Shanks
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 April 2019 |
| Neutral Citation | [2019] UKFTT 279 (TC) |
| Date | 26 April 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 279 (TC)
Judge Peter Kempster
Mr Bob Roberts appeared for the appellant
Ms Iona Stevenson (HMRC Solicitor's Office and Legal Services) appeared for the respondents
Income tax – Loss deduction – Profession – Partnerships – Whether entitled to carry forward losses against later profits – ITA 2007, s. 83 – Inaccuracy penalty – FA 2007, Sch. 24.
The First-tier Tribunal (FTT) dismissed a taxpayer's appeal against closure notices disallowing trading losses, but allowed the appeal against inaccuracy penalties, finding that the errors in the taxpayer's returns were not caused by deliberate or careless action.
The appellant (Mr Shanks) was a professional accountant. From April 2004 he carried on his business through Douglas Shanks LLP. The Douglas Shanks LLP was dissolved in October 2009 and a return for 2008–09 was submitted several years late showing losses. Since Mr Shanks ceased to practice with the Douglas Shanks LLP in June 2008 he had practiced with a succession of other sizable LLP firms.
Mr Shanks's personal tax returns for 2008–09, 2009–10 and 2010–11 claimed to deduct the losses sustained in Douglas Shanks LLP against his income from the other firms. Mr Shanks included a “white space” disclosure in his 2009–10 and 2010–11 returns explaining that he had always acted as a professional accountant with a constant client base and that his income was treated as one profession throughout the time in the returns and should be treated as a continuation of the same profession.
HMRC enquired into Mr Shanks's personal returns and issued closure notices adjusting his self-assessment. This was on the basis that:
- the loss relief claim for 2008–09 was not allowable, because:Douglas Shanks LLP was dissolved before filing a partnership return reporting the results of its actual trade and that disqualified the partners in that firm from reporting the results of their notional trades; andthe firm failed to provide any accounts information; and
- the losses could not be carried forward against the profits of other firms.
HMRC also assessed Mr Shanks to inaccuracy penalties under FA 2007, Sch. 24 on the basis that Mr Shanks's actions had been deliberate but not concealed.
The FTT rejected Mr Shanks's description of his professional activities as being some form of freelance consultant who supplied his services under the “umbrella” of various firms. In relation to Douglas Shanks LLP Mr Shanks was a partner (strictly a member, as it was an LLP) in that firm he was not a sole practitioner; he was entitled to a share of the profits or losses. The FTT also found that Mr Shanks was a partner of firms where he worked after leaving Douglas Shanks LLP.
In relation to the loss relief claim for 2008–09, the FTT noted that the income tax position was that Douglas Shanks LLP had an “actual trade” and Mr Shanks had a “notional trade” (per ITTOIA 2005, s. 852). The FTT did not agree with HMRC that where a firm was dissolved before filing a partnership return reporting the results of its actual trade, then that somehow disqualified the partners in that firm from reporting the results of their notional trades. Mr Shanks was therefore entitled (and required) to return the results of his notional trade. Although the firm failed to provide accounts information the FTT noted that Mr Shanks did provide some draft accounts for the LLP. However as the accounts were only draft and did not in any way justify the substantial loss claim they did not result in Mr Shanks being overcharged by the closure notice. The FTT accordingly dismissed the appeal against the 2008–09 closure notice.
It followed that the losses claimed as carried forward to subsequent years were also unsustainable, and so the FTT dismissed the appeals against the 2009–10 and 2010–11 closure notices. In any event, as the FTT had found Mr Shanks to have been a partner in all the firms it followed that any losses incurred in Douglas Shanks LLP would not have been available to carry forward against profits arising from the other firms.
In relation to the inaccuracy penalty, given the above, the basis on which Mr Shanks reported his income in his returns had proved to be incorrect. However, the FTT did not agree with HMRC that Mr Shanks's behaviour had amounted to a deliberate inaccuracy. When Mr Shanks submitted his returns he took a view on how his income should be reported; that view was not spurious or fanciful; he followed that view accurately, and he explained to HMRC (via the white space) exactly what he had done and why. When he provided the documents, he subjectively believed they were accurate.
The FTT also concluded that the inaccuracy was not careless and therefore the FTT allowed the appeal against the penalty. The FTT took into account two important issues. First, all the caselaw referred to in this decision concerning the tax treatment of partnerships post-dated Mr Shanks's submission of his returns, so none of that judicial comment was available to Mr Shanks when he decided how to report his income on his returns. Secondly, Mr Shanks took considerable care in reporting the information; he made an explicit white space statement of what he had done and why he took his view.
The FTT accordingly allowed the appeal in part, so that:
- the closure notices for 2008–09, 2009–10 and 2010–11 were confirmed; but
- the penalty was removed in full.
This case provides a useful reminder that just because an individual's tax return is proved to have been completed incorrectly, it does not necessarily mean that the individual will be liable to an inaccuracy penalty. This is because an error in itself does not mean that the individual has failed to take reasonable care.
[1] The Appellant (“Mr Shanks”) appeals against closure notices for the tax years 2008–09 to 2010–11 issued on 14 March 2014 by the Respondents (“HMRC”) and a consequent inaccuracy penalty. HMRC disallowed certain trading losses claimed by Mr Shanks.
[2] The amounts of income tax charged by the disputed closure notices are:
| (1) Tax year 2008–09 | £45,421.93 |
| (2) Tax year 2009–10 | £59,406.85 |
| (3) Tax year 2010–11 | £91,662.19 |
[3] HMRC have decided not to pursue part of the 2010–11 closure notice liability; this relates to a separate dispute (concerning enterprise zone allowances) and does not affect the matters before the Tribunal in this appeal.
[4] The amount of the disputed penalty (varied after formal internal review) is £55,104.84.
[5] Mr Shanks is a professional accountant. He has in the past (including the time relevant to this appeal) suffered from serious illness; it is not necessary to go into details, only to note that this may explain why his conduct of his professional and tax affairs fell short of that normally expected of an accountant, and I have taken that into account in evaluating the evidence.
[6] From 14 April 2004 Douglas Shanks LLP carried on the profession of accountancy. The two members of Douglas Shanks LLP were Mr Shanks and Celestial Accounting Limited. Mr Shanks's evidence is that the only function of Celestial Accounting Limited was to provide the second member necessary for formation of an LLP, and that it was dormant; that Celestial Accounting Limited received no share of the profits or losses of the LLP, so that everything accrued to Mr Shanks; and that Mr Shanks was not a director or shareholder of Celestial Accounting Limited.
[7] Douglas Shanks LLP filed its first partnership tax return for the tax year 2005–06 (covering the accounting period ended 30 April 2005) declaring a loss of £20,773.
[8] Douglas Shanks LLP was dissolved on 13 October 2009.
[9] No further partnership tax returns were filed until 11 October 2012 when an amended return for the tax year 2008–09 was submitted. (The partnership returns were not in the trial bundle and I was given no explanation why the 2008–09 return was described as “amended”.) A further amendment to the 2008–09 partnership...
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