Special Commissioners Decisions

Sparrow Ltd (SpC 289); M J Ainslie (SpC 304); Waterloo Plc, Euston Ltd, Paddington Ltd (SpC 301); Paul Wall (SpC 303).

On 12 December 2000, the Revenue assessed the appellant, a property investment business, to corporation tax of some £36.87 million on estimated profits of £115 million for the period from 19 September 1996 to 18 September 1997. The appellant had been involved in a number of intricate tax planning agreements, but the Revenue was aware only of a share sale agreement under which the appellant had been sold to Nightingale.

On 8 January 2001, the appellant appealed against the assessment, on the grounds that it was estimated and in excess of the company's taxable profits for the period. It applied to postpone all the tax charged, claiming that it had no tax liability at all for the period. The Revenue listed the appeal for hearing before the General Commissioners, but did not accept the application to postpone all the tax, and said in a letter dated 12 January 2001 that the appropriate form 64-5 would be issued showing the tax due. A form 64-5 was sent on 15 January showing that all the tax was postponed, and none due; this was subsequently, on 17 January, corrected by another form 64-5 reversing the position. However, the appellant wrote accepting the first form 64-5, and said that the second form 64-5 could not revoke the agreement since there had been no change in circumstances since the issue of the first form.

The General Commissioners agreed to transfer the application for postponement to the Special Commissioners.

The Special Commissioner firstly decided the tax that should be postponed pending the appeal's determination. Counsel for the appellant said that section 55, Taxes Management Act 1970 required tax to be paid, regardless of the assessment being appealed, unless the grounds of appeal were reasonable. In this instance, the grounds of appeal were reasonable, and the taxpayer was likely to have no liability to corporation tax.

The appellant's counsel also referred to the transactions carried out, but the Revenue considered this to be a matter for the substantive appeal and did not deal with them. The Revenue argued rather that when the appellant was sold to Nightingale, it had a tax liability of £37,242,901. The accounts were unreliable, and the documents upon which the appellant relied were fundamentally flawed.

The Special Commissioner said that it was undisputed that the appellant received rents from investments upon which it would normally have been liable to pay tax. She said that there were some unexplained inconsistencies in the supporting documentation produced by the appellant, in particular a zero coupon note and a forward share purchase transaction.

The zero coupon note was to ensure that the appellant incurred a deficit under a loan relationship for the purposes of section 83, Finance Act 1996. The loan relationship was with an overseas bank, but the Special Commissioner doubted whether such a relationship could have existed, since the bank did not appear to have made any enquiries before agreeing to the loan (which was £1.65 billion), it did not know the names of the directors of the appellant, and was not given any security. Furthermore there was no complete documentation relating to the loan, so overall, she considered that there were no reasonable grounds for believing that there was a loan relationship between the appellant and the overseas bank.

She then turned to the forward share purchase agreement. Under this, the appellant agree to pay £1.65 billion to Woodpecker in return for the transfer one year late of an unidentified company valued at £1.765 million in a specified jurisdiction. The Commissioner said that there was considerable doubt that the appellant had £1.65 billion with which to pay Woodpecker, and there were other difficulties relating to that agreement. However, most importantly, it appeared that Woodpecker did not complete the agreement: there was no evidence that it had transferred all the share capital of a company to the appellant.

She concluded that there were no reasonable grounds for believing that the appellant had been overcharged to tax, other than by an amount agreed with the Revenue.

The Commissioner then considered whether the first form 64-5 constituted an agreement to postpone all the tax payable. She said that unless the appellant knew that the Revenue had made an error, this had to be such an agreement. The Revenue's letter of 12 January clearly stated that none of the tax would be postponed, so the appellant could not reasonably have believed that the form 64-5 postponing all the tax was correct.

The application for postponement was dismissed.

(Anonymised decision: Sparrow Ltd (SpC 289).)

The taxpayer, an auctioneer, was required by his employer to work from his home largely because the journey to and from the actual office was too long, and it was untenable to set up a proper office near the taxpayer's home.

The taxpayer claimed that the monthly payments made to him by the employer included an amount for the use of his home as an office, and that this should be assessed under Schedule A.

The Special Commissioner accepted that the taxpayer was required to work from home, and effectively set up a room as an office. However, there was no express provision in the employment agreement for any payment for the use by the taxpayer, as the employee, of accommodation in his home. While the taxpayer must have incurred some expense in setting up the room as an office, there was, apart from a telephone and fax, no provision for reimbursement. The employer treated the whole of the salary as arising from employment, and treated the office use as incidental to the employment.

The Commissioner said that the payments arose from employment, and dismissed the appeal.

Note: see Taxation, 13 July 2000 at page 386 for a form of licence which an employee may grant to an employer to enable tax relief to be given for a proportion of home expenses.

(M J Ainslie (SpC 304).)

An appeal by a company relating to the repealed transfer pricing legislation found in section 770, Taxes Act 1988 came before the Special Commissioners in July 2001.

The case involved the Waterloo Group setting up a share option trust, some share option schemes and making loans to the trustee of the share option trust, which was over a period from 1987 through to 1997. The trustees were lent money to enable them to purchase shares and grant options to employees of subsidiary companies. It was accepted that the Waterloo Group regarded the granting of share options as an important means of incentivising its employees.

The question was whether this was a giving of business facilities under the old provisions of sections 773(4) and 770(1)(a), Taxes Act 1988 and whether the Inland Revenue's interpretation relied upon administrative concessions.

Waterloo Group argued that section 770(1)(a), Taxes Act 1988 did not apply because there was no transaction between associated persons and that there was no giving of business facilities. In particular the loan was to a trust which it did not control and thus there was no transaction between associated persons within the legislation. Also the Inland Revenue's interpretation was inconsistent and relied upon an administrative concession.

Seven issues were identified for the determination of the appeals:

(1) Was there a giving of business facilities within the meaning of section 773(4)Taxes Act 1988?

(2) Did the provisions of section 770(1)(a), Taxes Act 1988 with the necessary adaptations and extensions apply?

(3) Were the Inland Revenue's contentions consistent with the purposes of section 770, Taxes Act 1988?

(4) Did the Inland Revenue's interpretation depend upon an administrative concession?

(5) Did Waterloo's officers' directions contain sufficient information?

(6) Was it possible to identify an arm's length price?

(7) Could the tax charge be quantified?

On the authority of Ametalco UK v Commissioners of Inland Revenue [1996] STC 399, the appellant accepted that the granting of an interest-free loan was in principle a facility but it was argued that the provision of share options for the group employees was not for business purposes. The Special Commissioners said that in the Ametalco case the giving of business facilities of whatever kind in section 773(4), Taxes Act 1988 was a very wide description and on the natural meaning of the words would include the advancing of money for business purposes. The Commissioners concluded that there was a giving of business facilities within the meaning of the former section 773(4), Taxes Act 1988.

The above issues (2) to (4) were debated at length and the case of Macniven vWestmoreland Investments Ltd [2001] STC 237 was cited. The Commissioners concluded that the Revenue was not dependent upon administrative concession and the Waterloo Group did through the arrangements as a whole give business facilities to its subsidiaries. Therefore there was a transaction between associated parties (the parent and the subsidiaries) within the relevant provisions. They also concluded that it was also possible to calculate an arm's length price and quantify a charge to tax.

The appeal was dismissed and either party was at liberty to apply for a further hearing.

The revised transfer pricing legislation at Schedule 28AA to the Taxes Act 1988 is more widely drawn and includes transactions in a series via a third party.

(Waterloo Plc, Euston Ltd, Paddington Ltd (SpC 301).)

The taxpayer, a self employed building subcontractor, appealed against the Revenue's refusal to allow an error or mistake relief claim in relation to his tax returns for 1996-97 and 1997-98. In essence, the Inspector opened enquiries into the taxpayer's 1996-97 and 1997-98 tax returns looking in particular at motoring expenses. Rather than appoint a tax adviser, the appellant took along his father. He wanted to tape record the meeting, but the Inspector refused to allow this. Eventually they agreed with the Inspector's conclusions, in order to end the enquiries. As a result, no business use of the appellant's car was allowed in the absence of any records showing business usage.

An enquiry was later opened into the appellant's 1999 tax return, but this time, the appellant appointed a tax adviser who discovered that the car had substantial business use. He submitted an error or mistake claim for the years 1996-97 and 1997-98, but the Inspector refused it on the grounds that the appellant had accepted the Inspector's notice of completion of enquiries into those years. No right of appeal existed in section 31, Taxes Management Act 1970, against a taxpayer's amendment of his self assessment because there was no need to appeal against something that the appellant had accepted.

The Special Commissioner said that under section 33(1), Taxes Management Act 1970 any person who paid tax under an assessment, including self assessment, could make a claim for error or mistake relief if he alleged that self assessment was excessive by reason of an error or mistake in the return. As the appellant argued that his amended self assessment was excessive by reason of an error or mistake in the return, it seemed that he was entitled to make the claim. The Revenue could not rely upon Eagerpath v Edwards [2001] STC 26, as this relied upon the existence of an agreement under section 54, Taxes Management Act 1970, which was not the case in this instance.

Furthermore, the Revenue argued that section 31 did not allow an appeal against an amendment to a tax return made by the taxpayer, but the Commissioner said that the amendment of a return by the taxpayer had the same effect as an original self assessment, i.e., that if the Revenue accepted it, an error or mistake claim could be made within the statutory time limits.

The Commissioner concluded that the taxpayer's claim for error or mistake relief was allowable. She added that, although the Revenue had not subjected the taxpayer to duress, he had agreed to the settlement just to close the enquiry. There was no consensus or meeting of minds.

The appeal was allowed.

(Paul Wall (SpC 303).)

Issue: 3855 / Categories: