Schechter and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 March 2017 |
| Neutral Citation | [2017] UKFTT 189 (TC) |
| Date | 02 March 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0189 (TC)
Judge Aleksander
John Dewhurst of Chown Dewhurst LLP appeared for the appellants
John Corbett, an officer of HM Revenue and Customs, appeared for the respondents
Income tax – Offset of trading losses against income – Whether land was held as trading stock – Whether declaration of trust was effective to transfer beneficial ownership of land to appellants – Effect of Stamp Act 1891, s. 14 on admissibility of trust declarations – Application of foreign laws – Recognition of Trusts Act 1987 – Illegal return of capital – Sham – Appeal dismissed.
The First-tier Tribunal (FTT) found that HMRC were correct to deny two taxpayers a deduction for losses arising in respect of property transactions against their other income.
Stephen Schechter and his son Lawrence Schechter (the appellants) submitted 2008–09 tax returns which included losses which had arisen in respect of property transactions being offset against other income. Following an enquiry HMRC issued closure notices disallowing the losses. The appellants' appealed against the closure notices.
The appellants held shares in a company incorporated in the Bahamas, Vinexsa International Ltd (Vinexsa). Vinexsa owned two flats in London and 100% of the issued share capital in Sweet Revenge Ltd (Sweet Revenge), which owned a property in France. The appellants' submitted that as a result of a nominee agreement and a declaration of trust, Vinexsa and Sweet Revenge held their respective assets as nominees for the Vinexsa shareholders (being the appellants and two other family members). They also asserted that the French property and one of the London flats were held as trading stock. In consequence, the appellants asserted that trading losses arising in respect of those properties could be offset against other taxable income accruing to them.
The FTT noted that the nominee agreement and the declaration of trust were both liable to fixed stamp duty as declarations of trust. As neither instrument had been impressed with any stamp duty the FTT found that neither instrument was admissible in evidence. As the appellants' case was wholly dependent upon the transfer of the beneficial interests in the properties to the Vinexsa shareholders having been effected by these two instruments, it followed that their case had to fail and the FTT therefore dismissed the appeal.
However, as the appellants could have submitted the two instruments to HMRC for stamping at a later time (subject to payment of interest and penalties), the FTT went on to consider whether the appeal would have succeeded if the instruments had been stamped. It found that neither the nominee agreement nor the declaration of trust were effective to vest the beneficial and equitable ownership of the properties in the Vinexsa shareholders because:
- in the case of the London flats, the purported bare trust was a sham and was never respected by Vinexsa or its shareholders; and
- in the case of the French property, neither the nominee agreement nor the declaration of trust could extend to assets not owned by Vinexsa itself (such as assets owned by its subsidiary Sweet Revenge). Even if they could have, the transfer of the beneficial interest in the property to the Vinexsa shareholders would have been ineffective, as it would have represented an unlawful return of capital, which was ultra vires and was incapable of ratification.
The FTT also decided that had it needed to, it would have found that neither of the properties which the appellants purported were trading stock, were owned as trading stock by their respective owners.
The FTT noted that given its findings as to the beneficial and equitable ownership of the properties, and the status of those properties as capital investments, it did not need to consider whether any losses arising in respect of the properties were available to be set against the taxable income of the appellants.
The FTT held that HMRC were correct to deny the appellants a deduction for trading losses against their other income for 2008–09 and accordingly dismissed the appeals.
The FTT dismissed the appeals because the appellants' case depended on the transfer of the beneficial ownership of assets from companies to the shareholders of the companies, and the evidence for this was inadmissible and therefore the case had to fail. Even if the evidence had been admissible the FTT would still have dismissed the appeal because it found that both instruments purportedly transferring the beneficial ownership of assets to the companies' shareholders had not done so.
[1] This is an appeal against closure notices issued by HM Revenue and Customs following an enquiry into self-assessment tax returns prepared by Stephen Schechter and his son Lawrence Schechter. The closure notices relate to the self-assessment tax returns for the tax year 2008/09.
[2] In relation to Stephen Schechter, his self-assessment tax return showed total income before personal allowances and losses of £155,260.00. Against this were claimed losses of £123,567.00 and personal allowances of £6,035.00. His total taxable income was £25,658.00. After taking account of tax credits and tax withheld from income, Stephen Schechter claimed a tax refund of £47,521.43.
[3] The effect of the closure notice of 30 March 2011 was to disallow the losses. His revised total taxable income was £149,225.00. After taking account of tax credits and tax withheld from income, Stephen Schechter was liable to pay £855.55 income tax.
[4] In relation to Lawrence Schechter, his self-assessment tax return showed total income before personal allowances and losses of £201,441.00. Against this were claimed losses of £61,111.00 and personal allowances of £6,035.00. His total taxable income was £134,295.00. After taking account of tax credits and tax withheld from income, Lawrence Schechter claimed a tax refund of £9,037.62.
[5] The effect of the closure notice of 4 November 2010 was to disallow the losses. His revised total taxable income was £195,406.00. After taking account of tax credits and tax withheld from income, Lawrence Schechter was liable to pay £15,406.78 income tax.
[6] Both Stephen and Lawrence Schechter appealed against their closure notices. Since the factual circumstances and other issues arising in respect of their respective appeals are substantially the same, the Tribunal directed that the Appellants' appeals be heard together. The issue in the appeals is the ability of the Appellants to offset losses arising in respect of property transactions against other income.
[7] Stephen Schechter is married to Sherry Schechter. Stephen, Sherry, Lawrence and Lawrence's brother (Scott) are the sole shareholders in Vinexsa International Limited (“Vinexsa”). They are also the directors of Vinexsa. As at 11 June 2003, Vinexsa had 1000 shares in issue, of which Stephen owned 245, Sherry owned 245, Lawrence owned 255, and Scott owned 255. In this decision, I refer to Stephen, Sherry, Lawrence and Scott as the “Vinexsa shareholders”.
[8] Vinexsa owns two flats in London at 12 Charles Street; it also owns all the issued shares in Sweet Revenge Limited (“Sweet Revenge”). Sweet Revenge owns a property in France at 20 Chemin de Bellevue.
[9] It is the Appellants' case that as a result of a nominee agreement dated “as of” 11 June 2003 (“the Nominee Agreement”) and a declaration of trust dated 11 June 2003 (“the Declaration of Trust”), Vinexsa and Sweet Revenge hold their respective assets as nominees for the Vinexsa shareholders. They also assert that the French property and one of the London flats are held as trading stock. In consequence, the Appellants assert that trading losses arising in respect of those properties can be offset against other taxable income accruing to them.
[10] In an appeal against closure notices, the Appellants have the burden of proving their case and showing that HMRC's decision is wrong.
[11] Neither party was legally represented. Lawrence and Stephen Schechter were represented by Mr Dewhurst (I do not know what professional qualifications, if any, Mr Dewhurst has). HMRC were represented by Mr Corbett, an officer of HMRC. Witness statements were provided by Stephen Schechter, Lawrence Schechter, Castino D Sands and Oliver Goldstein. Stephen Schechter gave oral evidence. None of Lawrence Schechter, Mr Sands or Mr Goldstein attended the hearing, and I deal with this in more detail below. In addition, bundles of documentary evidence were produced. Mr Corbett also produced a report on Sweet Revenge that summarised information available from the public file at Companies House, including summaries of the accounts of that company. None of the documentary evidence was challenged.
[12] At a case management hearing in January 2016, the Appellants applied pursuant to rule 5(3)(e) of the Tribunal's Procedure Rules for certain matters to be determined as a preliminary issue. I refused that application. During the course of the application, it became apparent that as Vinexsa was incorporated in the Bahamas, and as Sweet Revenge owned a property in France, issues of Bahamian and French law could arise in relation to the appeals. I therefore gave directions permitting expert evidence to be adduced on matters of Bahamian and French law. I later supplemented these with further directions making it clear that paragraphs 1 to 3 (inclusive) of Part 35 of the Civil Procedure Rules and paragraphs 9 to 15 the Guidance for the Instruction of Experts in Civil Claims applied to the experts and their evidence (and extracts from the CPRs and the Guidance setting out these paragraphs were annexed to my directions for ease of reference). I also directed that the letters of instruction to the expert witnesses be exhibited to their witness statements, together with a list of all documents provided to them, I also expressly stated that paragraph 83 of the...
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...he said that the burden of proof shifted because an allegation of sham was such a serious matter (in support of which he cited Schechter [2017] TC 05677 at [139] and [140]).[30] Mr Gordon suggested that HMRC's disavowal of any sham argument in the Appellant's case should be seen as no more ......