Langham v Veltema
| Jurisdiction | England & Wales |
| Judge | Mr Justice Park |
| Judgment Date | 10 December 2002 |
| Neutral Citation | [2002] EWHC 2689 (Ch) |
| Date | 10 December 2002 |
| Court | Chancery Division |
| Docket Number | Case No: CH2002/APP/0282 |
[2002] EWHC 2689 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Roya1 Courts of Justice
Strand, London WC2A 2LL
The Honourable Mr Justice Park
Case No: CH2002/APP/0282
Ingrid Simler (instructed by the Solicitor of the Inland Revenue) for the appellant
Michael Sherry (instructed by M&S Solicitors) for the respondent
Hearing date: 14 November 2002
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.
Overview
1. This is an income tax appeal by the Inspector of Taxes from a decision of the General Commissioners of Taxes for King's Lynn. The case is not about any principle of substantive tax law. Rather it concerns the machinery of the tax system, and in particular the self-assessment mechanism which was introduced in the late 1990s. I may be wrong, but as far as I know this is the first case in which the self-assessment system has been considered in the High Court.
2. In circumstances which I will describe later in this judgment the taxpayer, Mr Veltema, was liable to income tax upon the market value of a house. He was advised that the value was �100,000, and he put in his self-assessment tax return an entry showing that figure as the taxable amount. Later the Inspector of Taxes formed the view that the true value was more than �100,000, and after negotiation a value of �145,000 was agreed between the Revenue and Mr Veltema's advisers. The inspector then assessed Mr Veltema to income tax on the extra �45,000. Mr Veltema appealed. His case was that under the self-assessment system there is normally a deadline after which the Revenue cannot alter an existing self-assessment or make a new assessment, and the inspector had missed the deadline. The inspector agreed that that would normally have been so, but he pointed out that there are two situations in which assessments can be made after the deadline. He said that either or both of those situations was present in Mr Veltema's case.
3. The General Commissioners did not agree with the inspector and therefore allowed Mr Veltema's appeal. The inspector has appealed to this court. However, I agree with the result reached by the Commissioners, although I would myself express the reasons somewhat differently. I shall therefore dismiss the inspector's appeal.
The factual background and the general tax law applicable
4. Mr Veltema is of Dutch origin, but he has lived in this country for many years. He is now in his mid to late eighties. He has been a farmer, and his farming activities were carried on by a company controlled by himself and his wife. At the time relevant to this appeal he was the sole director. The company is called British Horticultural Company Limited. I will refer to it simply as 'the company'. It owned the house in which he lived. The house is at Castle Rising near King's Lynn in Norfolk. In 1997 or 1998 Mr Veltema was planning to retire, and it was decided that the house should be transferred to him for no consideration. It was so transferred on 6 March 1998, in the tax year 1997/98.
5. The transfer had tax consequences both for Mr Veltema and for the company, and the amounts of the consequences depended on the value of the house at the time of the transfer. Mr Veltema, being a director of the company who had received a valuable asset from the company without paying anything for it, was liable to income tax under Schedule E for 1997/98 upon the market value of the house. The company was liable to corporation on any chargeable gain which was deemed to accrue to it on the disposal of the house to Mr Veltema. The disposal was deemed to be made at the open market value of the house (Taxation of Chargeable Gains Act 1992 s 17), and the chargeable gain would be the excess of that value over the value of the house in 1982 (ibid. s 35). Mr Veltema and the company were both advised by the well-known firm of chartered accountants, Pannell Kerr Forster (hereafter referred to as 'PKF'), and they appreciated that the foregoing tax consequences geared to the value of the house in March 1998 (income tax for Mr Veltema and corporation tax on chargeable gains for the company) would follow. They took advice from a King's Lynn firm of chartered surveyors, whose estimate of valuation was �100,000. The company and Mr Veltema both made returns to the Revenue disclosing the �100,000 figure. Later in this judgment I shall have to explain more precisely the nature and the timing of the returns.
6. Mr Veltema's tax return was submitted to the Inspector of Taxes for King's Lynn. In the first instance the Revenue raised no queries about the return. However, when over a year later the company's corporation tax returns and computations were submitted to the Company Tax Unit at Leicester the company's Inspector of Taxes referred the valuation to the District Valuer. I do not think that he did this out of any sense of suspicion. It was simply a matter of common procedure. When a liability of more than trivial dimensions depends on a valuation, the Revenue will often have the valuation considered by their own valuation experts. The District Valuer reported back to the company's inspector that in his opinion the house was worth more than �100,000. His initial valuation was �160,000. It was arranged that the matter would be discussed between the District Valuer and the surveyors who had advised Mr Veltema and the company. After discussion and negotiation the District Valuer and the surveyors agreed on a figure of �145,000. There was nothing out of the ordinary about what happened. Discussions about valuations between a taxpayer's advisers and the Revenue's advisers, resolved by a negotiated figure, happen all of the time in the routine operation of the tax system.
7. So far as the company was concerned the agreed valuation of �145,000 meant that the chargeable gain which was taken to have accrued to it was computed by reference to a deemed disposal consideration of that amount. There is no issue concerning the company's corporation tax liability. However, the revised valuation could have made a difference to Mr Veltema's income tax liability: the benefit on which he was in principle liable to tax under Schedule E was not �100,000 (the amount which had appeared in his self-assessment return, and on which he had already paid the tax) but �145,000. The increased valuation was notified by the District Valuer (or possibly by the Company Tax Unit in Leicester) to the Inspector of Taxes for King's Lynn, who was responsible for Mr Veltema's tax affairs. The inspector made an additional assessment to income tax on Mr Veltema for the extra �45,000. That was the assessment which was the subject matter of the appeal to the General Commissioners and which has now come before me.
Information supplied to the Revenue
8. The transfer of the house by the company to Mr Veltema required to be disclosed in three documents which had to be supplied to the Revenue.
i) The P11D return. This is a return made of benefits in kind, etc, provided by an employer to employees. Where the employer is a company, directors are treated in the same way as employees. The form is relevant to the tax affairs of the director or employee, but the responsibility for submitting it rests with the employer, in this case the company. The P11D for Mr Veltema for 1997/98 disclosed some other benefits and expenses, but importantly for the present appeal it recorded the transfer of the house to him, valued at �100,000. I say more about the P11D in paragraph 28 below. The P11D was prepared by PKF and sent to the office of the inspector at King's Lynn. Mr Veltema also received a copy. It was the first of the three returns which were sent to the Revenue. It was due by 6 July 1998, and it was sent on that date.
ii) Mr Veltema's own self-assessment return. This was prepared by PKF and signed by Mr Veltema on 28 July 1998. It was required to be sent to the Revenue by 31 January 1999, and in fact was received by the King's Lynn inspector on 30 July 1998, six months early. I will say more about the contents of the return later, but I mention now that, in a box captioned 'Assets transferred/payments made for you' and providing a space for an amount to be entered, the return stated '�100,000'.
iii) The company's corporation tax returns, if I have understood the position correctly the company drew up accounts for the calendar year 1998, but because it had ceased to carry on its farming trade on 24 February 1998 it needed to submit two corporation tax returns, one for the period from I January to 24 February 1998, and the other for the period from 25 February 1998 to 31 December 1998. Both returns and all supporting accounts, computations, etc, were sent together on 7 October 1999 to the Leicester Company Tax Unit. One of the supporting computations was a chargeable gains computation relating to the disposal of the house. It was based on a market value of �100,000, and was the item which led to the company's inspector consulting the District Valuer.
The working of the self-assessment system
9. The statutory provisions which regulate the self-assessment system are now found in the Taxes Management Act 1970 (the TMA), but for the most part they were inserted in that Act by statutes enacted in the mid 1990s, beginning with the Finance Act 1994. For most purposes they started to operate from the income tax year 1996/97, Henceforth references to sections are to sections of the TMA in the form which that Act took at the time of the matters with which this case is concerned.
10. The self-assessment system was a significant change to the tax...
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