Thomas and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 October 2014 |
| Neutral Citation | [2014] UKFTT 980 (TC) |
| Date | 21 October 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 980 (TC)
Judge Anne Redston, Mrs Sonia Gable
Mr Roderick Thomas appeared for the Appellants
Ms Harry Jones of HM Revenue and Customs' Appeals and Reviews Unit, appeared for the Respondents
Income tax - Whether discovery assessment valid - Share loss relief claim founded on extinction of company - Whether claim invalid as a result of company's restoration to the register - If not, whether new shares issued - If issued, whether for money or money's worth - Whether transferred to appellants - Whether qualifying shares for share loss relief purposes - Appeal on share loss relief dismissed and assessments upheld - Appellants in receipt of interest - Whether tax deducted by company - Whether appellants entitled to credit for interest - Held, no - Whether penalty determinations can be raised when the discovery assessment did not rely on Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 29 subsec-or-para 4s. 29(4) - Whether invalid because of manuscript amendments - Whether appellants negligent - Whether mitigation percentages should be changed - Appeals dismissed and one penalty determination increased.
The First-tier Tribunal (FTT) has dismissed the appellants' claims for share loss relief under the Income Tax Act 2007 (ITA 2007), Income Tax Act 2007 section 131s. 131 finding that there was no occasion of loss under the Taxation of Chargeable Gains Act 1992 (TCGA 1992), Taxation of Chargeable Gains Act 1992 section 24 subsec-or-para 1s. 24(1) because although the company whose shares were the subject of the loss claim had been struck off the Register of Companies it had subsequently been reinstated and the effect of the Companies Act 2006 (CA 2006), Companies Act 2006 section 1032s. 1032 was that it was deemed to have continued in existence throughout. Additionally, there had been no share "issue" under company law (the Companies Act 1985 (CA 1985), Companies Act 1985 section 738 subsec-or-para 1 section 88 subsec-or-para 2ss. 738(1), 88(2), and Companies Act 1985 section 186186), nor "money's worth" given in consideration even if there had been an issue so there had been no subscription for shares under ITA 2007, Income Tax Act 2007 section 135s. 135 as required by Income Tax Act 2007 section 131 subsec-or-para 2s. 131(2). The FTT also upheld discovery assessments in respect of interest received gross rather than net finding that the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), Income Tax (Trading and Other Income) Act 2005 section 370 section 371ss. 370 and 371 placed the liability for the tax on the interest squarely on the appellants and the fact that the companies had failed to deduct income tax at source in accordance with ITA 2007, Income Tax Act 2007 section 874 subsec-or-para 1s. 874(1)(a) did not allow the appellants to deem the interest to have been received net.
Mrs Sarah Thomas and Mrs Rebecca Thomas (the wives of two brothers) appealed discovery assessments raised by HMRC which disallowed share loss relief claims and treated interest received by them as having been received gross rather than net. They also appealed the associated penalty determinations for having negligently delivered incorrect returns. A number of issues were raised in argument and considered by the FTT who upheld the discovery assessments on both appellants finding as follows:
in relation to the discovery assessments in respect of the share loss relief, the condition in the Taxes Management Act 1970 (TMA 1970), Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5) was satisfied; the hypothetical officer could not have been reasonably expected, on the basis of the information provided, or inferences he could make from that information, to be aware that the loss claims were excessive, or that the assessments were invalid (Langham (HMIT) v VeltemaTAX[2004] BTC 156 considered);
the discovery assessments were also validly made; in line with the finding in Honig v Sarsfield (HMIT)TAX[1986] BTC 205, TMA 1970, Taxes Management Act 1970 section 30As. 30A made a clear distinction between making the assessment and serving the Notice of that assessment; the assessments were "made" by being input into the HMRC computer as evidenced by the computerised calculations issued and enclosed with the notices of assessment sent to the appellants and the notices themselves met the requirements of TMA 1970, Taxes Management Act 1970 section 30As. 30A by being addressed to the appellant in question, dated and advising that appeal must be made within 30 days and that was all that statute required;
the appellants claim for relief under ITA 2007, Income Tax Act 2007 section 131 subsec-or-para 3s. 131(3)(c) in respect of a capital gains tax loss arising under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 24 subsec-or-para 1s. 24(1) failed because there was no "occasion of the entire loss, destruction, dissipation or extinction of an asset" (the shares in Spring Salmon & Seafood Ltd) because although the company had been struck off the company register, it had subsequently been reinstated and the effect of CA 2006, Companies Act 2006 section 1032s. 1032 was that the company was deemed to have continued in existence throughout.
Although the above findings meant that the loss claim could not succeed, as the FTT were unable to identify any other tax case in which CA 2006, Companies Act 2006 section 1032s. 1032 had been considered, they continued to consider the other submissions, finding that:
ITA 2007, Income Tax Act 2007 section 131 subsec-or-para 2s. 131(2)(b) required shares to have been "subscribed for" and Income Tax Act 2007 section 135 subsec-or-para 2s. 135(2) defined a subscription as an "issue" for money or money's worth, however, in the absence of any contemporaneous documentation and failure to make a return to Companies House, the appellants had failed to prove that there had been a new share "issue" in accordance with the company law meaning of issue (CA 1985, Companies Act 1985 section 738 subsec-or-para 1 section 88 subsec-or-para 2ss. 738(1), 88(2), and Companies Act 1985 section 186186) and although National Westminster Bank plc v IR Commrs; Barclays Bank plc v IR CommrsTAX[1994] BTC 236 confirmed that the term "issue" had different meanings in different contexts, in the context of share loss relief, there was no basis to depart from the meaning given by company law;
as new shares had not been issued, they could not have been transferred to the appellants, as was supported by the absence of the contemporaneous transfer documentation required by CA 1985, Companies Act 1985 section 183s. 183;
notwithstanding the above findings, there was no consideration given in money's worth (as contended) as there was no director's loan out of which consideration could have been taken and further the paperwork which did exist failed to support the contention that the shares were paid for by reducing the loan account balance;
the company did not meet the "independence" requirement of ITA 2007, Income Tax Act 2007 section 134 subsec-or-para 2 section 139 subsec-or-para 2s. 134(2)(ii) and 139(2)(a) for the requisite period of six years before the disposal (ITA 2007, Income Tax Act 2007 section 134 subsec-or-para 3s. 134(3)(a)) as it had been a 51% subsidiary of a BVI Limited company during part of this period.
In respect of the assessments that interest paid to the appellants on their loans to Thomas McLennan Ltd and Spring Seafoods Ltd, the FTT found that:
the discovery assessments were valid because the hypothetical officer would not have known that the interest arose from loans in relation to which the appellants could not produce any evidence that tax had been deducted, and HMRC were not prevented from raising a discovery assessment simply because they could also have raised an assessment under TMA 1970, Taxes Management Act 1970 section 30s. 30;
on the basis of the evidence, the appellants did not have tax deduction certificates at the time the returns were completed and according to the company accounts, no such interest had been deducted and, although ITA 2007, Income Tax Act 2007 section 874 subsec-or-para 1s. 874(1)(a) obliged the companies to deduct tax from yearly interest, ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 section 370 section 371ss. 370 and 371 placed the liability for the tax on the interest squarely on the appellants and the companies failure to deduct tax did not allow the appellants to deem the interest to have been received net; it should have been included on their returns as received gross;
the actual payment some five years later to HMRC of the interest purportedly deducted by the company did not affect the earlier liability in respect of the interest arising on the appellants.
Finally, the FTT upheld the penalties raised by HMRC finding that:
the fact that HMRC relied upon TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5) for the purposes of justifying the discovery assessments rather than Taxes Management Act 1970 section 29 subsec-or-para 4s. 29(4) did not mean there had been no "negligence" for penalty purposes;
following the test of what a reasonable person would have done in line with Anderson (Deceased)TAX[2009] TC 00206 and Moore v R & C CommrsTAX[2011] BTC 1793, the appellants were negligent in claiming interest had been received net of tax when holding no information which would evidence that claim;
the abatement reductions given by HMRC were not to be disturbed with the exception of the differing reduction for gravity that HMRC had allocated to each appellant; the fact that HMRC had blocked one of the repayments was an insignificant and accidental difference that was remedied by the interest charge that would be levied on Rebecca Thomas only (who had received a refund); both penalties were to be abated by the same percentage for gravity and Sarah...
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