AB (A Firm) v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 07 December 2006 |
| Date | 07 December 2006 |
| Court | Special Commissioners |
special commissioners decision
Stephen Oliver QC and Dr A N Brice
Conrad McDonnell, counsel, for the Appellant firm
Bruce Carr, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
Income tax - Appellant was a firm of solicitors and acted for one of its partners in connection with personal litigation - in one case the firm paid the costs of the other successful party - in that and five other cases the firm paid some of the disbursements - whether such payments were wholly and exclusively laid out for the purposes of the profession of the firm -no - appeal dismissed - TA 1988 Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1s. 74(1)(a) Time limits- amendments to partnership statements where loss of tax discovered - whether negligent conduct on the part of the representative partner - yes - appeal dismissed - TMA 1970 Taxes Management Act 1970 section 30B subsec-or-para 5s. 30B(5)
1. Messrs AB (the Appellant) was, at the relevant time, a firm of solicitors. The Appellant appeals against amendments to the partnership statements in respect of the following periods of account and tax years:
| Period of account | Tax year |
| 1 May 1994 to 30 April 1996 | 1996/97 |
| 1 May 1996 to 30 April 1997 | 1997/98 |
| 1 May 1997 to 30 April 1998 | 1998/99 |
2. The partnership statements were amended by the Commissioners for Her Majesty's Revenue and Customs (the Revenue) because they were of the view that, in computing the amount of the profits of the Appellant, certain sums had been deducted which were not wholly and exclusively laid out for the purpose of the profession of the Appellant.
3. The amendments were made on 14 July 2005 and notified to the Appellant on 26 September 2005. The Revenue accepted that the amendments were made outside the ordinary time limits but were of the view that the loss of tax was attributable to the negligent conduct of the representative partner.
4. The legislation about the allowability of deductions is contained in Income and Corporation Taxes Act 1988 section 74section 74 of the Income and Corporation Taxes Act 1988 (the 1988 Act). The relevant parts provide:
Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of -
(a) any disbursement or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation …
5. The legislation about time limits is contained in section 30B of the Taxes Management Act 1970 (the 1970 Act) the relevant parts of which provide:
(1) Where an officer of the Board or the Board discover, as regards a partnership statement made by any person (the representative partner) in respect of any period - …
(b) that an amount of profits so included [in the partnership statement] is or has become insufficient …
(b) the officer may, subject to subsections (3) and (4) below, by notice to that partner, so amend the partnership return as to make good the omission or deficiency … .
(4) No amendment shall be made under subsection (1) above unless one of the two conditions mentioned below is fulfilled.
(5) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of-
(a) the representative partner or a person acting on his behalf; … .
6. Thus what we had to decide was:
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(2) whether the sums which had been deducted in computing the profits of the Appellant were money wholly and exclusively expended for the purpose of the Appellant's profession within the meaning of Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1section 74(1)(a) of the 1988 Act; and, if they were not
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(3) whether the insufficiency of the amount of the profits was attributable to the negligent conduct on the part of the representative partner within the meaning of Taxes Management Act 1970 section 30B subsec-or-para 5section 30B(5) of the 1970 Act.
7. Five numbered bundles of documents were produced (A/B, B, C1, C2, and D). A bundle of witness statements was produced and this also contained exhibits to the statements. There was also a statement of agreed facts.
8. Oral evidence was given on behalf of the Appellant by Mr A, the senior partner of the Appellant firm, and by a Chartered Accountant who had acted for both Mr A personally and also for the Appellant firm.
9. Oral evidence was given on behalf of the Revenue by Mr Peter John Chipperfield and Mr Robert Grant, both of whom at the relevant time were investigators in the Inland Revenue's Special Compliance Office. Oral evidence was also given on behalf of the Revenue by two partners in the firm of Messrs XYZ, Solicitors, namely Mr X, the senior partner and Mr Y, a litigation partner.
10. Throughout the events which are the subject of our findings of fact Mr A acted in four capacities. He personally was the litigant in the litigation; he was also the partner at the Appellant firm who conducted the litigation; he was also the senior partner of the Appellant firm; and finally he was the firm's representative partner for tax purposes. In acting simultaneously in all four capacities he did not avoid the conflicts which arose between his own personal interests on the one hand and the interests of the firm and the Revenue on the other.
11. From the evidence before us we find the following facts
12. At the relevant time the Appellant firm had a number of partners. Mr A was the senior partner and the representative partner for tax purposes. The way in which the profits of the firm were divided changed over the years but at the relevant time it was 50% to Mr A and 50% between all the other partners.
13. The work done by the Appellant firm was mainly litigation and the sums at issue in the appeal relate to litigation conducted by the Appellant firm on behalf of Mr A personally. Mr A was the partner at the Appellant firm who was responsible for conducting each matter. The largest sum at issue amounted to £160,000 and was paid to Messrs XYZ as the costs of their client, Mr Z, who had been successful in proceedings brought against him by Mr A personally. The other sums were disbursements incurred in connection with proceedings initiated by Mr A personally.
14. The Appellant firm moved offices in September 2002 and the area occupied by the firm reduced from 4,000 square feet to 1,100 square feet. Furniture and papers had to be destroyed and Mr A told us that at that time he destroyed all the papers relating to his personal litigation. On 20 December 2004 the Appellant was first notified of the Revenue's enquiry into its tax returns.
15. We now consider separately each of the disputed payments.
16. Shortly stated, the issue here is whether, as the Appellant firm contend, the sum of £160,000 was an amount laid out by Appellant firm wholly and exclusively for the purposes of its business on the grounds that that amount had to be paid to remove the real threat of a wasted costs order and the consequences such an order would have had on its business. The Revenue say there was no such threat. The liability to pay Mr Z's costs had at all times been Mr A's personal liability. Mr A had, say the Revenue, created a liability for the Appellant firm where none had existed in order to enable himself as representative partner to present the £160,000 as a deductible expense of Appellant firm, and in so presenting it in the Appellant firm's tax returns, the Appellant firm had been negligent.
17. We now give a chronological account of the events relied upon and, where appropriate, single out and explain the relevance of the contentious issues.
18. Mr A was a Name at Lloyds and suffered losses. He came to believe that he had been induced to become a Name because of pre-existing losses. He and Mr Z, who was then the senior partner of Messrs XYZ, set up an action group with a view to commencing litigation. The Appellant firm acted for the action group and issued the first writ. Mr Z and some other members of the action group then formed the view that they would prefer a larger firm of solicitors to conduct the litigation. They formed a Names Association which eventually included most members of the action group. As a result of a dispute Mr A was not permitted to join the Names Association. Thus the Appellant firm lost the future fee income which it would have earned for acting for the action group and Mr A personally was unable to join the Names Association. He said that he was also unable to bring proceedings on his own because of the potential cost.
19. Accordingly, Mr A and the Appellant firm brought proceedings against Mr Z and the new firm of solicitors based on allegations that Mr Z had breached the terms of an oral agreement with Mr A that the Appellant firm would conduct the litigation brought on behalf of the action group. The Appellant firm acted for itself and also for Mr A personally and instructed leading counsel to act in the proceedings. Mr Z was represented by Messrs XYZ.
20. The Appellant's claim was dismissed. Thereafter the action proceeded solely on the basis of a private and personal claim by Mr A against Mr Z. The Appellant firm continued to act for Mr A personally and to instruct their leading counsel. Messrs XYZ continued to act for Mr Z. The main issue then was whether Mr Z had acted fraudulently by making representations to Mr A which he knew were untrue. Fraud was specifically pleaded in the claim.
21. Mr A's claim against Mr Z was dismissed and...
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