James H Donald (Darvel) Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 May 2017 |
| Neutral Citation | [2017] UKFTT 446 (TC) |
| Date | 25 May 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Anne Scott
Philip Simpson, QC and Nicholas Davis, Solicitor appeared for the appellants
Duncan Tebbet and Barry Marriot, Officers of HMRC appeared for the respondents
Income tax and National Insurance contributions (NICs) – Tax avoidance schemes – Whether alternative assessments for different companies in schemes – No – Whether tribunal has power to order HMRC to “set-off” assessments for different taxes in different companies – No – Application refused.
The First-tier Tribunal (FTT) rejected an application for self-assessed corporation tax paid as part of failed tax avoidance to be set off against PAYE and NICs assessed by HMRC on another company.
James H Donald (Darvel) Ltd (Darvel) entered into tax avoidance schemes with the intention of saving tax and National Insurance contributions (NICs) on wages and salaries. As part of the schemes employees' contractual pay from Darvel was replaced by lower earnings and the difference between their contractual pay net of PAYE and NIC and their reduced net pay was paid to the employee as a dividend from either J H Donald Company Services Ltd (Services) or J H Donald Retail Ltd (Retail). As part of the schemes, and with the use of partnership deeds and a joint venture agreement, Retail (via Reedon Partnership LLP (Reedon) and Services received a share of Darvel's profits. Darvel, Services and Retail acted on the basis that the schemes had the tax consequences that they were intended to have. Accordingly Darvel's profits were calculated after deducting all wages and the profit share paid to Reedon and Services and in turn Retail and Services paid corporation tax on all profits, including their share of partnership profits. Services and Retail submitted self–assessment corporation tax returns and paid corporation tax on that basis. As those returns were self-assessments, it was not possible for them to be appealed to the FTT.
HMRC enquired into Darvel's tax returns and assessed Darvel as the employer of the scheme participants to recover unpaid PAYE and NIC. The assessments were raised on the basis that the total sums received by the participants, whether by wage, salary or dividend from Services or Retail, represented emoluments of their employment with Darvel. The assessments were upheld on appeal by the FTT and the Upper Tribunal (UT) ([2015] BTC 529), subject to the issue of whether Darvel should have been, or indeed could have been, given any credit for the corporation tax paid by Services and Retail.
In this appeal Darvel argued that its assessments and the Services and Retail corporation tax assessments were made on inconsistent, factual and legal bases and were therefore alternative assessments. This was because the Services and Retail assessments had been made on the basis that they had been trading, but as the FTT and UT decided that the companies had not been trading and were merely ciphers or agents for Darvel, they could have no corporation tax liability. If they were alternative assessments then it was not open to HMRC to collect the sums charged by both sets of assessments. The argument went on that the corporation tax paid by Services and Retail should have been treated as a credit and therefore the tax assessed to Darvel should have been limited to the difference between the total of those and the total of the corporation tax assessments.
HMRC instead submitted that the Darvel assessments arose as a result of the failure by that company to meet its obligations as an employer and neither Services nor Retail were the employer. The liabilities paid by Services and Retail arose from corporation tax obligations that they decided that they had incurred. Darvel had no right to claim credit for tax paid by a legally separate company. HMRC argued that the Darvel assessments were not raised as an alternative to the self-assessment corporation tax returns made by Services and Retail as for that to be the case all the assessments would have had to be raised by HMRC.
The FTT noted that the self-assessment corporation tax assessments had never been appealed and most certainly were not the subject matter of these appeals. It therefore failed to see how the validity of the self-assessed corporation tax returns for Services and Retail could be challenged in these proceedings because these proceedings solely concerned the Darvel assessments. The FTT had no doubt that HMRC could make alternative and inconsistent assessments and on more than one entity, but this was not the position here as HMRC had raised only the assessments on Darvel. The FTT also found that there was no double taxation on the same income as collection of PAYE and NIC on payments to employees was not an alternative to self-assessed corporation tax in another entity. They were not mutually exclusive.
The FTT accordingly found that it had no power to order HMRC to set off or credit the corporation tax paid by Services and Retail against the Darvel assessments.
The appellants argued that it was unfair that, since the schemes they implemented did not work, the company should have to account for PAYE and NIC and yet the corporation tax that was paid as part of those schemes (which would not have been paid had the schemes not been entered into) was also retained by HMRC. The FTT found that the principle espoused in Greene King plc TAX[2012] TC 02069 applied here i.e. as the appellants were quite happy to enter into arrangements to avoid tax it was not legitimate for them to then complain when the schemes did not work as intended and instead resulted in them paying tax twice.
[1] After a hearing on conjoined appeals, a decision was issued by the First-tier Tribunal (“FTT”) on 3 June 2014. The judge in that Tribunal was Kenneth Mure QC who has sadly died since then.
[2] That decision was a decision in principle dealing with the effect of each of three arrangements known as “Plan 2”, “Plan 5” and “Plan 7” respectively. The appellants acknowledged that those were all devised as tax avoidance schemes.
[3] The FTT decision had been a decision limited to those issues so there were other matters outstanding in regard to the appeals. The only issue now remaining in contention is whether the first appellant should be, or indeed can be, given any credit for corporation tax paid by other participants in Plans 5 and 7 for the period when those plans were operating...
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