“The company accounts, Corporation Tax computation and return for period ended31 July 2002 as originally submitted refer to a claim for relief for goodwill amortisation of£700,000 . The claim to relief for the period was however reduced to£5,479 by reason of the amended policy for amortisation referred to in the company letter of23 July 2005 and note 19 to the company accounts for period ended31 July 2003 . The revised return submitted by the company on23 July 2004 reflects this amended policy. I conclude that the company is not entitled to relief for goodwill amortisation in any amount and that the relief of£5479 referred to in the Corporation Tax computation of23 July 2004 is to be disallowed in the calculation of CT profits. This claim arises from the purchase of the business and in particular goodwill costing£2,800,000 referred to at notes 7 and 15 to the company accounts for period ended31 July 2002 . The note advises that the company purchased goodwill for£2,800,000 from the partnership of S & R Thomas. The partners of S & R Thomas are the directors of the company. All of the issued shares in Spring Salmon & Seafood were owned by Bala Ltd that was in turn owned by the MacLennan Trust. The trustees of the MacLennan Trust are participators in Bala and therefore participators in Spring Salmon and Seafood. I conclude that RC Thomas and SJ Thomas our participators in Spring Salmon & seafood within the meaning of Section 417 (1) and (3) ICTA 1988 by reason of being beneficiaries and set laws in the MacLennan Trust. The Third Schedule of the trust deed of the MacLennan Trust states that RC Thomas and SJ Thomas are beneficiaries in the trust. I conclude that RC and SJ Thomas made a settlement into the MacLennan Trust and are therefore also settlors within the meaning of section 620 ITTOIA 2005. They are therefore participators in Spring Salmon & Seafood within the meaning of Section 417 (1)(c) and (d). I conclude that RC and SJ Thomas are therefore connected persons by reason of the control referred to at Section 286 (6) TCGA 1992 in which case market value is to apply to the transfer of any goodwill from the partnership to Spring Salmon & Seafood in accordance with section 18 TCGA 1992. I have previously advised you that the Valuer in Shares and Assets Valuation has said that the background to the S & R Thomas Partnership was such that there are doubts as to the transfer of any business as a going concern. He has said that it is for the parties to establish that a business was transferred and that he has difficulty identifying the business that a third party could acquire. He has said that he would need to see copies of the business bank account, copies of the full business accounts, copies of contracts for suppliers and customers and copies of the details of the tying-in by the transferee company of any key individuals before being able to establish that there was any business and therefore free transferable goodwill in the former partnership. The only evidence submitted to HMRC is the partnership accounts. Having concluded that RC Thomas and SJ Thomas are participators in Spring Salmon and Seafood I have therefore assessed the£1.4m each received by them from the company as distributions by virtue of Section 209 (2) (b) or 209 (4) TA 1988. You are also aware from previous correspondence that the Head Office specialist dealing with intangibles relief has confirmed that he would support a submission to Solicitors Offers that any transfer of goodwill from RC and SJ Thomas to the company was motivated for tax avoidance arrangements as referred to at paragraph 111 Schedule 29 FA 2002.” 66. As far as I am aware, the information required by HMRC’s valuer was never supplied by the appellant. 67. However, HMRC subsequently retracted their view (viz that Messrs Thomas had received a distribution) in letters dated6 December 2013 , accepting that the sums of£1.4 million in respect of Mr Thomas and Mr Stuart Thomas were not to be treated as distributions. HMRC’s letter of6 December 2013 to Mr Thomas enclosed their statement of case and stated as follows: “I am able to tell you… that recent further advice just received by me means that HMRC will not be pursuing the submission that each of the to the appellants in the accounts of Spring Salmon & Seafood for the period ended31 July 2002 are distributions.” 68. The letter continued by asking various questions, including a question in relation to whether “there were meetings at which the payment of the£2 .8m and the over-drawing (of in excess of£1m ) referred to at 5 of your submission of6 August 2013 to the Tribunal were discussed.”
“I have advised my colleague that I have no evidence of any such meetings and do not know whether such meetings took place let alone have the notes of those meetings and the answers to the questions raised. I have though spoken with [the writer’s manager] and he has agreed that HMRC cannot delay these appeal proceedings. The decision therefore has been made not to pursue the submission that the 1.4 million each paid to the appellants was distributions. I refer to the advice at 5 of your submission of6 August 2013 to the Tribunal that “at the time of the payment of the sum they owed money to the company and so were not loan creditors.”
“…you will see from my letter that I have been able to advise Mr Thomas that further advice just received by me means that HMRC will not be pursuing the submission that the£1 .4m each credited to the appellants in the accounts of Spring Salmon & Seafood for the period ended31 July 2002 are distributions assessed for 2002/03. I have explained to Mr Thomas that I have recently been advised that guidance that is in place in relation to a part of HMRC [sic] submissions in these appeals is being reviewed and is to be updated. The previous advice to me is affected. The possibility of obtaining further information and documents has been raised but having considered the matter the decision has been made that HMRC cannot delay and therefore cannot continue these proceedings in so far as the tax treatment of the£1.4m each to the appellants is concerned.” 70. In an email, apparently sent shortly after HMRC’s letters of6 December 2013 , from Mr Thomas to his accountant, Mr Thomas wrote: “I thought you would be pleased to hear that HMRC have dropped the claim against us for 2002/03. Obviously the technical arguments we advanced as regards ss 209 & 418 had to be accepted in the end. As regards his letters to me and his question about a possible benefit in respect of the putative overdrawn loan account in 2002/03, for the avoidance of doubt I have no intention of responding. Moreover, if pushed for a response I will remind him that the 2002/03 enquiries were closed in 31/10/07 and that, in any event, the Undertaking proscribes any further enquiries.” 71. In a letter dated28 March 2017 , HMRC wrote to the accountants acting for Messrs Thomas in the following terms: “You have made no specific comment in relation to the£1,557,991 credit on Director’s current accounts (including related party) in the [SSS] accounts for the period ended31 January 2005 . I advised Mr Rod Thomas way back on17 July 2007 that it was possible that we would have to rewrite the DCA following the final determination of that question of the nature of the payment of£2,800,000 . I repeat that on my analysis Mr Stuart Thomas and Mr Rod Thomas were overdrawn in [SSS] and have remained so since.” 72. In a further letter from HMRC to the same accountants dated25 October 2017 HMRC noted: “You have not provided the analysis of the£1,557,991 as between the directors (and related parties), and I will take advice on the basis that it is to be allocated equally between Mr Roderick and Mr Stuart Thomas.” 73. In his evidence, Mr Thomas, whilst supplying no further details of the alleged transfer of the business to SSS by the S & R Thomas Partnership, said that he was “guided by the approach of the HMRC” in the first two paragraphs of the closure notice quoted above. Mr Thomas stated that: “The Revenue [sic] conclusion is that there was no acquisition of goodwill of any significant value and that the£2.8 million cannot be treated as consideration given for the acquisition of such an asset. The analysis of the tax inspector in the Closure Notice was that the£2.8 million required to be treated as distributions to myself and my brother.” 74. From the above correspondence, I have concluded that HMRC, despite repeated requests, did not receive any detailed information in respect of or an analysis of the current accounts of Messrs Thomas shown in SSS’s various accounts or in respect of the purchase of goodwill by SSS. The suggested tax treatment (i.e. the distribution analysis) put forward by HMRC appears to have been advanced in an information vacuum. It is evident that the appellant has either refused to or has not supplied the necessary information to HMRC. In the light of the email from Mr Thomas to his accountants quoted in paragraph 70 above, I suspect that it is more likely than not that the appellant has simply refused to supply the information requested. Submissions and discussion Date of the cessation of SSS’s trade and the£1 million dividend 75. Mr Upton, appearing with Mr Haddow for the appellant, acknowledged that the significance of the date on which SSS ceased to carry on its trade (strictly, the time immediately before that event) was relevant only to the payment of the£1 million dividend. This was because the dividend was an interim dividend and was paid on1 November 2004 . The fact that the dividend had been declared on31 July 2004 did not create a liability of SSS on22 September 2004 . The dividend was an interim dividend declared under Article 103 of SSS’s Articles of Association (in the same form as the corresponding Article in the Table A). Mr Upton submitted that it was well-established that the declaration of an interim dividend in the terms of Article 103 did not create an enforceable obligation in the hands of a shareholder or a debt owed by the company: Potel v Inland Revenue Commissioners[1971] 2 All ER 504 at 513 (Brightman J); Doherty v Jaymarke Developments (Prospecthill) Ltd 2001 SLT (Sh Ct) 75. 76. Mr Upton submitted that SSS ceased to carry on its trade or about22 September 2004 and that it was immaterial whether it did so on 22, 23 or24 September 2004 . Mr Upton further submitted that SSS did not cease to carry on its trade on a single day. Similarly, the appellant did not carry on all of the trade with immediate effect from 22 September. There was, he submitted, a “run-off” period of a few weeks until 11 November or until7 December 2004 . 77. Mr Upton argued that this situation, where the trade of one company was wound down and the same trade was begun to be carried on over a period of time by a successor company, was a commonplace in business and was contemplated by section 343 ICTA. On a reasonable application of the test in section 344(5) and (6) ICTA the point in time immediately before SSS ceased to carry on the trade was immediately before the appellant began to carry it on. That date, he argued, was 22 or24 September 2004 . 78. There were three reasons which Mr Upton identified that supported the conclusion that the date immediately before the cessation of SSS’s trade for the purposes of section 344(5) and (6) ICTA was the beginning of the transition period (i.e. 22-24 September 2004 ) rather than the end of the period (11 November or7 December 2004 ). 79. First, the cessation of a trade was something which did not always happen overnight. Of course, if the parties executed a standard form business sale agreement there could be a clear cut-off date. However, in the present circumstances the cessation of the trade of SSS and the commencement of the carrying on of the same trade by the appellant was what Mr Upton described as “a process”
“Where, on a company (“the predecessor”) ceasing to carry on a trade, another company (“the successor”) begins to carry it on…” 86. Mr Upton submitted that section 343(1) ICTA – part of the statutory context against which sections 343(4) and 344(5) and (6) ICTA must be construed – linked the cessation of the trade by the predecessor to the commencement of the trade by the successor. This was, he said, another reason why the beginning of the trade carried on by the successor should be taken as the date of the cessation of the trade by the predecessor. 87. I accept, of course, that section 343(1) ICTA is part of the statutory context against which sections 343(4) and 344(5) and (6) ICTA must be interpreted. I do not, however, draw the same meaning from these provisions as Mr Upton. 88. Earlier in this decision, I have set out the statutory history of sections 343 and 344 ICTA. The relief afforded by section 343 ICTA was always intended to be widely drawn and was intended to apply in cases of a cessation of a trade by one company and the commencement of that trade by another company within a specified period of time where there was a substantial identity of ownership. The wording of section 343(1), in my view, provides no support for Mr Upton’s argument. All that the introductory wording of section 343 (1) ICTA does is to provide that there has to be a cessation of a trade and another company beginning to carry it on – the remainder of the provision provides for the relevant time limit and the three-fourths continuous ownership requirements. Mr Upton’s argument, in my view, places far too much weight on the word “on” – a weight which it was never intended to bear. Moreover, I do not think that the explicit wording of section 344(5) and (6) ICTA (“immediately before it ceased to carry on the trade”) can be distorted to require that, in some way, the time of the cessation of the trade by the predecessor must be treated as or deemed to be the commencement of the trade of the successor. The words of section 344(5) and (6) ICTA simply do not bear that meaning either when read alone or in the context of section 343(1) ICTA. 89. In my judgment, taking account of all the circumstances, including those identified in the First Decision at [118]-[126], the trade of SSS ceased on11 November 2004 . This was the date of the last invoice issued by SSS to its customers. I recognise that there were receipts in SSS’s bank account after this date but in my view these were effectively post-cessation receipts. When a company ceases to deliver goods and issue invoices [2] its stream of income ceases, albeit that payment in respect of those invoices may be made at a later date. The cessation of those activities – particularly the issuing of invoices – in my view marks the date on which SSS ceased to trade. In any event, until10 November 2004 onwards the volume of invoices issued by SSS significantly exceeded the number issued by the appellant. 90. Accordingly, the cash comprising the£1 million interim dividend, which was paid on1 November 2004 , cannot be counted as a “relevant asset” of the appellant. The dividend was paid before the trade of SSS ceased. The loans to Messrs Thomas 91. Mr Upton’s argument was, essentially, that although SSS’s audited balance sheet for the year ended31 July 2002 showed a credit to the loan accounts with the appellant of Messrs Thomas of£2.8 million (£1.4 million each), HMRC had disputed whether the goodwill attaching to the business by SSS from the S & R Thomas Partnership was worth£2.8 million (or anything at all) or that any goodwill could be transferred. Accordingly, notwithstanding its appearance in the audited accounts, the loan account showing Messrs Thomas as creditors did not exist. It followed, according to Mr Upton, that the amount of£2.8 million previously owed to Messrs Thomas was now, instead, an amount of£2.8 million owed by Messrs Thomas to the appellant. Therefore, so the argument ran, the£2.8 million now counted as a “relevant asset” of the appellant for the purposes of section 344 (5) ICTA. Mr Upton, with the assistance of Mr Haddow, took me through a detailed analysis of how the loan accounts should have appeared in the various accounts of the appellant. [3] 92. It seems to me that this argument is entirely hopeless because it is simply not supported by the evidence. 93. It is an elementary proposition that, except in certain specified instances (e.g. penalty proceedings and, for example MTIC fraud appeals), the burden of proof in a tax appeal lies upon the taxpayer to displace an assessment (section 50(6) Taxes Management Act 1970 and see, for example, Brady (Inspector of Taxes) v Group Lotus Car Companies plc[1987] STC 635 at 630 9h-j and 642c ). There is a good reason for this rule. In most cases, the facts relevant to a liability to tax or an entitlement to a relief will be within the knowledge of the taxpayer or, at least, the taxpayer will be better placed to produce evidence of the underlying facts (e.g. documents, witnesses etc.). I accept, of course, that if a taxpayer produces prima facie evidence to support its case then, at some point, the evidential burden shifts to HMRC. 94. The appellant must, therefore, prove that the relevant assets of SSS immediately before its cessation of trade exceeded its relevant liabilities in order for losses to be carried forward under section 343 ICTA without restriction. It follows that the appellant must prove that SSS, at that date, had relevant assets for the purposes of section 344(5) and (6) ICTA and must prove the amount of those relevant assets. 95. In this case, the disputed sum of£2.8 million was originally shown in the appellant’s July 2002. It appears that no (or certainly no sufficient) evidence substantiating this valuation was provided by the appellant to HMRC. Certainly, I was shown no such evidence. It is clear from the correspondence that HMRC repeatedly requested information in respect of the loan accounts but no such information was provided by the appellant. Initially, in the absence of information, HMRC sought to treat the amount of£2.8 million as a distribution for tax purposes, but later withdrew from that position for the reasons set out in correspondence. 96. At no stage in these proceedings has the appellant established whether or not the total amount of£2.8 million credited to the loan accounts of Messrs Thomas reflected the value of the goodwill purchased by the appellant from the S & R Thomas Partnership. No valuation evidence has been produced has been produced to demonstrate that the goodwill was worth: (1)£2.8 million , (2) nothing or (3) some other amount. The fact that HMRC, in the absence of information provided by the appellant, took the position that the crediting of£2.8 million to the loan accounts of Messrs Thomas constituted a distribution of that amount does not, in my judgment, constitute any kind of evidence that the payment of this amount to Messrs Thomas resulted in them becoming debtors of the appellant. As I have said, it is for the appellant to prove that the goodwill acquired by SSS from the S & R Thomas Partnership was worthless (or worth less than£2.8 million ) and that, therefore, the entry in the31 July 2002 balance sheet was incorrect. It would then be for the appellant to prove that Messrs Thomas were, therefore, debtors of the appellant. The appellant has simply not done this. To be clear, the appellant has come nowhere near putting forward sufficient or, indeed, any evidence to shift the evidential burden to HMRC. 97. In my view, therefore, the amount of£2.8 million [4] has not been shown to be a “relevant asset” of the appellant. Liabilities in respect of PAYE and NIC 98. In the light of my conclusions in respect of the£1 million dividend and the loans to Messrs Thomas, it is unnecessary for me to express a conclusion in relation to the alleged liabilities regarding PAYE and NIC. Conclusion 99. The net relevant liabilities shown in the balance sheet of the appellant at31 January 2005 liabilities were£936,739 . The removal of the “asset” in respect of the tax repayment claim of£642,835 results in total net relevant liabilities, for the purposes of section 344(6) ICTA, of£1,579,574 . This was common ground. I have concluded that the loan accounts of Messrs Thomas cannot be regarded as “relevant assets”