Chadwick (as trustee in bankruptcy of Oduneye-Braniffe)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 August 2017 |
| Neutral Citation | [2017] UKFTT 656 (TC) |
| Date | 30 August 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0656 (TC)
Judge Richard Thomas, Jacqui Dixon
Mr Scott Redpath, instructed by DWF LLP, appeared for the appellant
Mr Karl Masi, instructed by the National Crime Agency, with post-hearing submissions by Jolyon Maugham QC, appeared for the respondent
Income tax – Exercise of revenue functions by the National Crime Agency (NCA) – Proceeds of Crime Act 2002 (POCA 2002), s. 317 – Whether qualifying condition met – Yes – Validity of assessments on pre-bankruptcy income addressed to trustee – Whether cured by TMA 1970, s. 114 – No – Whether deliberate conduct properly pleaded – Validity of assessments assessing one figure on two bases – Whether returns required and made – Whether discovery of loss of tax – Whether bankrupt was carrying on trade of money laundering from which profits arose – Appeals allowed.
The First-tier Tribunal (FTT) found that tax assessments made on a trustee in bankruptcy instead of on the bankrupt could not be cured by TMA 1970, s. 114 and were invalid and therefore had to be cancelled.
The National Crime Agency (NCA) arrested Mrs Oduneye-Braniffe (referred to in the decision and here as “the appellant”) on suspicion of money laundering in relation to a business she was connected with. The appellant was later told by NCA that no further action (NFA) would be taken because the Crown Prosecution Service (CPS) had decided that there was insufficient evidence for there to be a realistic prospect of conviction. NCA still thought that there were reasonable grounds to suspect the appellant of involvement in money laundering and gave notice to HMRC that it intended to carry out general Revenue functions as specified in the notice (Proceeds of Crime Act 2002 (POCA 2002), s. 317(2)). NCA then wrote to Mr Chadwick as trustee in bankruptcy of the appellant saying that one of its purposes for writing was to assess the income tax and Class 4 National Insurance contributions (NICs) for several years (the NCA years). The letter referred to “your” declared self employment income and the declaration of such income being signed by “you”. The letter included notices of assessment addressed to Mr Chadwick at his office, the tax calculations relating to each year, an interest summary and other information.
The FTT was satisfied that the qualifying condition in POCA 2002, s. 317(1) was met, i.e. that NCA had reasonable grounds to suspect that income arising to the appellant in respect of a chargeable period was chargeable to income tax and arose as a result of the appellant's or another's criminal conduct. The FTT noted that the NFA letter was irrelevant and it was reasonable for the NCA officer to take into account that the police officer arresting the appellant would have had reasonable grounds to suspect that she had committed an arrestable offence (money laundering), so long as the NCA officer was not aware of any action having been taken by the appellant to seek to dispute the validity of the arrest on “reasonable suspicion” grounds. In terms of making the arrest and meeting the qualifying condition in POCA 2002, s. 317(1), the threshold for reasonable grounds to suspect is far lower than that which the CPS applied in coming to the NFA decision, which instead considered whether the criminal standard of proof was likely to be met.
The FTT noted that the notices of assessment were addressed and served on Mr Chadwick in his capacity as trustee in bankruptcy of the appellant. Further copies were enclosed to enable the trustee “to forward to [the appellant] if you consider this necessary”. The NCA accepted that it was the bankrupt who was assessable, but argued that by virtue of TMA 1970, s. 114(1) the error, assessing the trustee, was of no consequence, as both the appellant and NCA clearly understood that the intent was to assess the appellant to tax. In the FTT's view the error here was one which could not be cured by s. 114(1) because the assessments and the notices were not “in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts”. Saying that “NCA clearly intended to assess Mr Chadwick”. They referred to “you” in the letter as meaning him, not the appellant, and it wa absolutely clear from the statement that further copies were enclosed for the appellant “should you consider this necessary”. The FTT considered this to be a gross error because Mr Chadwick was never assessable on the income assessed and an error capable of misleading the appellant, and Mr Chadwick (and whether it actually did mislead was immaterial). The FTT held that the assessments were invalid and had to be cancelled.
While the decision on the above point disposed of the appeal, the FTT went on to consider other issues in case it was wrong and its decision overturned. It's key findings, were that:
- As the notice of assessments were only served on Mr Chadwick they failed to be served on the appellant. This failure to serve the notice of assessment did not invalidate the assessment per se, but it did mean that any recovery action was invalid as no notice of assessment will have been given to the right person (TMA 1970, s. 59B(6)). It did not prevent an appeal being made.
- Although the assessments referred to being made under ITTOIA 2005, s. 5 (trade profits) and/or in the alternative under ITTOIA 2005, s. 687 (income not otherwise charged), the assessments could only charge the person assessed on the profits of a trade.
- The assessments were competent (subject to discovery and time limit issues) to charge trading profits to tax and Class 4 NICs even though the assessments did not specify the source of income assessed, but those profits had to arise from money laundering.
- NCA had not shown that there was a loss of tax for any of the NCA years. Although for some of the years the bank accounts demonstrated substantial amounts of prima facie unexplained sums the FTT had found that these did not derive from a trade and for the other years there was simple no evidence to cast doubt on the explanations given.
This decision comes hot on the heels of the Upper Tribunal (UT) decision in R & C Commrs v Mabbutt [2017] BTC 528, which also looked at whether TMA 1970, s. 114 could save an HMRC error. In that case HMRC erroneously notified a taxpayer of their intention to enquire into his return “for the year ended 6 April 2009” instead of the year ended 5 April 2009. The FTT had originally ruled that s. 114 could not save the error, but in the UT's decision overturning the FTT's decision it considered that the letter to the taxpayer was “in substance and effect in conformity with the intent and meaning of the Taxes Acts” and therefore the error was such that s. 114(1) would have applied to cure the defect.
Judge Thomas suspects that there will inevitably be an appeal by NCA in this case, so we wait to see what happens next.
[1] This was the hearing of appeals by Mr Matthew Chadwick who is the trustee in bankruptcy1 of Mrs Gloria Oduneye-Braniffe2. Because the assessments which are the subject of the appeals concern the tax affairs of Mrs Oduneye-Braniffe and her alleged connection with criminal conduct we refer to her as “the appellant” from now on, while recognising that all her rights of appeal vest in the trustee, who has considered that it is in the interests of the appellant's creditors to bring these appeals.
[2] The appeals are against assessments to income tax for the years of assessment3 2004–05 to 2006–07 inclusive and the tax years 2007–08 and 2008–09 and against assessments to Class 4 National Insurance Contributions for the tax years 2004–05 to 2008–09 inclusive. (From this point on we use “tax year” to include years of assessment)
[3] The issues for our decision as outlined in the Respondents' (“NCA”) skeleton were:
- Whether NCA had shown that they had reasonable grounds to suspect that income arising to the appellant was chargeable to income tax and that it arose or accrued as a result of her or another person's criminal conduct (so that NCA could properly serve the notice on the Commissioners for Her Majesty's Revenue and Customs44Part 6 of the Proceeds of Crime Act refers to the Commissioners of Inland Revenue which it abbreviates to the Board. By s 50(1) Commissioners for Revenue and Customs Act 2005 (CRCA) references in any enactment to the Commissioners of Inland Revenue or to the Board are to be read as references to the Commissioners for Her Majesty's Revenue and Customs. (HMRC) that NCA intends to carry out the general Revenue functions specified in the notice.)
- If they had so shown, whether the appellant had discharged the burden of proof on her to show that the assessments were excessive.
[4] In view of the fact that all the assessments in this case were made on 22 April 2015 and that the normal time limit for making income tax and Class 4 NIC assessments5 is four years from the end of the tax year, so that all the assessments in this case were made outside those time limits, we informed the parties that a further issue arose in that the burden of proof was undoubtedly on NCA to show that the assessments were properly made, including whether they were made in any of the circumstances described in s 36 Taxes Management Act 1970 (“TMA”). If we decided that they were properly made, then the burden did fall on the appellant to show that the assessments were excessive.
[5] After the hearing we sought further submissions from the parties on a number of mostly procedural matters to do with the assessments. We received submissions from Mr Redpath for the appellant and from Mr Jolyon Maugham QC, who did not appear before us, for NCA.
[6] We had received skeleton arguments before the hearing in relation to an application by NCA to serve a witness statement from Mr Kevin Diedrick after the time allowed by the directions in the case. In the event Mr Redpath did not contest the application, not least...
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...in tax/POCA cases Khan v Director of Assets Recovery Agency (2006) Sp C 523 and Chadwick (as trustee in bankruptcy of Oduneye-Braniffe) [2017] TC 06083). [26] When applied to a person not involved in law enforcement it may be that a higher threshold is required, or that a person such as the......