Special Commissioners' Decisions

Special Commissioners' Decisions

ALLISON PLAGER and MIKE TRUMAN report some decisions from the Special Commissioners.

Tale of woe

The taxpayer was a property developer who fell into financial difficulties in the late 1980s and early 1990s when the property market fell flat. In order to reduce his overdraft and prevent economic disaster, he took other jobs, move into the property that he was currently renovating, and sell his own residence which he owned jointly with his wife. Unfortunately, the taxpayer's residence did not attract a buyer, so he decided to let it instead.

The taxpayer obtained a mortgage on his residence, and used the money to reduce his overdraft. The rent partly covered the mortgage repayments. Eventually, in 1999, the taxpayer sold his former residence.

The matters under dispute were:

The Special Commissioner said that whether or not a jointly owned property could become an asset of the taxpayer's trade, depended on the stated intentions of the joint owners. Had ownership of the property been put into the sole name of the taxpayer, this would have been a powerful pointer to the property becoming part of his trading stock. This did not occur however, and so the property had not become part of his trading stock.

The taxpayer claimed that his accountant had made a mistake in not including the residence as a business asset in his income and expenditure account for 1990. The Special Commissioner noted that the accountant had noted that the transfer to private use of the house that the taxpayer moved into was included in the accounts, and so concluded that no mistake had been made.

With regard to the taxpayer's financial arrangements made in 1990-91, the taxpayer claimed that the overdraft and mortgage were used to maintain his business in times of difficulty. The Commissioner, however, concluded that the arrangements had been made to maintain a reasonable standard of living and safeguard personal capital rather than save the taxpayer's property development business.

Finally, the Commissioner considered the works carried out on the taxpayer's former home. He said that work was done either while the taxpayer lived there, or considerably later than 1990 when it was said that the property became part of the trading stock. This did not support the taxpayer's claim that the property was transferred to trading stock.

The taxpayer's claim that interest paid on the mortgage on his former residence should be allowed in full as a business expense was dismissed, on the ground that the property had not formed part of his trading stock.

However, the Commissioner agreed that the rents received on the former residence were assessable only on the taxpayer and not his wife, since the paperwork relating to the property was in the taxpayer's name only, and all dealings were done through him.

The appeal was allowed in part only.

(Mr Stanley EN Kings; Mrs Marilyn J Kings (SpC 402).)

Missed penalty

Mr Austin submitted returns for the years ended 5 April 2000 and 2001 showing estimated figures for trading income, dividends and interest. Section 19A notices for each year were issued early in 2003, followed by penalty warning notices and the imposition of daily penalties.

The first daily penalty notices for each of the two years showed the total penalty as £340, being a penalty of £10 per day for 34 days. However, the notices also said that they were charging:

Both notices also gave the date of the section 19A notice as 26 March 2003, when the notice for 1999-2000 had actually been issued on 22 January 2003. They said that the section 19A notices had required the production of documents, when they had actually required the production of accounts and particulars.

The Special Commissioner found that any of these errors was sufficient to render the notices invalid; they were too significant to be rectified by the 'want of form' provisions in section 114, Taxes Management Act 1970. He also considered that two subsequent penalty notices for £510 each, which were correctly prepared, were too high because they represented 41 per cent and 25 per cent of the tax liability respectively. He reduced the penalties by one half.

It is good to see section 114 limited to minor mistakes, and the Special Commissioner makes a reasoned case for how such notices could be misleading. However, reducing the daily penalty because the tax liability was low is surprising. Daily penalties are the last in a long series of attempts to get taxpayers to submit full details of their income; it should surely be the extent of the delay and any mitigating circumstances that affect the quantum of daily penalties, not the amount of tax that is ultimately due.

(Austin (SpC 426).)

Diplomatic immunity

Mrs Jimenez appealed against a refusal to allow error or mistake claims under section 33, Taxes Management Act 1970 in respect of the tax paid on her earnings as a cook for the Namibian High Commission in London. She claimed that she was entitled to diplomatic immunity under the Vienna Convention of 1961, which is brought into United Kingdom law by the Diplomatic Privileges Act 1964.

Article 37(3) of the Convention exempts from tax members of the service staff of the mission who are neither nationals nor permanent residents of the 'receiving state' (in this case the United Kingdom). Mrs Jimenez was a national of the republic of the Philippines, and claimed that her residence here was not permanent.

The first question considered was whether Mrs Jimenez was a permanent resident. She had originally come to the United Kingdom on holiday, and had decided to stay after a volcano had erupted near to her home in the Philippines. She had been advised that the best way to stay on was to get a job in a diplomatic mission. Apart from one short visit to the Philippines for a month in September 1992 she had been living in the United Kingdom from April 1991, although her husband who had originally accompanied her had returned to the Philippines in 2000. The Commissioner found as a fact that Mrs Jimenez intended to return to the Philippines when she retired from her job in the Namibian High Commission or when the job ended for any other reason.

The Special Commissioner said that the question of whether she was a permanent resident was not to be decided according to local tax rules, but on broad principles that are generally accepted, looking for the autonomous and international meaning of the treaty. This includes accepted practice in interpreting the treaty as applied by the Member States, and in the United Kingdom the unchallenged practice had been to decide permanent residence on the basis of whether someone would be in the United Kingdom but for the requirements of the sending State. On this ground Mrs Jimenez would be considered a permanent resident and therefore not eligible for tax exemption.

In any case, in order to claim exemption she had to be a member of the service staff of the mission. Again looking at the treaty in an autonomous and international context, other provisions of it required notification of her status to the Foreign Office if she was to enjoy immunity. A certificate from the Foreign Office that she had not been so notified, which was provided to the tribunal, was therefore conclusive, and Mrs Jimenez lost her appeal.

(Jimenez (SpC 419).)

--------------------

Visit www.brewermorris.com for the best tax opportunities in practice, industry and commerce - alternatively call Matthew Phelps on 020 7415 2815 to discuss your career situation.

Issue: 3977 / Categories: