HM Revenue and Customs v Household Estate Agents Ltd
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE HENDERSON,The Honourable Mr Justice Henderson |
| Judgment Date | 12 July 2007 |
| Neutral Citation | [2007] EWHC 1684 (Ch) |
| Docket Number | Case No: CH/2006/APP/0895 |
| Court | Chancery Division |
| Date | 12 July 2007 |
[2007] EWHC 1684 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Henderson
Case No: CH/2006/APP/0895
Ms Nicola Shaw (instructed by HMRC Solicitor's Office) for the Appellants
Mr Jeremy Woolf (instructed by Dickinson Dees) for the Respondent
Hearing date: 21 June 2007
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an appeal by way of case stated brought by the Commissioners for Her Majesty's Revenue and Customs (“HMRC” or “the Revenue”) against a decision of the General Commissioners for the Division of Bedfordshire dated 3 July 2006 whereby they allowed the appeal of the taxpayer company, Household Estate Agents Ltd (“the Company”) against an assessment to corporation tax made on 23 November 2005 (“the Assessment”) in respect of the Company's accounting period ended 31 December 1999.
The Assessment was a “discovery assessment” made pursuant to paragraph 41 of schedule 18 to the Finance Act 1998, which provides as follows:
“(1) If the Inland Revenue discover as regards an accounting period of a company that –
(a) an amount which ought to have been assessed to tax has not been assessed, or
(b) an assessment to tax is or has become insufficient, or
(c) relief has been given which is or has become excessive,
they may make an assessment (a “discovery assessment”) in the amount or further amount which ought in their opinion to be charged in order to make good to the Crown the loss of tax.”
The purpose of the Assessment, briefly stated, was to charge to corporation tax a sum of £60,000 which the Company had contributed in 1999 to an employee benefit trust (“EBT”) established by it in the previous year, and which the Company had deducted in computing its trading profits chargeable to tax under Case I of Schedule D for its 1999 accounting period. There is no dispute that the deduction was properly made in accordance with normal accountancy principles, but following the decision of the House of Lords in July 2005 in Macdonald v Dextra Accessories Ltd [2005] UKHL 47, 77TC 146, HMRC took the view that the deduction was disallowed by the provisions of section 43 of the Finance Act 1989 on the basis that the payment of the £60,000 was a payment of “potential emoluments” within the meaning of section 43(11), and no part of that sum had been paid as actual emoluments to beneficiaries of the EBT before the expiry of nine months from the end of the 1999 accounting period.
The Company accepts, in the light of the decision of the House of Lords in Macdonald v Dextra, that the Assessment is correct both in principle and in amount. Nevertheless, the Company contended successfully before the General Commissioners that the Assessment was invalid on two separate grounds. Those grounds, again shortly stated, were as follows:
(a) the Assessment was not made in the circumstances specified in paragraph 44 of schedule 18, which applies where, as in the present case, a company has delivered a company tax return, and empowers HMRC to made a discovery assessment if at the time when they ceased to be entitled to give a notice of enquiry into the return (which in the present case is agreed to be 31 December 2001) they could not have been reasonably expected, on the basis of the information made available to them before that time, to be aware of the relevant situation mentioned in paragraph 41(1) (i.e. in the present case that an amount which ought to have been assessed to tax had not been assessed); and
(b) the Assessment was also precluded by paragraph 45 of schedule 18, which provides that no discovery assessment may be made for an accounting period for which a company has delivered a company tax return if the relevant situation in paragraph 41(1) is attributable to a mistake in the return, and the return was in fact made “on the basis or in accordance with the practice generally prevailing at the time when it was made”.
At the hearing before the General Commissioners HMRC were represented by an officer of Revenue and Customs, Mrs Christine Morris, and the Company was represented by a tax consultant, Mr Andrew Brown. On the appeal to this Court both sides have been represented by counsel, Ms Nicola Shaw for HMRC, and Mr Jeremy Woolf for the Company.
The reasons given by the General Commissioners for their conclusions are very short, and in some respects not very clearly expressed. As I shall explain, I consider that they erred in law in relation to each of their conclusions and that HMRC's appeal must therefore be allowed. A further question that then arises is whether the matter should be remitted to the Commissioners for further consideration, or whether I should simply affirm the Assessment. For the reasons I shall give, I am not satisfied that any proper grounds for a remitter have been made out, so I will affirm the Assessment.
The Facts
The relevant facts, as found by the General Commissioners, are sparse in the extreme and unsupported by any documents apart from two letters from the Company's accountants, Messrs Whittaker & Company.
No witnesses were called, and no attempt appears to have been made to agree a statement of facts before the hearing. On the basis of the very limited material available, the relevant facts appear to me to be as follows.
By a deed dated 23 September 1998 the Company established an EBT with non-resident trustees. Unfortunately, the case stated says nothing about the terms of the trust, nor does it incorporate or annex a copy of the deed. I am therefore left entirely in the dark about its contents. Nor are there any findings of fact about the nature and structure of the Company's business, or the names, remuneration and terms or conditions of service of its directors and employees. However, it is reasonable to infer from the Company's name that it carries on business as an estate agency; and it appears from the two letters from the accountants dated 2 July 2002 and 22 September 2005 which were in evidence that the two principal directors and employees were a Mr Simon Woodhouse and a Mr Peter Norman. It may also be inferred from those letters that, as one would expect, the terms of the EBT gave the trustees a wide discretion as to the form in which benefits could be provided to employees, because particulars are given of payments out of the trust consisting of payments to the Company “re staff bonuses”, and of loans made by the trust to Mr Woodhouse and Mr Norman. There are also references to the purchase of a Mercedes car by the trust in January 2000, and the sale of a Mercedes car (presumably the same one) in November 2001.
On 22 October 1998 the Company paid £61,000 into the EBT. On 15 December 1998 a total of £47,150 was paid out of the trust, consisting of loans of £20,000 each to Mr Woodhouse and Mr Norman and a payment of £7,150 to the Company “re staff bonuses”. The Company's corporation tax computation for its year ended 31 December 1998 disclosed in note 4 that £61,000 had been paid into the EBT during the year.
On 17 June 1999 the Company paid a further £60,000 into the EBT. This is the payment with which the present appeal is directly concerned.
No payments were made out of the trust during 1999. According to paragraph 5(c) of the case stated, note 4 to the Company's tax computation for the year ended 31 December 1999 stated:
“As previously notified to the Inland Revenue, the above named scheme [ i.e. the EBT] was set up and amounts of £60,000 were paid into it during the accounting period.”
On 13 January 2000 £9,500 was paid out of the trust to the Company “re staff bonuses”, and on 18 January 2000 £53,548 was spent by the trust on the purchase of the Mercedes car.
No further sums were paid out of the EBT until 23 January 2002, when a further £6,200 was paid to the Company “re staff bonuses” and further loans of £13,000 each were made to Mr Woodhouse and Mr Norman, thereby increasing their loans to £33,000 each. The full amount of the loans was still outstanding as at 5 April 2002: see the accountants' letter of 2 July 2002.
The car owned by the trust was driven by Mr Woodhouse, and the relevant benefit in kind was shown on the returns in form P11D (expenses and benefits) submitted by the Company to HMRC at the end of each income tax year.
The Company's accounts and tax computations for the 1999 accounting period were submitted to the Inspector under cover of a letter dated 21 August 2000. The £60,000 paid into the EBT during the year was shown as a deduction in the accounts, and no adjustment was made in respect of it in the corporation tax computation.
I assume that the accounts and tax computation submitted on 21 August 2000 either comprised, or at least formed the main part of, the Company's company tax return for the 1999 accounting period. By virtue of paragraph 7(1) of schedule 18 to the Finance Act 1998, the return had to include a self-assessment of the amount of tax payable by the Company for the period on the basis of the information contained in the return. By virtue of paragraph 14(1), the filing date for the return was 12 months from the end of the period for which it was made, that is to say 31 December 2000.
Under paragraph 24(1) and (2) of schedule 18, HMRC could give notice of their intention to enquire into the return at any time up to 12 months from the filing date, i.e. at any time up to 31 December 2001. However, no such notice was given before that date.
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