Special Commissioners' Decisions

Special Commissioners' Decisions

ALLISON PLAGER and MIKE TRUMAN summarise some Special Commissioners' decisions.

Account is fully taxable

The two taxpayers, sisters, had a joint account with their mother, deceased. The account was originally the mother's, but in 1995 it was transferred into the joint names of herself and the two daughters. The account was used only by the mother or on her behalf by the daughters. Interest on the account was returned for tax purposes equally by all three account holders. The account had been transferred into the joint names, as part of an inheritance tax arrangement. The Special Commissioner said that from the evidence, the deceased in so doing had intended to make an immediate gift to the daughters. On the mother's death, one third of the account was reported as being her share for inheritance tax purposes, but the Revenue said that the whole account was subject to inheritance tax.

The Special Commissioner said that it appeared that the account was for the use of the deceased rather than the daughters. All the withdrawals were made for the benefit of the deceased, and no check was made to see that she took no more than her share. He did not accept the appellants' contention that if the deceased had required more than one third of the initial balance, the excess would have been a gift to her from the appellants. It was more realistic to say that the deceased had the power to use the account as she wished.

He also agreed with the Revenue that it was a gift with reservation. The account was held beneficially as joint tenants, and the gift was a chose in action consisting of the whole account, rather than two-thirds of the initial balance. The appellants had not assumed possession or enjoyment of the account, because the deceased was still entitled to a share.

The appeal was dismissed, and the whole amount was liable to inheritance tax under section 5(2), Inheritance Tax Act 1984.

( Mrs Barbara Anne Sillars and Mrs Diana Deeprose (SpC 401).)

One asset or three?

Three partners who owned and operated a fishing vessel, the M V Endeavour, sold the vessel, its licence and fishing quota 'track record' in February 1998. The sum received was £1.3 million.

The contract for the sale was made by a written offer from the purchasers, accepted verbally by the partnership. The partners claimed that they had never agreed to any apportionment of the purchase price, and that they had therefore sold one asset for the total sum received. The Inland Revenue argued that the vessel, the licence and the track record were three distinct assets, on which separate capital gains tax calculations were required. In practice, the important distinction was between the vessel on the one hand, and the licence and track record on the other.

The Commissioners found that the written offer included a clause saying that the value of the licence and track record as part of the price was to be mutually agreed. The purchaser had agreed a split with the partnership's business agent, allocating £900,000 to the vessel and £400,000 to the licence and track record. The agent had authority to agree such a split, and the apportionment was reasonable. It was clear from the House of Lords' decision in Aberdeen Construction Group Ltd v Commissioners of Inland Revenue [1978] STC 127 that it was necessary to calculate the gains separately on each disposal.

The taxpayers also raised further arguments that excluding expenditure on which capital allowances had been claimed from the computation amounted to double taxation, and that their human rights had been infringed in various ways. These were all dismissed very quickly by the Commissioners

Comment: It is hard to follow exactly why the partners were appealing against the division into separate assets, as not all the necessary calculations and figures were included in the case. The most obvious reason (given the date of sale) would be indexation, which could reduce a gain but not increase a loss.

( M V Endeavour & connected appeals (SpC 403).)

Penalties galore

In March 1999, Special Compliance Office began an investigation into the appellants' 1997-98 tax returns, in connection with a capital gain of £20.3 million. The couple claimed to be not resident and not ordinarily resident for the year, but the Inspector disputed this.

The appellants' adviser claimed that they were non-resident, or if not, they had dual residence in Spain, and the effect of the United Kingdom-Spain tax treaty was that the capital gain was taxable in Spain only.

The Inspector served a section 20, Taxes Management Act 1970 notice on the taxpayers, requiring details of the days spent in the United Kingdom from 6 April 1996 to 5 April 1998, address of accommodation, and purpose of visits. No satisfactory information was produced.

At a meeting before the General Commissioners, the appellant's adviser accepted that the appellant was resident in the United Kingdom for 1996-97 and 1997-98, but said that the gain should be taxed in Spain. A penalty was imposed for not complying with the section 20 notice.

In October 2002, the Inspector imposed further penalties, under section 100, Taxes Management Act 1970, totalling £5,250 on each appellant for failure to comply with the section 20 notice. The Inspector said he needed the information specified in the notice, as:

• United Kingdom residence was not a matter of concession, but of fact and law;

• there was insufficient evidence of residence in Spain;

• he did not have enough evidence to establish residence under the tax treaty, particularly whether or not the appellants had a permanent home in the United Kingdom.

Information provided from the Spanish tax authorities showed that the appellants were not considered to be resident during 1996 to 1999. The Inspector subsequently imposed more penalties totalling £13,260 for the period from 31 October 2002 to 8 June 2003, and the section 20 notice remained uncomplied with at the time of the Special Commissioners' hearing.

The Special Commissioner said that the documents and information required by the Inspector in the section 20 notice were within the scope of section 20. The certificate from the Spanish authorities was useless. It referred to the appellants as being resident at the current time, which was irrelevant, but said that they were not resident at the relevant time. He could see no ground for mitigating the penalties, which had to be seen in the light of the potential tax liability of £7 million. Given the lack of information provided by the appellants, he thought the time had come for the tax due on the gain to be determined.

The Commissioner lambasted the appellants for their complete lack of co-operation with the tribunal's directions, and imposed a penalty of £500. He considered that they had acted wholly unreasonably in connection with the hearing, and awarded the Inspector costs.

Both sets of section 20 penalties were confirmed, together with the new penalty of £500 and costs against the appellants.

( R J Morris and M J Morris (SpC 407).)

Profit adjustments

The Inland Revenue raised an enquiry into the 2000-01 tax return of Mr Hall. His declared turnover from a business as a service engineer was £14,780. In fact the turnover shown by his invoices was £42,622. In addition Mr Hall had said that he had no bank or building society accounts when he in fact had eight; he had produced five duplicate books and a notebook purporting to be his prime records for 2000-01 which he later admitted to having written up after the enquiry started; and he initially told the Inspector that his trade was repairing hi-fi systems for individuals whereas he actually repaired gaming machines for companies.

For 2000-01 Mr Hall was appealing against the closure notice mainly because it only allowed £20 per week for wife's wages instead of an amount equal to the personal allowance which Mr Hall had claimed. He could provide no record of the hours worked by his wife, and the Inspector did not accept his estimate of 25 hours. The Commissioner did not give much weight to Mr Hall's estimates either, did not have sufficient evidence to say that the self assessment contained in the closure notice was excessive, and therefore confirmed the figures. The Commissioner also confirmed the Inspector's estimate of 55 per cent business mileage as opposed to the 75 per cent claimed.

The Inspector raised assessments to make good lost tax for the years 1992-93 to 1999-2000. For the years 1998-99 and 1999-2000 the figures were agreed subject to adjustments for wife's wages and business mileage, but the taxpayer did not accept that his conduct had been fraudulent or negligent. Since the agreed turnover was significantly higher in both years compared to the figures initially submitted, the Commissioner found that the loss of income tax had been due to fraud or negligence.

For the years 1992-93 to 1997-98 there were no records. 1997-98 was assessed within normal time limits; for the other years the burden of proof was on the Inspector to show fraudulent or negligent conduct. For the same reasons as stated above, the Commissioner found that this burden of proof was satisfied.

The Inspector assessed the earlier years by taking the increased profit for 2000-01, £22,572, adjusting it for increases in the retail prices index and adding back these adjusted figures for the years 1992-93 to 1997-98. The taxpayer complained that 2000-01 was an exceptionally good year, and that the figures now agreed for 1998-99 and 1999-2000, showing much smaller increases, were more representative. The Commissioner agreed that the increase for 2000-01 was probably exceptional, but did not agree with using 1999-2000, as the figures for this year had not been examined in as much depth as those for 2000-01. It was likely that the appellant had been suppressing the same percentage of his profits each year, and therefore the profits declared for the earlier years should be increased by a percentage calculated from the increased profits agreed for 2000-01over the original profits declared.

Comment: The declared turnover figures for the three years to 5 April 2001 were all just under £15,000, and Mr Hall had presumably made three-line profit returns. This would appear to be an example of the Inland Revenue's increased interest in taxpayers who return turnover figures just below £15,000 year after year.

( Hall v Couch (SpC 417).)

Balance sheet

A section 19A, Taxes Management Act 1970 notice was issued to Mr Parto requiring him to produce various documents relating to his tax affairs. In correspondence with his Inspector of Taxes, Mr Parto's accountant had queried whether a taxpayer could be required to produce a balance sheet.

The Commissioner noted that the question had been dealt with before, in the case of Accountant v HMIT (SpC 258). Section 19A(2)( a ) only requires the taxpayer to produce documents which he or she already has, or can obtain; it does not require the taxpayer to create new documents. This follows from the use of the words 'in the taxpayer's possession or power'. A taxpayer would normally have a bank statement, for example, or could obtain one by asking the bank for a copy. Unless a balance sheet has already been prepared, it cannot therefore be required under section 19A(2)( a ).

However, section 19A(2)( b ) requires the taxpayer to furnish the officer with such accounts and particulars as he may reasonably require for the purpose of the enquiry. The omission of the words 'in the taxpayer's possession or power' from this subsection, and the use of a different verb ('furnish' rather than 'produce') indicates that a different activity is in mind. 'Accounts' in this subsection includes a balance sheet, so a taxpayer can be required to produce one.

( Parto v Bratherton (SpC 414).)

Issue: 3972 / Categories: