Kamran v Revenue & Customs (NCOME TAX - income from property - rents under tenancy agreement) [2019] UKFTT 257 (TC)

FTT-Tax
Kamran v Revenue & Customs (NCOME TAX - income from property - rents under tenancy agreement)
[2019] UKFTT 257 (TC) · 2019-02-15
[28]“The retention of s.50 in terms which closely follows that of its predecessor is a powerful indication that Parliament did not intend to change the jurisdiction of the Commissioners in as dramatic a fashion as the introduction of a system of self‑assessment might have suggested. As Henderson J remarked, the public interest is that taxpayers pay a correct amount of tax (see [115]). In the exercise of their statutory functions the Commissioners are not deciding a case inter partes; they are determining the amount on which, in the interests of the public, the taxpayer ought to be taxed (see R v Income Tax Commissioners ex‑parte Elmhurst [16] [1936] 1 KB 487 at 493). That public interest has in no way been altered by the introduction of self‑assessment.” 136. We turn thus now to the correct computation of profits from a property business. The combined effect of Mr Phillips’ and Mr Jones’ assessments for 2010‑11 to 2012‑13 was to treat as the profit from exploiting the land at 11 Otley Street by way of rent the gross amount of the rents accruing under the tenancy agreement. 137. Tax is charged under Chapter 3 Part 3 ITTOIA on the “full amount of the profits arising in the tax year”. The word “full” here is redundant [17] but the phrase has been taken in cases arising in relation to trades to require a balance to be struck of incomings and outgoings [18] . 138. This striking of a balance must be done in accordance with UK generally accepted accounting practice (s 272(2) ITTOIA importing s 25 ITTOIA) so that the rents will be brought into account on an accruals basis, whether or not received. Where rents are payable weekly in advance then in a year where the tenancy agreement was in force throughout, receipts and accruals may well be the same, taking one such year with another, but in the year when the tenancy agreement starts there may well be a difference between the two. In this case the starting year was 2010‑11 and the final Friday in that year was on 1 April. Thus the receipt on that Friday of £110 needed to be divided up so that only £78 fell to be brought into account. 2011‑12 was a 53 Friday year so the correct amount for assessment there is £5,830. 139. HMRC say that the appellant is not entitled to any expenses including for interest on the mortgage, as it was payments by his sister into the mortgage account that enabled it to be paid. The same goes for payments out of the Halifax account to insurance providers. 140. These points raise a tricky issue. The appellant entered into the mortgage agreement and came under an obligation to pay the interest. It seems that he also must have entered into the insurance agreements. Mr Glover, when denying deductibility, said that the payments had to “be wholly and necessarily incurred by yourself”. We assume that “necessarily” was a slip for “exclusively”, but with that correction, Mr Glover is still wrong. The “wholly and exclusively” rules relate to the purpose of incurring the expenditure not to the identity of who incurred it, but even if they related to the persons incurring the expenditure, there is no one but the appellant who can possibly be said to have incurred it in the sense of becoming liable to pay it. If Mr Glover had it in mind that the appellant had to pay it out of his own resources, he is also wrong. But in any case it was paid out of his bank account which would be an asset of the business in any balance sheet created using UK GAAP. 141. What Mr Glover was probably struggling to express was that because the Halifax account had been funded by payments made by Miss Akhtar and her family, those payments should be treated as incomings in GAAP accounts and so as receipts of the property business. But it is a necessary pillar of HMRC’s primary case that what went into the Halifax account was in fact the rents. They have not shown that if there was an excess of incomings in the account over rents that they had either the quality of items that should be in a profit and loss account, and if they were that they were receipts of a property business. 142. Thus in our judgment any calculation of the profits must take into account, on an accruals basis, the interest payable on the mortgage and the premiums to the insurers. 143. The discussion above about what UK GAAP dictates is somewhat unreal in that most individuals with income from property do not produce GAAP accounts for their own purposes and do not supply them to HMRC with a tax return. In fact HMRC have long recognised (see their Property Income Manual at paragraph 1101 in a version that predates 2017) that for smaller cases where GAAP accounts are not required by any other body, such as Companies House, the receipts and expenses basis or cash basis is perfectly acceptable. So much so in fact that the practice or concession of allowing a cash basis was legislated for by Part 2 Schedule 2 Finance (No. 2) Act 2017. But before the cash basis was put on a statutory basis, this tribunal had no jurisdiction to apply that basis if HMRC insisted on the GAAP basis. 144. In this case however it is unlikely that the cash basis would make much difference. But for what we say below we would have said that in principle the profits for each relevant tax year are to be computed as follows: Rents of £110 per week on an accruals basis, less Mortgage interest payable on an accruals basis, and Insurance premiums payable on an accruals basis. 145. Although we have the figures for rents which we could use, we do not have readily available the figures for the expense items and we would have left it to the parties to agree. Directions 146. In the discussion above we made a number of assumptions, and in particular that there was a valid tenancy agreement under which rents were paid by Miss Akhtar to the appellant. But we needed to consider the strenuous arguments of the appellant that he had bought the property in his name for the appellant and gained no financial benefit from it, as they might have a bearing on his liability to tax. Because of this we made directions allowing HMRC to make submissions on two issues. The questions on the first were:(1) Do the circumstances of the appellant’s acquisition and disposal of 11 Otley St, Halifax in 2010 and 2015, his passing of control of his mortgage account and his conduct generally demonstrate that, while undoubtedly being the legal owner of the property, he was holding the property on (bare) trust for his sister?(2) Assuming the answer to question (1) is “yes”, does that make any difference to HMRC’s analysis of the tax consequences of his having legal ownership? 147. The second issue related to the tenancy agreement alone and asked: (1) What are HMRC’s arguments for saying that the agreement was not a sham? 148. HMRC did not avail themselves of the opportunity to make any submissions in response. Was the tenancy agreement a sham? 149. We think it is more convenient to deal with the sham issue first, as if the agreement for a tenancy is a sham, then there is no need to consider the trust issue. The concept of a sham has been considered in surprisingly few binding decisions of courts and tribunals in tax cases [19] . 150. In Dickenson v Gross (HM Inspector of Taxes) 11 TC 314 (1927) Rowlatt J considered a case where a farmer, Mr Dickinson, had entered into a written deed of partnership with his three sons for the avowed purpose of enabling four personal allowances to be set against the income from the business. The Inspector of Taxes argued before the General Commissioners for the Division of Whitchurch in the County of Salop that no partnership existed, that the appellant had the use and was the occupier of the lands in question (relevant for Schedule B [20] purposes) and that the appellant was the sole proprietor of the business. The General Commissioners agreed and said there was no partnership and the deed had been completely disregarded. 151. On appeal to the King’s Bench Division of the High Court, Rowlatt J, in a three paragraph decision (plus one were he told the Solicitor‑General he need not trouble him), said:
“A partnership, of course, is a legal position and a legal result, but like every other legal position it depends on facts, and what the Commissioners are saying here is: ‘The facts are not those from which a legal partnership results, because although there was the deed they are not acting on it; it is not governing their transactions; they are not paying the slightest attention to it. They are going on just as before.’ They have not used the word ‘fictitious,’ and they have not used the word ‘sham,’ but I think they have put it even more clearly. They say: ‘The facts here were not a partnership although there was a bit of paper in the drawer, which if the facts had been according to it, would have shown there was a partnership.’” 152. It is clear from this that had the Commissioners held that the deed was a sham, Rowlatt J would have had no difficulty in supporting them. 153. Martin v Davies [1952] 42 TC 314 did not involve the Inland Revenue as a party. In it the Court of Appeal (Sir Raymond Evershed MR, Jenkins and Hodson LJJ) were dealing with an appeal from Willesden County Court (Judge Leon). The headnote in HMSO Tax Cases says: “On 2nd January, 1950, M and D entered into an agreement purporting to be for the sale of a flat in a house for the sum of £6,500 payable by 600 monthly instalments of £10 16s. 8d. each. M was the tenant of the premises under a lease with 60 years to run when he bought it in 1936, but the agreement contained no conditions as to tenure or length of title. M was to be entitled to re‑enter and the contract was to be determined if (inter alia) any payment was in arrears for one month or if D vacated the premises before the completion of all the payments. On a claim to possession by M on the ground of default in payment by D and a counterclaim by D on the ground that the premises were within the protection of the Rent Acts and the monthly payments constituted rent in excess of the standard rent, the County Court Judge found that the true transaction between the parties was one of letting and not of sale. M’s claim was accordingly dismissed, and, the standard rent having been assessed at 25s. per week, judgment was given for D on the counterclaim. M appealed to the Court of Appeal.” 154. Jenkins LJ said: “The substantial issue in the case is whether the agreement of 2nd January, 1950, was a genuine agreement for sale, or was merely a sham or pretence to make what was in fact a transaction of letting look like a sale, so as to evade the restrictions and protective provisions of the Rent Acts. The learned Judge, having heard the Plaintiff give evidence, having considered the terms of the agreement and a letter and certain rent books, to which reference is made in the evidence and in his judgment, came to the conclusion that there was in this case no genuine sale, and that in truth, according to the real substance and effect of the transaction, the Defendant was a tenant at the rent of £10 16s. 8d. per month, with the consequences I have already stated. In my judgment there was clearly evidence before the learned Judge on which he could properly come to the conclusion to which he came. Therefore, so far as it is a conclusion of fact the decision is one with which this Court should not interfere, and indeed cannot interfere. So far as it is a conclusion of law, having given the best consideration I can to the circumstances of this case, and to the really extraordinary document constituting the agreement of 2nd January, 1950, I have myself reached the same conclusion as the learned Judge. … The document I think does more credit to Mr. Martin’s ingenuity than to his judgment. Of his ingenuity there is no doubt, and he has set the Court a puzzle of some little difficulty, but in the end I have no doubt that the learned Judge, on the evidence and on this document, that is the agreement of 2nd January, 1950, came to a right conclusion, and that the true view of Mr. Davies’s rights, according to the real substance and effect of the transaction between the two parties, is that he was at all material times, and is, tenant of these premises at a rent of £10 16s. 8d., and inasmuch as that rent exceeds the standard rent, the consequences indicated by the learned Judge, and the relief he granted, must follow as a matter of course, and it equally follows as a matter of course that the claim for possession must necessarily fail.” [ emphasis added ] 155. In King v Walden (HM Inspector of Taxes) and Johnson v Walden (HM Inspector of Taxes) 68 TC 387 (1993/5) the Special Commissioners (Mr Brian O’Brien and Mr THK Everett) considered the existence of a partnership in which (non‑resident) relatives were said to be partners and to have supplied loans. The narration of the facts is lengthy and for that reason we have put it in an Appendix, but the decision of the Special Commissioners was this: “Mr King acknowledged that “tax reasons” were behind these strange arrangements. He was, of course, relying in 1972‑1973 on his mistaken understanding of the law. Such reasons do not, by themselves, invalidate the arrangements — provided that the arrangements were real. But we have come to the conclusion that the “partnership” was a complete sham. In saying that, we do not found heavily on the tender years of most of the “partners”: though an element of near farce is introduced thereby. The whole of the conduct of the business points towards Mr King’s beneficial ownership; and the overwhelming evidence that Mr King retained in his own hands the power of nominating “partners” (and, it seems, of removing them) shows how unreal was his vesting of the beneficial ownership in others. In answer to the first question, we find that at all material times the beneficial owner of the Warwick Guest House business was Mr King.” [Emphasis added]
156. They also found that a loan to Mr King’s business purportedly from Mr King’s father was in fact Mr King’s own money, in these terms: First, we cannot bring ourselves to believe that the £28,000 sterling, in cash, originated with Mr King senior. We have had no reliable evidence to suggest that Mr King senior would have been able to raise such a sum in England; and there would not appear to be any reason for him to effect such a substantial transaction in cash. On the other hand, we have much evidence of the holding of cash by Mr King. On any footing we believe that Mr King must have been party to the raising of the cash sum and we do not credit his assertion that he knew nothing about it. We are convinced that Mr King provided his father with the money and that the latter’s participation in the matter was (as it had been in connection with 10 Fielding Terrace) a sham designed (hopefully) to enable Mr King senior’s New Zealand residence to be prayed in aid for tax purposes. [Emphasis added] 157. Both the High Court (Evans‑Lombe J) and the Court of Appeal (Peter Gibson and Kennedy LJJ and Sir Iain Glidewell) had no doubt that it was impossible to say that the Special Commissioners had not reached the right decision on the facts. 158. In Hitch and others v Stone (HM Inspector of Taxes) 73 TC 600 (1999/2001) (“ Hitch ”) Mr Hitch entered into an avoidance scheme devised by the notorious peddler of such things, Mr TPD Taylor using his tame life assurance company, Monarch Assurance Ltd. The headnote gives sufficient flavour of the facts and the decision of the Special Commissioners:
“Three members of the H family owned, as tenants in common, a farm most of which they wished to sell for development. In 1983 they engaged T, a solicitor specialising in tax avoidance. T devised an avoidance scheme and took part in the negotiations for the sale. On 10 April a form of agreement (‘‘the 1984 Agreement’’) was signed by the H family by which they agreed to sell long leasehold interests to two companies, CP and MA, managed and/or controlled by T. T signed that agreement on behalf of the companies on 16 April. The agreement contained several difficulties of interpretation and several unfilled blanks, and some of its terms were never carried out. On 16/17 April agreement was reached with the Crest Group for sale of a large block of land. Under the written agreement made on 17 April (‘‘the Red Land Agreement’’) the vendor was expressed to be MM, another of T’s companies. Later on that day T’s three companies made an agreement (‘‘the 17 April Internal Agreement’’) by which CP agreed to assign to MM the benefit of the 1984 Agreement. The 17 April Internal Agreement also had unfilled blanks. On 22 June 1984 the H family, T’s three companies and two members of the Crest group executed a deed (‘‘the 1984 Deed’’) by which the Red Land Agreement was completed and sundry provisions were made in relation to the other land (‘‘The Green land’’). Recitals (2) and (3) of the 1984 Deed referred to the 1984 Agreement and the 17 April Internal Agreement. Various subsequent transactions took place, including sales of parts of the Green land to outsiders. Appeals against assessments to capital gains tax for 1984–95 were made by one of the members of the H family, by the husband of the second, and by the executrix of the third. By agreement between the parties the Special Commissioners made a decision only in respect of the Crown’s contention that certain of the documents relied on by the taxpayers were of no legal effect. The Crown’s primary contention was that those documents were shams, and that the true arrangement between the H family and T was a wider financial arrangement by which T, personally or by his companies, acted at all times as agent or banker for the H family, and that T (or his companies) held the proceeds of sale on, in effect, a bare trust for the H family. The Commissioners did not accept all of the evidence given by one member of the H family and by T. The Commissioners decided that the 1984 Agreement was a sham in the sense that it was ‘‘…intended … to give the appearance of creating between the parties legal rights and obligations different from the legal rights and obligations (if any) which the parties intended to create’’ ( Snook v. London and West Riding Investments Ltd . [1967] 2 QB 786, 802C, per Diplock L.J.). The Commissioners concluded that it followed them from that finding that the 17 April Internal Agreement was also a sham, and likewise recitals (2) and (3) of the 1984 Deed.” 159. In the High Court Jonathan Parker J overturned the decision of the Special Commissioners, and the Inspector appealed to the Court of Appeal. Giving the only reasoned decision, Arden LJ (with whom Kay LJ and Sir Martin Nourse agreed) set out useful (and of course binding) “principles which are in my judgment the relevant principles as respects sham transactions.” “63. The particular type of sham transaction with which we are concerned is that described by Diplock L.J. in Snook v. London and West Riding Investments Ltd . [1967] 2 QB 786 above. It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties, in this case the Revenue, or the court, the appearance of creating different rights and obligations. The passage from Diplock L.J.’s judgment set out above has been applied in many subsequent decisions and treated as encapsulating the legal concept of this type of sham. Mr. Price Q.C. referred us to Sharment Pty Ltd. v. Official Trustee in Bankruptcy (1988) 82 ALR 530 in which the Federal Court of Australia drew on Diplock L.J.’s formulation of sham in Snook’s case. 64. An inquiry as to whether an act or document is a sham requires careful analysis of the facts and the following points emerge from the authorities. 65. First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties’ explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties. 66. Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties. 67. Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship. 68. Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied: see for example Garnac Grain Co. Inc v. H.M.F. Faure and Fairclough Ltd. [1966] 1 QB 650, at pages 683–4 per Diplock L.J. which was cited by Mr. Price. 69. Fifth, the intention must be a common intention: see Snook’s case above. This is relevant to issue 3 below.” 160. These are the principles by which we shall judge the tenancy agreement in this case. 161. In The Brain Disorders Research Limited Partnership and another v HMRC [2017] UKUT 176 (TCC) (Birss J and Judge Colin Bishopp) (“ Brain Disorders ”) considered an appeal against, among other things, a finding of fact by the First‑tier Tribunal that parts of a research agreement and the provisions for pricing in it were a sham, designed to vastly inflate a claim for capital allowances. The Upper Tribunal held that there was no error of law in the First‑tier Tribunal’s findings, and made other comments. They first said that principles set out by Arden LJ in Hitch were not in dispute, having set out the same paragraphs as we have. They added at [24]: “We agree with Mr Prosser that the FTT’s finding of sham is a finding of fact and that we may interfere with it only on Edwards v Bairstow grounds (see Edwards v Bairstow [1956] AC 14 itself and the long line of authority following it). We are, however, conscious that a finding of sham, even if it does not imply dishonesty in the ordinary sense, necessarily requires the fact‑finding tribunal to be satisfied of an intention to deceive or, at least, to make things appear other than as they are. This is a point to which we shall need to return; for the moment we merely observe that, because of this consideration, we have examined the detail of the FTT’s findings with particular care.” 162. They also considered arguments by the appellants that sham had not been properly pleaded, starting at [28]: “… Contrary to Mr Bremner’s submission it is clear that HMRC’s Statement of Case before the FTT and its skeleton argument before the hearing referred to sham expressly and it is equally clear that the point was put to the Appellant’s witness Mr Hardy. 29. Mr Bremner is correct to say that the FTT did not make any finding of dishonesty; on the contrary, it described Mr Hardy, at [34], as “basically honest”
. We do not, however, and despite the note of caution we have sounded, consider that a finding of sham necessarily implies dishonesty. The pretence here was that 96 or 99 might have been spent on research, but the parties did not go further by pretending that it had in fact been spent on research. This was a tax avoidance, or deferral, scheme, and not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up. One might disapprove of what was done; but we do not consider it could be said to have crossed the threshold into dishonesty.” 163. We could also refer to many tens of reported cases where the court or tribunal has remarked that the Inland Revenue or HMRC had not argued for sham (even in those cases where the judge’s remarks make it clear that they could, or even should, have done). What makes this case different from all those cases, and the cases we have cited (apart from Martin v Davies ) is that it is not in HMRC’s interests to argue that the agreement is a sham: quite the contrary, the assessments are based on the unspoken proposition that it is not, and that there is a genuine entitlement to (taxable) rents. We are conscious of what the Upper Tribunal said about pleading in Brain Disorders. The party in this case in whose interests it is to argue for a sham is the appellant, who was a litigant in person. In our view, having examined the documentation and in particular the letters sent by the appellant, drafted we understand by his wife, a civil servant in a relatively senior position though not a lawyer, and having considered what the appellant said in his notice of appeal and at the hearing, we consider that he was arguing that the agreement was a sham, though he did not use those words. 164. We now consider the tenancy agreement in accordance with Arden LJ’s principles. 165. First, we have considered matters outside the four corners of the agreement. In particular we have considered the documentation relating to the purchase, sale and mortgage payment arrangements, and answers given in the housing benefit claims. We have also considered the appellant’s evidence about these matters. 166. Second, we have accepted the appellant’s evidence that he did not intend to enter into a landlord‑tenant relationship with his sister, and we have not seen any evidence that his sister intended to enter into such a relationship. In particular we think her answer on the 2013 benefit claim form that she owned the house was a slipping of the mask. They had entered into the relationship they intended which was that the appellant acquired the house with a benefit of a mortgage but was doing so entirely on behalf of his sister. The sale arrangements in particular show that this was the real relationship. At that time the reality was that Miss Akhtar owned the equity in the house worth £27,000 for which she paid the appellant nothing, and she redeemed the mortgage taken out by her brother the appellant. 167. As to deception it is our clear finding that the agreement was entered into by Miss Akhtar with the support of her wider family to deceive Calderdale Metropolitan Borough Council into granting Miss Akhtar housing benefit, something she would not be able to obtain without a tenancy agreement. We will ensure that a copy of this decision is sent to the council. 168. As to the third principle this is not relevant as there is no suggestion that the tenancy agreement was itself artificial or uncommercial. Nor is the fourth principle (departure). 169. Bringing all these matters together we find that the tenancy agreement is a sham. It is like the piece of paper that Farmer Dickenson kept in his drawer and did not follow. 170. As there never was a tenancy agreement the appellant is not liable to tax on rents to which he was entitled, as he had no such entitlement. 171. This finding does not however answer HMRC’s alternative argument, that the payments which Miss Akhtar, with or without contributions from the family, paid into the appellant’s mortgage account, were “other receipts” within the scope of s 266(1) ITTOIA. This argument is an alternative in case the Tribunal held that the appellant was not entitled to any rents. It seems to have been based on the wording of s 271 ITTOIA that the person liable for any tax charged under Part 3 of that Act is the person receiving or entitled to the profits. 172. This contention overlooks a number of matters. 173. First, the alternatives “receiving” or “entitled” relate to “profits”, rather than rents or other receipts. Thus the question posed by s 271 is not “are there receipts to which the person is not entitled but which fall to be taken into account as part of the computation of profits in accordance with UK GAAP” but “what is the relationship between the person and the profits” [21] . 174. Second, the “receiving” case, the charge to tax on the person receiving the rents (which has been part of the tax code since at least 1803 [22] ) is for those who are not entitled to the profits because they are trustees or otherwise holding the assets from which the profits arise in a fiduciary capacity (see eg Martin v CIR 22 TC 330) [23] . 175. Third, these receipts are not in the specific category of receipts in s 266(3) ITTOIA. 176. On the alternative view of HMRC these payments are not of rent, but are payments made by Miss Akhtar from either her housing benefit or from other family donated resources to enable the mortgage interest and other expenses to be paid to the Halifax and others by being paid into the appellant’s bank account with the Halifax. It is impossible to see how on this basis the payments arose from any exploitation by the appellant of his interest in land for the purpose of generating them or how a GAAP‑compliant set of accounts for a property business could be created from them. Was there a trust? 177. As to the first question we asked of HMRC (see 146(1)) it is not necessary to make a decision on this independently of the sham argument. But we set out our views lest we be overturned on the sham issue. Based on our findings of fact in §96 to §103, and especially that last paragraph, we consider that the appellant held the entire interest in the property on trust for his sister, ie a bare trust. That could have given rise to some perplexing issues about capital gains tax in 2015 when the appellant sold his legal interest in the house to his sister, but as the gain was only £5,000 it did not have any real world consequences [24] . Nor do we intend to untangle the conundrum posed by such a finding as far as rents under the agreement (on the assumption that the agreement was not a sham) are concerned, but the logical conclusion would seem to be that the appellant was receiving rents from Miss Akhtar as trustee for her, the one paying them. However one resolves that conundrum, and it may be insoluble, the fact that we find it so puzzling merely reinforces our view that the tenancy agreement was a sham. Decision 178. Under section 50(6) TMA 1970 we cancel all assessments made. Appeal rights 179. 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. RICHARD THOMAS TRIBUNAL JUDGE RELEASE DATE: 09 APRIL 2019 APPENDIX The Special Commissioners’ findings of fact in King v Walden We now take up again the history of the purchase of 10 Fielding Terrace (and its business). Towards the end of 1972, Mr King paid a visit to his parents in New Zealand and, after the matter had been discussed with their), he decided to buy that property. By an agreement [R5b] dated 12 April 1973 Mr King agreed to purchase the freehold premises, the goodwill of the business known as The Warwick Guest House carried on there, and fixtures and fittings etc for a total price of £31,000. It appears from an opening balance sheet [A3a] prepared many years later by Mr AC Wood (on information which can only have been furnished by Mr King) that the total price was apportioned between the three elements of the purchase, £20,000, £10,750 and £250 respectively. (The goodwill figure was, we understand, subsequently reduced to £10,250.) The same balance sheet credits £6,000 of the £11,000 attributable to the business to Mr King’s capital account; and the £5,000 balance to a loan advanced jointly by “New Zealand relations”. It is clear that there was no such loan. The purchase of 10 Fielding Terrace and the business was initially funded as to £21,000 by loan on mortgage to First National Securities Ltd as to £6,000 by loan on second mortgage to the Bank of New Zealand, and as to the balance by other funds which we find were Mr King’s. (As to part, that finding is dependent on our answer to question 3 below.) In due course the bank loans were paid off; but there were no contributions from New Zealand towards that, or towards the servicing of the loans while they remained outstanding. It is also clear that upon completion, the legal title not only to the premises (10 Fielding Terrace) but also to the business (Warwick Guest House) became vested in Mr King. The question thus arises as to how, as Mr King claims, the beneficial interest in the business became vested in others. The answer does not lie in the provision of funds; and, as we see it, the claim must be founded on gift. Despite the evidence of the opening balance sheet, Mr King says that he never had a beneficial interest in the business, which belonged from the beginning to others. In 1973, the candidates for ownership were limited to Mr King senior and David (both of whom were then in New Zealand‑‑it is not suggested that Mr King’s mother was a part‑owner of the business. In support of this contention Mr King produced copies of applications for registration under the Registration of Business Names Act 1916, and Particulars of Ownership as required by s 29, Companies Act 1981. The earliest of the applications (1974) states that Mr King senior (and he alone) was the proprietor of the business (Mr King being the “Manager”). Applications made in 1977 and 1981 name the proprietor as “William Harold King and Associates” (WH King being Mr King senior). Those three applications were signed by Mr King on behalf of his father. The first of the Particulars of Ownership (1982) names seven proprietors: Mr King senior, a Mr Jacobsen (a friend of Mr King’s in New Zealand who had made a loan to Mr King in connection with his King Enterprises Engineering & Hardware business some time before 1973), David (then aged about 21), and Mr King’s four elder children by Miss Johnson (the eldest of whom was then aged about 7). Peter had not yet been born. The second set of Particulars before us (1986 or later) lists eight proprietors: Mr King’s two brothers (New Zealand residents: at Mr King’s request they took the place of Mr King senior, who had died in 1985), David, and all five of Miss Johnson’s children. Mr Jacobsen’s name had been removed. Mr King told us that each of Miss Johnson’s children had had her or his name added to the list as soon as they were born. We accept that these Particulars of Ownership were exhibited on the premises‑‑all the children spoke to that. They also said that they were “partners”; but they must have been told that, because knowledge of such a relationship is not to be derived from the Particulars Unsurprisingly, the children did not have any material understanding of what being “a partner, meant. On the other hand, if Mr King was only the manager or secretary in relation to the Warwick Guest House, and accountable to others, it is difficult to explain the absence of any accounts on a regular basis (until eventually, late in 1984, the Inspector’s activities obliged Mr King to go to Mr Wood). Mr Wood’s accounts also show that Mr King made drawings on Warwick Guest House for his own purposes. Further, during the course of the hearing there emerged a Lloyds Bank loan account (not appearing on the Schedule BA, but which we will call “A/c 22a”) which was serviced in part by the Warwick Guest House business. The loans comprised in that account were used, first for paying off so much of the First National Securities debt (purchase of 10 Fielding Terrace) as remained outstanding, and later, for assisting the purchase of Wolverton and Twyford. The alleged proprietors of the Warwick Guest House business were not concerned in the ownership of any of those premises. [1] By virtue of regulation 2(1)(b) of the Data Protection Act 2018 (Commencement No. 1 and Transitional and Saving Provisions) Regulations 2018 (SI 2018/625 (c.51)). [2] The letter actually says “her mother” but that cannot be right. [3] We who do now do not understand how an unrepresented tax payer is supposed to know what this means. We have also struggled to find the relevance of this “sect” as we explain later. [4] This is a strange statement. How did Mr Phillips know that personal allowances would cover the gain when he must have known the appellant was taxed under PAYE? He might we suppose have meant the annual exempt amount for chargeable gains. [5] What exactly, we wondered, were the department’s interests that needed the protection of these assessments. Phrases like this are usually used where an assessing time limit is approaching that would, if not met, put a subsequent burden on HMRC to show eg carelessness or fraud. But the normal time limit in s 34 Taxes Management Act 1970 is 4 years from the end of the tax year, so on 27 July 2016 an assessment for 2010-11 and 2011-12 would be several months beyond the time limit, but that for 2012-13 was more than eighth months away. But that is to overlook, as Mr Phillips undoubtedly did, that the time limit for assessment for the earliest year where there is a failure to notify, 2010-11, was 5 April 2031! [6] The wrong way round. If they are rental income they are charged to income tax as income from a property business. [7] Mr Burke was as perplexed as we were why in the first two years the assessments were less than the payment, but in the last were more. Mr Glover’s explanation to the appellant was that Mr Phillips must have allowed some “notional” expenses and charged tax on assumed profits. If that was what Mr Phillips did, at least in the first two years, we do not see what was “notional” about allowing expenses. Any proper estimate of income from property business involves using a balance of incomings and outgoings in accordance with accounting principles, and that would include, without any need for a claim, expenses. But Mr Glover recognised that Miss Akhtar was paying the expenses including the mortgage interest, so he was obviously sceptical about what Mr Phillips had done. But he said that he would not alter or amend the assessments on that account. He overlooked the obvious fact that he had in fact no power to do that anyway. [8] At least one assessment must be understated by £110 as there would have been at least one 53 week year (the rent was payable, Mr Glover said, on a Friday in advance). At first glance it seems 2012 was a 53 Friday year. [9] It is not clear to what exactly the appellant was being asked to respond. [10] In fact there was no return and so no figures “as returned” as the appellant been taxed under PAYE on his income. [11] HMRC do not say under which heading the refusal falls. We assume it is the last one. [12] This statement is blatantly untrue. [13] If it was a 53 week year then the weekly figure is £101.60 [14] We consider this phrase in the context of Part 3 ITTOIA below. [15] See s 130 Social Security Contributions and Benefits Act 1992. [16] In fact the applicant for a writ of prohibition in that case was Mr Leonard Elmh i rst, the founder, with his rich American wife Dorothy, of the Dartington Hall Trust. [17] Anyone interested to know why is referred to “What is the full amount?” (Richard Thomas) in Chapter 2 Studies in the History of Tax Law Volume 6 ed. Prof. John Tiley (Hart, Oxford, 2013). [18] Indeed until the Income Tax Act 1952 the phrase used was the “full amount of the balance of profits and gains”. [19] There were a number of findings of “sham” against taxpayers by the Special Commissioners in the 1980s which were not appealed to the High Court and so remained unreported. See in this regard reference to the defeat of Ronald Plummer’s (of Rossminster fame, or rather, infamy) Deferred Purchase Capital Loss Scheme in 1981 in “In the Name of Charity: The Rossminster Affair” by Michael Gillard at page 257. [20] Until the Second World War farmers were taxed under Schedule B to the Income Tax Act 1918 (tax on income from the occupation of land) on a fraction of the net annual (ratable) value of their land. [21] See in this connection the very helpful decision of this Tribunal in Maureen Hepburn v HMRC [2013] UKFTT 445 (TC) (Judge J Gordon Reid QC FCIArb and Dr Heidi Poon CA CTA PhD – the member of the tribunal as she then was – now Judge Poon). [22] Section 134 Income Tax Act 1803 Schedule (D)., third paragraph: “[Schedule D] shall extend to every Description of Property or Profits which shall not be chargeable or charged to either of the said Duties contained in Schedules (A), (B), or (C), and to every Description of Employment of Profit not chargeable or charged to the Duty herein-after mentioned, contained in Schedule (E), and not specially exempted from the said respective Duties, and shall be charged annually on and paid by the Person or Persons, Bodies Politick or Corporate, Fraternities, Fellowships, Companies, or Societies, whether Corporate or not Corporate, receiving or entitled unto the same, his, her, or their Executors, Administrators, Successors, and Assigns respectively.” [23] This is also HMRC’s view in their Business Income Manual at BIM 15015 in relation to the identical wording in s 8 ITTOIA for trades. They say it is for trustees and personal representatives of a deceased person. [24] We think the answer is to be found in s 60(1) Taxation of Chargeable Gains Act 1992 which ignores for the purposes of that Act any acquisition of an asset by the person absolutely entitled from the trustee. It doesn’t in terms say that the disposal by the trustee to the person absolutely entitled is disregarded, but it does say that the acts of the trustee are treated as the acts of that person, so the person absolutely entitled would be disposing of their beneficial interest in the asset to themselves, which is a nonsense.