Sarah Thomas v The Commissioners for HMRC [2026] UKFTT 627 (TC)

[2026] UKFTT 00627 (TC)Case No TC 09861
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 10, 11 and 12 February 2026Date Judgment date: 24 April 2026
Appeal reference: TC/2024/05315
Taxation of shareholder on assignment of debt – whether deliberate – whether there has been a discovery – whether prior agreement under section 54 Taxes Management Act –penalty for deliberate behaviour – whether breach of Article 6 ECHR
Before
TRIBUNAL JUDGE IAN HYDESIMON BIRD
Between
SARAH THOMASAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentDavid Welsh of counsel for AppellantRoss Birbeck of counsel for RespondentsDECISION

Introduction

[1]This appeal concerns whether the assignment of a debt by a company to a controlling shareholder amounts to dividend income as being in excess of the shareholder’s loan account. Other issues arising include whether the tax position had been subject to a prior agreement under s. 54 Taxes Management Act 1970, whether HMRC had made a discovery entitling them to issue an assessment, whether the taxpayer’s failure to declare such tax was deliberate, whether the Appellant was liable to a penalty for deliberately failing to declare such tax and, if so, the appropriateness of HMRC's credit for taxpayer’s behaviour against such penalty.[2]We were referred to a hearing bundle, authorities bundle and a supplemental bundle. Witness evidence was given by Mr Roderick Thomas, Mr Ian Fieldhouse and Mr Barry Charles. Following a direction by this Tribunal the parties also made written submissions after the hearing which were accompanied by supplemental bundles.[3]The parties have not made submissions on the detailed calculations that would follow our decision. This decision is therefore one of principle but we have found it convenient to attempt to draw out the numerical consequences of our findings. However, these calculations are illustrative, and the parties are at liberty to reach agreement on those computational matters or, in the absence of agreement, make an application to this Tribunal.[4]References in this decision to sections are to the Taxes Management Act 1970 and to Rules are to the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 unless stated otherwise.

Issues in this appeal

[5]The central issue in this appeal is the taxation of an assignment of a debt by a company Thomas MacLennan Limited (“TML”) to the Appellant and whether it amounts to dividend income as being in excess of the Appellant’s loan account but a number of other consequential issues arise.[6]In this decision we use the term “Appellant’s Loan Account” to mean all monies owed to the Appellant by TML from time to time, whether pursuant to the loan made by her or otherwise.[7]The issues in more detail are:(1) whether the assignment of the debt by TML to the Appellant is taxable as the Appellant’s dividend income.(2) whether the assessment was settled by the parties by an agreement under s.54, together with associated case management issues raised by the Appellant about HMRC’s pleading of this issue.(3) whether the relevant assessment was validly issued in time, by HMRC making a discovery of a loss of tax within s.29(1).(4) whether the assessment was validly issued in time because the loss of tax was brought about deliberately by the Appellant within s.36(1).(5) In respect of the penalty assessment: (a) Whether the loss of tax was brought about deliberately within schedule 24 Finance Act 2007 (b) Whether HMRC provided appropriate notices of the risk of penalties in compliance with Article 6 of the European Convention on Human Rights (c) if the penalty assessment is valid, the whether the level of the penalty is excessive[8]HMRC accept that that, even if they succeed in this appeal, the assessment and associated penalty assessment are, as set out in their review conclusion letter of 19 December 2023, too high and so have asked the Tribunal to exercise its powers under s. 50(6) to vary the assessments.[9]If the Appellant is right on a number of issues in this appeal there is no need for us to consider the other issues, including whether the assignment of the loan is taxable in the Appellant’s hands. However, we have considered and made decisions in respect of all the issues as set out below.

The facts

[10]We find the central facts as out below.

The witnesses

[11]Mr Thomas gave evidence as to the events relevant to this appeal and HMRC’s investigation. For reasons set out in this decision we found Mr Thomas’ evidence to be unreliable and, in at least one respect, untruthful. As set out below, Mr Thomas is very familiar with tax appeals and the responsibilities of witnesses but notwithstanding that he has made untrue statements repeated under oath to this Tribunal. We therefore find him to be an unreliable witness and place little weight on his evidence.[12]Mr Fieldhouse is a semi-retired chartered accountant and fellow of the Institute of Chartered Accountants in England and Wales. Mr Fieldhouse prepared TML’s accounts. We found Mr Fieldhouse to be a credible witness and we accept his evidence.[13]Mr Charles is an officer in HMRC’s Fraud Investigation Service team and had conduct of HMRC's inquiries from April 2022 taking over from Mr Gill. We found Mr Charles to be a credible witness and we accept his evidence.[14]The Appellant did not appear as a witness. Mr Thomas, the Appellant’s husband, explained that she had a severe health condition and, if subject to stress, was at risk of suffering an aneurysm which would have a 50% chance of being fatal. Mr Thomas did not produce any written medical evidence as to the Appellant’s medical condition but his evidence as to her health was not challenged by HMRC. It was common ground that Mr Thomas controlled the Appellant’s tax and financial affairs. He had prepared her tax returns for over 35 years, took all the decisions relevant to this appeal that were apparently made by the Appellant. We therefore find that the Appellant’s evidence would have been of no assistance, that Mr Thomas stands in her shoes and speaks for her in this appeal.

Previous decisions

[15]We note, principally for background, that the Appellant, Mr Thomas, other family members and associated companies have appeared in this Tribunal and higher courts on a number of occasions, principally in connection with the Spring Capital and Spring Salmon litigation (Spring Capital Ltd v HMRC & Ors [2015] UKFTT 0066, Spring Salmon & Seafood v HMRC [2016] UKUT 313, Spring Salmon & Seafood Ltd v HMRC [2017] UK UT 0205 and Spring Capital Ltd v HMRC 2023 UK UT 91).[16]More importantly, the decision of this Tribunal in Rebecca Thomas and Sarah Thomas v HMRC [2014] UKFTT 980 ("Thomas 2014") is relevant to certain issues arising in this appeal, as is the decision in Sarah Thomas v HMRC [2021] UKFTT 357 (amended decision) (“Thomas 2021”) Which concerned this Appellant’s appeal of a notice under schedule 36 of Finance Act 2008 (“Schedule 36”) issued in the investigation leading to this appeal.[17]We have noted those decisions but, subject to those matters relevant to this appeal and expressly noted in this decision, have reached our own conclusions based on the evidence available to us in this appeal.[18]TML’s activities are described in its 2008 accounts as being engaged in monetary intermediaries, business and management consultancy and artistic and literary creation. We find that in practice the main part of TML’s activities consisted of making loans and seeking to develop a music business through its wholly owned subsidiary Artemis Records Limited.[19]Throughout the relevant period, Mr Thomas, was the sole director of TML.[20]In period up to 3 October 2009 the Appellant held 8,000 of the 10,000 issued shares in TML and Mr Thomas held the balance of 2,000. On that date the Appellant transferred 2,000 shares to her daughter Emily and that remained the shareholder position up to 1 February 2010.[21]On 15 February 2011 TML was dissolved. The Appellant was its sole creditor.

TML’s accounts

[22]TML’s accounting periods ran to 31 October each year and were prepared by Mr Fieldhouse. The accounts were unaudited and abbreviated. The last set of accounts produced were for the year to 31 October 2008.[23]The 2007 accounts only included a balance sheet, not a profit and loss account. However, using the prior year figures included in the 2008 accounts we find that the TML accounts show the following amounts in respect of 2007 insofar as relevant: 2007 Profit and loss account (from 2008 accounts) £ Turnover (note 3) 351,337 Retained profit/(loss) for the financial year 11,698 Balance sheet Cash at bank 267,861 Creditors (note 6) (1,442,717) Shareholder funds 21,416[24]The 2007 and 2008 accounts had the following notes relevant to 2007: (1) Note 3 to 2008 accounts: Interest payable on shareholder funds as at 31 October 2007: £91,981:
“Shareholders’ loans are repayable on demand and earn interest at commercial rates. They would be expected to be repaid only as funds permit” (2) Note 5 to 2007 accounts: “Amounts owing by related parties comprise £30,000 … owed by Artemis Entertainment limited. Mr RC Thomas who is the company’s director and a shareholder owns 45.6% of the ordinary share capital of Artemis Entertainment Limited… During the year the company utilised A&R services of £119,385 provided by Mr RC Thomas”
During the year the company utilised A&R services of £119,385 provided by Mr RC Thomas” (3) Note 6 to 2008 accounts: Shareholder loans as at 31 October 2007: £1,281,797[25]The 2008 accounts show the following amounts insofar as relevant: 2008 Profit and loss account £ Turnover (note 3) 355,573 Retained profit/(loss) for the financial year (80,841) Balance sheet Cash at bank 14,679 Creditors (note 6) (1,812,865) Shareholder funds (59,425)* *The accounts showed shareholder funds as “£59,425” but it was agreed that was a typographical error and should have been “£(59,425)”[26]The 2008 accounts had the following notes:(1) Note 3: Interest payable on shareholder loans: £150,000(2) Note 5:
“Amounts owing by related parties comprise £32,500 … owed by Artemis Entertainment limited. Mr RC Thomas who is the company’s director and a shareholder owns 45.6% of the ordinary share capital of Artemis Entertainment Limited, During the year the company invested £243,715 in its wholly owned subsidiary, Artemis Records Limited, which is currently in liquidation… During the year the company utilised A&R services of £nil… provided by Mr RC Thomas”
During the year the company utilised A&R services of £nil… provided by Mr RC Thomas” (3) Note 6: Shareholder loans: £1,759,480 “Shareholders loans are repayable on demand and earn interest at commercial rates. They would be expected to be repaid only as funds permit”[27]We accept Mr Fieldhouse’s evidence and further accept that, subject to points discussed below, the 2008 accounts are accurate. Mr Fieldhouse’s evidence was that he prepared the accounts based on TML’s bank statements and information provided to him by Mr Thomas. He also stated that he had had sight of the NRL loan agreement and would have seen minutes prepared by the directors (i.e. Mr Thomas) on the accrual of interest but he cannot recall what they said and he does not have them now.[28]In Mr Fieldhouse’s view the shareholders’ loan account was made up of interest, remuneration and expenses paid for by Mr Thomas. He could not expand on the reference in the accounts to shareholder loans earning interest at “commercial rates” save that they would have been significantly above base rate but lower than the rate on the NRL loan.[29]However, Mr Fieldhouse accepted that the 2008 accounts simply show a shareholders’ loan account of £1,759,480. The shareholders in this period were the Appellant and Mr Thomas, and when asked the question by the Tribunal, Mr Fieldhouse could not say to which shareholder the money was owed. He would have had sub accounts at the time to identify to whom the loans were made but did not now have access to those records.[30]Further, we do not accept Mr Thomas’ evidence that he assigned to the Appellant his right to repayment of debts owed by TML, whether before 31 October 2008 or in the period after these accounts to 1 February 2010. The Appellant was unable to produce any evidence to support any such assignment and Mr Fieldhouse could not recall seeing anything. The only evidence provided to us was Mr Thomas’ witness evidence upon which we place little or no weight. It is undoubtedly the case that family companies do not always make formal records or preserve them for such a long time. That said, in orchestrating the transfer of an asset worth in excess of £2m to his wife Mr Thomas ought to have realised there were potential tax consequences and evidencing the value of the Appellant’s Loan Account was central to that tax treatment. The burden of proof is on the Appellant on this issue and it has not been discharged.[31]We therefore find the shareholders’ loan account in the 2008 accounts of no assistance in determining the amount of the Appellant’s Loan Account.

the TML Loan

[32]On 19 March 2007 the Appellant made a loan of £1m to TML, funded by a mortgage on the family home (“the Mortgage” and “the TML Loan”). The terms of the TML Loan and specifically the interest accruing on it, if any, were not documented and there was extensive discussion on this point in submissions and during the hearing.[33]We find that the interest on the TML Loan was payable at 15% a year accruing on a daily basis and payable on a simple not compounding basis. This rate (and the fact that it accrues at a simple basis) is in overall terms consistent with the reference in TML’s 2008 accounts to an accrual of £150,000 during the year, the amount declared by the Appellant in her 2007 and 2008 tax returns and the calculations produced by the Appellant. There are inconsistencies in the Appellant’s tax returns and the calculations produced by the Appellant but we discuss those points further below and do not find it affects our conclusion on the rate of interest on the TML Loan. For completeness, we do not accept the suggestion put by Mr Birbeck to Mr Thomas in cross examination, that the interest only accrued when the directors, that is Mr Thomas, declared interest to be due at the year end.[34]Applying a simple rate of interest at 15% we make tentative findings that interest of £430,684.93 accrued on the TML Loan over the period from 19 March 2007 to 1 February 2010. Further, it accrued by TML’s accounting year period and the Appellant’s tax year as follows: TML Loan interest accrual by accounting period Accounting year accrual period duration interest (£) 06/07 19.3.07 to 31.10.07 226 days 92,876.71 07/08 1.11.07 to 31.10.08 One year 150,000.00 08/09 1.11.08 to 31.10.09 One year 150,000.00 09/10 1.11.09 to 1.2.10 92 days 37,808.22 Total 430,684.93 TML Loan interest accrual by tax year Tax year accrual period duration interest (£) 06-07 19.3.07 to 5.4.07 17 days 6,986.30 07-08 6.4.07 to 5.4.08 One year 150,000.00 08-09 6.4.08 to 5.4.09 One year 150,000.00 09-10 6.4.09 to 1.2.10 301 days 123,698.63 Total 430,684.93[35]We note there is not a precise correlation with other figures, for example the 2007 accounts show an interest accrual of £91,981 rather than £92,876.71.

payment of interest on the TML Loan

[36]The Appellant argued that TML did not have the resources to make any payments of any kind and did not do so. She was wholly dependent on Mr Thomas for financial support. That being the case, the interest on the TML Loan accrued and increased the Appellant’s Shareholder Loan.[37]Mr Charles did not think it was credible that the Appellant could service the Mortgage without payment by TML of interest on the TML Loan to the Appellant.[38]Mr Charles obtained from one of the Appellant's banks, Handelsbanken, copies of statements which showed a number of payments to the Appellant totalling £349,794.08. Most of these entries in the bank statements had descriptions for each transfer which were either “SDG” plus a number (for example “00026”), “BGC” with no number and one entry appeared as “cheque”. Mr Charles concluded and it was HMRC’s argument in the hearing that these payments represented payment of interest to the Appellant under the TML Loan.[39]Further, according to its accounts, TML had cash at bank of £267,861 as at 31 October 2007 and £14,679 as at 31 October 2008. HMRC suggested that this indicated TML had the resources to pay interest to the Appellant.[40]Mr Thomas in his witness statement said, contrary to the Appellant’s case:
“Between 2006 and 2009 TML made payments of interest to the appellant amounting to £306,000…”
[41]Mr Thomas was cross-examined on what he meant by this statement and he tried to retract it, argue he had meant the interest had accrued and generally referred the Tribunal to Mr Fieldhouse and that this interest had been declared in the Appellant's tax returns.[42]We do not accept HMRC’s conclusion that the entries in the bank statements represent payment of interest to the Appellant nor that TML had resources to pay the interest. We find that TML did not have any resources beyond those provided by Mr Thomas. We also find that that Mr Thomas would have supported the Appellant sufficient to enable her to make the interest payments on the Mortgage.[43]We therefore find based on the evidence including TML’s 2008 accounts and Mr Fieldhouse’s evidence, that it is more likely than not that TML did not pay any interest to the Appellant during the life of the TML Loan and that interest accrued on the TML Loan from 19 March 2007 to 1 February 2020. In making such a finding we (to the Appellant’s benefit) disregard Mr Thomas’ evidence save to note it as a further example of Mr Thomas’ evidence being unreliable.

the Appellant’s tax returns

[44]The Appellant filed self-assessment tax returns for all relevant years.[45]In those returns the Appellant declared the following interest relating to the TML Loan:(1) 2007-08: £120,000(2) 2008-09: £120,000(3) 2009-10: nil[46]The Appellant had in fact declared interest in 2007-08 and 2008-09 on a net rather than gross basis. Following a discovery assessment in October 2010 the Appellant amended her 2008-09 tax return to show a gross receipt of £150,000. This Tribunal inThomas2014 found at [237] and [241]that the Appellant should have declared interest of £150,000 in 2007-08 and the Appellant was not entitled to declare the interest on a net basis.[47]The Appellant also declared the following employment income in her tax returns:(1) 2007-08: £5,000 income from TML(2) 2008-09: (a) £5,000 income from Artemis Records Ltd (b) £30,000 tax exempt compensation(3) 2009-10: £6,000 income from Spring Capital Ltd[48]The Appellant did not declare any tax liability for the assignment of the NRL Loan in her 2009-10 tax return.

The NRL Loan and Assignment

[49]Nine Regions Limited (“NRL”) is a separately owned company independent of the Appellant, Mr Thomas and TML. In 2007 TML made two loans to NRL totalling £1,250,000, the first being £1m in March 2007 and the second being £250,000 in November 2007. The NRL loan (being the aggregate of those loan advances) had an interest rate of 5% a quarter or 20% a year (“the NRL Loan”). It is agreed between the parties that as at 1 February 2010 the total amount owed by NRL to TML under the NRL Loan was £2,135,713.[50]It is agreed that, notwithstanding HMRC’s belief at the time of the Schedule 36 appeal (Thomas 2021 at [9] and [13]), the Appellant did not make a further loan of £250,000 to TML to fund the second NRL advance. We note in passing that in an e mail in May 2019 Mr Thomas suggested to HMRC that HMRC had accepted the Appellant had made the additional loan. Mr Thomas must have been aware at the time of the Thomas 2021 hearing and the May 2019 e mail that this was not the case, did not at the time attempt to correct the position (Thomas 2021 , for example at [77] –[80]) and we are left with the impression he would have been happy for HMRC to proceed on a false basis. The position was later corrected in the first response to the schedule 36 notice in May 2022 but we find this approach illustrative of Mr Thomas’ approach to evidence and HMRC's investigation.[51]Between 2007 and 2010 the NRL loans were restructured, and it appears replaced by two loans advanced in 2009 and representing a total advance of £1,796,525.83. The loan restructuring was not explained to us and the parties have not suggested this is relevant to our decision.[52]On 1 February 2010 two documents were executed:(1) TML and the Appellant entered into a deed. That deed was not produced in evidence by the Appellant,(2) Later that same day, the Appellant assigned the NRL Loan to Spring Capital Limited (formerly Spring Seafoods Limited) (“SCL”) in exchange for the issue of a debenture. The deed of assignment was produced in evidence and states (with names added for clarity):
“BACKGROUND (A) Pursuant to an assignment dated 1st February 2010 the [Appellant] was assigned the debt (as defined below) by Thomas MacClellan Limited. The [Appellant] now wishes to invest in the assignee company in return for a credit to her shareholder loan account… INTERPRETATION 1.1 The definitions and rules of interpretation in this clause apply in this deed. Debt: means the respective amounts now owing to The [Appellant] under the Loan Agreements Loan Agreements. Loan Agreements: means those agreements listed in the Schedule ASSIGNMENT In consideration for a credit in the amount of £2,135,713 to her shareholder account with [TML] , [the Appellant] hereby assigns the Debt, (the value of which is £2,135,731) and all rights in relation to it, with limited title guarantee, to [SCL]”
. INTERPRETATION Debt: means the respective amounts now owing to The [Appellant] under the Loan Agreements Loan Agreements. Loan Agreements: means those agreements listed in the Schedule

ASSIGNMENT

[53]The “Debt” for the purposes of the deed was the NRL Loans.[54]The effect of these arrangements have been interpreted differently over the period of this dispute. In the CGT Assessment Mr Charles appeared to treat the effect as being as assignment (or disposal) by the Appellant of the Appellant’s Loan Account, thus for example, in his letter of 4 May 2023 he said:
“The debt you assigned to [SCL] arose from the money you were owed by Thomas MacLennan limited for funds that you introduced…”
[55]This is also consistent with the Appellant’s appeal and the reference to the Appellant as the original creditor.[56]We find that the drafting of the deed of assignment is obscure and have not had a clear and comprehensible explanation of its terms. However, it appears to us - and is common ground between the parties - that there must have been an assignment of the benefit of the NRL Loan by TML to the Appellant and a credit of £2,135,713 against the Appellant’s Loan Account. The benefit of the NRL Loan was then assigned by the Appellant to SCL in exchange for a debenture. To the extent there has been a receipt of value by the Appellant it is on the first stage but given HMRC has abandoned a capital gains tax analysis, we do not consider the mechanics material to our decision. In short the substantive issues in this appeal are simply concerned with whether the value of the NRL loan on 1 February 2010 exceeded the value of the Appellant’s Loan Account on that date and so the excess value accrued to the Appellant’s benefit. The mechanics of the assignment are in our view irrelevant.[57]Mr Thomas was at the time a director and according to the 2007 accounts, owned 25% of the ordinary share capital of SCL.

HMRC’s investigation and assessment

[58]The enquiry and subsequent assessments relevant to this appeal grew out of HMRC’s investigations into SCL. The details of those investigations are not relevant but included SCL’s accounting period ended 30 April 2010 and whether the TML Loan and other amounts represented income for SCL. That inquiry was eventually closed.[59]On 27 January 2017 as part of that enquiry RSM, SCL’s accountants, in a letter to HMRC made reference to the Appellant’s assignment of a debt due to her from TML of £2,135,713.[60]On 24 February 2017 HMRC wrote to RSM and suggested that inquiries may need to be extended to include the Appellant and potentially issuing discovery assessments “…if, for example, I conclude that amounts that should have been taxed were probably paid to or credited to Mrs Sarah Thomas by Thomas MacLennan Ltd…”.[61]On 28 March 2017 RSM wrote to HMRC explaining the £1m loan, enclosing a copy of the TML accounts for the year to 31 October 2008, showing shareholder loans outstanding at that date of £1,759,480 and stating that the Appellant no longer had the bank statement sheets to show credits in her account. The letter further stated that RSM understood that the Appellant did receive over £300,000 of interest from TML on the loan and also received dividends, gifts from her father and sums from Mr Thomas.[62]On 13 December 2018 HMRC commenced a compliance check into the Appellant’s tax affairs and an enquiry into her tax return for 2017-18. HMRC were particularly interested in £650,000 paid by the Appellant on 3 February 2010 and the NRL debt assignment. HMRC asked a number of questions and made requests for background information on the funding and background to the 2010 NRL debt assignment and the TML shareholder loan accounts.[63]On 25 January 2019 Mr Thomas responded to HMRC's letter:
“As you are aware we consulted with our accountants last week, who reviewed your letter of 13/12/18. We were advised that the other matters you raised do not fall within the scope of your statutory enquiry. Having said that, in a spirit of co-operation, the matters you raised have already been comprehensively addressed by your predecessor in correspondence and in meetings with RSM. I refer you back to that correspondence and HMRC’s meeting notes. As previously stated, we have nothing further to add. I would also make the point that your predecessor carefully considered the question of shareholder capital injections more than two years ago and decided against making any assessment in respect of Sarah Thomas. Having decided not to involve Sarah he elected instead to impose a substantial assessment on Spring Capital Ltd together with a large penalty. Those assessments were the subject of appeals in the FTT (that were settled under s54 TMA 1970 last summer). In my view it is not reasonable for HMRC to pursue this matter any further. If you review your files you will note that we have already provided HMRC with compelling evidence that the shareholders (including Sarah) had more than adequate means to finance the capital injections made by them.”
[64]Mr Charles responded to Mr Thomas on the same day:
“Please rest assured that I did read all the correspondence, papers and representations before writing to you on 13 December 2018. I am satisfied that the overall position (in so far as it impacts on Mrs Thomas) has been put to you as tax agent. No assurances, implied or otherwise, have been given in relation to the affairs of Mrs Thomas. Mr Tony Stewart did not decide not to raise an assessment on Mrs Thomas and your assertion is simply wrong . The correspondence on the agreement of the shareholders loans issue in Spring Capital Ltd (July 2018) is very clear in what it says. You have stated there is nothing further to add other than what has already been the subject of correspondence with my predecessor. I am fine with that if that is your position but it does mean I will have to proceed with my enquiries (including consideration of third party enquiries) with or without your cooperation and take whatever steps are deemed necessary to investigate the tax position (as set out in my letter of 13 December 2018) for Mrs Thomas.”
[65]On 21 March 2019 HMRC issued a notice under paragraph 1 of Schedule 36 requesting information and documents relating to the funding and arrangements of £250,000 paid by the Appellant to TML, £650,000 paid by the Appellant to SCL and the 2010 NRL debt assignment.[66]On 16 April 2019 the Appellant appealed the issue of the taxpayer notice on grounds including:
“1. The appellant has already provided all the information requested by HMRC which is within her power or possession; … 7. The appellant has cooperated with HMRC and provided HMRC with extensive information which underscores the sources of her wealth and her financial resources; the appellant’s advisers have offered to meet with HMRC to clarify any further issues in relation to this matter”
[67]There then followed further exchanges between the parties.[68]On 31 May 2019 HMRC responded to the Appellant’s grounds of appeal against the schedule 36 notice. In that letter HMRC responded to Mr Thomas's offer of a meeting by saying more progress needed to be made on providing the information requested, noting Mr Thomas’ continued failure to cooperate and his stated position that “we have nothing further to add”.[69]On the same day Mr Thomas in an email to HMRC sought to explain the value of the Appellant’s Loan Account by reference to loans made by her to TML, salaries accrued to the Appellant and Mr Thomas and invoices for services provided by Mr Thomas to TML. Where those amounts were owed to Mr Thomas he had assigned them to the Appellant.[70]On 28 August 2019, following approval by the Tribunal, HMRC issued third party notices under paragraph 2 of Schedule 36 to two of the Appellant’s banks, Barclays Bank plc and Handelsbanken plc, requesting information including bank statements.[71]On 4 October 2021 this Tribunal issued its decision in Thomas 2021 dismissing the appellants appeal against the taxpayer schedule 36 notice (amended on 20 April 2022 but only to correct the position on rights to appeal).[72]On 25 May 2022 Mr Barnard on behalf of the Appellant provided responses to the schedule 36 notice. In the responses Mr Barnard confirmed that the Appellant had not lent £250,000 to TML. He also sent HMRC the 2010 deed of assignment for the NRL assignment.[73]On 30 June 2022 Mr Charles raised further questions.[74]On 9 August 2022 Mr Barnard stated that no personal bank account statements were available for this period. Mr Barnard also provided Mrs Thomas’s loan account balances with SCL for the 5 years ended 30 April 2016 showing that Mrs Thomas had drawn down £1,593,465 of the £2,135,713 (shown as £2,135,413 on the schedule) credited to her shareholders loan account with SCL for the debt she assigned from TML.[75]On 23 September 2022 Mr Charles replied to Mr Barnard raising the possibility that NRL Loan Assignment might give rise to a chargeable gain but suggesting that any gain was dependent on the value of the Appellant’s Loan Account.[76]On 11 October 2022 Mr Barnard provided the Appellant’s Calculation, a schedule summarising costs incurred in the period 2006-7 to 2009-10 and showing that Mrs Thomas was owed £2,146,114 by TML.[77]On 22 February 2023 Mr Barnard provided further copy documentation to support the schedule being in respect of separate credits to Mrs Thomas’s shareholders account with TML to February 2010.[78]On 4 May 2023 Mr Charles notified the Appellant that HMRC would issue a discovery assessment in the amount of £192,297.24 for tax year 2009-10 relating to the Appellant’s assignment of the NRL Loan to Spring Capital on the basis that the NRL Loan was a capital asset for capital gains tax purposes. The capital gain was calculated by HMRC on the basis that NRL Loan had a value of £2,135,713 and the Appellant had provided consideration in setting off her loan account worth £1,057,295, being the £1m TML Loan principal plus £57,295 of interest owed. Mr Charles said he would be writing further with his view on penalties and attached factsheets CC/FS9.[79]On 10 May 2023 HMRC issued the assessment in the amount of £192,297.24 (“the CGT Assessment”).[80]On 12 May 2023 HMRC notified the Appellant that it considered a penalty under schedule 24 Finance Act 2007 was applicable and enclosed fact sheets CC/FS7a and CC/FS14.[81]On 31 May 2023 the Appellant’s agents appealed on the Appellant’s behalf against the CGT Assessment and in that appeal argued that even if there were a gain it would not be chargeable to CGT because s. 251(1) Taxation of Chargeable Gains Act 1992 (“TCGA”) provided that where a person incurs a debt to another no chargeable gain shall accrue except in the case of a debt on security. This was not a debt on security and the Appellant would be the original creditor for the purposes of s. 251(1).[82]In a letter dated 26 October 2023, Mr Charles changed his view and concluded that transaction was not subject to CGT but in the same letter Mr Charles concluded that the assignment of the debt from TML to the Appellant constituted an income distribution to the extent its value exceeded the Appellant’s Loan Account:
“As the majority shareholder in Thomas MacLennan Ltd you have received an asset of the company worth £2,135,713, which potentially gives rise to an income tax charge in accordance with s209(2)(b) ITCA 1988 as an income distribution. The amount of that income distribution takes into account any “new consideration” you gave for the asset. … You therefore received an income distribution of £1,078,418 (£2,135,713 less £1,057,295) assessable under s383 ITTOIA 2005. I attach a calculation of the income tax liability arising on this income. In accordance with s29(1)(a) TMA 1970, I consider that as an officer of the Board I have discovered that an amount of income tax that ought to have been assessed has not been assessed.”
[83]On 31 October 2023 HMRC issued a new discovery assessment (“the Income Tax Assessment”) for tax year 2009-10 in the amount of £423,971.20. The assessment attached a calculation showing “other” income of £1,078,418. The calculation of tax due used marginal rates up to 40% (“the Other Income Calculation”).[84]On 8 November 2023 the Appellant appealed the Income Tax Assessment.[85]On 14 November 2023 HMRC issued a penalty assessment for deliberate inaccuracy in the amount of £286,180.56 (“the Penalty Assessment”). In calculating the penalty HMRC gave the following percentage reductions:(1) Telling – 0%(2) Helping – 5%(3) Giving access – 5%[86]On 15 November 2023 HMRC agreed to postpone the tax assessed.[87]On 21 November 2023 the Appellant appealed the Penalty Assessment.[88]On 22 November 2023 the Appellant’s agents made a number of arguments to HMRC. The Appellant asked whether the letter of 26 October 2023 constituted an agreement for the purposes of s.54. The Appellant also pointed out that the Other Income Calculation charged the Appellant to “other” income and applied the tax rates for that source of income rather than the lower rates attaching to dividend income as indicated in the 26 October letter:
“…In your letter you have referred to this as a distribution but your actual assessment for the year 5 April 2010 describes this as ‘other income’, and taxes it at the normal rates for that year instead of the special rates that apply to dividends and other distributions of a company. Therefore, what is this ‘other income’ and how in your view did it arise?”
[89]On 27 November 2023 HMRC agreed to postpone payment of the penalties.[90]On 19 December 2023 Mr Charles issued a view of the matter letter upholding the Income Tax Assessment and the Penalty Assessment but agreeing that the income should be taxed as a dividend:
“I agree that in accordance with s397 ITTOIA 2005 a tax credit equal to one ninth of the amount or value of the distribution is due. I attach a revised calculation. The distribution is taxed at the higher dividend rate. The revised tax payable is £263,081.25”
Mr Charles therefore substituted a revised calculation of the tax due, applying the tax calculation for distributions including tax rates of 32.5% and 10% credit, reducing the tax due to £263,081.25 (“the Distribution Calculation”). The letter also included a consequential reduction in the assessed penalties to £177,579.84. The revised tax payable is £263,081.25”[91]On 10 January 2024 the Appellant’s agents argued that the change in calculations amounted to a s.54 agreement settling the Income Tax Assessment.[92]On 22 March 2024 an internal review by HMRC upheld the decisions.[93]On 2 April 2024 the Appellant appealed to the Tribunal.

findings of fact: The value of the Appellant’s Loan Account

[94]A central question and one upon which the parties disagree is the value of the Appellant’s Loan Account on 1 February 2010. As this forms part of the issue as to whether there is a tax charge, the burden of proof is on the Appellant.[95]The task of establishing the amount owed by TML to the Appellant is difficult not least because of the passage of time but the parties have come up with three different methods.[96]In summary, HMRC’s position is that the value of the Appellant’s Loan Account stood at £1,049,794.08 as of 1 February 2010 and so the Appellant is subject to tax on the difference between £1,049,794.08 and £2,135,713, being the value of the NRL Loan. The Appellant’s position is that, taking into account a number of factors outside the TML Loan, the Appellant’s Loan Account was at least the value of the NRL Loan as at that date and so there is no tax charge. The Appellant justifies this on two alternative approaches.

The Appellant’s primary position

[97]The Appellant’s primary position is that the starting point is TML’s 2008 accounts, the most recent accounts prepared for TML. These accounts had been prepared by Mr Fieldhouse, a highly qualified and experienced chartered accountant and should be accepted by HMRC.[98]These accounts show the shareholders’ loan account at £1,796,480 and interest accrued in the year at £150,000. If interest then accrued at 15% a year in the 16 months from 31 October 2008 to 1 February 2010, £200,000 of additional interest would have accrued. TML did not have funds to pay the Appellant any interest and so all of the accrued interest must have increased the Appellant’s Loan Account. The amount in the Appellant’s Loan Account would therefore be: shareholders’ loan account as at 31.10.08 £1,796,480 accrued interest as at 31.10.08 £150,000 post 31.12.08 interest £200,000 Appellant’s Loan Account £2,146,480[99]As £2,146,480 is in excess of the value of the NRL Loan at £2,135,713 no tax arises.[100]As set out below, HMRC did not accept that the shareholders’ loan account in the 2008 accounts was an accurate reflection of the Appellant’s Loan Account and that interest on the TML Loan had not been paid.

The Appellant’s alternative position

[101]As set out above, in the course of correspondence with HMRC, and faced with Mr Charles not accepting the Appellant’s primary position on the Appellant’s Loan Account, Mr Thomas in 2022 felt obliged to justify the value of the Appellant’s Loan Account by providing information on expenses incurred at the time on behalf of TML. The argument was that for expenses incurred by TML, TML did not have the funds to pay the costs itself and so needed external funding which was provided by Mr Thomas. This created a debt owed to Mr Thomas and he assigned to Mrs Thomas the right to receive repayment from TML. In short, this explained the value of the shareholders’ loan account in the 2008 accounts, how it increased after October 2008 and why the Appellant’s Loan Account exceeded £2,135,713, the value of the NRL Loan.[102]To support his argument Mr Thomas sent to HMRC on 11 October 2022 a table summarising debts owing to Mr Thomas and the Appellant together with expenditure he had incurred on behalf of TML. We have replicated that table at Appendix A to this decision (“the Appellant’s Calculation”).[103]The Appellant has consistently stressed that this table and the backing explanation were indicative of the type of expenditure incurred and reflected in the shareholders’ loan account. It had been compiled in order to show that the shareholders’ loan account was at least equal to £2,135,713. Evidence was necessarily difficult to put together a long time after the relevant events but other expenditure would have been incurred making the real figure even higher. Had there not been such a passage of time more accurate information would have been available and HMRC should not be entitled to benefit from their tardiness. These difficulties should be taken into account in determining whether the Appellant has established the expenditure was incurred.[104]HMRC did not accept the Appellant’s Calculation, essentially because of the complete lack of documentary evidence to support it.[105]There has been extensive discussion in correspondence and during the hearing as to the credibility of the constituent elements of the Appellant’s Calculation and whether the costs claimed should form part of the Appellant’s Loan Account, and our findings are as set out below.[106]As a general point, as found above, we do not accept Mr Thomas’ evidence that he assigned to the Appellant his right to repayment of debts owed by TML, whether before or after 31 October 2008. This point is sufficient for us to find that none of the claimed expenditure incurred by Mr Thomas should be added to the Appellant’s Loan Account but for completeness we have briefly considered each category of expenditure.

The Appellant’s employment income

[107]We find that the £5,000 of employment income in the Appellant’s Calculation and claimed in each of 2006/07, 2007-08 and 2008-09 and the £30,000 tax exempt compensation in 2008-09 represents income payable to the Appellant. We accept this £50,000 was due to her and was never paid. Those incomes therefore increase the Appellant’s Loan Account. Mr Thomas’ employment income and consultancy services Employment income:£5,000 and £35,000

Mr Thomas’ employment income and consultancy services

[108]The Appellant’s Calculation includes claims for £5,000 of employment income in 2006/07 and £35,000 in 2008-09 for Mr Thomas.[109]We accept these amounts were not paid to Mr Thomas but do not accept that the debt was assigned.

Consultancy services

[110]The Appellant’s Calculation includes two amounts for consultancy services being £66,800 in 2008-09 and £53,385 in 2009-10. The consultancy services were for services invoiced by Mr Thomas to TML on 31 October 2008 and 31 October 2009 respectively. The Appellant produced invoices to support the claim.[111]HMRC suggested that these amounts were reflected in note 6 in the 2008 accounts where there was an accrual in October 2007 of £120,185. The accruals figure in the 2008 accounts reduced by £66,800 to £53,385 and so HMRC concluded it was reasonable to assume that Mr Thomas had been paid £66,800. In the absence of later accounts it was also reasonable to conclude that the balance of £53,385 was also paid to Mr Thomas.[112]We find that the £66,800 invoice was on balance paid by TML but not the second invoice of £53,385. However, again, we do not accept this debt was assigned by Mr Thomas to the Appellant.

Employment income:£124,385

[113]On 8 February 2011 HMRC issued a determination under Regulation 80 of the PAYE Regulation assessing to employment income £119,385 of income payable to Mr Thomas. The Appellant produced the determinations to support the claim. The regulation 80 determination was appealed by TML and payment of the tax postponed but the company went into liquidation before that appeal could be determined.[114]The underlying income referenced in the Regulation 80 assessment was listed as an expense in the Appellant’s Calculation. In cross examination Mr Thomas accepted that this employment income was the same as the consultancy services income amounts of £66,800 and £53,385 invoiced in October 2008 and 2009 as discussed above. Mr Thomas was indignant that HMRC had assessed the consultancy services to PAYE. He had paid tax through his personal tax return on these amounts and, it appeared to him, that he would in effect be subject to double taxation on the consultancy services as HMRC had refused to credit the personal tax he had paid against TML's PAYE bill. That being the case Mr Thomas felt entitled to show in the Appellant’s Calculation not only the original consultancy services but also the employment income HMRC said arose.[115]It was accepted by Mr Thomas in cross examination and by Mr Welsh in closing submissions that the employment income of £124,385 in the Appellant’s Calculation in effect duplicated the consultancy services and there had never been employment income of that amount independent of the consultancy services recharacterized by HMRC.[116]We find that Mr Thomas knowingly made a fictitious claim repeated under oath which was intended to reduce the Appellant’s tax liability. As already noted, Mr Thomas is extremely familiar with the tax appeals and cannot have made an innocent mistake. That aside, the claim for employment income of £124,385 in the Appellant’s Calculation cannot stand.

Interest

[117]The Appellant claimed interest accruals of £6,101 in 2006/07 and £150,000 in 2007-08. As we have found, we consider the total interest accrual over the period of the TML Loan is £430,684.93, significantly higher than that claimed by the Appellant.

Mortgage

[118]The Appellant claimed a “mortgage” of £1m in 2006/07. This is a misdescription of the principal advanced under the TML Loan but it is common ground that the TML Loan is a constituent element of the Appellant’s Loan Account.

Office and other costs

[119]The Appellant claimed for office and other costs as to £39,754 in 2006/07, £32,866 in 2007-08 and £4,108 in 2009-10. Mr Thomas argued that these amounts represented costs of fitting out TML’s offices including the value of items already owned by Mr Thomas and given (or introduced) to TML. The costs also included music equipment for TML’s subsidiary, Artemis Records.[120]The Appellant argued that these costs were borne by Mr Thomas and so amounted to a debt owed by TML to Mr Thomas which he assigned to the Appellant. Mr Thomas accepted that he did not have any invoices or other evidence of the expenditure.[121]In the absence of any evidence to support this expenditure and Mr Thomas’ lack of credibility as a witness, we have difficulty believing TML needed £76,728 spent on office furniture for a company that appears by the accounts to have had a maximum of four employees who were paid token salaries. We also note that the Thomas family ran other companies and it is not obvious to us why the office costs needed to be allocated to TML. No specifics were given by Mr Thomas as to the nature of the music equipment.[122]Further, as we have found that Mr Thomas has not shown he assigned any debt to TML these amounts cannot be treated as increasing the Appellant’s Loan Account.

Land in Skye

[123]This expenditure relates to the purchase by TML for £25,000 of a property in Skye owned by Mr Thomas’ mother. It was Mr Thomas’ evidence that having purchased the property his mother did not want the sale proceeds so assigned the right to receive them to Mr Thomas. Mr Thomas then assigned the right to receive the proceeds to the Appellant. Accordingly, TML owed the Appellant £25,000 which had never been paid. The Appellant produced an email from a solicitor at Skene Edwards LLP to Mr Thomas in respect of land in Skye being purchased by TML from Mr Thomas’s mother for the price of £25,000.[124]HMRC doubted this account, including what happened to the land, whether ultimately ended up in the hands of Mr Thomas on the Appellant.[125]We do not find Mr Thomas is account of the dealings in this property to be credible and in short in the absence of any evidence do not accept any debt was assigned to the Appellant.

MacLellan Trust distributions

[126]The Appellant claimed that £115,000 was introduced by Mr Thomas into TML in 2007-08 using proceeds distributed by the MacLellan Trust. Mr Thomas evidenced the payments with bank statements from his account at Handelsbanken showing a deposit of £130,000 from the MacLellan Trust on 3 January 2008 and two payments to TML, one of £100,000 on 3 January 2008 and one of £15,000 on 31 July 2008.[127]HMRC argued that there was no evidence these payments had not been repaid and rejected the argument that they added to the Appellant’s Loan Account.[128]We accept that these payments were made but as they were made by Mr Thomas we do not accept the debt was transferred to the Appellant.

Artemis Records loan

[129]The Appellant claimed that Mr Thomas lent TML’s subsidiary £243,715.[130]HMRC argue that there is no evidence for this loan, save that the 2008 accounts show that TML invested £243,715 in its subsidiary Artemis Records. The company never filed accounts and was wound up in July 2008. There was never any evidence that the debt was assigned from Artemis to TML when it was clear that Artemis records was in financial difficulties. Had this happened it is likely the ultimate creditors would have challenged any preferential arrangements in favour of the Appellant.[131]We accept based on the evidence in the accounts that there was a loan but we do not accept the debt was transferred to the Appellant.

Conclusion and observations generally on the Appellant’s Calculation

[132]As we have found that the shareholders’ loan account in the 2008 accounts does not indicate the shareholder to whom it is owed and predates the NRL loan assignment by 16 months, there is therefore a legitimate task in identifying debts owed to the Appellant by TML as at 1 February 2010.[133]The Appellant’s Calculation is an attempt to do so. However, having reviewed the items of claimed expenditure, we do not accept the Appellant’s arguments that the expenditure shown in the Appellant’s Calculation support the amount claimed for the Appellant’s Loan Account save for;(1) £1,000,000 advanced under the TML loan(2) On our calculations, £430,684.93 of interest accrued but not paid to the Appellant(3) £50,000 of employment income payable to the Appellant[134]The Appellant argued and it was Mr Thomas’ evidence, that the costs shown in the Appellant’s Calculation were examples and illustrative of the financial support provided by Mr Thomas, the debts from which were assigned to the Appellant. Aside from the general finding that there was no assignment, we do not draw any such wider conclusions. It is for the Appellant on the balance of probabilities to show that the Appellant’s Loan Account was equal or in excess of the value of the NRL loan and, save for the specific items identified, has not done so.

HMRC’s methodology

[135]During the course of the investigation Mr Charles reviewed and considered the evidence provided by Mr Thomas in support of the Appellant’s primary and alternative positions. Mr Charles did not accept the shareholder loan account numbers in the 2007 and 2008 accounts, the Appellant’s primary or alternative position or the supporting evidence produced by the Appellant. Instead, Mr Charles sought to construct a version of the Appellant’s Loan Account and produced the HMRC Calculation which shows the Appellant’s Loan Account to be worth £1,049,794.08.[136]There are three elements to the HMRC Calculation:(1) Mr Charles accepted that the Appellant was owed the £1m principal advanced under the TML Loan.(2) Mr Charles assumed that £150,000 of interest accrued in each of 2007-08 and 2008-09 because of the amounts declared in the Appellant’s tax return, as amended and following Thomas 2014.(3) Mr Charles did not accept TML did not pay the £300,000 interest accruing on the TML Loan. Further, Mr Charles relied upon bank statements from the Appellant's bank, Handelsbanken, to show the Appellant had been paid £250,205.92 which Mr Charles concluded represented interest due to the Appellant under the TML Loan. He accepted that TML had not paid the Appellant the balance of the interest being £49,794.08.[137]We have found that TML did not pay any interest to the Appellant. However, we have found that a total of £430,684.93 of interest accrued on the TML Loan from 19 March 2007 to 1 February 2010 and not just £300,000 in 2007-08 and 2008-09.

Findings of fact on the Appellant’s Loan Account

[138]As described above, we do not accept that the Appellant has shown that Mr Thomas assigned to the Appellant his right to repayment of debts owed by TML. We have also found that the shareholder loan account in the 2008 accounts does not assist us in determining the Appellant’s Loan Account.[139]The only evidence we can rely on is the amount of the TML Loan, our findings as the terms of the interest and that no interest or employment income was paid to the Appellant. Accordingly, we find that as at 1 February 2010 the Appellant’s Loan Account was £1,480,684.93 being the TML Loan of £1m plus (subject to the caveat as to illustrative numbers) £430,684.93 of interest and £50,000 of the Appellant’s employment income.

The taxation of the NRL Loan assignment

[140]The central issue in this appeal is whether the assignment of the NRL Loan by TML to the Appellant is taxable as the Appellant’s income.

generally

[141]An individual taxpayer in receipt of distributions as a shareholder is liable to income tax under s. 383 Income Tax (Trading and Other Income) Act 2005:
“383 Charge to tax on dividends and other distributions (1) Income tax is charged on dividends and other distributions of a UK resident company. (2) For income tax purposes such dividends and other distributions are to be treated as income. (3) For the purposes of subsection (2), it does not matter that those dividends and other distributions are capital apart from that subsection”
[142]Section 209(2) ICTA provides:
“In the Corporation Tax Acts “distribution”, in relation to any company, means— (a) … (b) subject to subsections (5) and (6) below, any other distribution out of assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution;”
[143]It is common ground that the Appellant is liable to income tax as a distribution to the extent that the value of the NRL Loan assigned by TML to the Appellant exceeded the Appellant’s Loan Account.

The section 209(4) argument

[144]Mr Welsh for the Appellant has made a point in submissions that the effect of s. 209(4) is that an assessment should be made on the value of the benefit received. Thus, there is a tax charge to the extent: “(4)Where on a transfer of assets or liabilities by a company to its members or to a company by its members, the amount or value of the benefit received by a member (taken according to its market value) exceeds the amount or value (so taken) of any new consideration given by him, the company shall, subject to subsections (5) and (6) below, be treated as making a distribution to him of an amount equal to the difference."[145]It is agreed that the face value of the NRL Loan was £2,135,713. However, according to Mr Welsh, the value of the NRL Loan was impacted by the fact that NRL was, as agreed by Mr Charles in his evidence, in financial difficulties. Mr Welsh argued that no attempt has been made to determine the market value (as opposed to the face value) of the NRL Loan and so the assessment does not comply with section 209(4).[146]The point was made in submissions handed up during the hearing but was not in Mr Welsh’s skeleton argument, aired in the hearing or otherwise so far as we can determine foreshadowed at any earlier stage in this dispute. Indeed, Mr Welsh’s skeleton argument provides at 2.12:
“Parties are in agreement that the total value of the amounts owed by NRL to TML at 1 February 2010 was £2.135,713”
[147]Further, section 209(4) was not in the authorities bundle.[148]Mr Birbeck has unsurprisingly not made any submissions on the point.[149]HMRC should have included this argument in their ground of appeal or sought permission to raise it (Rule 20, ABP Technology at [2] and Asiana Limited at [15] as discussed further below). However, on the facts of this appeal it is in our view a short point and we will address it.[150]HMRC have assessed using the amount of £2,135,713, being the amount the parties have agreed as having accrued on the NRL Loan. We also note that the NRL deed of assignment in February 2010 provided:
“…[the Appellant] hereby assigns the Debt, (the value of which is £2,135,731)…”
[151]It may well be appropriate to discount this face value due to NRL’s difficulties, but the burden of proof is on the Appellant on this issue and the Appellant has not produced any evidence as to what that alternative value would be. Indeed, we would expect it would need to be a matter of expert evidence.[152]The Appellant therefore has not persuaded us that we should apply an alternative value to the assignment of the NRL Loan. We therefore reject the argument.

Conclusion on taxation of the NRL Loan assignment

[153]We have found that the value of the Appellant’s Loan Account on 1 February 2010 was £1,480,684.93 and that the value of the NRL Loan was £2,135,713. Accordingly, we find that , subject to the arguments discussed below, the Appellant is liable to income tax on a distribution of £655,028.07, being £2,135,713 less £1,480,684.93.

taxation of accrued interest

[154]We note that it follows from our findings of fact that the Appellant did not declare all the interest that accrued on the TML Loan in her tax returns.[155]As set out above, the Appellant declared interest in her tax returns in 2007-08 and 2008-09, initially of £120,000 in each year, but increased to £150,000 by the Appellant amending her 2008-09 tax return in October 2010 to show a gross receipt of £150,000 and, in respect of 2007-08, the decision of Thomas2014.[156]However, it appears to us that the Appellant did not declare the £6,986.30 of interest that accrued in 2006/07 and the £123,698.63 interest that accrued in 2009-10. That interest serves to increase the Appellant’s Loan Account and so reduces the Appellant’s liability to distribution income but is in principle itself taxable.[157]There is no appealed assessment before us in respect of the 2007-08 tax year so that is not an issue we can consider in this appeal. Further, HMRC did not in the Income Tax Assessment argue in the alternative or otherwise that tax was due on the interest accruing in 2009-10. The evidential and legal issues arising, including us to our powers to uphold the Income Tax assessment on that basis, were not considered by the parties in this appeal. Accordingly, we have decided it would be inappropriate now to make findings on this point.

Whether the tax position was previously settled by an agreement under section 54 TMA

[158]The Appellant argues that in substituting the Dividend Calculation for the Other Income Calculation, HMRC had entered into an agreement under s. 54 discharging or cancelling the Income Tax Assessment and has not issued a fresh assessment. Accordingly, as no fresh assessment was issued to accompany the Dividend Income Calculation, there was no live assessment taxing the Appellant. For brevity we refer to this argument as the s.54 argument.[159]Towards the end of the hearing Mr Welsh for the Appellant objected to Mr Birbeck raising counter arguments on this point on the basis that his argument had not previously been raised or pleaded by HMRC. Again, for brevity we refer to this issue as the s.54 procedural argument.[160]It became clear that it was necessary for the parties to make written submissions on the issue and I directed accordingly. Those submissions have been made by the parties and have been considered in this decision.

Section 54 TMA

[161]Section 54 TMA provides insofar as relevant:
“54 Settling of appeals by agreement (1) Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the tribunal, the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the tribunal had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be.” (2)… (3) Where an agreement is not in writing— (a) the preceding provisions of this section shall not apply unless the fact that an agreement was come to, and the terms agreed, are confirmed by notice in writing given by the inspector or other proper officer of the Crown to the appellant or by the appellant to the inspector or other proper officer; and (b) the references in the said preceding provisions to the time when the agreement was come to shall be construed as references to the time of the giving of the said notice of confirmation. (4)...”
The section 54 procedural argument The Appellant’s arguments[162]The Appellant argued in the appeal and in written submissions that HMRC was not entitled to raise arguments on the s.54 argument because they had not pleaded them, given the Appellant notice, included the argument in their skeleton argument or sought permission from the Tribunal to make the argument.[163]HMRC had had due notice of the Appellant’s argument on s.54. The argument had been raised in Mr Barnard’s letter to HMRC on 10 January 2024 requesting a review. In their review conclusion letter of 22 March 2024 HMRC noted the argument and rejected it arguing that there had simply been an “administrative error” in the computations which was corrected in the review of the matter letter.[164]The point was further raised in the Appellant’s application to the Tribunal of 18 December 2024 objecting to HMRC’s application for an extension of time to serve their statement of case:
“…The inspector of taxes issued three different assessments in relation to the same matter and that of course is part of the cause of further delay and stress to my client. There have effectively been two Section 54 TMA 1970 agreements as noted in the appeal application to the tribunal, which can very clearly be seen from the correspondence…”
[165]Following HMRC's successful application for an extension of time to serve their statement of case, and the Tribunal’s specific direction that HMRC answer the issues raised by Mr Bernard in a letter of 28 May 2025, HMRC failed to include any argument on the point, even though HMRC was aware of it.[166]The Appellant relied on the Court of Appeal in ABP Technology Ltd v Voyetra Turtle Beach Inc [2022] ETMR 33 at §2:
“The system of civil justice includes the idea that litigation is conducted with cards on the table - face up. Parties are required to spell out their case to their opponents not least because opposing parties are entitled to know what case they have to meet.”
[167]Failing to alert the Appellant as to these arguments until making closing submissions amounted to litigation by ambush. Accordingly, the Appellant was not able to present their case properly including cross examine witnesses.[168]Rule 25 requires HMRC’s statement to case to set out HMRC’s position. Rule 20 did not do so the same for an Appellant’s grounds of appeal.[169]Mr Welsh accepted that the Appellant’s grounds of appeal did not expressly refer to s. 54 but the grounds did provide (emphasis added):
“1. It is not considered that HMRC have raised a valid discovery assessment to form the basis of the liability in 11. above. The inspector of taxes made a discovery that there had been a Capital Gain in relation to the loan account with Thomas Maclennan Limited but then agreed that owing to the provisions of Section 251(1) TCGA 1992 any such gain could not be assessed. That ought to have been the end of the matter whereas the inspector took another approach to try and assess income tax that in itself involved an error as noted by the review officer in describing what the inspector had intended to be taxed as a distribution by the company as other income.”
[170]That argument was the basis of the s.54 point which was made clear in correspondence and so fair notice had been given by the Appellant to HMRC of the argument. The position, including documents and authorities relied on, was also fully set out in the Appellant’s skeleton argument.[171]However, it was clear that HMRC for its part did not give the Appellant fair notice of its argument. HMRC instructed counsel for the first time shortly before the hearing and no doubt realised the case needed to be argued on a different basis. However, rather than seeking permission to change their pleaded case, HMRC made the arguments in closing relying on authorities not produced and hoped no one would notice (Jacobs v Chalcot Crescent (Management) Co Ltd [2024] EWHC 259 (Ch) at [57], [60], [63] and [65])).[172]The Appellant’s position therefore was that in consequence not only should HMRC's arguments not be considered by the Tribunal but also an award of costs in favour of the appellant under Rule 10(1)(b) of the Tribunal Rules (Witton v HMRC [2024] UKFTT 489 (TC) at [37-41]) HMRC’s arguments[173]HMRC argued that the s.54 argument had not been pleaded as part of the Appellant’s case. The Appellant had made the argument in their request for an internal review of 10 January 2024 but, following HMRC's rejection of that argument in the review conclusion letter of 22 March 2024, the Appellant did not raise the point again. It was not in her grounds of appeal and the Appellant did not at any time seek to amend her grounds of appeal. The argument was only raised at the last possible stage in the skeleton argument filed on 29 January 2026, after HMRC had filed their skeleton on 19th January 2026.[174]An Appellant must state what its grounds of appeal are, otherwise it cannot rely on them (Asiana Limited v HMRC [2019] UKFTT 267 (TC) at [15],[175]It was not for HMRC to make submissions on the argument if the Appellant did not do so, just in case the Appellant sought to resurrect the point in their skeleton argument. The implication of the Appellant’s argument was that if HMRC failed to anticipate an Appellant’s argument not only should the Appellant be entitled to rely on it without pleading it but any defence to the point should have automatically be struck out and the appeal decided as if the Appellant’s argument were correct.[176]Mr Birbeck for HMRC suggested that the Tribunal should either(1) refuse to allow the Appellant to rely on the s.54 argument or(2) exercise its case management powers on the basis that the Appellant has impliedly made an application to amend their grounds of appeal so as to include it. HMRC would not oppose any application by the Appellant (implied or otherwise) to admit the s.54 argument as there is little prejudice, see Denley v HMRC [2017] UKUT 340 (TCC) at [34]:
“34. On balance, it seems to us that we should grant Mr Denley permission to rely on the further grounds of appeal. The issues he seeks to raise are essentially legal ones and can be addressed with no evidence beyond that which was before the FTT and is available to us. In the circumstances, it seems to us to be just, and not unfair to HMRC, to exercise our discretion to allow Mr Denley to amend his grounds of appeal in the way he wishes.”
[177]In this appeal all the relevant evidence and law was before the Tribunal, and the argument could be and was addressed at the hearing. In particular, had the s. 54 argument been properly pleaded, no further witness evidence or cross-examination would have been required.[178]Accordingly, the only prejudice suffered was to HMRC who was denied the opportunity of making written submissions on the point and that prejudice has been remedied by the post hearing written submissions. The substantive argument The Appellant’s arguments

The substantive argument

[179]The Appellant argues that, just as HMRC has accepted in its statement of case that the letter of 26 October 2023 constituted a settlement of the CGT position for the purposes of s.54, HMRC’s letter of 19 December 2023 withdrawing the Other Income Calculation constitutes a settlement of the Income Tax Assessment. Thus, the Appellant and HMRC both agreed that the assessment should be cancelled and therefore on the wording of s. 54:
“the inspector …and the appellant come to an agreement, whether in writing or otherwise, that the assessment …should be treated as …discharged or cancelled”
[180]That being the case, the effect of that agreement is that:
“…like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the tribunal had determined the appeal and had …discharged or cancelled it...”
[181]Further, the Dividend Income Calculation is not in itself an assessment for tax purposes but it is a necessary element of a tax assessment which must identify the proper source of the income and therefore the manner and rate at which it is taxable (Ashraf v HMRC [2018] UK FTT 97).[182]As a result, once the Income Tax Assessment was withdrawn there is no live assessment to be appealed and no tax payable by the Appellant.[183]Mr Welsh accepted in the hearing that there would appear to be nothing to prevent HMRC issuing a fresh assessment but he argued that that did not alter the effectiveness of the argument in this appeal. HMRC’s arguments[184]HMRC accept that the letter of 26 October 2023 constituted a settlement of the CGT Assessment under s. 54 but deny that their letter of 19 December 2023 constitutes a settlement of the Income Tax Assessment. As stated in the review letter, it was an administrative error which did not invalidate the Income Tax Assessment. Mr Charles in his evidence confirmed that that was his view. The decision to assess the Appellant as receiving distribution income was made and communicated to the Appellant on 26 October 2023 but the calculation “was put in the wrong box”.[185]The normal rules or offer and acceptance apply to agreements under s. 54 (Schuldenfrei v Hilton (Inspector of Taxes) [1999] STC 821). HMRC did not in the letter of 19 December 2023 make an offer to discharge or cancel the Income Tax Assessment. Further, there has never been a meeting of minds as to the amount of tax due so it cannot therefore be said that the parties agreed that it should be varied.[186]In the hearing Mr Birbeck sought to make an argument as to the effect of s. 49F and that the decision being appealed was the review conclusion letter. However, he did not pursue the point in submissions and we take him to have withdrawn it. Conclusion on the section 54 argument

The section 54 procedural argument

[187]We agree with HMRC that the Appellant did not include the s.54 argument in its grounds of appeal as required by Rule 20(1)(f) and s. 31A(5) TMA. In our view the argument in paragraph 1 of the grounds of appeal that HMRC have not “raised a valid discovery assessment” and that the raising of the Income Tax Assessments “involved an error” do not amount to a clear indication that s. 54 is engaged.[188]There was a reference to the point in the Appellant’s objection to HMRC’s application for an extension of time to serve their statement of case. However, the issue is not in Mr Barnard’s email of 28 May 2025 to which the Tribunal on 12 December 2025 directed HMRC respond in their statement of case.[189]The fact that the Appellant had raised the point in previous correspondence including the application for a review does not amount to a pleaded ground of appeal or argument that HMRC is required to address in its statement of case or skeleton argument. It is not unusual for parties to raise wider arguments in correspondence which they ultimately do not pursue in the appeal.[190]Further, the Appellant did not at any stage seek to amend its grounds, even at the hearing (Rule 20, ABP Technology at [2] and Asiana Limited at [15]). The first time the argument appears is in HMRC’s skeleton served on 29 January 2026, after HMRC had filed their skeleton. That being the case, we do not find it surprising HMRC did not include any arguments on the point in their statement of case or skeleton.[191]Indeed, applying the standard the Appellant seeks to apply to HMRC, we consider the procedural issue might be better couched as to whether the Appellant should be entitled to run her s.54 argument at all. In raising a new argument, the Appellant must be treated as seeking permission to add a new ground of appeal. However, in our view for the reasons set out below, we consider that the s.54 argument is a short legal point and, applying the principles in Denley [2017] UKUT340 and having had the benefit of written submissions, there is no prejudice to either party in deciding it.[192]For completeness we dismiss the Appellant’s application for costs.

The substantive argument

[193]The short point is whether the Appellant’s argument at the time and Mr Charles’ letter of 10 December 2023 amounted an agreement for s.54 purposes.[194]We do not accept that in substituting the Dividend Calculation for the Other Income Calculation in the 10 December 2023 letter Mr Charles was agreeing “…that the assessment …should be treated …as discharged or cancelled”. In his letter of 26 October 2023 Mr Charles had expressed his view that the Appellant was liable to tax on a distribution but, as he explained in his evidence, in issuing the Income Tax Assessment calculation there was an error resulting in HMRC producing an “other income” calculation not a distribution calculation. In admitting the error in the 10 December 2023 letter, Mr Charles still believed that the Appellant had failed to declare £1,078,418 of distribution income in 2009-10 but was simply correcting the calculation of the tax liability that arose in consequence.[195]Mr Charles necessarily agreed that the Income Tax Assessment should be reduced to £263,081.25, the amount shown in the Dividend Calculation, but the Appellant did not accept that any was payable.[196]For s.54(1) to apply there must be “..an agreement…that the assessment …should be treated as upheld without variation, or as varied …or as discharged or cancelled…”[197]Mr Charles did not believe the Income Tax Assessment should be “discharged or cancelled” and the Appellant did not agree that it should upheld “as varied”. Accordingly, the terms of s.54(1) were not met.[198]We therefore find that the Appellant and HMRC did not reach an agreement within s.54 when HMRC substituted the Dividend Calculation with the Other Income Calculation.

Whether HMRC made a discovery

[199]The Appellant argued that there is no valid assessment because HMRC did not make a discovery within s. 29(1) which entitled HMRC to raise the Income Tax Assessment.[200]The burden of proof is on HMRC to show there was a discovery.

Legislation

[201]Section 29 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 tax, have not been 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.”
The Appellant’s arguments[202]The Appellant argued that HMRC are not entitled to issue the Income Tax Assessment because, in accordance with s.29, once a discovery has been made, HMRC is only entitled to make “an” assessment not multiple assessments. HMRC purported to issue two assessments in respect of the substantive tax, the CGT Assessment on 10 May 2023 and the Income Tax Assessment on 26 October 2023. HMRC could have issued an assessment in the alternative but chose not to.[203]The Appellant’s challenge is not as to whether there was a discovery which led to the CGT assessment on 10 May 2023 but that there was no new discovery that entitled HMRC to issue the Income Tax Assessment. In effect having acted on the discoveries made prior to 10 May 2023, they could not be used again and no new discovery was made prior to issuing the Income Tax Assessment on 26 October 2023. The reason why Mr Charles issued the Income Tax Assessment was because it was pointed out to him in the 31 May 2023 letter that the CGT analysis was wrong. There was at that time no discovery of new facts or a different understanding of the circumstances.[204]The Supreme Court in Tooth [2019] EWCA Civ 826 was dealing with a discovery by an officer of something previously known by a different officer. In the current appeal the position is different as it is the correction of an error by the same officer and that is not a discovery.

HMRC’s arguments

[205]HMRC argued that on receiving the Appellant’s appeal of 31 May 2023 setting out why the NRL Loan was not a capital asset, Mr Charles concluded that there was insufficient information to determine whether the debt was a debt on security or a simple debt. Accordingly, he changed his view and concluded instead that the assignment of the NRL Loan was taxable as a distribution within s. 209 ICTA. The CGT Assessment was therefore settled under s. 54 and Mr Charles issued the Income Tax Assessment.[206]HMRC rely on the Upper Tribunal’s decision in Charlton [2012] UKFTT 770 (TCC) at [37]:
“In our judgement, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight…”
[207]HMRC further rely on the principles summarised by the Upper Tribunal in Jerome Anderson [2018] UKUT 0159 at [24], [29] and [30], approved by the Supreme Court in Tooth at [72], that for there to be a discovery by an officer a subjective and objective test must be satisfied:(1) “The officer must believe that the information made available to him points in the direction of there being an insufficiency of tax.” (Anderson at [28]) (the subjective test)(2) “…the officer’s belief is one that a reasonable officer could form.” (Anderson at [30]) (the objective test)[208]Mr Charles’ belief was based upon evidence obtained by HMRC during the enquiry and resulting from the s.36 notice. The analysis that the assignment was not an assignment of a debt on security was new information. In any event there is no requirement for Mr Charles to have obtained new information for him to make a further discovery. Mr Charles reviewed the information available to him during the appeal and changed his view of the tax treatment which was in itself, in accordance with Charlton, a new discovery. He believed that there was an insufficiency of income tax and that belief was one a reasonable officer could form.

Conclusion on discovery

[209]The case law in this area was extensively reviewed in Tooth and we take the interpretation of s.29 from that judgment, the tests set out in Anderson at [24] and the first part of Charlton at [37] both of which was endorsed by the Supreme Court, save for the later observations in Charlton on staleness (Tooth at [76]).[210]In our view the information obtained during the inquiry amounted to a discovery by Mr Charles for the purposes of s.29(1). We do not accept the Appellant’s argument that, having issued the CGT Assessment, those discoveries were spent and could not justify the later issue of the Income Tax Assessment. However, in our view nothing turns on that point because the decision to issue the Income Tax Assessment was based on two things, the information provided by the Appellant’s appeal of 31 May 2023 and Mr Charles’ change of mind in October 2023. Both of these things were new discoveries which justified a fresh assessment. He had been working on the basis that the NRL Loan was an asset for CGT purposes. He was provided with further information which alerted him to this not being the case and so he changed his mind. Even aside from the Appellant’s appeal of 31 May 2023 pointing out that a CGT treatment was inappropriate amounting to new information, Mr Charles’ change of mind was “a change of view, change of opinion, or correction of an oversight…” as described in Charlton at [37] and so amounted to a “discovery”. Having made a new discovery Mr Charles was entitled to issue the Income Tax Assessment.

Whether any insufficiency was brought about deliberately

[211]The question as to whether the Appellant deliberately failed to pay tax arises in three contexts:(1) Whether HMRC can issue an assessment (s. 29(3) and (4))(2) Whether HMRC are time barred (s.34 and 36)(3) Whether the Appellant is liable to a penalty (paragraph 1 schedule 24 Finance Act 2007)[212]The penalty question is addressed separately below.

The relevant legislation

[213]The first context, as to whether HMRC can issue an assessment, arises in s. 29(3) and (4) TMA which provide:
“(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment— (a) that an amount of income tax or capital gains tax ought to have been assessed but has not been assessed, (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)… (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 was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf.”
[214]The second condition referred to in s. 29(3) is not relevant to this appeal and so the effect of s. 29(1),(3) and (4) is that in order for HMRC to raise an assessment the failure to pay tax must have been brought about carelessly or deliberately.[215]The second context, whether HMRC are time barred, arises is in s.34 and 36 TMA which provides insofar as relevant:
“34. Ordinary time limit of 4 years (1) Subject to the following provisions of this Act, and to any other provisions of the Taxes Acts allowing a longer period in any particular class of case, an assessment to income tax or capital gains tax may be made at any time not more than 4 years after the end of the year of assessment to which it relates. (2)… 36. Loss of tax brought about carelessly or deliberately etc (1) An assessment on a person in a case involving a loss of income tax or capital gains tax brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates (subject to subsection (1A) and any other provision of the Taxes Acts allowing a longer period). (1A) An assessment on a person in a case involving a loss of income tax or capital gains tax — brought about deliberately by the person, … may be made at any time not more than 20 years after the end of the year of assessment to which it relates (1B) In subsections (1) and (1A) references to a loss brought about by the person who is the subject of the assessment include a loss brought about by another person acting on behalf of that person.”
[216]The effect of s.34 and 36 is that in order for HMRC to raise an assessment more than 6 years after the end of the year of assessment the failure to pay tax must have been brought about deliberately. Here HMRC issued the Income Tax Assessment on 31 October 2023, over 13 years after the end of the 2009-10 tax year and so these provisions are engaged.[217]Section 118(7) TMA provides guidance on the meaning of “deliberately”:
“(7) In this Act references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to Her Majesty's Revenue and Customs by or on behalf of that person.”
[218]Whilst the requirements in s.29(3) and (4) TMA could be satisfied by the Appellant being careless, HMRC must in any event show the Appellant acted “deliberately” so as not to be time barred under s.36(1A) and so it is insufficient for HMRC to show the Appellant acted carelessly.[219]The Supreme Court in Tooth v HMRC [2021] 1 WLR 2811 summarised the test of deliberate inaccuracy:
“[47] It may be convenient to encapsulate this conclusion by stating that, for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so.”
[220]The burden of proof on this issue is on HMRC.

HMRC’s arguments

[221]HMRC argue that the failure to account for the dividend income arising from the assignment of the NRL loan was brought about deliberately, whether by the Appellant or by Mr Thomas acting on her behalf.[222]The Appellant knew she had made a £1m loan to TML funded by a mortgage on her family home. On 1 February 2010 she received the benefit of the NRL Loan which has a value of £2,135,713. The assignment documentation signed by her on that day expressly referred to that value. She was therefore aware that she had received something of a value exceeding the amount owed to her and that the transaction has a tax consequence. However, her tax return did not declare any liability for such a substantial transaction. This was deliberate behaviour.[223]HMRC further argue that even if the Appellant did not fully understand the tax consequences, the evidence demonstrates she at least suspected a tax liability arose. A reasonable taxpayer receiving value would recognise the likelihood of tax arising. HMRC do not need to show the Appellant understood the precise tax head under which the liability arose. The test is whether she knew—or deliberately avoided knowing—that a tax liability existed and failed to declare it. HMRC argue that the facts clearly meet that threshold, and the inaccuracy is deliberate.[224]In the alternative, HMRC argue that the insufficiency was brought about deliberately by Mr Thomas acting on behalf of the Appellant. It is accepted by the Appellant that Mr Thomas managed the Appellant’s tax affairs, and she relied on him for help with all financial affairs. He communicated with HMRC on her behalf, controlled the provision of documents and information, acted as director of TML and SCL, and prepared or facilitated the preparation of the Appellant’s returns and explanations (Hicks v HMRC [2020] UKUT 12 (TCC) at [122]).

The Appellant’s arguments

[225]The Appellant first argues that HMRC has failed to explain and the Appellant has had no notice of HMRC's arguments as to how the Appellant deliberately failed to account for tax. In Mr Charles’ witness statement he characterised the deliberate behaviour as “the omission of the acquisition of a company asset from Mrs Thomas’ 2010 SAR” but there is no such requirement to include it.[226]The Appellant would have known the £1,759,480 value of the shareholders’ loan account and the accrued interest of £150,000 as recorded in the 2008 accounts. Further, in the 16 months since October 2008 further interest would have accrued, increasing the shareholders’ loan account. Finally, as illustrated in the Appellant’s Calculation, the Appellant would have been aware that Mr Thomas was incurring expenditure on behalf of TML and assigning the benefit of that debt to her. For all of those reasons the Appellant had no reason to believe that there was any profit or income arising on the assignment of the NRL debt.[227]The purpose of time limits are to protect taxpayers against stale or tardy assessments (HMRC v BUPA Purchasing [2008] STC 101 at [59], Pegasus Birds Ltd v Customs and Exercise Commissioners [2000] STC 91 at [15]). In this matter HMRC, in exercising their information powers, have required the Appellant to reconstruct many years after the event figures that were shown in professionally prepared accounts and then simply refused to accept the taxpayer's explanation.

Conclusion on the deliberate issue

[228]On the procedural point, we do not accept the Appellant’s argument that she has had no notice of HMRC's position on this issue. In our view it was clear from HMRC's Statement of Case, specifically at [66]:
“As a result of knowing the facts set out at 64 (a) to (c) above, the Appellant knew that: a) She had received an amount of value from TML that substantially exceeded TML’s liability to her. b) The 01 February 2010 transaction would result in a tax liability. c) She did not include a tax liability in respect of the 01 February 2010 transaction on her self-assessment return. d) By filing her self-assessment return without including a tax liability in respect of the 01 February 2010 transaction, her self-assessment was insufficient.”
[229]On the substantive point, as with this appeal as a whole, it is common ground that Mr Thomas took all the relevant decisions for his wife, the Appellant. In this context that position is reinforced by s.36(1B) and 118(7) TMA. We attribute Mr Thomas’ actions and knowledge to the Appellant. Mr Thomas is a sophisticated businessman who for years filed tax returns on behalf of himself, the Appellant and others (in evidence he stated he had filed “over 250 tax returns”) and has been engaged directly or indirectly in tax disputes with HMRC. We therefore take him to understand a taxpayer’s self-assessment obligations.[230]For the reasons set out above we have found that the Appellant’s Loan Account as at 1 February 2010 was significantly below the value of the NRL Loan and that difference was taxable as a distribution.[231]Mr Thomas, representing the Appellant and the architect of the Appellant’s tax and financial affairs, would have known all the circumstances as to the accrual of the Appellant’s Loan Account including that there had been no assignment by him of debts owed by TML. He would also have known the value of the NRL Loan as at 1 February 2010: it is recorded in the assignment documentation. We therefore find that Mr Thomas knew that the assignment of the NRL loan by TML to the Appellant was in excess of the value of the Appellant’s Loan Account. Further, we find that whilst he may not have been aware of the precise tax treatment of the assignment, he would have known that the profit or benefit to the Appellant was likely to be taxable. Mr Thomas knowingly failed to include the assignment in the Appellant's tax return.[232]We find that Mr Thomas (and so the Appellant) in failing to declare the tax held an intention to mislead HMRC as to the Appellant’s taxable income and so the accuracy of the 2009-10 return.

penalty assessment

[233]On 14 November 2023 HMRC issued the Penalty Assessment for deliberate inaccuracies in the amount of £286,180.56 which the Appellant has appealed. Mr Charles accepted in his view of the matter letter of 19 December 2023 that the amount of the penalty should be reduced to £177,579.84 following the reduction in the Income Tax Assessment.[234]The Penalty Assessment is necessarily contingent on the Income Tax Assessment being upheld and the amount of any penalty dependent on the amount of tax payable, if any.[235]However, the Appellant challenges the Penalty Assessment on three grounds:(1) the loss of tax was not brought about deliberately within schedule 24 Finance Act 2007(2) HMRC failed to provide appropriate notices in compliance with Article 6 of the European Convention on Human Rights(3) the level of the penalty is excessive[236]The penalty regime is set out in schedule 24 Finance Act 2007, principally for this purpose by paragraphs 1 and 3: “1(1)A penalty is payable by a person (P) where—(a) P gives HMRC a document of a kind listed in the Table below, and(b) Conditions 1 and 2 are satisfied. (2) Condition 1 is that the document contains an inaccuracy which amounts to, or leads to— (a) an understatement of a liability to tax, (b) a false or inflated statement of a loss, or(c) a false or inflated claim to repayment of tax. (3) Condition 2 is that the inaccuracy was careless or deliberate (within the meaning of paragraph 3). (4) Where a document contains more than one inaccuracy, a penalty is payable for each inaccuracy.” …. 3(1) For the purposes of a penalty under paragraph 1, inaccuracy in a document given by P to HMRC is— (a) “careless” if the inaccuracy is due to failure by P to take reasonable care, (b) “deliberate but not concealed” if the inaccuracy is deliberate on P's part but P does not make arrangements to conceal it, and (c) “deliberate and concealed” if the inaccuracy is deliberate on P's part and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure).[237]HMRC assessed the Appellant on the basis that the inaccuracy was deliberate and prompted.

Deliberate inaccuracy

[238]The Appellant accepts that Condition 1 is satisfied but argues that Condition 2 is not because she had not acted deliberately in failing to declare the income arising from the assignment of the NRL Loan in her 2009-10 tax return.[239]We have found in the context of s.29(3) and 36(1A) that the Appellant, acting through Mr Thomas, acted deliberately in failing to declare the income. No argument was put by either party as to any distinction in the meaning of “deliberate” in these different contexts. We note the comments of the Upper Tribunal in CF Booth Limited v HMRC [2022] UKUT 00217 (TCC):
“36. It seemed to be common ground that the formulation used by the FTT in Auxilium was correct. In that case the FTT said: “63. In our view, a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time. “63. In our view, a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time. 64. The test of deliberate inaccuracy should be contrasted with that of careless inaccuracy. A careless inaccuracy occurs due to the failure by the taxpayer to take reasonable care (see paragraph 3(1)(a) of Schedule 24 Finance Act 2007 and Harding v HMRC [2013] UKUT 575 (TCC) at [37]).” 37. We agree with these comments of the FTT in Auxilium. 38. In Tooth the Supreme Court considered the test of “deliberate inaccuracy” in section 118 Taxes Management Act 1970, which was required in order to enable HMRC to serve a “discovery assessment” within a 20 year window. It held that the natural meaning of the phrase “deliberate inaccuracy” meant a statement which, when it was made, was deliberately inaccurate, rather than a deliberate statement that was in fact inaccurate. “Deliberate” attached a requirement of intentionality to the whole of that which it described, namely “inaccuracy”
. The required intentionality therefore attached both to the making of the statement and to its inaccuracy (§43). 39. At §47, Lords Briggs and Sales, delivering the judgment of the Supreme Court, said:
“It may be convenient to encapsulate this conclusion by stating that, for there to be a deliberate inaccuracy in a document within the meaning of s118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so.””
[240]We find that the inaccuracy in the Appellant’s 2009-10 tax return was brought about deliberately and so Condition 2 is satisfied.

Article 6

[241]The Appellant criticised HMRC's approach to raising penalties in that HMRC did not issue warnings to the Appellant until the Penalty Assessment was issued. Certain penalties are “criminal” in nature and so protected by Article 6 of the European Convention on Human Rights, the right to a fair trial (Engel v Netherlands (1976) 1 EHRR 647). HMRC recognise that inaccuracy penalties under paragraph one of schedule 24 are “criminal” for this purpose (HMRC manuals at CH300200):
“In order to protect the person’s rights under Article 6 of the ECHR you must tell them that they may be liable to a penalty as soon as you find something wrong that could result in a penalty and before you discuss the behaviour. This will be when you have an evidence-based reason to believe that a penalty may be due …” (CH300400)”
[242]The specific criticism of HMRC's behaviour by the Appellant is that the first time that HMRC raised the possibility of penalties was when they issued the Penalty Assessment on 12 May 2023. However, beyond a reference to CF Booth Limited v HMRC, Mr Welsh says no more on this point, the approach to be taken by the Tribunal and the remedy sought.[243]Mr Birbeck for HMRC simply suggested that there had been no breach of Article 6. Mr Charles had been investigating the Appellant and when he decided it was appropriate to consider penalties he issued the usual notifications.[244]This argument is not in the Appellant's grounds of appeal and was, so far as we can detect, first included in the Appellant's skeleton argument and the Appellant has not sought to amend her grounds of appeal (Rule 20, ABP Technology at [2] and Asiana Limited at [15])[245]However, we do not find that HMRC have breached Article 6. Mr Charles first warned the Appellant that there may be penalties in his letter of 23 September 2022 to the Appellant’s agent Mr Barnard. On 12 May 2023 Mr Charles then wrote to the Appellant to notify her of the penalty assessment and enclosed the relevant factsheets explaining in greater detail how the penalty was calculated and regarding deliberate behaviour.[246]Article 6 ECHR provides:
“Right to a fair trial 1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interests of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice. 2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law. 3. Everyone charged with a criminal offence has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) to have adequate time and facilities for the preparation of his defence; (c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; (d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; (e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court.”
[247]We have considered the conduct of this matter and each aspect of Article 6 and particularly the minimum rights set out in Article 6(3) and in brief cannot see that there has been any prejudice to the Appellant’s ability to have a fair trail.

level of penalty

[248]The Appellant’s main argument on the Penalty Assessment was that insufficient credit was given and so the penalty was excessive.[249]As a prompted inaccuracy, the maximum penalty is 70% of the potential lost revenue which can be reduced to a minimum of 35%. In their letter of 12 May 2023 HMRC gave the following percentage reductions:(1) Telling – 0%(2) Helping – 5%(3) Giving access – 5%

Telling

[250]Out of a potential reduction of 30% HMRC gave no reduction for “telling” on the basis that there was no disclosure of the NRL assignment in the Appellant's tax return and it only came to light several years later. The Appellant did not admit any inaccuracy but instead offered vague and inconsistent explanations.[251]The Appellant argued that she believed she was correct in her argument that no tax was payable and did her best to explain where the numbers came from. Her advisers also offered to meet HMRC but the offer was declined. A taxpayer is entitled to a full reduction for telling even if she disputes there is a tax liability (CH82444). Further, a taxpayer should not be penalised for taking advantage of their right to appeal a schedule 36 notice. The reduction should therefore have been at least 10%.

Helping

[252]Out of a potential reduction of 40% HMRC gave a 5% reduction for “helping” on the basis that, as reflected in Thomas 2021:
“She has not provided all of the information which is within her power or possession to supply. She has provided vague and unsupported assertions…”
[253]Further, the schedule produced by the Appellant to support the value of the Appellant’s Shareholder Account was unreliable, inaccurate and implausible.[254]The Appellant argued that this reduction should be seen against the context of HMRC only having sought information more than a decade after the relevant events. The Appellant as requested provided the Appellant’s Calculation and associated documents in support of her arguments. The reduction should have been 10-12%.

Giving access

[255]Out of a potential reduction of 30% HMRC gave a 5% reduction for “giving access” on the basis that when the investigation was opened the Appellant’s response was that the matter had been comprehensively dealt with and there was nothing further to add. It was therefore necessary to issue a schedule 36 notice and nothing of substance was provided until the Tribunal had endorsed the notice.[256]The Appellant argued that her initial reaction was to say that information had been provided previously and a note of exasperation was to be expected as the request came a long time after the events in question. Again, the Appellant’s advisers offered to meet HMRC and making use of the right to appeal should not be taken against the Appellant. The Appellant and her advisors provided explanations and documents and responded to the queries that were put to them. The reduction should have been at least 10%.

Decision on level of penalty

[257]We agree that the credit given by HMRC is very low at 10% of the difference between 35% and 70%. The Appellant asks for the reduction to be increased to at least 30%.[258]We are also conscious of the Appellant’s point that it is very difficult to provide information relating to a period after a long time has lapsed. HMRC made much during the correspondence and in submissions over Mr Thomas’ comment that “we have nothing further to add”. We understand that part of Mr Thomas’ frustration with HMRC’s enquiries into the Appellant’s position was borne out of having (in his mind) having already explained the position in respect of the NRL Loan and SCL.[259]However we do find that the Appellant's approach, as reflected in the evidence shown to us and as summarised in Thomas 2021, has been obstructive and difficult. It is right not to prejudice a taxpayer for exercising their right to appeal a schedule 36 notice and we do not do so. However, in the wider context it is clear to us that the Appellant acting through Mr Thomas dragged her feet and provided vague contradictory and sometimes untrue information to HMRC.[260]That being the case, we do not find it necessary to interfere with HMRC's decisions as to reductions given in the level of penalty.

Decision

[261]We find as set out below.

The Income Tax Assessment

[262]We find that the Appellant’s Loan Account consisted of the £1m principal under the TML Loan, interest on the TML Loan which accrued to 1 February 2010 and £50,000 of employment income owed to the Appellant. Our illustrative calculation of the accrued interest on the TML Loan is £430,684.93.[263]We therefore find (and using our figures as illustrative), that the Appellant is liable to tax on a distribution of £655,028.07, being the difference between £2,135,713 and the Appellant’s Loan Account of £1,480,684.93.[264]Further, we find that the Appellant failed to declare £6,986.30 of interest in her 2006-07 tax return and £123,698.63 of interest in her 2009-10 tax return. However, HMRC has not assessed such income and for reasons set out in this decision do not make any findings on it.[265]We find that the loss of tax was brought about deliberately by the Appellant within s.29 and s.34, that HMRC made a discovery within s.29 entitling HMRC to raise the income tax assessment. We also find that the Appellant and HMRC did not enter into a section 54 agreement when HMRC substituted the Dividend Calculation for the Other Income Calculation.[266]We therefore find that the Income Tax Assessment was validly issued by HMRC and the Appellant is liable for income tax as a distribution in the amounts as varied.

The Penalty Assessment

[267]We find that the Appellant acted deliberately in failing to declare the income arising from the assignment of the NRL loan. We find that the Appellant did not plead the Article 6 argument as a ground of her appeal but in any event we do not find that Article 6 has been breached. Finally, we find no reason to interfere with HMRC's decision as to reductions in the level of penalties.[268]The amount of penalty payable will necessarily reduce in accordance with our findings in respect of the Appellant’s liability to income tax but we otherwise uphold the Penalty Assessment.[269]For the above reasons we allow the Appellant’s appeal in part.

Right to apply for permission to appeal

[270]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. Release date: 24 April 2026 Appendix A 271. The Appellant’s Calculation £ 2006-07 Employment income 5,000 Interest 6,101 Employment income (RCT) 5,000 Mortgage loan 1,000,000 Various office and introduction costs paid by shareholder 39,754 Purchase of development land in Skye 25,000 2007-8 Employment income 5,000 Interest 150,000 Employment income (RCT) 124,385 MacLellan trust distributions (RCT) 115,000 Various office and introduction costs paid by shareholders 32,866 Transfer of loan to Artemis Records Ltd (RCT) 243,715 2008-9 Employment income and termination payment 35,000 Interest 150,000 Employment income etc (RCT) 35,000 Consultancy Services (RCT) 66,800 2009-10 Consultancy services (RCT) 53,385 Interest 50,000 Various office etc expenses 4,108 2,146,114 Appendix B HMRC’s Calculation Date Description Debit (£) Credit (£) 19/03/2007 Loan capital introduced 1,000,000 18/09/2007 Payment to Mrs Thomas 90,000 25/01/2008 Payment to Mrs Thomas 30,000 05/04/2008 Interest accrued from 6 April 2007 150,000 05/06/2008 Payment to Mrs Thomas 20,000 10/06/2008 Payment to Mrs Thomas 32,705.92 04/11/2008 Payment to Mrs Thomas 20,000 16/01/2009 Payment to Mrs Thomas 20,000 17/03/2009 Payment to Mrs Thomas 10,000 05/04/2009 Interest accrued from 6 April 2008 150,000 13/05/2009 Payment to Mrs Thomas 20,000 13/08/2009 Payment to Mrs Thomas 3,000 21/09/2009 Payment to Mrs Thomas 3,000 12/10/2009 Payment to Mrs Thomas 1,500 01/02/2010 Balance 1,049,794.08