Tower MCashback LLP v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lord Justice Scott Baker,Lady Justice Arden |
| Judgment Date | 02 February 2010 |
| Neutral Citation | [2010] EWCA Civ 32 |
| Docket Number | Case No: A3/2008/2833 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 February 2010 |
[2010] EWCA Civ 32
The Honourable Mr Justice Henderson
Before: Lady Justice Arden
Lord Justice Scott Baker
and
Lord Justice Moses
Case No: A3/2008/2833
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
Mr Kevin Prosser QC (instructed by The Solicitor for HM Revenue and Customs) for the Appellant
Mr Giles Goodfellow QC and Mr Richard Vallat (instructed by Messrs Ashton Rowe) for the Respondent
Hearing dates: 21–22 October, 2009
Lord Justice Moses:
The introduction of self-assessment was a dramatic change in determining a taxpayer's liabilities. The Budget Notes 1994 described it as “the most fundamental reform of personal tax administration for 50 years”. This appeal raises the question how far those changes affected the jurisdiction of the Special and General Commissioners and now the First-Tier Tax Tribunal. Under the old regime a taxpayer was required to complete a return disclosing his categories of income and chargeable gains. But his return did not determine his legal liability to tax or entitlement to relief. The power to raise assessments was vested exclusively in the Revenue. Its assessment was the final determination of a taxpayer's liability to tax for the year in question.
Under the regime introduced in 1996/7 the taxpayer not only submits a return of his income and gains but makes a single self-assessment of the amount of income tax from all sources and capital gains tax chargeable on him on the basis of the information contained in the return. In those cases where the Revenue makes an assessment, for example, if a return is delivered on or before 30 September preceding the filing date or the taxpayer fails to submit the tax return, the Revenue's determination is treated as a self-assessment. The taxpayer's self-assessment is the final determination of his taxable income and chargeable gains for a particular year of assessment subject to three exceptions. One of those exceptions arises when the Revenue gives a Notice of Enquiry into a return and concludes the enquiry by issuing a Closure Notice and amending the return pursuant to s.28(A) or s.28(B) of the Taxes Management Act 1970 ( TMA). The Closure Notice must state the Inspector's conclusions and must make such amendments to the taxpayer's return as are required to give effect to his conclusions.
A taxpayer may appeal against any conclusion stated or amendment made by a Closure Notice. He must specify his grounds of appeal. The question then arises as to the extent to which the conclusion stated in the Closure Notice and the appeal against that conclusion limits the jurisdiction of the Commissioners exercised according to the procedure identified in s.50 TMA.
Tower MCashback LLP 1 (LLP 1) and Tower MCashback LLP 2 (LLP 2) claimed first year capital allowances pursuant to s.45 of the Capital Allowances Act 2001 ( CAA 2001). LLP 1 and LLP 2 had claimed First Year Allowances in respect of the full amount of first year qualifying expenditure on completion of Software Licence Agreements entered between them and MCashback Ltd on 31 March 2004.
The Revenue opened enquiries into the partnership tax returns and self-assessments submitted by LLP 1 for the tax year 2003/4 and by LLP 2 for the tax year 2004/Following investigation and correspondence, the Revenue rejected the claim on the grounds that the expenditure had been incurred with a view to granting another person the right to use or otherwise deal with the software in question and, thus, LLP1 and 2 were not entitled to the allowance by virtue of s.45(4).
On the third day of an eight-day hearing before the Special Commissioner the Revenue abandoned that contention but contended that the LLPs had not incurred expenditure in buying the software licences because their members had borrowed 75% of the funds against security provided by the vendor, MCashback, on uncommercial terms.
There were also other issues, in particular an issue as to when LLP 1 had begun to trade, which are no longer of relevance to this appeal.
The Special Commissioner concluded that he had jurisdiction to consider other grounds rather than the ground on which the Inspector had relied in refusing the First Year Allowance. Freed, as he thought, from any restriction as to the basis upon which the First Year Allowance could be refused, he concluded that LLP 2 was limited to a First Year Allowance in respect of 25% of the first year qualifying expenditure it had incurred [2008] STC (SCD) 1.
Henderson J took a contrary view ( [2008] EWHC 2387). He concluded that the scope of any appeal was confined to the question whether s.45(4) applied and thus restricted to the factual issue as to whether the LLPs had incurred expenditure with a view to granting another person a right to use or to deal with it [122]. Accordingly, he concluded that the Special Commissioner was not entitled to refuse the First Year Allowances on any other basis than that for which s.45(4) provides.
In the event that it became relevant, Henderson J concluded that LLP 1 was not trading in 2003/4 but that LLP 2 had incurred expenditure in the full amount it claimed. The Revenue appealed and during the course of this appeal LLP 1 abandoned its point as to the year in which it commenced trading.
Accordingly, two issues arise. Firstly, whether the Special Commissioner should have limited the appeal to the ground upon which the Inspector refused the First Year Allowance and declined to permit the Revenue to advance further grounds for refusing the allowance. Secondly, if the Special Commissioner rightly allowed the Revenue to advance the argument as to the extent of expenditure incurred, whether Henderson J was wrong to conclude that LLP 2 had incurred expenditure in the full amount of the consideration it paid for the software licensing agreements.
The Statutory Scheme
The changes in the statutory scheme introduced by the Finance Act 1994, with effect from the year 1996–97, are thrown into clearer relief against the background of the previous legislative mechanism for assessment. Under the old regime, with certain irrelevant historical exceptions, the power to raise assessments to tax was confined to an Inspector ( s.29(1)TMA (opening words). If the Inspector was satisfied with a return he would make an assessment in accordance with that return (s.29(1)(a)). If it appeared to the Inspector that chargeable profits had not been included in a return or he was dissatisfied with any return, he was entitled to make an assessment to the best of his judgement (s.29(1)(b)).
The Inspector or the Board of Inland Revenue's power to make “discovery” was wide and is to be contrasted with the more limited powers of discovery under the new regime. Prior to 1996–1997 an Inspector or the Board had the power to make an assessment or make an assessment in a further amount in cases where profits which ought to have been assessed had not been assessed, and an assessment to tax was or became insufficient or any relief given was or became excessive (s.29(3)(a)-(c)). That power could be limited if an appeal had been settled by agreement pursuant to s.54 in relation to the same year of assessment, expressly or impliedly covering the point in issue.
Subject to any appeal, the Inspector's assessment was the final determination of a taxpayer's liability to tax for the year in question (s.50(6)).
As I have already remarked, under this statutory scheme the submission of a tax return did not itself determine the taxpayer's legal liability to tax or to relief. Further, no tax became due and payable until after the assessment had been made.
For the purposes of this appeal, it is important to emphasise that under the old regime assessment would often be estimated by an Inspector pursuant to his power under s.29 and often made in the absence of any information. Thus appeals against assessments would often raise new issues which had never previously been canvassed (I am, like Henderson J, indebted to the Special Commissioner, Dr Avery Jones, for his tour d'horizon in D'Arcy v R & C Commissioners [2006] STC (SCD) 543 (at paragraph 9)). Everything covered by an assessment was within the scope of the appeal and an assessment could be increased on account of something not in contemplation at the time it was made. The only inhibition would be that imposed by case management (see Glaxo Group Limited v IRC [1996] STC 191 and in particular the judgment of Robert Walker J [1995] STC 1075 at 1088 and 1090). As that judge pointed out, the tax computation of a large trading company could bristle with many points of possible dispute, none of which might be identified in a Notice of Assessment or a Notice of Appeal. Identification of the real issues depended upon the co-operation of taxpayers and of the Revenue and on suitable case management.
As Dr Avery Jones remarked, self-assessment made a major change to the system of appeals. The requirement to deliver a return for the purposes of establishing the amounts charged to income tax and capital gains tax is contained in s.8 of the TMA 1970. S.9, substituted by the Finance Act 1994, introduced, with effect from the year 1996–1997, the obligation to include in the return a self-assessment of the amounts chargeable to income tax and capital gains tax on the basis of the information contained in the return. As I have indicated, the taxpayer's...
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