Peter John Rafferty v HMRC
| Jurisdiction | England & Wales |
| Judgment Date | 19 May 2005 |
| Date | 19 May 2005 |
| Court | Special Commissioners (UK) |
special commissioners decision
Special Commissioners: Dr N A Brice and John Walters
David Goldberg QC, instructed by Messrs Herbert Smith & Co, for the Appellant
Bruce Carr of Counsel, instructed by Solicitor of Inland Revenue, for the Respondents
Income Tax - Appellant was a self-employed sales associate with Allied Dunbar and on retirement sold his practice to a subsidiary company of Allied Dunbar - whether renewal commissions received after the discontinuance of the trade arose from the carrying on of the trade before the discontinuance - yes - whether on the transfer of the trade there was a permanent discontinuance of the trade by reason of a change in the person carrying on the trade - yes - appeal allowed-A 1988 Ss 103, 106, 110 and 113ASSESSMENT - discovery of loss of tax - conditions for making assessment - whether the Special Commissioners have jurisdiction to consider whether an assessment falls within section 29(2) - yes - whether the Appellant's tax return was made in accordance with the practice generally prevailing at the time - no - whether the officer of the board could have been reasonably expected on the basis of the information made available to him to be aware that profits which ought to have been assessed to tax had not been assessed - no -TMA 1970 S 29(2) and (5)
1. Mr Peter John Rafferty (the Appellant) appeals against an assessment dated 15 April 2002 for income tax of £5,190.82 in respect of the year ending on 5 April 1997. We were informed that this appeal was representative of a large number of others.
2. The Appellant carried on business as a self-employed sales associate of Allied Dunbar and was taxed on an earnings basis. On 13 June 1996 the Appellant sold his business to a subsidiary of Allied Dunbar for a lump sum and after that date the subsidiary received commissions in respect of policies sold by the Appellant before 13 June 1996. The assessment was made because the Revenue were of the view that part of the lump sum received by the Appellant for the transfer of his business was consideration for the right to receive the commissions and that they were taxable as income in the year of the transfer under section 106(1) of the Income and Corporation Taxes Act 1988 (the 1988 Act) because they arose during the period before the discontinuance of the trade within the meaning of section 103.
3. The Appellant appealed because he was of the view that the renewal commissions did not arise during the period before the discontinuance of his trade and so were not taxable under section 106(1). Alternatively, he was of the view that section 106(2) applied and that tax was not chargeable on him but on the transferee because there had been a permanent discontinuance of his trade by reason of a change in the persons carrying on the trade and the commissions had been received by the transferee and brought into the computation of the profits of its trade. The Appellant was also of the view that two of the conditions for making the assessment had not been complied with. The first condition was in section 29(2) of the Taxes Management Act 1970 (the 1970 Act) and he argued that his return had been made on the basis of the practice generally prevailing at the time it was made. The second was in section 29(5) of the 1970 Act and the Appellant argued that the Revenue could reasonably have been expected, on the basis of the information available to them, to have been aware that income which ought to have been assessed to income tax had not been assessed.
4. The legislation which applies to receipts after the discontinuance of a trade is found in sections 103 to 110 and 113 of the 1988 Act. We start with section 103 which defines the sums on which income tax is charged. The relevant parts of section 103 provide:
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(1) Where any trade, profession or vocation the profits or gains of which are chargeable to tax under Case I or II of Schedule D has been permanently discontinued, tax shall be charged under Case VI of that Schedule in respect of any sums to which this section applies which are received after the discontinuance.
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(2) Subject to subsection (3) below, this section applies to the following sums arising from the carrying on of the trade, profession or vocation during any period before the discontinuance (not being sums otherwise chargeable to tax)-
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(a) where the profits or gains for that period were computed by reference to earnings, all such sums in so far as their value was not brought into account in computing the profits or gains for any period before the discontinuance, and …
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5. Thus, as a result of section 103(2)(a), the general rule is that tax is charged after the discontinuance of a trade on sums arising from the carrying on of the trade during any period before the discontinuance if they were not previously brought into account.
6. However, special rules apply where rights to payments are transferred on a discontinuance and these are found in section 106, the relevant parts of which provide:
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106(1) Subject to subsection (2) below, in the case of a transfer for value of the right to receive any sum to which section 103 … applies, any tax chargeable by virtue of … [that] section shall be charged in respect of the amount or value of the consideration … and references in this Chapter … to sums received shall be construed accordingly.
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(2) Where a trade …is treated as permanently discontinued by reason of a change in the persons carrying it on, and the right to receive any sum to which section 103 … applies is or was transferred at the time of the change to the persons carrying on the trade … after the change, tax shall not be charged by virtue of … [that] section , but any sum received by those persons by virtue of the transfer shall be treated for all purposes as a receipt to be brought into the computation of the profits of the trade … in the period in which it is received.
7. Thus section 106(1) provides that, if there is a transfer of value of the right to receive sums to which section 103 applies (that is, sums which arise from the carrying on of a trade during any period before the discontinuance) then the tax chargeable under section 103 is charged on the amount of the consideration. However, section 106(2) goes on to provide that if a trade is "treated as permanently discontinued" by reason of a change in the persons carrying it on, and the right to receive sums to which section 103 applies is transferred at the time of the change to the transferee who carries on the trade after the change, then tax is not charged on the transferor under section 103 but the sums are treated as receipts of the transferee and brought into the computation of the profits of his trade in the periods in which they are received. The business of the Appellant has been treated and taxed as a trade, and we adopt that treatment in this Decision.
8. In order to apply section 106(2) it is necessary to know the meaning of the phrase "treated as permanently discontinued". Section 110(2)(a) defines the permanent discontinuance of a trade as including the occurrence of any event which, under section 113, is to be treated as equivalent to the permanent discontinuance of a trade. Section 113(1) provides that "where there is a change in the persons engaged in carrying on any trade … then … the persons on whom [the income tax] is chargeable, shall be determined as if the trade … had been permanently discontinued, and a new one set up and commenced, at the date of the change".
9. The legislation which applies where a loss of tax is discovered is found in section 29 of the 1970 Act. During the year of assessment 1996-97 the relevant parts provided:
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(1) If an officer of the Board … discover, as regards any person (the taxpayer) and a chargeable period-
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(a) that any profits which ought to have been assessed to tax … have not been assessed, …
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the officer … may, subject to subsections (2) and (3) below, make an assessment in the amount … which ought in his … opinion to be charged in order to make good to the Crown the loss of tax.
(2) Where-
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(a) the taxpayer has made and delivered a return … in respect of the relevant chargeable period, and
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(b) the situation mentioned in subsection (1) above is attributable to an error or mistake in the return as to the basis on which his liability ought to have been computed,
the taxpayer shall not be assessed under that subsection in respect of the chargeable period there mentioned if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
(3) Where the taxpayer has made and delivered a return … in respect of the relevant chargeable period, he shall not be assessed under subsection (1) above-
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(a) in respect of the chargeable period mentioned in that subsection ; and
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(b) … in the same capacity as that in which he made and delivered the return
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(c) unless one of the two conditions mentioned below is fulfilled. …
(5) The second condition is that at the time when an officer of the Board-
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(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return … in respect of the relevant chargeable period, or
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(b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if-
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(a) it is contained in the taxpayer's return … in respect of the relevant chargeable period (the return) or in any accounts, statements or...
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