Smith v HMRC
| Jurisdiction | UK Non-devolved |
| Judge | The Hon Mr Justice Arnold |
| Judgment Date | 10 May 2011 |
| Neutral Citation | [2011] UKUT 270 (TCC) |
| Respondent | MAJESTY’S REVENUE AND CUSTOMS |
| Appellant | Dr David Southern, instructed by Bright & Sons, for the |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Appeal Number | FTC/47/2010 |
[2011] UKUT 270 (TCC)
Appeal number
FTC/47/2010
Income Tax – Schedule D – computation of profits – section 42 FA 1998 – whether
accounts prepared in accordance with generally accepted accounting practice –
sections 29, 34, 36 TMA 1970 – whether negligent conduct if accounts not prepared
in accordance with generally accepted accounting practice – whether HMRC
discovered tax loss
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
LESLIE SMITH
Appellant
- and –
THE COMMISSIONERS FOR HER
MAJESTY’S REVENUE AND CUSTOMS Respondents
Tribunal: The Hon Mr Justice Arnold
Sitting in public in London on 11 and 12 April 2011
Dr David Southern, instructed by Bright & Sons, for the Appellant
Hui Ling McCarthy, instructed by HMRC Solicitor’s Office, for the Respondents
© CROWN COPYRIGHT 2011
[2011] UKUT 270 (TCC)
Page 2
MR JUSTICE ARNOLD:
Introduction
1. This is an appeal from a decision of the First-Tier Tribunal (Tax) (Charles
Hellier and John Cherry) (“the Tribunal”) dated 24 February 2010 [2010]
UKFTT 92 (TC) by which the Tribunal dismissed the appeal of Leslie Smith
(“Mr Smith”) against decisions of the Commissioners for Her Majesty’s
Revenue and Customs (“HMRC”) to make (a) assessments to his 1997/98,
1998/99 and 1999/2000 income tax returns pursuant to sections 29 and 36 of
the Taxes Management Act 1970 (“TMA 1970”), (b) an amendment to his
2000/01 income tax return pursuant to section 28A TMA 1970 and (c) an
assessment to his 2001/02 income tax return pursuant to section 29 TMA
1970. It should be noted that the effect of the amendment to the 2000/01 return
was to reduce the tax payable in that year, but the reason for the reduction in
that year was the same as the reason for the increased assessments in the other
years.
2. In a nutshell, the Tribunal decided that the way in which Mr Smith’s
accountants had prepared his accounts for each of those years was in two
respects not in accordance with generally accepted accounting practice at the
relevant time, and that this constituted “negligent conduct” by a person acting
on Mr Smith’s behalf which resulted in a tax loss that HMRC had
“discovered”. Mr Smith appeals against the Tribunal’s decision in relation to
the date at which income was recognised in his accounts. He does not
challenge the Tribunal’s decision in relation to the manner in which stock and
work in progress was treated in the accounts.
3. The Tribunal also allowed appeals by Mr Smith against assessments in respect
of his 1994/95, 1995/96 and 1996/97 returns. There is no cross-appeal by
HMRC in respect of this aspect of the decision, and I shall say no more about
it.
The legal framework
4. For the tax years 1997/98 to 1999/2000, the common law principle was that
the profits and losses of a business for tax purposes were those determined by
applying “the correct principles of the prevailing system of commercial
accountancy” unless there was some statutory or judge-made rule which
displaced those principles: see Pennycuick V-C in Odeon Associated Theatres
Ltd v Jones (1971) 48 TC 257 at 273 and Sir Thomas Bingham MR (as he then
was) in Gallagher v Jones [1993] STC 537 at 554. The courts recognised that,
in some situations, there could be more than one method of accounting for
particular items that was in accordance with sound principles of commercial
accounting: see Lord Fraser of Tullybelton and Lord Keith of Kinkel in
Willingale v International Commercial Bank Ltd (1978) 52 TC 242 at 272,
280 and Knox J in Johnston v Britannia Airways Ltd [1994] STC 753 at 782.
5. For periods of account beginning after 6 April 1999 (i.e. for 2000/01 and
2001/02), section 42(1) of the Finance Act 1998 (“FA 1998”) provided:
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