Thomas and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 February 2016 |
| Neutral Citation | [2016] UKFTT 133 (TC) |
| Date | 25 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Clark, Noel Barrett
Roderick Thomas appeared for the Appellants
Dr Barry Williams and Nicola Parslow, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Self-assessment – Discovery assessments – Whether relevant conditions met – Reference during enquiry window to potential assessability – Held on facts that no information available then to enable HMRC officer to quantify loss of tax for relevant tax year – Condition in Taxes Management Act 1970 (TMA 1970), s. 29(5) met – Held, assessments valid – Whether appellants were settlors for tax purposes in respect of non-UK trust – Burden of proof – Approach where appellants would have to prove a negative – Held, for HMRC to show prima facie case and then for burden of proof to revert to appellants – Held on facts that appellants were settlors – Quantum of assessments to be adjusted – Loss relief claims not within tribunal's jurisdiction as not finally determined by HMRC – Appeals dismissed.
The First-tier Tribunal (FTT) dismissed two taxpayers' appeals against discovery assessments. The FTT found that the discovery assessments were validly made and the taxpayers were settlors for tax purposes of a non-UK trust. However, the FTT adjusted the quantum of the assessments and found that loss relief claims were not within its jurisdiction as they had not been finally determined by HMRC.
There was a long history of disputes between HMRC and the appellants (Mr Thomas and Stuart Thomas, together referred to as Messrs Thomas). In May 2004 an agreement was reached in which Messrs Thomas agreed to pay a sum of money in return for proceedings not being taken by HMRC in respect of tax, interest and penalties concerning various liabilities for tax years 1997–98 to 2003–04. As part of the settlement agreement Messrs Thomas undertook to wind up and distribute the assets of a trust (the Maclennan Trust) and a company (Bala Ltd) by 31 December 2004 and on this basis the steps involved would give rise to no UK tax liability and for capital gains tax (CGT) purposes the beneficiaries would be treated as having acquired any asset distributed to them as at the date of acquisition by the original trustee. The winding up process took much longer than intended.
Messrs Thomas submitted 2005–06 self-assessment tax returns showing no income, deemed income or gains from them being settlors and beneficiaries in the Maclennan Trust. In October 2007 HMRC wrote to Mr Thomas (in his capacity as agent for Stuart Thomas) saying:
The 2005/06 return is under enquiry with my colleague in East Hampshire and I had previously requested that she should not close that enquiry. I have told her that it is probable that I will be assessing s. 660A and 739 as well as s. 86 TCGA 1992 liabilities for that year.
HMRC's records showed that in January 2008 enquiry notices under the Taxes Management Act 1970 (TMA 1970), s. 9A were issued to Messrs Thomas in respect of the 2005–06 tax returns, but following a tribunal hearing concerning information notices in which it was found that there was insufficient evidence that the enquiry letters had been received, HMRC informed Messrs Thomas that the enquiries were regarded as settled, as notice had not been served in time.
In relation to separate appeals concerning 2002–03 and 2004–05, in November 2008 HMRC received a copy of financial statements of the Maclennan Trust for the period 27 August 1997 to 31 December 2006 from which it could be determined that in the three years to 31 December 2006 there had been interest income and capital gains not previously taken into account. Further information was requested to try and ascertain which tax years the income and gains related to, but as it was not forthcoming HMRC carried out internet research in October 2009 which enabled them to conclude on the timing of the disposals. In November 2009 HMRC wrote to Messrs Thomas indicating that they were on the point of rasing discovery assessments for 2005–06. In April 2010, following a meeting to discuss matters in March 2010, HMRC issued the discovery assessments for 2005–06 to Mr Thomas and Stuart Thomas respectively. Messrs Thomas appealed against the assessments.
The FTT found that the discovery assessments were validly made as they met the conditions in TMA 1970, s. 29(5). Although HMRC had indicated in October 2007 the probability that they would be making assessments under the relevant statutory provisions, that did not amount to a conclusion that it was probable that there was an insufficiency. It was not until November 2009 (after the enquiry window had closed) that they had the information enabling them to make a reasonable calculation of the amount of the insufficiency and the assessments were made relatively promptly after the discovery.
The FTT then turned to the other issues raised and found that:
Messrs Thomas were for tax purposes settlors of the Maclennan Trust as a result of transfers made in 1997 and 1998 respectively. It was for Messrs Thomas to prove that they were not settlors, but as this would have involved the undesirable situation of them having to prove a negative, the FTT decided to require HMRC to show a prima facie case in respect of the matters which would otherwise require Messrs Thomas to prove a negative, and then to require Messrs Thomas to produce evidence to show that HMRC's prima facie case should not be accepted. The FTT did not accept Messrs Thomas' argument that the settlor question was res judicata (that the question had already been litigated and determined); even if other Tribunals had arrived at determinations of the settlor issue for periods other than 2005–06 HMRC were not prevented by any such determinations from making assessments for 2005–06 on the basis that they were settlors. In any event the FTT were not persuaded that decisions in other Tribunal proceedings as to the settlor issue could be regarded for the purposes of these appeals as res judicata, it did not consider that the comments in the decisions amounted to definitive findings sufficient to determine the settlor issue. There was not enough evidence to satisfy the FTT that Messrs Thomas had discharged the burden of proof in respect of the settlor issue.
Adjustments to the assessments should be made as set out in HMRC's Statement of Case. However, the FTT rejected Messrs Thomas' argument that a Mr Lindh was also a settlor so that the assessments should be in relation to thirds of the relevant amounts. This was on the application of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 644 and similarly for the capital gains because Mr Lindh only settled £100, whereas Messrs Thomas jointly provided £800,000 and therefore the proportion of income and gains attributable to Mr Lindh would have been negligible.
The FTT did not have jurisdiction to consider various loss relief claims which Messrs Thomas argued had not been taken into account in arriving at the amounts of tax charged as a result of the discovery assessments. During the hearing HMRC undertook to investigate the loss relief claims and therefore there had not been a confirmed decision by HMRC against which Messrs Thomas could appeal.
Subject to the adjustments in relation to the quantum of the assessments, the FTT confirmed the discovery assessments and dismissed the appeals of Mr Thomas and Stuart Thomas.
In this case although during the enquiry window HMRC had notified the taxpayers that it was probable that they would be making assessments the FTT found that that did not amount to a conclusion that it was probable that there was an insufficiency and as it was not until after the enquiry window had closed that HMRC had the information enabling them to make a reasonable calculation of the amount of the insufficiency the discovery assessments were validly made.
[1] The first Appellant (Mr Thomas) appeals against a discovery assessment issued by the Respondents (HMRC) for the year 2005–06 covering certain tax liabilities as described below. The second Appellant (Stuart Thomas) appeals against a similar assessment for 2005–06. (Where appropriate, we refer to both Appellants together as Messrs Thomas.)
[2] To a large extent, the facts relating to the assessments on Mr Thomas and Stuart Thomas are similar; where appropriate, we draw attention to differences between their respective circumstances.
[3] The evidence consisted of two bundles of documents. There was no witness evidence. An application by HMRC shortly before the hearing to introduce a witness statement given by Mr AW Stewart, the HMRC Inspector who had dealt with the assessments and a range of other matters concerning Messrs Thomas and companies with which they had been involved, had been refused; we set out the reasons for that refusal at a later point in this decision.
[4] In addition to the two bundles of agreed documents, Mr Thomas handed up at the hearing a supplementary bundle containing seven further documents. Dr Williams did not object to this additional evidence, which we decided should be admitted.
[5] From the evidence, we find the following background facts. (We deal with disputed matters of fact at the appropriate stages below.)
[6] There is a long history of disputes between Messrs Thomas and HMRC. (In this decision, we use the initials HMRC to refer both to the present body and to the predecessor body, the Commissioners of Inland Revenue.) At this point we do not need to refer to much of that history other than an agreement reached between Messrs Thomas (together with certain other parties) and HMRC on 24 May 2004.
[7] By that agreement, Messrs Thomas agreed to pay a sum of money in consideration of proceedings not being taken by HMRC in respect of tax, interest and penalties–
1) for a series of tax years from 1997–98 to...
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Spring Capital Ltd
...by this Tribunal's consideration of the relationship of his and his brother's (Mr Stuart Thomas) to the relevant companies in Thomas [2016] TC 04921 (Judge Clark and Mr Noel Barrett) released on 25 February 2016. In particular, it was said that the Tribunal's determination that both he and ......