Grint
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 August 2016 |
| Neutral Citation | [2016] UKFTT 537 (TC) |
| Date | 03 August 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Barbara Mosedale
Mr P Soares and Mr I Afzal, Counsel, appeared for the appellant
Ms S Choudhury, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Whether appellant met criteria in Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 217 for a change in accounting date – Meaning of accounts – Whether various financial statements were accounts – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed a taxpayer's appeal against HMRC's decision that his attempt to change his accounting date had failed. The FTT found that the taxpayer did not have accounts with an accounting period of less than 18 months to his new accounting end date at the time he notified the change in accounting date to HMRC, and he had therefore not met the 18 month test in the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 217(3).
The appellant (Mr Grint) started work as an actor in September 2000 and prepared accounts to 31 July each year. At around the time of the introduction of the additional rate of income tax of 50% in April 2010, on the advice of his accountant, Mr Grint decided to change his accounting date to 5 April. The aim of this was to advance the tax liability on Mr Grint's profits for the period from 1 August 2009 to 5 April 2010 into the 2009–10 tax year. This meant that his basis period for tax purposes would be 20 months in 2009–10, and his 8 months of income from 1 August 2009 to 5 April 2010 would be taxed at 40% instead of the 50% that would have been applicable if the accounting date had not been changed.
To make this change various accounts were prepared (the use of the term accounts did not mean that the parties had accepted that these documents were accounts, as will be seen later):
An accounting report covering the 20 month period from 1 August 2008 to 5 April 2010. This was in the format of ordinary trading accounts, with an accountant's report, profit and loss account, balance sheet and notes. They were entitled the unaudited accounts of Mr R Grint and they were produced to and signed by Mr Grint in October 2010 under a statement which said I approve the accounts … I acknowledge my responsibility for the accounts. They were used to discuss Mr Grint's financial performance over the 20 month period and Mr Grint knew that they would be used as the basis for drawing up two accounts covering two shorter periods as part of the process of changing the accounting period. The tribunal referred to these as the Long Accounts.
A time apportioned version of the Long Accounts splitting the figures in the Long Accounts between the periods 1 August 2008–31 July 2009 and 1 August 2009–5 April 2010. Drafts of these were prepared by the tax department of the accountants prior to the meeting in October 2010 but they were not shown to Mr Grint at that meeting, although he was later shown a draft of them and said that he was happy with them. These accounts were only shown to HMRC as part of this appeal in May 2015. The tribunal referred to these as the 2009 Schedule Accounts and the 2010 Schedule Accounts, and together as the Schedule Accounts. It was the information from the schedule accounts that was used to complete Mr Grint's 2009–10 tax return.
The 2 self employment pages of Mr Grint's 2009–10 tax return (one covering the 12 month period ending 31 July 2009 and one covering the approximately 8 month period to 5 April 2010) included pages containing profit and loss and balance sheet information. The tribunal referred to these as the 2009 Return Accounts and the 2010 Return Accounts, and together as the Return Accounts.
Following an HMRC enquiry Mr Grint's accountants prepared two new accounts, covering the same period as the Schedule Accounts and Return Accounts, but prepared on the accruals basis. The tribunal referred to these as the 2009 New Accounts and 2010 New Accounts, and together as the New Accounts. These accounts were signed by Mr Grint and submitted to HMRC on 21 June 2012.
HMRC did not dispute that Mr Grint could change his accounting date (and at no point suggested any involvement in tax avoidance), but did not accept that he had effectively changed his accounting date because he had not met the 18 month test in ITTOIA 2005, s. 217(3). This was on the basis that the Long Accounts were accounts and as neither the Schedule Accounts nor the Return Accounts were accounts, and although the New Accounts were accounts, they did not satisfy the 18 month test because the New Accounts did not exist at the time of the notification of the change in accounting date (31 January 2011). HMRC's view was that the New Accounts had to have been adopted as the appellant's accounts no later than when the appellant notified HMRC of the change in his accounting date.
Mr Grint considered that the Schedule Accounts and Return Accounts were accounts and that either or both the 2010 Schedule Accounts and the 2010 Return Accounts meant that he satisfied the 18 month test (as they were for an 8 month period). Mr Grint did not consider that the Long Accounts were accounts, but merely working papers.
On the time limit issue the FTT found that it could not reach a conclusion based on a literal interpretation of the 18 month rule legislation. But looking at it purposively the FTT decided that where in ITTOIA 2005, s. 217(1)(b) it said the 18 month test is met it meant that the state of affairs described in s. 217(3) comes into existence no later than the time the tax return is submitted (i.e. there must be accounts not longer than 18 months in existence when the tax return is submitted). The FTT decided that the New Accounts were accounts but they did not have the effect that the taxpayer met the 18 month test because they did not exist at the time his basis period was determined (i.e. they did not exist when his 2009–10 return was filed on 31 January 2011).
The FTT then turned to the issue of what constitute accounts for the purposes of the legislation. With the help of expert evidence the FTT concluded that the accountancy profession would ascribe that accounts:
a) must relate to an entity;
b) must be considered by, and intended by, the entity to be its accounts, by some kind of informal approval or adoption or otherwise;
c) must represent (whether accurate or not) its past transactions over a set period of time,
and accounts could be accounts prepared for a specific or general purposes although the context in which the word is used might indicate a particular type of accounts, such as general all purpose accounts.
The FTT also found that it was the trader's actual accounts used for its general trading purposes had to be identified and those were the ones which mattered for ITTOIA 2005, s. 217.
The FTT found that both the Long Accounts and the Schedule Accounts were accounts, but that the Return Accounts were not accounts. It considered that the Long Accounts were the accounts which mattered for the purposes of ITTOIA 2005, s. 217: they were the only accounts for that period which could be described as Mr Grint's business accounts; and even if wrong on that, and both the Long Accounts and the Schedule Accounts were business accounts, then the Long Accounts were more important than the Schedule Accounts. This was because the Long Accounts were:
signed as such by Mr Grint;
intended to be and actually were a reasonably accurate record of Mr Grint's financial performance over period to which they related;
contained a record of the accounting policies used in their preparation;
used by his accountants in discussion with Mr Grint to report to him his financial performance over the 20-month period; and
used as a step in process of preparing Mr Grint's tax return.
and none of the above could be said about the Schedule Accounts except for the last point.
The FTT concluded that Mr Grint failed the ITTOIA 2005, s. 217 test for a change in accounting date because he could not show that his period of account ending with the new accounting date was not longer than 18 months, because the period of account referred to was the period of account used in accounts other than accounts drawn up solely for tax purposes, and its accounting date was the date to which it had accounts, other than accounts solely drawn up for tax purposes, drawn up.
The FTT accordingly dismissed Mr Grint's appeal.
This case will be of interest to many taxpayers and their advisers because tax planning ahead of the introduction of the 50% additional rate of tax in April 2010 was widespread. In this case it involved a taxpayer changing his businesses' year end to move income that would have been taxed in 2010–11 into the previous tax year when the tax rate was 10% lower. While this was a perfectly legitimate form of tax planning the FTT found that it did not work in this instance because although the taxpayer's accountant had prepared what they purported to be separate accounts of 12 and 8 months respectively the accounts were not accounts within the meaning of the legislation.
[1] The appellant appeals against amendments made to his tax returns for the years ended 2010 and 2011 in closure notices issued by HMRC.
[2] Without considering the sections in detail, as it was not in dispute, a trader pays tax on his profits from a trade in relation to basis periods. The normal basis period is the 12 months ending with the accounting date which falls in the tax year. So in this case, as the appellant had an annual accounting date of 31 July, he paid tax in tax year 08/09 on his profits in the 12 month period to 31 July 2008; and there was no issue with HMRC with respect to that year. If he left his accounting date unaltered, he would be liable to pay tax in tax year 09/10 on the profits of the 12 months' to 31 July 2009. But the basis period alters if the accounting period is...
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Grint v Revenue and Customs Commissioners
...the period of account and therefore the 18 month test was not met. Summary The appellant appealed the decision of the FTT (Grint [2016] TC 05286) that had concluded that the 18 month test in ITTOIA 2005, s. 217 had not been met. The appellant started work as an actor in September 2000 and p......