Tax Cases - The foreign earnings deduction considered in Carstairs v Sykes

The foreign earnings deduction considered in Carstairs v Sykes; the taxpayer's claim to relief on a gain arising from a sale of business premises was not allowed in Purves v Harrison; date of registration and 'best judgment' assessments considered in Henderson and another (trading as Tony's Fish and Chip Shop) v Commissioners of Customs and Excise.

Residence Status

The foreign earnings deduction is considered by the High Court in Carstairs v Sykes.

A taxpayer had lived and worked abroad for six years, and then returned to the United Kingdom. He claimed that he was entitled to include this period in aggregating the qualifying period in relation to the foreign earnings deduction. The Revenue disagreed. In the High Court, it was ruled that for the purposes of the foreign earnings deduction, absence had to relate to a period in which the taxpayer was resident and ordinarily resident in the United Kingdom.

Background

Christopher Sykes lived and worked in Asia for six years until 15 February 1993, and was considered not resident and not ordinarily resident in the United Kingdom for tax purposes. He returned to the United Kingdom to work and live on 15 February 1993, and therefore became resident and ordinarily resident in the United Kingdom. Between 15 February 1993 and 5 April 1994, he spent 27 days outside the United Kingdom and, in 1993-94, the number of days abroad was 143 days.

The taxpayer appealed against an income tax assessment for 1993-94 on the grounds that he was entitled to a foreign earnings deduction under section 193(1), Taxes Act 1988 (now repealed). He claimed that he was entitled to include the period of his time in Asia in aggregating the qualifying period in respect of which the deduction fell to be calculated, saying that nothing in the Taxes Act 1988 confined the qualifying period to the time at which he was resident or ordinarily resident in the United Kingdom.

The General Commissioners found for the taxpayer, so the Revenue appealed to the High Court.

(Bruce Carr for the Revenue; Nicola Shaw for the taxpayer.)

High Court, Chancery Division judgment

Mr Justice Hart said that the issue was whether or not the taxpayer was entitled to include the period when he was in Asia in aggregating a qualifying period for the purposes of section 193(1). He said that there were two methods by which a taxpayer could establish the necessary qualifying period of 365 days required in section 193(1)(b). He either needed to demonstrate a period of unbroken absence of 365 days or, alternatively, he could aggregate a period of absence which ended in the year of assessment with previous qualifying periods. However, for aggregation purposes, there had to be no more than 62 days between the relevant period and the last or only qualifying period, and when dividing the total number of days in the resulting period, the resulting figure had to be greater than the total number of days in the same resulting period which were not days of absence from the United Kingdom.

The General Commissioners had based their decision by considering the whole period, i.e., 2,077 days, that the taxpayer was abroad. By applying the one-sixth rule for 1993-94, 2,492 days could be taken into account: 2,077 days to 15 February 1993, the remaining 50 days of 1992-93, and the full 365 days of 1993-94.

It therefore followed, said the judge, that before the one-sixth rule could be broken, the taxpayer could have had 416 days which were not days of absence from the United Kingdom. On the facts, at 15 February 1993 when he returned to the United Kingdom as resident but not ordinarily resident there were 23 days when he was not absent from the United Kingdom. He had 393 days which, subject to the 62 day rule, he could spend in the United Kingdom out of a total 415 days between 15 February 1993 and 6 April 1994. He spent 21 days in the United Kingdom between 15 February 1993 and 5 April 1993, leaving 372 days which he could be in the United Kingdom in 1993-94. Thus, he could effectively spend only five days out of the United Kingdom during 1993-94 to obtain the 100 per cent deduction.

The Revenue considered this to be anomalous, but said that it need not be if the word absence means absence from place of residence or ordinary residence, not including absence during any period when the taxpayer is not resident or ordinarily resident in the United Kingdom, and thus not subject to tax under Schedule E, Case I.

The Revenue said that the whole statutory context should be considered. Section 19 provides for tax to be charged under Schedule E, Case I where an individual is resident or ordinarily resident in the United Kingdom. There is an exception to the charge, the application of which presupposes that the taxpayer is resident or ordinarily resident. Absence is taken as being from the place of residence or ordinary residence, and so the Revenue submitted that the taxpayer could not rely on periods when he was not resident. Absence implied a state of not being present.

The taxpayer submitted that the only time when residence needs to be considered is the year of assessment in which the charge arises.

The judge said that the word 'absent' had to be construed as being not physically present in the United Kingdom as the country of residence and ordinary residence. Thus the taxpayer could only include in his qualifying period the whole of the year of assessment 1992-93, as that was the year in which he became resident and ordinarily resident. The Revenue's appeal was therefore allowed.

Decision for the Revenue

(Reported at [2000] STC 1103.)

Commentary by Allison Plager

While the foreign earnings deduction for taxpayers other than seafarers has been abolished by section 63(1), Finance Act 1998, the decision in Carstairs v Sykes is likely to be relevant to any taxpayer who is in the process of settling his tax affairs for periods prior to 17 March 1998. The court noted that the taxpayer's claim would have been allowed up to 1991, although Statement of Practice SP18/91 (also now defunct) subsequently ruled that the foreign earnings deduction would depend upon periods of residence.

Two Into One Does Not Go

The taxpayer's claim to relief on a gain arising from a sale of business premises was not allowed in Purves v Harrison.

The taxpayer disposed of his business premises some nine months before disposing of the business operation, having continued in business during the intervening period. The Revenue refused his claim to retirement relief on the ground that it had not been a disposal of the whole or part of a business. The High Court agreed that there was no evidence to suppose that the two disposals should be regarded as a single one.

Background

The taxpayer ran a coach and minibus business. In 1989, he began discussions with Mr Harris regarding the sale of the business to him, but Mr Harris had problems with finance. Later in 1989, another company, MPK Garages, approached the taxpayer with a view to purchasing the premises from which the business was run. In March 1990, Mr Harrison sold the premises to MPK, but was allowed to continue to occupy them as a licensee, and agreed the terms of an assignable lease.

Mr Harrison continued in business until May 1990 when he advertised it for sale, and sold some vehicles. In December 1990, he sold the business to Mr Harris, and ceased trading. He claimed retirement relief on the sale of the premises contending that the sales in March and December were connected and formed part of the whole transaction, i.e., the disposal of the whole business.

The Revenue refused retirement relief on the gain arising from the sale of the premises to MPK on the ground that it was not the disposal of the whole or part of a business within section 69(2)(a), Finance Act 1985.

The General Commissioners allowed the taxpayer's appeal, so the Revenue appealed by way of case stated.

(Christopher Tidmarsh for the Revenue; Greg Sinfield for the taxpayer.)

Court of Appeal judgment

It was agreed that the required age to qualify for retirement relief (section 69(1), Finance Act 1985) had been met. However, section 69(2) provided:

'For the purposes of this section and Schedule 20 to this Act, a disposal of business assets is — (a) a disposal of whole or part of a business …'

Qualifying disposal was defined in paragraph 4(1)(a) of Schedule 20 as including a 'material disposal of business assets'. Mr Justice Blackburne said that there clearly had been a disposal of a business asset, namely, the business premises, in March 1990. Similarly the disposal in December was also the sale of a business asset. The question was whether the sale of the premises was part of a disposal of the business within the meaning of section 69(2)(a), regardless of the facts that the two sales had been to different persons and were separated by nine months.

Guidance as to what was meant by 'a disposal of the whole or part of a business' could be found in Atkinson v Dancer, Mannion v Johnston [1988] STC 758, where the judge said that the sale of a business asset did not necessarily constitute the sale of the business or any part of it, even if it meant that the business activity would be reduced because of the sale. Mr Justice Blackburne said that this was true of the instant case, although the business activity was not reduced as a result of the business premises. So a business could be sold to different purchasers at different times.

Furthermore, it was right that whether or not the sale of the premises was part of the disposal of the whole business was a question of fact. The most important factor to consider was whether the two sales were connected and formed part of the same transaction.

Mr Justice Blackburne said that the continuing intention to sell the premises along with the remainder of the business was not sufficient to create a connection between the two, where the disposals were made to different persons and were separated by nine months. The sale of the premises was structured to enable the taxpayer to run his business as he had before the sale. He was during that time able to find a purchaser of the business, who happened to be the person with whom he had had discussions in 1989, but could just as easily have been someone else.

The two sales could not be regarded as a single transaction or disposal, and it would be to stretch the meaning of disposal in section 69(2) too far to suppose they could. Retirement relief was therefore not due. The Revenue's appeal succeeded.

Decision for the Revenue

(Reported at [2001] STC 267.)

The Importance of Evidence

The Court considers the date of registration and 'best judgment' assessments in Henderson and another (trading as Tony's Fish and Chip Shop) v Commissioners of Customs and Excise.

Following a surveillance operation by Customs and Excise, the appellant was registered for VAT retrospectively and best judgment assessments were made on the business. Appeals were made firstly on the basis that the registration date was incorrect by one day and also that the assessments were not made according to Customs' best judgment. However, both of these grounds for appeal were dismissed.

Background and facts

The appellants carried on a fish and chip business in Carlisle which had commenced in 1990. At the beginning of 1996 officers of Customs and Excise made a covert visit to the site of the shop and observed the number of customers leaving the takeaway business with fish and chips within opening hours.

Subsequently, Customs and Excise officers visited the shop and spoke to one of the appellants. The recorded takings for the day when the previous surveillance had taken place did not appear to be correct and the officers suspected that they were greater than the amount recorded.

Subsequent surveillance showed further evidence of the average price for transactions during a particular lunch hour. Following further surveillance, Customs and Excise took the view that the recorded takings were lower than estimated true takings by about 40 per cent. In addition they considered that the business should have been registered for VAT purposes from 1 October 1991.

Assessments were originally raised for a sum of £27,030 which was later reduced to £26,062.

The appellants appealed against the assessments. Firstly, they contended that registration should have taken effect from 30 September 1991 (one day earlier than that imposed by Customs) in accordance with paragraph 5 of Schedule 1 to the VAT Act 1994. Secondly, the appellants submitted that the assessments had not been made to the best of Customs' judgment within the meaning of section 73(1), VAT Act 1994. The basis of this submission was that Customs and Excise had based their calculation on sales recorded during only one lunchtime.

(Perdita Cargill-Thompson for the appellants; Andrew Macnab for Customs and Excise.)

The Chancery Division judgment

The matter came before Mr Justice Park who rehearsed the facts, how the case arose and the appeals already made to the VAT tribunal (see decision 16362).

As regards the best judgment issue, two well-known cases were relevant: Van Boeckel v Commissioners of Customs and Excise [1981] STC 290 and Rahman (trading as Khayam Restaurant) v Commissioners of Customs and Excise [1998] STC 826. The findings of fact made by the VAT tribunal mirrored the direct tax principles of Edwards v Bairstow 36 TC 207 and the 'Wednesbury' principle (see Associated Provincial Picture Houses Limited v Wednesbury Corporation 1 KB 223).

Mr Justice Park agreed that registration should have taken effect from 30 September 1991 rather than 1 October 1991, but the error of one day did not invalidate everything.

In validating the various assessments, the VAT tribunal had referred to the resources of Customs. The judge observed that the case was very important to Mr and Mrs Henderson, but in the wider scheme of things it was a fairly small case and he did not accept that Customs failed to exercise their best judgment when they decided that one lunchtime's analysis was enough. The appeal was dismissed.

Decision for Customs

(Reported at [2001] STC 47.)

Commentary by John T Newth FCA, FTII, FIIT, ATT

One is tempted to make the rather flippant comment that every owner of a fish and chip shop has 'had their chips' as regards their VAT affairs. Fish and chip shops represent an easy and soft target for the department and the number of such cases successfully defended at tribunal must be minute. Appellants need the equivalent of the Special Commissioners' appeal for direct purposes in Farthing Steakhouse (see SpC 91).

Having said that, the current case demonstrates once again the importance of facts and evidence. If fish and chip shop owners are to successfully defend the type of covert surveillance which Customs appear so much to enjoy, then they must counter this with equivalent evidence. The best evidence is, of course, a watertight and complete bookkeeping system where the till rolls match up with the record of takings. In addition, where Customs do try and take a case to appeal, the fish and chip shop owner could always instruct a private detective to undertake covert surveillance on behalf of the business (unknown to the proprietors).

The case may have been small in the general scheme of VAT, according to the tribunal and the judge, but one suspects that Mr and Mrs Henderson will not have regarded assessments of £26,000 a small matter at all.

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