Anderson
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 August 2016 |
| Neutral Citation | [2016] UKFTT 565 (TC) |
| Date | 10 August 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Rachel Short, Mrs Rebecca Newns
Mr Gordon of Temple Tax Chambers instructed by Wilson Wright LLP appeared for the appellant
Ms Nathan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Losses – Trading in footballer development – Discovery reasonable basis for belief tax under assessed – Held – Valid discovery under Taxes Management Act 1970 (TMA 1970), s. 29(1) – Activity investment not trade.
The Appellant claimed losses generated from activities relating to a football talent scheme against his personal income. A discovery assessment was raised by HMRC and a challenge into the availability of the losses on various grounds in Income Taxes Act 2007 (ITA 2007), s. 66, 72 and 74. The tribunal found for HMRC and upheld the discovery assessment and denied the use of the losses.
The Appellant, Mr Anderson claimed losses of 5 £3,002,772 in his personal income tax return for the 2008–9 tax year on the basis that those losses arose from trading activities, described as football development (Bafana Scheme). This is an appeal against HMRC's decision that these losses, arising from activities undertaken to develop and bring young South African footballing talent to the European football market are not allowable.
The Appellant stated that the assessment made on him on 2 May 2012 was made outside the usual enquiry window, which closed on 28 January 2011, on the basis that a discovery had been made under Taxes Management Act 1970 (TMA 1970), s. 29(1).
The Tribunal stated that the onus is on HMRC to demonstrate that the specific conditions at TMA 1970, s. 29 have been fulfilled and that the discovery assessment is valid. Mr Anderson argued that those conditions have not been met because at the time when the assessment was made HMRC did not have a reasonable basis for concluding that he had paid insufficient tax for the 2008–9 tax year.
The onus of proof was on Mr Anderson to demonstrate on the balance of probabilities that the trading losses claimed in his tax return for the 2008–9 tax year are losses arising from his trading activities.
The Appellant argued that HMRC's discovery assessment was not valid because on the basis of the information which was available at the time when the discovery assessment was made, the officer making the assessment, Ms Lampard (HMRC), did not have a reasonable basis for believing that Mr Anderson had been under-assessed to tax. The tribunal stated that it is settled law that the officer who makes a discovery under TMA, s. 29 must have a reason for doing so as made clear in Sanderson in the Upper Tribunal, referring to CharltonAll that is required is that is has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment [para 21]. However, the Appellant said that knowledge of the existence of the Bafana Scheme and how it had been implemented by other parties to the scheme was not enough to form a reasonable belief by Ms Lampard that Mr Anderson was not entitled to the losses he had claimed. HMRC had reason to suspect, there might be a loss of tax, but not sufficient information to form a reasonable belief. The Appellant relied on statements from the Sanderson decision in the Upper Tribunal to suggest that knowledge that losses arose from a tax scheme does not justify the making of a discovery assessment.
The tribunal stated that the hurdle for the making of a discovery, set out in Langham v Veltema and Corbally-Stourton is that HMRC should have a reasonable belief that there is an insufficiency in an assessment. As made clear in Charlton this can arise even though there has been no new information, there only needs to have been a new appreciation of the facts. Nor does there need to be a certainty that there has been an under-assessment, but there has to be a reasonable belief that this is the case. The tribunal did not consider that HMRC were required to be certain of all relevant facts in order to have a reasonable belief for the purposes of TMA 1970, s. 29(1). They just needed to be sure of enough facts to enable them to determine a reasonable conclusion by the application of logic.
In the tribunal's view it is not fatal to HMRC's case that they did not list all of the information on which their discovery assessment was based in correspondence with the Appellant or internal mails. The statutory question was what Ms Lampard knew at the time, not what she subsequently told the Appellant she knew at the time.
Therefore, the Tribunal found that the discovery assessment had been issued correctly.
With regard to the use of the losses it was HMRC's position that restrictions are applicable to Mr Anderson and this would mean that the losses claimed by him from his activities under the Bafana Scheme are not allowable because Mr Anderson was trading in a non-active capacity and the losses arose in connection with tax avoidance arrangements (Income Tax Act 2007 (ITA 2007), s. 74B and s. 74C).
The Appellant argued that the disputed losses are allowable as losses from a trade carried on by him as a sole trader in the relevant period. The losses should be available either under ITA 2007, s. 66 or 72. The Appellant argued that his activities were commercial as required by ITA 2007, s. 66 and s. 74(1). The trade was set up in a commercial manner, relying on advice from professional advisers and Mr Anderson's own expertise in selecting players. Its particular subject matter and lack of specific customers should not mean that there is no trade.
HMRC argued that while it might be correct that for tax purpose trade has no fixed meaning, Mr Anderson has not provided any description of the trade which he said was actually being carried on and that while Bafana was a genuine operation in South Africa, Mr Anderson's involvement in it (i) was not carried on as a trade; (ii) was not carried on on a commercial basis; (iii) the main motive for Mr Anderson's involvement was to obtain losses to set-off against his income tax for 2008–9; (iv) Mr Anderson's involvement was more akin to an investment than a trade and (iv) the money invested was to acquire a capital asset (the rights under the Warranty and Indemnity Agreement) not for trading purposes. Mr Anderson's role for Bafana was too remote and too passive to amount to a trading activity.
HMRC also stated that Mr Anderson's claim for loss relief was caught by the anti-avoidance rules at ITA 2007, s. 74B. Mr Anderson failed both the test at s. 74B(1)(a), the time logs provided by him do not provide sufficient proof that he spent more the 10 hours a week personally involved in Bafana activities and at s. 74B(1)(c) because the scheme was structured with a view to generating tax losses for Mr Anderson; the tax repayment was intended to fund the second repayment on the loan due in June 2010 and also that one of Mr Anderson's main purposes for investing in the Bafana scheme was to generate tax losses to shelter his taxable income for the 2008–9 and 2007–8 tax years.
The tribunal stated that the tests under both ITA 2007, s. 64 and 72 have both a qualitative element (was the trade carried on on a commercial basis and with a view to the realisation of profits) and a quantitative element, specifically under s. 74B (was time actively spent and did it amount to more than ten hours per week). The logs retained by Mr Anderson were critical evidence in this regard. While, despite some contradictions about how they were created, the tribunal accepted that they provided an indication of the time which Mr Anderson allocated to the Bafana Scheme, but the tribunal shared HMRC's scepticism about the quality of the time spent by Mr Anderson. The tribunal found that the evidence suggested that the appellant work on the football academy did not pass the test as being sufficient enough in terms of time and quality and stated that whilst it would not describe Mr Anderson's actions as that of a dilettante neither did they think they fulfil the description suggested in Wannell v Rothwell as a serious trader seriously interested in profits. The conclusion was that Mr Anderson's activities did not fulfil the conditions at ITA 2007, s. 74(1) and s. 66 that his trade was carried on on a commercial basis. Having decided that Mr Anderson does not fulfil the threshold conditions of carrying on a trade, there was no need for the tribunal to consider the application of s. 74B, but there is a significant overlap between tests at s. 74B(1)(a) (individual carries on a trade in a non-active capacity) and the common law tests for trading. For reasons already cited concerning Mr Anderson's the activities recorded by Mr Anderson not amounting to a trade, the tribunal also concluded that his activities fail the test at s. 74C concerning tax avoidance motive.
The tribunal therefore agreed with HMRC that the evidence suggested that availability of tax losses was a significant consideration for Mr Anderson's being involved in the Bafana Scheme.
For these reasons discussed above the tribunal rejected the Appellant's arguments that the losses claimed by him in his income tax return for 2008–9 were allowable losses arising from trading activities and confirmed HMRC's assessment of 2 May 2012 denying those losses.
This is an important and detailed case concerning the usage of losses and the technical arguments for and against as to whether those losses were legitimately created as part of a commercial trade. Importantly the tribunal gave clear guidance with regard to the knowledge expected of a Tax Inspector to be able to raise a discovery assessment, reaffirming past case law that HMRC should have a reasonable belief that there is an insufficiency in taxes declared.
[1] The Appellant, Mr Anderson claimed losses of £3,002,772 in his personal income tax return for the 2008–9 tax year on the basis that those...
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