Smith v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 May 2011 |
| Date | 10 May 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Upper Tribunal (Tax and Chancery Chamber).
Arnold J.
Dr David Southern (instructed by Bright & Sons) for the appellant.
Hui Ling McCarthy (instructed by the solicitor for HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
AH (Sudan) v Secretary of State for the Home Department UNKELR[2007] UKHL 49; [2008] 1 AC 678
Bolam v Friern Hospital Management Committee WLR[1957] 1 WLR 582
Edwards v Bairstow TAXELR(1956) 36 TC 207; [1956] AC 14
Employee v R & C Commrs SCD(2008) Sp C 673
Gallagher v Jones (HMIT) TAX[1993] BTC 310
Georgiou (t/a Marios Chippery) v C & E Commrs VAT[1996] BVC 236
Hankinson TAX[2009] UKFTT 384 (TC); [2010] TC 00319
Johnston v Britannia Airways Ltd TAX[1994] BTC 298
Jones v Kaney [2011] UKSC 13
MA (Somalia) v Secretary of State for the Home Department UNK[2007] UKSC 49; [2011] 2 All ER 65
Odeon Associated Theatres Ltd v Jones (HMIT) TAX(1971) 48 TC 257
Procter & Gamble UK v R & C CommrsUNKVAT[2009] EWCA Civ 407; [2009] BVC 461
Willingale v International Commercial Bank Ltd TAX(1978) 52 TC 242
Income tax - Sch. D - Computation of profits - Discovery assessment - Generally accepted accounting practice (GAAP) - Whether accounts prepared in accordance with accounting standards - Whether negligent conduct if accounts not prepared in accordance with GAAP - Whether HMRC entitled to make discovery assessment - Taxpayer's appeal dismissed - Finance Act 1998, Finance Act 1998 section 42s. 42 - Taxes Management Act 1970, Taxes Management Act 1970 section 29s. 29.
This was an appeal by the taxpayer against a decision of the First-tier Tribunal ([2010] UKFTT 92 (TC); [2010] TC 00403) that the taxpayer's accountants had adopted the wrong accounting practice in drawing up the taxpayer's trading accounts which amounted to negligent conduct entitling HMRC to raise discovery assessments.
The taxpayer traded as a ground works subcontractor. The contract terms normally required the taxpayer to make applications for payment. In preparing the taxpayer's accounts, his accountant took the view that valuations made by the taxpayer's own quantity surveyors and incorporated into the applications for payment could not be used as a basis for recognising an asset and income of the amount of such a valuation, because the amounts were not realised until they had been agreed by the customer's quantity surveyors. Once a valuation certificate had been issued by the customer the income, and asset, were recognised.
HMRC opened an enquiry into the taxpayer's 2001 return and issued discovery assessments in respect of the years 1998 to 2000 and 2002 in reliance on s. 29 of TMA 1970.
The First-tier Tribunal dismissed the taxpayer's appeal on the basis that the way in which the taxpayer's accountants had prepared his accounts for each of those years was in two respects not in accordance with GAAP at the relevant time. That constituted negligent conduct by a person acting on the taxpayer's behalf which resulted in a tax loss and entitled HMRC to make discovery assessments ([2010] UKFTT 92 (TC); [2010] TC 00403).
The taxpayer appealed against the tribunal's decision in relation to the date at which income was recognised in his accounts but did not challenge the tribunal's decision in relation to the manner in which stock and work in progress was treated in the accounts. It was common ground that no debt was due and owing until the valuation certificate was issued. However, as the tribunal found, the sums requested in applications for payment were generally paid in full or in amounts which varied by only a few per cent from the amounts claimed. Payments were made about 30 days after the application and about two weeks after the certificate. The issue of whether the income should be recognised when the application for payment was made or when the valuation certificate was issued only mattered in cases where the application for payment was made in one accounting period and tax year, but the valuation certificate was issued in the subsequent period and year.
The taxpayer contended that no reasonable tribunal properly directed as to the law could have concluded from the evidence that the only correct point at which to recognise income was when the application for payment was made rather than when the valuation certificate was issued. Instead, the only conclusion which the tribunal was entitled to reach was that both methods were acceptable methods of commercial accounting at the relevant dates. Secondly, he contended that the tribunal exceeded its jurisdiction or applied the wrong test in making a finding of negligent conduct on the part of the accountant. Thirdly, the tribunal was wrong to conclude that HMRC had "discovered" a tax loss in relation to the years in issue.
Held, dismissing the appeal:
1.The first ground of appeal amounted to an attack on the tribunal's findings of fact and evaluation in relation to the accountancy issue, but did not demonstrate that those findings were ones that the tribunal was not entitled to reach. The tribunal was entitled to conclude that in the case of the taxpayer's business there was an asset the ultimate realisation of which could be assessed with reasonable certainty at the date of the application for payment. That was supported by SSAP2, FRS 5 and IAS 18. Themethod of income recognition adopted by the taxpayer's accountants had been chosen for what he believed to be good reasons. However, that was not determinative of the issue which the tribunal had to decide. The principal reason given was that it was common practice in the construction industry to use the valuation certificate as the only reliable basis for recognising income. However, the tribunal considered that that was not a good enough reason for using the method when preparing the taxpayer's accounts, because his business was unusual in employing a quantity surveyor and thus having a reliable basis for its applications for payment. The tribunal was careful to consider the matter by reference to the accounting standards applicable at the relevant time. The tribunal gave clear reasons for concluding that the accountants' approach was erroneous. The tribunal was entitled to find that, viewed as at the date of the application for payment, the taxpayer had an entitlement to payment for the work done under the subcontract (albeit not a debt due and owing) the ultimate realisation of which could be assessed with reasonable certainty, as required by the prudence concept, because history showed that the applications were always paid either in full or in amounts which varied by only a few percent. The tribunal also held that, even if there was not reasonable certainty at that date, the subsequent payment was an adjusting post balance sheet event within SSAP 17. It was entitled to reach those conclusions.
2.The tribunal did not find that the accountant had been guilty of professional negligence; it had found that there had been "negligent conduct" by a person acting on behalf of the taxpayer. The fact that the person in question was not a party to the proceedings did not prevent the tribunal from making a finding that there had been negligent conduct on his part. The burden of proof was not reversed. The burden lay upon HMRC to prove that there had been negligent conduct by a person acting on behalf of the taxpayer. Given the composition and expertise of the First-tier Tribunal, it was in at least as good, if not a better, position to determine whether the accountant had acted negligently as an ordinary civil court.
3.Where the person acting on behalf of the taxpayer was an accountant engaged by the taxpayer to prepare his accounts, the accountant's conduct had to be judged by reference to the standard of the ordinarily competent accountant. Although the tribunal had not asked itself explicitly whether the approach to income recognition which the accountant adopted when preparing the taxpayer's accounts fell outside the range of approaches open to a competent accountant at the time, it clearly articulated the test it was going to apply and there was no reason for thinking that it did not apply that test. Furthermore, the tribunal explicitly concluded that the approach adopted by the accountant was not in accordance with generally accepted accounting practice at the time. Still further, the essence of the tribunal's reasoning was that, in the case of the taxpayer's business, there was only one method of income recognition which did comply with generally accepted accounting practice.
4.The tribunal had applied the right test and its decision was clear as to who made the discovery and in relation to which years of account and as to what had been discovered, namely that in preparing the taxpayer's accounts, the accountant had not recognised as income sums which at the year end had been the subject of an application for payment, but not a valuation certificate, thereby understating the taxpayer's revenue and profits during that year.
Arnold J: 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); [2010] TC 00403) 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 Taxes Management Act 1970 section 29 section 36sections 29 and 36 of the Taxes Management Act 1970 (" TMA 1970"), (b) an amendment tohis 2000/01 income tax return pursuant to Taxes Management Act 1970 section 28Asection 28A of TMA 1970 and (c) an assessment to his 2001/02 income tax return pursuant to section 29 of 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...
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