Fessal
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 April 2016 |
| Neutral Citation | [2016] UKFTT 285 (TC) |
| Date | 26 April 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Tony Beare, Mrs Janet Wilkins
Ms Lovejoy and the Appellant, appeared in person for the Appellant
Mr Stone, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Self-assessment – Barrister – Move from cash to true and fair basis – Overpayment tax year between two underpayment tax years – Tax paid twice on same profits – Application of European Convention on Human Rights and Human Rights Act 1998 – Held – Taxes Management Act 1970 (“TMA 1970”), s. 29 to be construed in accordance with rights – Appeal allowed to the extent of the double payment.
The First-tier Tribunal (FTT) has allowed Mr Fessal's appeal against a discovery assessment under the Taxes Management Act 1970 (“TMA 1970”), s. 29 and associated penalty under s. 95, to the extent of reducing the assessments to reflect tax already paid on the same profits in a later tax year. Upholding the assessments in full would deprive Mr Fessal of a “possession” and breach his rights under the European Convention on Human Rights (the Convention), art. 1 of Protocol 1 (the A1P1) and TMA 1970, s. 29 was to be read as the power to issue an assessment which made good the loss of tax but only where assessing that amount did not breach the relevant taxpayer's rights under the A1P1 to the extent that giving effect to those rights did not go against the “grain of the legislation”.
Mr Fessal was a barrister and was in the “transitional regime” applicable to barristers moving from the cash to the true and fair basis of recognising profits for tax purposes under FA 1998, s. 42 for the three tax years 2005–06, 2006–07 and 2007–08. HMRC opened an enquiry into the 2008–09 tax year and Mr Fessal subsequently resubmitted four years’ returns for 2005–06 to 2008–09 which gave rise to an overpayment for 2006–07 and 2008–09 and underpayments for the other two years. HMRC refused Mr Fessal overpayment relief for 2006–07 on the grounds that relief for that year was out of time. HMRC then raised discovery assessments for 2005–06 and 2007–08 going back six years on the grounds Mr Fessal had been “careless” and still refused to take account of the overpayment claim. Mr Fessal appealed to the Tribunal.
HMRC had previously applied to the FTT in Fessal TAX[2015] TC 04287 to have Mr Fessal's claim to extend the time limit for the making of the repayment claim for 2006–07 struck out, which the FTT had allowed, but the FTT had refused HMRC's application to strike out the appeals against the 2005–06 and 2007–08 assessments.
As a preliminary point, the FTT first concluded that they were unable to set aside the earlier decision to strike out Mr Fessal's application to extend the time limit for the repayment claim in light of the case of Raftopoulou TAX[2015] BTC 535. The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 38 provided powers to set aside the earlier decision but provided specific conditions to be satisfied and a time limit of 28 days by which the application had to be made. It was accepted that none of the conditions in r. 38 were satisfied and the time limit expired some time ago. There was further nothing in r. 2 or r. 5 that could enable to FTT to interfere with the earlier decision because that was the exclusive preserve of r. 38. The FTT noted that this was a pity because had the Raftopoulou case been decided earlier, the FTT's earlier decision might well have been different.
The FTT noted that Mr Fessal was not disputing the amounts of HMRC's assessments or that HMRC were entitled to raise them. Nor was he challenging the mismatch between the four year time limit for making a repayment claim and six year time limit for raising a discovery assessment. His case was simply that his rights under the European Convention on Human Rights (the Convention), art. 1 of Protocol 1 (the A1P1) were breached if the assessments were upheld because taxing him twice on the same profits would deprive him of his “possessions” contrary to A1P1.
The FTT noted the relevant legislation including the A1P1 which stated that a person is not to be deprived of his “possessions”; and the Human Rights Act 1998, s. 3, which required that all domestic legislation must be read and given effect in a way which is compatible with Convention rights “so far as it is possible to do so”. The FTT further noted that the State had a “wide margin of appreciation” and that domestic tax laws were to be overturned only if “devoid of reasonable foundation”.
The FTT then confirmed that it did have jurisdiction (and indeed an obligation) to consider whether the assessments had been properly issued pursuant to TMA 1970, s. 29 and, in determining that question, was obliged to read the power conferred by s. 29 as being to issue an assessment which made good the loss of tax but only where assessing that amount did not breach the relevant taxpayer's rights under the A1P1 to the extent that giving effect to those rights did not go against the “grain of the legislation”.
The FTT confirmed (as HMRC had accepted) that the money Mr Fessal would be deprived of by the upholding of the assessments constituted a “possession” and that upholding the assessments would deprive him of that possession. The question was, therefore, whether TMA 1970, s. 29 without any A1P1 override was within the “wide margin of appreciation” or whether it was “devoid of reasonable foundation”.
The FTT noted the arguments in favour of HMRC, particularly that income tax legislation made no provision for offsetting an overpayment for one year against an underpayment in another, and Parliament clearly imposed a four year time limit on repayment claims and a six year limit on assessments where the taxpayer has been careless, and Mr Fessal had been careless.
Against this, however, there were numerous examples of judicial statements to the effect that avoiding double taxation on the same profits was a presumption in applying tax legislation. Mr Fessal was not claiming that an unrelated overpayment should be offset against an underpayment but that where income has shifted from one year to the next as a result of a discovery assessment, thereby throwing up an overpayment in respect of one tax year which was inextricably related to, and referable to, an underpayment in respect of another tax year, in those circumstances, it would be “devoid of reasonable foundation” for the assessment in respect of the underpayment tax year not to take account of the tax paid in respect of the overpayment tax year on the profits which are attributable to the underpayment tax year, and further that it did not strike a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights for a taxpayer to be required to pay tax twice in respect of the same profits.
The FTT concluded that the amount of the s. 29 assessment was to be reduced so as not to breach the taxpayer's A1P1 rights by disregarding tax already paid on the same profits (albeit in a different year). The assessment, therefore, remained valid but the amount was to be reduced under TMA 1970, s. 50(6). The adjustment was to be calculated so as to take into account of the difference in tax rates, personal allowance and band limits in the year in which the tax was paid so as to ensure that Mr Fessal neither gained nor lost from the fact that he paid the tax in a different tax year. The FTT also confirmed the year to which the overpayment was to be allocated and that additionally, an upwards adjustment was to be made so that Mr Fessal did not benefit from a reduction in interest costs by virtue of the allocation of overpayment otherwise resulting in tax being treated as paid before it was actually paid.
Finally, the FTT confirmed the penalties of 5% should be reduced to reflect the adjustments to the amounts assessed but otherwise stood.
This case considers the application of TMA 1970, s. 29 and raising of a discovery assessment against the backdrop of ensuring an individual's rights under the European Convention on Human Rights are not breached. In this case, Mr Fessal was a barrister moving from the cash basis to the true and fair basis of recognising profits and following an enquiry, he resubmitted four years’ tax returns, moving profits from one year to another which resulted in underpayments arising for two years and overpayments for two years. HMRC refused one of the overpayment claims on the basis it was out of time then raised discovery assessments for the two underpayment years. The FTT has ruled that taxing Mr Fessal twice on the same income would deprive him of a possession and constitute a breach of his A1P1 rights and as the avoidance of double taxation was an underlying presumption in applying tax legislation, s. 29 had to be read accordingly. The assessments and related penalties were to be reduced to reflect the tax already paid on those same profits in a different year.
[1] This is an appeal by Mr Ignatius Fessal (“Mr Fessal”) against discovery assessments made by HMRC in respect of the 2005/06 and 2007/08 tax years and penalties related to those assessments.
[2] In connection with this appeal, the parties have agreed the following facts:–
a) Mr Fessal is a barrister and was in the “transitional regime” applicable to barristers moving from the cash to the true and fair basis of recognising profits for tax purposes under section 42 Finance Act 1998 for the three tax years 2005/06, 2006/07 and 2007/08. HMRC opened an enquiry into Mr Fessal's self-assessment for the 2008/09 tax year on 10 January 2011, as a result of which Mr Fessal's representatives submitted further information on 19 February 2011. HMRC responded with their final analysis of how the true and fair basis should have been applied for the 2006/07, 2007/08 and 2008/09 tax years on 14 April 2011. Mr Fessal...
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