Peter Vaines v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Newey LJ,Sharp LJ,Lord Justice Henderson |
| Judgment Date | 25 January 2018 |
| Neutral Citation | [2018] EWCA Civ 45 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/1810 |
| Date | 25 January 2018 |
[2018] EWCA Civ 45
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Sharp
Lord Justice Henderson
and
Lord Justice Newey
Case No: A3/2016/1810
The Appellant appeared in person
Mr Michael Jones (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 7 th November 2017
Introduction
This is an appeal by the taxpayer, Mr Peter Vaines, from a decision of the Tax and Chancery Chamber of the Upper Tribunal (Judge Malcolm Gammie CBE QC and Judge Judith Powell) (“the Upper Tribunal”) released on 28 th January 2016. The Upper Tribunal allowed the appeal of the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) from the decision of the First-tier Tribunal (Judge John Brooks and Rebecca Newns) (“the FTT”) released on 15 th October 2013, which upheld a claim by Mr Vaines to be entitled to deduct a sum of £215,455 from his share of the profits of his profession as a solicitor in the tax year 2007/08.
At the material time, Mr Vaines was a partner in the law firm of Squire Sanders & Dempsey LLP (“SSD”). His share of profits from the firm was his only source of professional income for the year 2007/08. But the deduction which he sought to make had no direct connection with the business of SSD. It related, instead, to the previous period of Mr Vaines' professional career when he had worked (until 31 st December 2005) in the London offices of a German law firm, Haarmann Hemmelrath & Partner GbR (“HH GbR”). HH GbR was a partnership under German law, and Mr Vaines had been a member of that partnership until it was dissolved, and ceased trading, on 31 st December 2005.
At the time when it ceased trading, HH GbR owed a total of approximately €17 million (including accrued interest) to Bayerische Landesbank and two other German banks. In 2007, Bayerische Landesbank sought repayment of this sum from Mr Vaines, claiming that he was personally liable for the debts of HH GbR, either in his capacity as a former partner in that firm or in his capacity as a partner in SSD (which had apparently succeeded to part of the business of HH GbR). Similar claims were made against a number of Mr Vaines' former colleagues in HH GbR.
As Mr Vaines explained, in his witness statement for the hearing before the FTT:
“I did not consider that I was liable for any part of the amount claimed by the Bank but the risk of challenging the Bank through the German Courts was unacceptable to me. The Bank made it clear that they would sue me for the full amount which I understood was €17,000,000 on the basis of joint and several liability. I would have been involved in expensive and lengthy litigation in a foreign country and even a comparatively modest success on their part would have bankrupted me. Even a very low risk of bankruptcy was too great a risk to contemplate as it would have effectively deprived me of my livelihood.”
A brief statement of agreed facts prepared for the same hearing confirmed that, if he were made bankrupt, Mr Vaines would lose his position as a partner in SSD.
Following negotiations with Bayerische Landesbank, an agreement was reached in October 2007 whereby Mr Vaines would be released from all personal claims against him by the German banks upon payment of the sum of €300,000. Payment of this sum was funded by SSD, which agreed to make a loan for that purpose to Mr Vaines (and certain other colleagues who settled the claims against them on a similar basis). The payment was made in January 2008. Mr Vaines subsequently repaid the full amount of the loan to SSD over an agreed period.
On 27 th October 2009, Mr Vaines wrote to HMRC claiming to make an amendment to his self-assessment tax return for the year ended 5 th April 2008, in respect of the payment made to Bayerische Landesbank in January 2008. He enclosed a detailed note explaining the circumstances of the payment, and an additional information sheet for that year in which he included the sterling equivalent of £215,455 in box 6 (“Post-cessation expenses and certain other losses”) under the heading “Other tax reliefs”. He said he believed that to be the correct place for the claim, but added that, if it should be made in some other fashion, he would be grateful if HMRC would let him know.
Correspondence with HMRC then ensued, which resulted in the disallowance of the claimed deduction by a closure notice issued by HMRC under section 28A of the Taxes Management Act 1970 on 28 th February 2012. Mr Vaines then appealed against the closure notice to the FTT.
The FTT heard Mr Vaines' appeal on 27 th September 2013. He appeared in person, as he has at all subsequent stages of the litigation. HMRC were represented by an officer, Mr Hillier. The FTT had before it the brief statement of agreed facts which I have already mentioned, and which is reflected in the narrative I have already set out. Mr Vaines also gave oral evidence, and was cross-examined by Mr Hillier. In paragraph 3 of its decision (“the FTT Decision”), the FTT found that:
“Although [ Mr Vaines] accepted that the payment to Bayerische Landesbank had enabled him to avoid bankruptcy and protect his reputation we find, as a matter of fact, that his purpose for making that payment was to preserve and…protect his professional career or trade.”
(In paragraph 3, the word “his” appears before “protect” in the passage which I have quoted, but this appears to be a typographical error. Nobody has suggested that any significance attaches to it.)
In paragraph 6 of the FTT Decision, the FTT identified the following three issues as arising:
(1) whether Mr Vaines carried on, as an individual, a profession or trade;
(2) if so, whether the payment of €300,000 he made to Bayerische Landesbank was incurred wholly and exclusively for the purposes of that profession or trade; and
(3) whether the payment was revenue or capital expenditure.
The FTT added that, for consistency with the relevant legislation, they would refer to Mr Vaines as carrying on a “trade”, on the basis that (as is common ground) that term included his profession as a solicitor.
The FTT answered all three questions in Mr Vaines' favour, and therefore allowed his appeal. The Upper Tribunal then allowed HMRC's appeal on issues 1 and 2, for the reasons explained in their very full and careful decision (“the UT Decision”). In view of their conclusion on those issues, it was unnecessary for the Upper Tribunal to deal with the third issue.
Mr Vaines now appeals to this court, with permission granted by Kitchin LJ on 16 th September 2016. The Upper Tribunal had itself refused permission, in a further decision dated 15 th April 2016.
At the hearing before us on 7 th November 2017, Mr Vaines developed his submissions in support of his appeal clearly and courteously. We then heard submissions from counsel for HMRC, Mr Michael Jones, who had also appeared before the Upper Tribunal. At the conclusion of the hearing, we were able to state our conclusion, which was that Mr Vaines' appeal should be dismissed for reasons which we would later give in writing. This judgment contains the reasons which led me to that conclusion.
What was the trade carried on by Mr Vaines in 2007/08?
Mr Vaines claims to be entitled to deduct the £215,455 from his trading profits in 2007/08. More precisely, he claims to be entitled to make the deduction in computing the taxable profits of his profession as a solicitor for that year. He does not allege that there is any freestanding relief which would allow him to deduct that sum from his trading income for the year once it has been properly ascertained. The first necessity, therefore, is to identify the relevant trade for income tax purposes which Mr Vaines carried on in 2007/08. Once that trade has been correctly identified, the next question is whether the payment is properly deductible in computing his share of the profits of the trade for that year.
The only source of Mr Vaines' professional income in 2007/08 was the trade of SSD, of which he was a member. SSD is a limited liability partnership, which has a separate corporate existence from its members: see section 1(2) of the Limited Liability Partnerships Act 2000. In this important respect, therefore, a limited liability partnership differs from an ordinary partnership under English law, which is defined in section 1 of the Partnership Act 1890 as “the relation which subsists between persons carrying on a business in common with a view of profit.” Under English law, unlike the law of Scotland, an ordinary partnership as such has no separate corporate existence, and the business which it carries on is therefore the collective business of the individual partners.
For income tax purposes, however, limited liability partnerships are treated in the same way as an ordinary English partnership. This is achieved by section 863 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), the first two subsections of which provide as follows:
“(1) For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit –
(a) all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such),
(b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and
(c) the property of the limited liability partnership is treated as held by the...
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