Lowe and Another v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 March 2022 |
| Neutral Citation | [2022] UKUT 84 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 84 (TCC)
Mr Justice Marcus Smith, Judge Jonathan Richards
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax – Continuing failure to comply with information notice – HMRC application for tax-related penalty under FA2008, Sch. 36, para. 50 – Statutory conditions – Application granted – Penalty imposed.
[1] The appellants appeal against a decision (the “Decision”) of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 26 November 2020. The Decision dealt with a number of disputes between the Appellants and HMRC. With the permission of the FTT, the Appellants appeal against some, but not all, of the FTT's conclusions.
[2] The three issues that are now before us are as follows:
- The extent to which expenditure incurred on building works at John Street Sheffield (the Property) was deductible in calculating the gain the First Appellant (Mr Lowe) made on disposal of the Property for the purposes of capital gains tax (CGT). We will describe that as the CGT Issue.
- The amount of penalty properly chargeable on Mr Lowe under s95 of the Taxes Management Act 1970 (TMA) for the tax years 2006–07 and 2007–08. We refer to that as the Penalty Issue.
- The extent to which the Second Appellant (CES) was entitled to carry back a loss arising in its accounting period ended 30 April 2008 against profits, increased by the FTT's decision, of its accounting period ended 30 April 2007. We refer to this as the Carry Back Issue.
[3] Since these various issues are not inter-related to any significant extent, we will deal with them in the separate sections below. References to numbers in square brackets are to paragraphs of the Decision unless we say otherwise.
[4] It was common ground that to the extent that Mr Lowe made a chargeable gain on disposal of the Property, that chargeable gain was subject to CGT. Section 38 of the Taxation of Chargeable Gains Act 1992 (“TCGA”) specifies expenditure that can be deducted in the computation of a gain providing, so far as material, as follows:
(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to–
- …
- (b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset …
[5] It will be seen that the opening words of s38(1) identify “the person making the disposal” and s38(1)(b) permits a deduction for certain costs “incurred by him or on his behalf”. In this case it was Mr Lowe who made the disposal and at issue is whether expenditure was “incurred by him or on his behalf” or whether, as HMRC argue, the expenditure is not deductible because it was incurred by, or on behalf of, someone other than Mr Lowe.
[6] Mr Lowe acquired an interest in the Property in various stages starting in around 1979 or 1980 ([42]). He sold his interest in the Property for a consideration, including deferred consideration, of £2m in January 2007 ([6]). The CGT Issue (described as “Issue 2” in the Decision) involved the extent to which expenditure incurred on building works on the Property was deductible for CGT purposes. The relevant building works were:
- Stage 1 building works undertaken in 1986 ([42(2)]; and
- Stage 2 building works involving the building of offices which took place in 1987 and 1989 ([42(3)].
[7] At the time these building works were carried out, Mr Lowe held only a 50% interest in the relevant freehold titles in the Property, with the other 50% interest being held by Mr Almond, who was his business partner. Mr Lowe and Mr Almond also owned 50% each of the shares in a company called Hadee Engineering Co Ltd (“Hadee”).
[8] Difficulty arose because the evidence as to the nature and cost of the building works consisted of quotes from builders (largely addressed to Mr Lowe personally) and invoices from builders (largely addressed to Hadee), but there was not a single instance of both a quote and an invoice covering the same work. HMRC were not disputing that the amounts shown on the quotes or invoices had actually been paid ([58]). Nor were they disputing that the expenditure in question was reflected in the state or nature of the Property at the time of disposal. However, they put Mr Lowe to proof that the expenditure had been “incurred by or on behalf of” him as required by s38(1)(b). They argued that if, as the evidence appeared to suggest, some of the expenditure had been incurred “by” Hadee, Mr Lowe would need to establish that Hadee was incurring the expenditure “on behalf of” Mr Lowe if that expenditure was to be deductible.
[9] That articulation of the dispute made it necessary for the FTT to decide what it meant for one person to incur expenditure “on behalf of” another. At [91] and [92] it noted that this phrase could have either a broader meaning that extended to the situation where one person incurred expenditure for the purpose of benefiting another or it could have a narrower meaning confined to a situation where one person is acting as agent, or similar, for another. At [92] it concluded that the narrower interpretation was appropriate in the context of s38 of TCGA.
[10] The FTT's conclusion can be summarised as follows:
- Where a quote or an invoice evidenced Stage 1 or Stage 2 expenditure and was addressed to Mr Lowe, the FTT accepted that this expenditure was indeed incurred by Mr Lowe with the result that it could be deducted from the gain.
- Where a quote or invoice evidenced Stage 1 or Stage 2 expenditure and was addressed to Hadee, the FTT refused to accept that this expenditure was incurred by, or on behalf of Mr Lowe, and so refused to allow Mr Lowe to deduct that expenditure in the computation of his gain on disposal of the Property.
- This approach left open the possibility that a quote and an invoice might reference the same expenditure but for one type of document to be sent to Mr Lowe, and the other type of document to be sent to Hadee. In fact, that situation did not arise in practice but, in case it did, the FTT held that it would apply a tie-breaker so that the deductibility or otherwise of the expenditure would be determined by reference to the addressee of the invoice which the FTT considered would have a greater evidential value than a quote for the same work.
[11] Mr Lowe makes the following broad challenges to the FTT's conclusions on the CGT Issue:
- Ground 1 – The FTT wrongly focused on the question of who actually paid for the building works. It should have considered who had the legal liability to pay for them. Only Mr Lowe could have had the legal liability since the works were being done on land in which he, and not Hadee, had an interest and the works were undertaken for Mr Lowe's benefit and not for the benefit of Hadee.
- Ground 2 – The FTT failed to deal adequately with Mr Lowe's submission that it was simply impossible, as a matter of law, for Hadee to incur the costs of the building works itself without Mr Lowe having to suffer the economic costs of those works.
- Ground 3 – The FTT wrongly directed itself that Hadee could only have incurred the expenditure on behalf of Mr Lowe if it was acting as his agent.
- Ground 4 – Even if it was correct that something akin to a relationship of agency was necessary before Hadee could incur expenditure on behalf of Mr Lowe, the FTT failed to deal adequately with the submission that there was an agency relationship between Hadee and Mr Lowe.
[12] The parties approached Ground 1 from very different perspectives. Mr Lowe argues that it involves a challenge to the FTT's legal approach. He contends that the FTT was, in effect, asking itself the wrong question, namely who paid for the building works rather than who had the legal obligation to pay for them. Since the FTT was asking itself the wrong question, Mr Lowe submits that the FTT's conclusion was necessarily wrong in law and should not be allowed to stand. He also advances an alternative contention namely that, even if the FTT was asking itself the right question (contrary to his submission), the FTT's conclusion was still vitiated by a failure to take into account relevant considerations.
[13] HMRC, by contrast, characterise Ground 1 (and indeed Grounds 2 and 4) as Edwards v Bairstow challenges to the FTT's findings of fact. In their written and oral submissions, HMRC declined to make submissions as to whether s38(1)(b) is focusing on the liability to pay, or the actual payment, submitting that this distinction had no bearing on the issues that the FTT actually needed to decide.
[14] In our judgment, the parties' competing submissions on Ground 1 must be considered in the light of the very difficult case that the FTT had before it. We have already noted that the dispute concerned events that took place between 1986 and 1989. A good part of the evidence consisted of invoices and quotes that had been sent to Mr Lowe and Hadee. The FTT's task was to infer, from old documents, the extent to which expenditure had been incurred by or on behalf of Mr Lowe between 30 to 35 years previously.
[15] One difficulty that Mr Lowe faced was that quotes or invoices that were addressed to Hadee did not obviously demonstrate that the expenditure referenced in them was incurred by Mr Lowe or on his behalf. To meet that difficulty, Mr Lowe sought to explain his practice at the time of distinguishing between quotes and invoices relating to the...
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Hadee Engineering Co Ltd & Others v The Commissioners for HM Revenue & Customs [2022] UKUT 00084 (TCC)
...[2022] UKUT 00084 (TCC) Appeal number: UT/2021/000037 CORPORATION TAX, CAPITAL GAINS TAX, INCOME TAX – expenditure allowable under s38(1)(b) of TCGA 1992 – penalties imposed under s95 of TMA 1970 – interaction of s393A of ICTA 1988, paragraphs 58 and 59 of Schedule 18 FA 1998 and Schedule 1......