Baylis
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 October 2016 |
| Neutral Citation | [2016] UKFTT 725 (TC) |
| Date | 26 October 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Anne Redston
Miss Diane Blagg CTA of Stiles & Co, Chartered Accountants, appeared for the appellant
Mr David Linneker of HM Revenue & Customs Appeals and Reviews Unit, appeared for the respondents
Income tax – Benefits in kind – Family company paid care home fees for Mrs Baylis, wife of one employee and mother of another – Whether contract with care home made in a personal capacity or as agent for employer – Agency law considered and applied – Held, contracted as agent – Provision of the care therefore benefit in kind for family member – Whether statute directs which of two possible employees liable to benefit in kind charge – Whether a matter of employer's discretion – Reliance on Vestey – Other personal expenses paid by employer – Whether taken into account when dividends calculated – Whether benefits in kind – Appeal allowed.
The First-tier Tribunal (FTT) found that care home fees paid by a family company were a benefit in kind for the appellant's father rather than her personally.
The appellant, Ms Baylis, was employed by Val Wyatt Marine Ltd (VWML). Her father, Mr Baylis, was VWML's majority shareholder and managing director, and the spouse of Mrs Baylis, the appellant's mother.
It was not disputed that when Ms Baylis's mother went into a care home VWML paid the fees. HMRC contended that Ms Baylis had personally contracted with the care home, VWML had met her personal liability and the resulting benefit in kind was taxable on her. Ms Baylis's case was that she had contracted with the care home as agent for VWML. Although the payment of the fees was a benefit in kind, it was taxable on her father, the spouse of Mrs Baylis. HMRC also contended that certain sums paid by VWML were to settle personal expenses incurred by Ms Baylis, while she argued that any personal expenses were covered by dividends already included in her tax return.
HMRC's secondary case was that, if the contract was with VWML, the employer had the discretion to decide which of two possible employees should bear the resulting benefit in kind charge.
The FTT found that Ms Baylis had contracted with the care home as agent for VWML; and the resulting benefit in kind charge did not fall on her but Mr Baylis. This was because where two employees were potentially liable for the charge it was not for the employer to decide which of the two employees were to suffer the tax charge. The FTT drew attention to Vestey v IR Commrs TAX(1979) 54 TC 503, which made it clear that HMRC did not have a discretion to subject one person to tax rather than another; that was a matter for Parliament. The same must be true for employers. As Lord Wilberforce said in Vestey, taxes are imposed upon subjects by Parliament, it followed that they could not be imposed by employers. Instead, the FTT interpreted ITEPA 2003, s. 721 as setting out a hierarchical approach which directed the employer as to which employee should bear the tax. In that hierarchy, the person's spouse came before the person's parents. Finally, the FTT also held that other personal expenses were paid on account of dividends which were already included in Ms Baylis's tax return.
The appeal was allowed.
In the absence of any specific rules for which of two employees was liable for a benefit in kind in this case, the FTT interpreted the definition of members of a person's family or household in ITEPA 2003, s. 721 as a hierarchy with the spouse at the top and guest at the bottom. As spouse also came before parent, the FTT held that the benefit in kind arising from VWML's payment of care home fees was taxable on Mr Baylis, not on Ms Baylis.
This approach does not however entirely resolve the question in all situations: for example where a benefit is provided to a third party whose two children work as employees of the same employer. However, as the FTT concluded that is a matter for another day.
[1] On 11 November 2013, HM Revenue & Customs (HMRC) assessed Ms Baylis to tax on the basis that certain benefits in kind had been omitted from her 2009–10 and 2010–11 self-assessment (SA) tax returns. In this decision, I have called those two tax years the relevant period.
[2] The extra tax was £9,649.95 for the first year and £27,533.22 for the second. Most of the tax related to the payment of care home fees for Ms Baylis's mother, Mrs Baylis.
[3] During the relevant period, Ms Baylis was employed by Val Wyatt Marine Ltd (VWML). Her father, Mr Alec Baylis, was VWML's majority shareholder and managing director, and the spouse of Mrs Baylis.
[4] It was not disputed that VWML had paid Mrs Baylis's care home fees. HMRC's primary case was that Ms Baylis had personally contracted with the care home, VWML had met her personal liability and the resulting benefit in kind was therefore taxable on her. Ms Baylis's case was that she had contracted with the care home as agent for VWML. Although the payment of the fees was a benefit in kind, it was taxable on her father, the spouse of Mrs Baylis.
[5] HMRC's secondary case was that, if the contract was with VWML, the employer had the discretion to decide which of two possible employees should bear the resulting benefit in kind charge. Here, VWML had decided that Ms Baylis, not her father, was liable to tax on the care home fees.
[6] I decided that:
1) Ms Baylis had contracted with the care home as agent for VWML; and
2) the resulting benefit in kind charge did not fall on Ms Baylis. This is because, where two employees are potentially liable to tax on an employment-related benefit provided for a member of an employee's family or household, the legislation sets out a hierarchy, under which spouse takes priority over parent. I also rejected HMRC's submission that employers can decide which of two employees are to suffer the tax charge.
[7] It follows that Ms Baylis is not liable to tax on VWML's payment of her mother's care home fees.
[8] The remaining part of the assessments under appeal related to the following sums said to have been paid by VWML to settle certain personal expenses incurred by Ms Baylis:
1) credit card payments of £1,411 for 2009–10 and £6,475.10 for 2010–11; and
2) other third party payments of £3,000 for 2010–11.
[9] Ms Baylis's case was that any such personal expenses were covered by dividends already included in her tax return. I agreed with Ms Baylis.
[10] I therefore allow her appeal against the assessments for both years in full.
[11] There was no appeal before the Tribunal in relation to 2011–12. The parties are to discuss with each other in order to clarify the position for that year.
[12] The Tribunal had the benefit of a helpful bundle of documents prepared by HMRC, which included the following documents:
1) correspondence between the parties, and between the parties and the Tribunal;
2) correspondence between VWML and HMRC;
3) correspondence between HMRC and two firms of accountants, Eacotts Ltd (Eacotts) and Haines Watts Tax Compliance LLP (Haines Watts);
4) correspondence between Stiles & Co, representing Ms Baylis, and VWML, Eacotts and Haines Watts;
5) Ms Baylis's SA tax returns for 2009–10 and 2010–11, and draft SA returns for Mr Baylis for the same tax years;
6) P11D forms for Ms Baylis and Mr Baylis for both years, and amended versions of those forms;
7) extracts from VWML's cash book;
8) VWML's management accounts for June and December 2009;
9) VWML's statutory accounts for 2010, and its Annual Return filed with Companies House on 6 March 2012;
10) various bank statements for the joint bank account held by Mr and Mrs Baylis;
11) invoices and other documents relating to payments made to Mrs Baylis by VWML;
12) Minutes of an Extraordinary General Meeting held by VWML;
13) two letters from Mrs Forsyth, matron of the care home in question;
14) Mrs Baylis's death certificate;
15) personal correspondence between Mr and Mrs Baylis, together with family photographs; and
16) to whom it may concern letters from Ms Baylis's GP and from Mr Baylis's GP.
[13] Miss Blagg also provided a copy of VWML's statutory accounts for the year ended 31 December 2015, which had been posted on the Companies House website a few days earlier. Mr Linneker did not object to that document being admitted and I allowed it to be included in evidence.
[14] Ms Baylis provided a witness statement dated 18 May 2016, and an earlier undated document headed Background Notes which set out her view of the facts. She also gave evidence in chief, led by Miss Blagg, was cross-examined by Mr Linneker and answered questions from the Tribunal. I found her to be an honest and credible witness. For example, although no copy of the contract with the care home was in evidence, she said she had signed it in her own name, despite being aware that this would make her position more difficult. She accepted without hesitation that she had arranged for VWML to transfer money to her between October and December 2011, although this was the subject of dispute between her and VWML, and she gave a straightforward account of certain payments made to her mother by the company, and her knowledge of that practice.
[15] Mr Graham Maddrell had been Ms Baylis's partner between 1984 and 2004. He provided a witness statement, gave oral evidence, was cross-examined by Mr Linneker and answered questions from the Tribunal. I found his evidence to be reliable where it was based on his own first-hand knowledge. To the extent that he was setting out what he had been told by Ms Baylis, his evidence was hearsay. I have not relied on those parts of Mr Maddrell's evidence.
[16] Dr Gary Thomas Bell is a consultant psychiatrist who attended Mrs Baylis in 2009 and 2010. He provided a witness statement, gave oral evidence, and was cross-examined by Mr Linnekar. He was an impressive witness who gave clear and honest evidence.
[17] Ms Carol Sudbury is a former employee of VWML. She provided a witness...
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