Spring Salmon & Seafood Ltd v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 July 2016 |
| Neutral Citation | [2016] UKUT 313 (TCC) |
| Date | 05 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Lord Glennie
Michael Upton, Advocate, appeared for the appellant, instructed by Russell & Aitken, solicitors, Edinburgh
Graham MacIver, Advocate, instructed by the Office of the Advocate General, appeared for the respondents
Income tax – PAYE Determinations – National Insurance contributions decisions – Bonus – Whether liability excluded by agreement and/or undertaking.
In Spring Salmon & Seafood Ltd v R & C Commrs [2016] UKUT 0313 (TCC), the Upper Tribunal allowed an appeal against a decision by the First-tier Tribunal that the appellant company's liability to PAYE and NIC had not been excluded by way of an agreement or undertaking with HMRC.
This case concerned the liability of Spring Salmon & Seafood Ltd (the Company) to pay PAYE and NIC in relation to payment of a bonus of £900,000 and payment of wages and salaries of £178,230 to its sole director, Mr Roderick Thomas and its secretary, Mr Stuart Thomas.
The First-tier Tribunal (FTT) had found after consideration of five issues that the Company was fully liable to pay both PAYE and NIC in the amounts determined by HMRC. On appeal to the Upper Tribunal, the Company narrowed its appeal to two related issues:
1) Whether or not the terms of an alleged agreement made in July 2007 barred HMRC from pursuing the company for the PAYE and NIC liabilities on the bonus of £900,000; and
2) Whether or not an undertaking given by HMRC in insolvency proceedings brought by them in 2010 barred HMRC from pursuing those PAYE and NIC liabilities.
The appeal did not consider issues of tax law but simply concentrated on the proper construction of the 2007 agreement and 2010 undertaking.
The Company was incorporated in Scotland on 13 March 1998. It traded under the sole directorship of Mr R. Thomas as suppliers, distributors and processors of seafood between 1998 and January 2005 when if ceased trading. The company secretary was Mr Stuart Thomas (Mr R. Thomas' brother).
In or around August 2006, Mr R. Thomas decided to make a retrospective payment of a fish stock bonus of £900,000 to himself and his brother at some unspecified future date. That sum as well as £178,230 described as Staff Costs (wages and salaries) were reflected in the Company's cessation accounts which were submitted to HMRC on 30 August 2006 along with tax returns for the 2004 and 2005 accounting periods. Neither the corporation tax returns nor the personal tax returns of Mr R. Thomas and his brother took into account the bonus or salary payments.
The Company was struck off the Register and dissolved in 2007 but, on the request of HMRC, was retrospectively restored to the Register in 2010.
In January 2007, HMRC opened enquiries into the Company's tax returns and the personal tax returns of Mr R. Thomas and his brother. The Company's enquiries were closed in March 2011 and the individual's enquiries were closed in July 2007. In 2011, HMRC issued PAYE notices of determination and NIC decisions which were appealed by the Company.
Mr R. Thomas and his brother made applications to the General Commissioners for closure notices in relation to their personal tax enquires in June 2007. At that hearing, the Commissioners ordered Mr Thomas to provide evidence to reconcile Company accounts with personal returns and in particular explain the net increase of nearly £1.5m in the amount owed by the Company to the two brothers. The General Commissioners also requested evidence of some £1.2m of net capital paid into the Company's business. Mr Thomas produced bank statements showing that in March 2004, the Company's account was credited with the sum of £300,000 paid by a partnership (also established by Mr R. Thomas and his brother) and in October 2004, the Company's account was credited with £900,000.
Following this disclosure HMRC wrote to Mr R. Thomas requesting copies of all documentation with regards to the payment/crediting of the £900,000 bonus adding that if the bonus was not subject to PAYE and NIC then it would be disallowed in the Company accounts.
On 17 July 2007, HMRC wrote to Mr R. Thomas (in his capacity as sole director) confirming a telephone conversation between the two and agreeing that since the charging of the £900,000 did not constitute a tax avoidance scheme and if Mr Thomas agreed that the amount would be disallowed in the Company accounts, HMRC would not seek to charge PAYE or NIC on the amount. HMRC's letter also set out the potential tax implications of the sum being credited to the director's current account including a liability for beneficial loan arrangements in case the account had been overdrawn.
On 19 July 2007, HMRC wrote to Mr R. Thomas personally expressing concern about the £1.2m net increase in the amount outstanding to Mr Thomas and related parties in the Company's accounts, asking for details of any other transaction in the director's current account in the relevant period and warning him of potential assessments in regards to other employees who may had received a share of the £178,230 wages amount in the Company's accounts. There was no satisfactory response to these queries.
On the same day, HMRC wrote to the General Commissioners explaining that the parties had been able to determine the tax treatment of the £900,000 accrued bonus and that the charge was to be disallowed.
On 31 July 2007, HMRC issued closure notices in respect of 2004–05 to both brothers without making any amendment to the returns in respect of employment income. Nevertheless, amendments to certain other returns were issued seeking additional tax.
On appeal, the Company argued that HMRC had entered into a binding agreement as confirmed in the correspondence of July 2007 in return for the Company's agreement that the bonus payment of £900,000 would not be claimed as a deduction in its accounts. The Company challenged the First-tier Tribunal's findings that there was no binding agreement and/or that any agreement was qualified or conditional on the Company disallowing the amount in its accounts.
The Upper Tribunal (UT) accepted that the exchanges in early July 2007 amounted to a binding agreement between HMRC and the Company. The Tribunal rejected the FTT's reasoning on this point holding that it is an inherent part of a settlement agreement to put aside any uncertainty in order to reach finality. Notwithstanding this finding, the UT disagreed that the FTT had made an error of law in holding that the binding agreement had been conditional. Since the successor of the Company, after the closure notices were issued, were presently claiming a tax loss allowing the £900,000 in their accounts in breach of this condition, HMRC were entitled to charge PAYE and NIC accordingly. The UT rejected the notion that the Company could insist on the agreement in the appeal but ignore it when it suited them.
During proceedings for the restoration of the Company to the Register, HMRC were recorded as undertaking that:
(1) That upon the restoration of the Company to the Register HMRC will forthwith … issue closure notices and assessments in respect of the outstanding enquiries into the Company's liabilities. (2) The Revenue will (a) make no further demands of the Company's officers or any other person in relation to the said outstanding enquiries, and (b) raise no further enquiries into the Company's trade to the date that ceased namely 31 January 2005. (3) The Company may appeal any assessments made on the issue of the said closure notices, if so advised. (4) Apart from assessments made on the closure of the said enquiries the Revenue will have no power to, and will not, raise any assessments on the Company in relation to the said trade to the said date save on the discovery of fraudulent or negligent conduct on the part of the taxpayer within the meaning of Taxes Management Act 1970 (TMA 1970), s. 29, and has no present reason to anticipate making any such discovery or discovery assessment.
The Company argued that outstanding enquiries referred to enquiries into the Company's tax returns and that any questions about PAYE and NIC were in the context of assessing the Company's liability to corporation tax. In the circumstances, HMRC were not entitled to pursue their claim for PAYE and NIC as there was no outstanding enquiry in that regard.
The FTT found against the Company on the basis that the words enquiries and any assessments ought to be given a technical meaning. Since those words did not encompass a PAYE determination or an NIC decision, any liability by the Company PAYE and NIC was not covered by the Undertaking and there was no breach of its terms by HMRC.
The UT disagreed. It held that an Undertaking given to the Court should be interpreted in the same way as any legal document and that the plain meaning of the words as understood by the parties should prevail. Outstanding enquiries referred to the enquiries into the Company's tax returns and it followed that HMRC were allowed to issue closure notices in respect of those matters. The UT held that the last sentence of the Undertaking was crucial and that its clear intention was that the outstanding enquiry would be brought to an end resulting in finality for everyone concerned.
As the 2010 Undertaking affected both PAYE and NIC, the UT allowed the Company's appeal in its entirety with the Company's liability reduced to nil on both counts.
This case is a helpful reminder of the importance to be attached to the terms and conditions of settlement agreements and undertakings made to a court in the course of litigation. In this case HMRC either (a) did not fully appreciate the extent and effect of the agreements they were entering into; (b) failed to ensure that the terms of the...
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