance of refrigeration and catering equipment and was known as Excel Refrigeration. The Woods transferred into the business of the new partnership by way of introducing capital, the assets of the business formerly conducted by them under the same name but excluding the value of the outstanding liabilities of that business. For his part the appellant introduced as capital the sum of £20,000.[3]Under the terms of the partnership deed the appellant was to receive a salary of £20,000 per annum or such other sum as the parties might agree, 5% of the partnership profits and a bonus of 1% of turnover in excess of £750,000 in any 12 months accounting period expiring on 31 March in any year or on such other date as the parties might agree. The partnership deed contained detailed provisions as to the calculation of these entitlements. The deed also contained a provision requiring the Appellant to retire from the partnership on receipt of not less than 2 months written notice. The deed further included an option exercisable by the remaining partner(s) in such circumstance to purchase the outgoing partner’s share in the partnership.[4]The business appears to have proceeded satisfactorily but Mrs Wood died in January 2003. Whether the partnership in fact continued thereafter was a matter at issue between the parties in the proceedings referred to in the following paragraph.[5]On 21 May 2003 Mr Wood served a notice on the Appellant requiring him to retire from the partnership with effect from 21 May 2003. On the following day, 22 July 2003 Mr Wood served a notice on the Appellant of his intention to exercise the option referred to above to purchase the Appellant’s share of the partnership business. The Appellant contended that Mr Wood failed to pay to him the monies to which he was entitled under the terms of the partnership deed within the time specified for this purpose and in consequence a dispute arose which resulted in proceedings in the Chancery Division of the High Court of Justice under claim no: NE480045 in the Newcastle upon Tyne District Registry (“the proceedings”). The Appellant’s claim against Mr Wood[6]The Appellant claimed in the proceedings a sum of £110,309 “pursuant to clause 11 of the Deed” (the partnership deed). Clause 11 of the partnership deed was headed “Profit and losses” This clause was divided into 5 sub-clauses dealing separately with the division of partnership profits/losses; drawings entitlements; repayment of expenses; the timing of the payment of resulting profits following the signing of the annual accounts and, finally, dealing with the making of a provision for each partner’s anticipated tax liability. The Appellant also claimed: · damages for breach of contract; · damages for breach of fiduciary duty; · a declaration that the Appellant retired from the partnership on 21 July 2004; alternatively a declaration that the partnership dissolved upon the death of Mrs Wood in January 2003; an order that “for the purposes of the calculation of the Claimant’s [the Appellant’s] share of the Partnership pursuant to clause 23 of the Deed and/or any account of and /or inquiry into the Claimant’s share of the Partnership the Claimant’s capital account is credited with the £20,000…..” (being the capital introduced by the Appellant as stated above); · an order that within 14 days the parties instruct the partnership accountants to prepare the balance sheet and profit and loss account “as at the date of the Claimant’s retirement from the partnership pursuant to clause 23 of the Deed”; · “Further and/or alternatively an account of and/or inquiry into the Claimants share of the Partnership” · “Further or other relief” 7. These proceedings were the subject of discussion between the parties and their respective advisers as a result of which they were eventually compromised on terms which were embodied in a “Tomlin” order, (a form of order in which the substance of the settlement between the parties is set out in a schedule to a consent order staying the proceedings save for the purpose of enforcing the terms of settlement in the schedule).[7]8. The schedule to the Tomlin order read as follows:
“1. Upon the parties having complied with paragraph 2 herein and on or before 4pm on 6 th December 2006 the First Defendant shall pay to the Claimant and the Claimant shall accept the sum of £55,000 (fifty five thousand pounds) in full and final settlement of the claim and counterclaim herein. 2. On or before 4pm on 22 nd November 2006 the Claimant and the First Defendant shall execute a Deed of Retirement by which the Claimant’s retirement from the Partnership shall be formally recorded, and by which the Claimant shall transfer any share of his in the Partnership to the First Defendant in consideration of the agreement contained in this schedule and for no further consideration. The Claimant shall prepare and submit to the First Defendant the first draft of the said Deed, and the First defendant shall (subject to any reasonably necessary and agreed amendments thereto) approve the same” 9. Although it may not be significant it should be recorded that there was before the tribunal no information as to the substance of the counterclaim against the Appellant. Also it appears that, despite the terms of clause 2 of the Tomlin order schedule, no Deed of Retirement appears to have been drawn up. It seems probable however that the partnership had by that date already come to an end although the precise date on which it did so is again not clear to the tribunal. The tax treatment of the settlement 10. On 11 December 2009 the Respondents wrote to the Appellant stating their view that £20,000 of the settlement of £55,000 represented a return of the Appellant’s capital from the partnership but that the remaining £35,000 was “additional shares of partnership profits awarded to you”
. On this basis discovery assessments under s 29 TMA 1970 for the 8 years from and including 1996/97 to 2003/04 were issued effectively attributing one eighth of the £35,000 (£4,375) as additional income deemed to have been received by the Appellant in each of the years concerned. The competing arguments 11. The Respondents contend that the issue of discovery assessments under s 29 TMA 1970 was appropriate as at least £35,000 of the monies received by the Appellant pursuant to his settlement with Mr Wood is properly characterised as income and as such is chargeable to income tax. It is, they say, money in the nature of a post cessation receipt for a share of the profits which should have been received by the Appellant during the life of the partnership. The Respondents look upon the allocation of the sum of £35,000 over the 8 year period as a concession as it could alternatively be considered as a receipt of income in a single year (the tax year 2006/07) which might well have a more significant impact on the Appellant. 12. The Appellant says that the sum of £55,000 received on the settlement of the litigation with Mr Wood included a sum of £20,000 being the return of the capital subscription he made to the partnership; the balance of £35,000 was a capital sum paid in respect of the disposal of his share in the partnership. The Appellant contends that the assessments raised under section 29 TMA 1970 were invalid. The Appellant’s case 13. The Appellant was represented at the hearing of the appeal by his tax accountant Mr David Maultby. Mr Maultby told the tribunal that the returns for the partnership had invariably been prepared by Mr Wood who would simply ask the Appellant for his signature to returns as necessary. The impression conveyed was that the Appellant was a “hands-on” working partner almost exclusively concerned with the operational needs of the business whilst matters of administration were dealt with by Mr Wood. The Appellant trusted his partner to ensure that he received his correct entitlement. That the partnership returns included a correct statement of the earnings of the partnership is not a matter in dispute in this appeal. Nor too is it disputed that the Appellant or Mr Wood did other than to correctly include in their personal tax returns the monies they earned from the business. In consequence the Appellant argues that he has fully and correctly completed his tax returns and paid all tax and NI contributions properly payable by him for each of the years in question. There is no suggestion by the Respondents that, apart from the matter of the receipt of the £55,000 the subject of this appeal, the Appellant had any income which had not been assessed, that the assessments to tax during any of the years in question were or had become insufficient or that any relief which had been given was or had become excessive. It was therefore Mr Maultby’s contention that his client was entitled to consider his tax liabilities as properly met for each of these years so that by the tax year 2006/07 the previous years were beyond the date for enquiry or repair. Mr Howell was, he said, properly entitled to feel that he had settled his liability to income tax. He was entitled to certainty in respect of his tax affairs having done all that was required of him. 14. Mr Maultby contended that there was no proper basis for the opening or amending of the assessments previously made. Mr Wood’s accountants had in a letter dated 28 February 2007 to the Appellant’s accountants written that “…..It would appear to us that the £55,000 which was paid to Mr Howells by Mr Wood relates to £20,000 of capital introduced by Mr Howells with the remaining £35,000 being profits to which Mr Howells asserted he was due for the periods in question”. The accountants went on to state their intention to submit a revised partnership return for 2003/04 allocating £35,000 of the profit assessable in that year to Mr Howell. Mr Maultby argues that there was no justification in fact or law for this unilateral reallocation of profits. In this connection he referred to the Respondents’ letter dated 25 September 2009 in which the apparent justification for this treatment was suggested to be an Error or Mistake Relief claim. Mr Maultby directed attention to s 33A ss (1) TMA 1970 which provides:
“This section applies where in the case of a trade…..carried on by two or more persons in partnership, those persons allege that tax charged…..was excessive by reason of some mistake in a [partnership return]….. Mr Maultby argued, correctly we consider, that the use of the word “persons” required that both partners would need to agree an Error or Mistake Relief claim and not one only of them. This could not be dealt with unilaterally and accordingly neither Mr Wood’s accountants nor the Respondents were entitled to deal with the matter in this way. 15. Mr Maultby further contended that section 29 TMA 1970 had no proper application to this situation and that the assessments raised were invalid. 16. Section 29 TMA 1970 relevantly provides as follows: “29 Assessment where loss of tax discovered (1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment – (a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains, have not been so assessed, or (b) that an assessment to tax is or has become insufficient, or (c) that any relief which has been given is or has become excessive, The officer or, as the case may be the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. (2) [Not applicable to this appeal as it deals with errors or mistakes as to the basis of computing liability] (3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment. He shall not be assessed under subsection (1) above – (a) in respect of the year of assessment mentioned in that subsection; and (b)…in the same capacity as that in which he made and delivered the return, unless one of the two conditions mentioned below is fulfilled. (4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the tax payer or a person acting on his behalf. (5) The second condition is that at the time when an officer of the Board – (a) ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or (b) informed the tax payer that he had completed his enquiries into that return the officer could not have been reasonably expected on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above” 17. The Appellant contends that there has been no such fraudulent or negligent conduct as would be required to fulfil the first of the conditions in subsection 4 of section 29 TMA 1970. The Respondents did not argue before the tribunal that the second condition had been satisfied. What the Respondents did argue was that the Appellant had failed to include in his 2006/07 tax return the income which they contend is now to be brought into assessment following the settlement of the litigation. It is this failure which, it is contended, entitles the Respondents to raise the assessments concerned. 18. Mr Maultby pointed out that Mr Howell’s tax return for the year 2006/07, being the tax year in which he received the settlement monies, contained a note to the effect that any capital gain of over £35,200 need not be included in the return. Business asset taper relief at 75% reduced the otherwise reportable figure to £8750. For the year in question the tax free allowance for capital gains was £8,800 and consequently it was not correct to contend that the Appellant had in some way failed either as a result of fraudulent or negligent conduct to deal properly with his tax return for that year. Mr Maultby also drew the tribunal’s attention to the fact that by its letter dated 11 March 2009 the Respondents had stated clearly that they had completed an enquiry into Mr Howell’s tax return for the year ended 5 April 2007 and that they were pleased to tell him that no amendment to the return was needed. In the same letter they went on to state that a Revenue Assessment for 2003/04 would be raised under the discovery provisions of s. 29 TMA 1970 referred to above. 19. On behalf of the Appellant it was further argued by Mr Maultby that the monies received were in the nature of capital and not income. The Respondents argument that the receipt was in the nature of income was based on a number of tax authorities including that of Burman (H M Inspector of Taxes) v Thorn Domestic Appliances (Electrical) Limited [55 TC 493] That case and other similar cases were, said Mrs Bellingall, authority for the proposition that in a case where the party receiving the money has identified the character of the money sought in its claim as being either income or capital then it is right that it should be considered to have that character when paid. Put rather more prosaically the ruberic “What you asked for is what you got” applied in such circumstances and has judicial support The tribunal’s consideration of the appeal 20. The facts in this appeal are not in issue between the parties. What is at issue is the proper tax treatment of the receipts by Mr Howell pursuant to the provisions of the Tomlin Order by which his dispute with Mr Wood was settled on 8 November 2006. 21. The Appellant seeks to vacate the Discovery Assessments for each of the years 1996/97 to 2002/03. The grounds stated in the Appellant’s appeal notice can be summarised thus: (1) The criteria required for valid discovery assessments are not met (2) The imputation of the receipt in the tax year 2006/07 back to the years in question on a pro rata basis was inappropriate and wrong and not in accordance with established legal principles. (3) The receipt by the Appellant was of a capital nature and not income, a view supported by a proper construction of the relevant documents. 22. The Respondents in their Statement of Case in response state that the points at issue are: (1) Whether the £55,000 received by the Appellant should be charged to tax, in whole or in part, as revenue income or capital gains (2) If found, whether in whole or part, to be chargeable as revenue income for what year or years should that amount be charged to tax? (3) If the whole or part of £55,000 is found to be chargeable as revenue income and taxable in the years detailed above are the assessments issued for those years valid. 23. Section 29 TMA 1970 allows the revenue to raise against a taxpayer a further assessment to tax where it appears that there has been discovered a loss to the Revenue as a result of fraud or negligence. The power conferred by the section was said by Stanley Burnton J in R (Johnson) v Branigan [2006] EWCH 885 (Admin) at [15] to be: “…very substantially qualified. It is so qualified no doubt because Parliament considered that generally a taxpayer who has honestly provided a tax return under the self-assessment scheme should not be indefinitely liable to a demand for the payment of an amount of taxes beyond that which, by his return, he has disclosed is payable by him”
That strictness of approach was more recently affirmed by Moses LJ in Tower MCashback LLP v Revenue & Customs Commissioners [2010] STC 809 at [24] thus:
“As I have already observed, apart from a closure notice, and the power to correct obvious errors or omissions, the only other method by which the Revenue can impose additional tax liabilities or recover excessive reliefs is under the new s.29. That confers a far more restricted power than that contained in the previous s. 29. …………………Section 29(3) prevents the Revenue making a discovery assessment under s.29(1) unless at least one of 2 conditions is satisfied. The prohibition applies unless the undercharge or excessive relief is attributable to fraudulent or negligent conduct (s.29(4)) or having regard to the information made available to him the inspector could not have been reasonably expected to be aware that the taxpayer was being undercharged or given excessive relief (s.29(5)). There are statutory limitations as to the time at which the sufficiency or otherwise of the information must be judged. The provisions underline the finality of the self-assessment, a finality underlined by strict statutory control of the circumstances in which the Revenue may impose additional tax liabilities by way of amendment to the taxpayer’s return and assessment.” 24. It is clear to the tribunal, and indeed it is not disputed by the Respondents, that in this case the partnership returns submitted by Mr Wood for the business Excel Refrigeration & Catering Equipment were complete in that they included all of the income earned by the partnership and claimed only those reliefs to which the partnership was properly entitled. There was no suggestion by Mrs Bellingall to the contrary. Equally it is accepted by the Respondents that the partners in the business completed and submitted self assessment returns in respect of their individual earnings from the partnership business which were complete and accurate. There was therefore nothing in any of these returns for the Respondents to “discover”
. It is clear that as a first step in the process of raising a discovery assessment the officer of the Revenue must first decide whether a “discovery” within the meaning of sub-s(1) made by him warrants the making of an assessment. Only when this step is satisfactorily taken must he then go on to consider whether either of the two conditions referred to in sub-s (3) is fulfilled (see Derek William Hankinson v The Commissioners for Her Majesty’s Revenue and Customs [2010] UKUT 361 (TCC) . In the present appeal there was no “discovery” within sub-s (1) as any such discovery is required by the terms of that sub-s to be “as regards any person (the taxpayer) and a year of assessment” In the years of assessment with which this appeal is concerned the taxpayers returns fully met his obligations and he is entitled not to have the assessments opened up or the subject of further assessment. We accept the contentions advanced by Mr Maultby in this respect. Again referring to the judgment of Stanley Burnton J in R(Johnson) v Branigan (above):
“In my opinion the test has to be a two-stage one to fit in with the underlying purpose of the scheme [of s.29]. The officer has to discover something new otherwise the underlying purpose of early finality of assessment would be defeated. His assertion of the newly discovered insufficiency is then tested against the adequacy of the disclosure by the taxpayer. It is only if the taxpayer has made a return which has clearly alerted the officer to the insufficiency that it will be considered adequate and will shut out a s. 29 discovery assessment” 25. We find therefore that there was no “discovery” within sub-s(1) of s.29 in relation to any of the years in respect of which the discovery assessments have been raised. For that reason alone we would find the assessments to be invalid. The fact that the Revenue became alerted to a receipt of monies in 2006/07 which had (at least to the Revenue) the aspect of revenue income cannot in our view be canvassed as a “discovery” within sub-s (1). so as to bring into charge income which was not received in those years but which arose after the period within which the Revenue might properly re-open the taxpayers assessments. It is quite clear that the Revenue received the tax properly due from each of the partners in the business for each of the years in question. An additional charge to tax arising out of a quite different set of circumstances occurring after the periods concerned would have the effect of providing the Revenue with tax receipts in excess of that justified by the income actually received by the partners. This cannot in our judgment be right. 26. As indicated above a two stage process is required. The second stage involves an enquiry as to the satisfaction or otherwise of either or both of the conditions referred to in sub-s (4) and/or (5) of s.29. When Mrs Bellingall was asked by the tribunal to explain the grounds asserted by the Revenue so as to support the discovery assessments we were told that the Respondents relied on the negligent failure of the Appellant to include revenue income in his 2006/07 tax return. That reply of course rather begs the question concerning the nature of the receipt under the Tomlin Order. If the receipt was of a capital nature, as the Appellant says, then his return for that year has been dealt with, in our view, perfectly correctly. This was not contested. If, however, as claimed by the Respondents, some or all of the monies received were in the nature of revenue income arising only in the tax year 2006/07 then it is difficult to understand how the Respondents could rely on some “negligence” in his return for that year having conducted an enquiry into that return and having subsequently written on 11 March 2009 to the Appellant that: “ I am pleased to tell you that no amendment to the 2006/07 Return is needed as a result of my enquiry.”
It seems clear to the tribunal that the question of negligence in the context of the returns for the years covered by the discovery assessments had not been properly thought through. Negligence cannot in our judgment be established so that at least the condition in sub-s (4) cannot be met by the Respondents and for this reason too we have no hesitation in finding the discovery assessments for each of the years 1996/97 to 2003/04 invalid. No argument was advanced by the Respondents that the condition in sub-s (5) might apply nor do we consider it credible that this could be argued. 27. In light of the above and in particular because the Respondents have closed their enquiry for the year 2006/07 (the time for further assessment or repair having in any event closed (s.12 A-ABB TMA 1970) the question of the character of the receipt of monies under the Tomlin Order becomes unnecessary for us to decide. For the sake of completeness however we find that the whole of these monies were in the nature of capital representing the sum payable by Mr Wood for the assignment to him of his former partner’s share in the partnership. We accept the principle urged on us by Mrs Bellingall that “What you ask for is what you got”. In this case what was asked for by Mr Howell was a sum of money payable under the Partnership Deed on the retirement of a partner. He also asked for the sum of £20,000 being capital introduced by him into the partnership to be credited to his capital account. Particulars of the prayer for relief are set out above. Interestingly whilst Mr Howell asserted breaches of both contract and fiduciary duty in his Statement of Claim the claim did not specifically include an allegation that Mr Howell had not been paid the correct share of profits from the partnership. Undoubtedly any shortfall in such share would need to be taken into account in calculating the amount of Mr Howell’s capital account due on retirement but this would include other components. The whole thrust of Mr Howell’s claim was that he was entitled to a sum of money on retirement which included the £20,000 capital together with such further sum as might stand to the credit of his capital account. That is what he wanted. What he got was set out in the schedule to the Tomlin Order, namely £55,000 in return for which he agreed to “transfer any share of his in the Partnership to the First Defendant (Mr Wood) in consideration of the agreement contained in this schedule and for no other consideration (i.e. payment of the sum of £55,000). That this was a capital payment is further supported by the schedule to the Statement of Claim. This does not set out any unpaid income as the Respondents might expect but instead details year by year the adjusted balances to the Appellant’s capital account for which he contended in the litigation. Because of our decision in relation to the matter of the discovery assessments we do not propose in these reasons for our decision to elaborate further the arguments concerning the capital nature of the Appellant’s receipt of the sum of £55,000. Decision 28. For the above reasons we find for the Appellant. The tribunal concludes that a discovery has not been made and that neither of the conditions entitling the Respondents to issue discovery assessments has been met. The discovery assessments raised by the Respondents are invalid. The attempt by the Revenue to impute income over the past years was also misconceived for the reasons discussed above (see paragraph 14). So far as it may be necessary for us to do so we find that the sum of £55,000 received by the Appellant was a capital sum received in the tax year 2006/07 for the transfer of his share in the partnership Excel Refrigeration and Catering Equipment. The Respondents have closed their enquiry into the Appellant’s tax affairs for that year and no further tax is due. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. CHRISTOPHER S HACKING TRIBUNAL JUDGE RELEASE DATE: 16 March 2011