No Second Bite Of The Cherry

When resorting to litigation, it is important to get things right the first time around. RICHARD CURTIS reports Parmar and Others (trading as Ace Knitwear) v Woods.

THE TAXPAYERS CRITICISED the conclusions drawn by a Special Commissioner following an appeal hearing, but it was held that, on two out of three counts, this was due to poor advocacy on their behalf. The need for finality in litigation precludes a second chance to have the facts reviewed.

The taxpayers designed and made fashion knitwear and originally this trade was carried out in partnership. In April 1988 a fire destroyed their premises, machinery and stock and £97,000 was subsequently received from their insurance company. The business recommenced from new premises and new machinery was subsequently purchased, the balance sheet showing a total of £212,688 at December 1990, with a further £74,000 being spent in the first half of 1991. Subsequently in that year there was a theft of stock from the premises and another fire. The taxpayers' insurance consultants calculated that it would cost £387,513 to replace the machines and there were further claims for destroyed stock and loss of profits. The insurance company disputed the claims and the matter was finally settled for an amount (after payment of professional fees) of £270,505. This was used to purchase more machines, which were valued at £175,948 at December 1994 when the trade was transferred to a limited company, but without payment for stock or machinery being made to the taxpayers. The company did not prove successful and was put into liquidation in May 1998 with debts of £444,000.

In the meantime, the Revenue had started an investigation into the taxpayers' affairs and estimated assessments were issued against which appeals were lodged.

Three issues heard before the Special Commissioner were as follows.

• A claim for losses of approximately £150,000 for the year ended 31 December 1991.
• Whether, for the purposes of claiming capital allowances, the disposal value of the machinery destroyed in the fire in 1991 exceeded the capital expenditure on the machinery.
• Whether, for the purposes of calculating balancing allowances or charges on the transfer of the trade to the company, there was a disposal of the machinery to the company because no payment was received for it.

The Commissioner held that the taxpayers had not proved the first two points and, with regard to the third point, as there was no evidence of a sale to the company, the disposal was deemed to have taken place at market value. The taxpayers appealed.

None of the taxpayers had appeared before the Special Commissioner to give evidence and their accountant had argued their case.

(Jeremy Woolf for the taxpayers; David Rees for the Revenue.)

The taxpayers submitted that, because of their accountant's incompetence, they did not have a fair hearing before the Commissioner and the Court should therefore decide on the above issues itself or direct a fresh hearing. Mr Justice Lightman more succinctly saw the choice as being between 'a fresh hearing before me or the Commissioner or … proceedings for professional negligence against [their accountant]'.

Mr Justice Lightman reviewed the claims made by the taxpayers.

The loss claim

With regard to the claim for loss relief in 1991, he noted the accountant's explanation that accounting records had been lost in the fire. However, he also noted that despite stock of £130,940 being claimed as lost in either the fire or the previous theft, the Revenue had explained that stock at 31 December 1990 was, according to the accounts, only £15,375 and figures for previous years indicated that stock never rose above £24,000. The taxpayers produced no evidence to support their claim, neither was there any evidence regarding the theft nor production of police records: 'Mere assertions and calculations are not sufficient' and 'on the evidence before me I am not satisfied that the taxpayers incurred the loss that they claimed'.

The taxpayers had advanced two arguments against the Commissioner's treatment of their claims.

First, the taxpayers argued that the Commissioner was wrong to treat their accountant's contentions as mere assertions and not evidence. However, Mr Justice Lightman considered these statements and opined (citing Re Vandevells Trusts (No 2), White v Vandervell Trustees Ltd [1974] Ch 269) that the Commissioner had no choice, as the accountant did not give evidence; all he said was as an advocate, not a witness.

Secondly, counsel for the taxpayers argued that their accountant was not allowed to take the Commissioner through paperwork relating to the insurance claims on which the 1991 loss was based. However, it was held that the Commissioner left this decision to the accountant who, knowing the contents of the paperwork, decided not to do so.

However, Mr Justice Lightman did add that, having now seen the paperwork and while being of the opinion that it should have been shown to the Revenue, it would not have affected the outcome.

The taxpayers also argued that an injustice had occurred because the Commissioner had not advised their accountant of the difference between submissions and evidence. But Mr Justice Lightman felt that, by appearing before the Special Commissioner, the accountant was warranting his fitness to do the job and he had also agreed that the Commissioner had advised him at one point that he was not producing evidence.

Mr Justice Lightman considered that the taxpayers did have a fair hearing. Their accountant had been alerted to the difference between the roles of advocate and witness and chose not to give evidence. But this might have been because he considered this a high risk strategy as it would mean that he could be cross-examined, especially as the taxpayers themselves did not attend to give evidence in support. On the question of his ability, incompetence by an advocate was not enough to render a trial unfair (see Al-Mehdawi v Secretary of State for the Home Department [1990] 1 AC 876).

The 1991 capital allowances claim

The second point was the capital allowances computation for the year ended 31 December 1991. Section 26(2), Capital Allowances Act 1990 provided that 'the disposal value of any machinery or plant shall in no case exceed the capital expenditure incurred ... on the provision of the machinery or plant for the purposes of the trade …'.

The accountant had argued that there had been a gain of £96,500 in respect of five machines, because the compensation received from the insurance company exceeded their acquisition cost. However, the Revenue argued that the total compensation of £270,505 did not exceed the total expenditure on machines according to the business accounts. The total compensation claimed by the taxpayers' insurance consultants had not been achieved and, as the final settlement contained no analysis of the final amount paid between individual machines, it should be allocated to the whole 'pool' of machinery. In the lack of compelling evidence from their accountant, Mr Justice Lightman found that the Commissioner was right to accept the Revenue's approach.

Transfer to the company

The third issue under appeal was whether there was a disposal value to be taken into account in calculating capital allowances when the machinery was transferred to the limited company in 1994. The Commissioner had held that there was no evidence of a sale and therefore market value should be taken into account. However, the taxpayers contended that, before the Commissioner's hearing, it had been agreed with the Revenue that there was a sale. Mr Justice Lightman could see how the Commissioner had overlooked this, as it was not apparent from the submissions by the parties, and he agreed that this issue should be remitted to her for reconsideration.

Decision for the Revenue on the first two points, with the third point being remitted back to the Commissioner.

(Reported at [2002] STC 846.)

As usual there are two sides to every story. How much fault should be apportioned to the accountant who appears to have been out of his depth before the Special Commissioner and how much to the taxpayers who might have been reluctant to give evidence? Mr Justice Lightman ordered that the accountant's statement and his judgment should be sent to the Institute of Chartered Accountants who were 'invited to give consideration to taking remedial action'. One wonders whether the accountant was seduced into appearing before the Special Commissioner by the thought that this would be similar to the more informal proceedings before the General Commissioners. For those considering an appearance before the Special Commissioners, a review of the explanatory leaflet, Special Commissioners of Income Tax, Appeals and other proceedings before the Special Commissioners (available on the Internet at www.courtservice.gov.uk/tribunals/comtax/scitexpl.htm) is a starting point. However, it should be noted that the Court did point out that paragraph 18 'Will the tribunal help me to put forward my case' was addressed at the lay rather than professional person, who would be assumed to have more knowledge of such matters. For the inexperienced, discretion may well be the better part of valour if faced with similar circumstances, and instructions to an experienced advocate will be the professional approach so that this remains a case of 'there but for the grace of God …'.

Issue: 3878 / Categories: