[2010] UKFTT 611 (TC)

TC00852

Appeal number: TC/2010/02202

Capital Gains Tax -- computation of gain -- disposal between husband and wife -- section 58 Taxation of Chargeable Gains Act 1992 -- taxpayer's return computed gain on the market value acquisition cost -- appeal against closure notice re-computing gain -- whether Statement of Account constituted a closure notice -- appeal against surcharge -- appeal  dismissed

FIRST-TIER TRIBUNAL

TAX 

	ANN GODFREY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: GUY BRANNAN (TRIBUNAL JUDGE)							IAN ABRAMS (TRIBUNAL MEMBER)	

Sitting in public at Holborn Bars, London EC1 on 17 November 2010

 The Appellant appeared in person

Paul Reading, Presenting Officer, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against a closure notice issued on 24 November 2009. The Appellant also appeals against a surcharge issued on 18 February 2010. The appeal concerns the correct computation of a capital gain on the disposal of the property which was transferred to the Appellant by her husband. In addition, the appeal also concerns whether a Statement of Account issued by HMRC after the commencement of an enquiry into the Appellant's tax return constituted a closure notice.
The facts
2.	The documentary evidence was contained in bundles of documents produced by the Respondent ("HMRC"). In addition, the Appellant and her husband, Mr Brian Godfrey, gave oral evidence.
3.	 The facts are not in dispute.
4.	This appeal relates to the capital gains tax consequences of a disposal of a property at 169 Conway Road ("the Property").
5.	The Property was inherited by Mr Godfrey in 1986. The probate value of the Property was £40,000 and this value was agreed by the district valuer. This value, therefore, constituted Mr Godfrey's acquisition cost of the Property.
6.	On 9 November 2005 Mr Godfrey transferred a one half share in the Property to the Appellant by way of gift. The value of the entire interest in the Property was stated in the Land Registry to be £450,000.
7.	On 19 April 2006 the Property was sold to a third party. The Appellant's share in the proceeds of sale was £232,500.
8.	On the Appellant's self-assessment tax return for the tax year ended 5 April 2007 (which was received by HMRC on 28 August 2007) the capital gain in respect of the Property was calculated using the value of the property, at the time of the transfer on 9 November 2005, as the acquisition cost.
9.	HMRC opened an enquiry into the Appellant's tax return for the year ended 5 April 2007 by a letter dated 18 September 2008. The enquiry was opened under section 9A Taxes Management Act 1970 ("TMA").
10.	On 19 August (ie before the date on which HMRC opened their enquiry into the 2007 tax return) HMRC issued a "Self Assessment -- Tax Calculation". This was stated to be a Tax Calculation for 2007 -- 08 (year ended 5 April 2008). This indicated that the Appellant had overpaid tax of £90.45 and was therefore due a refund.
11.	About five weeks later, on 28 September 2008, HMRC issued to the Appellant a "Self Assessment Statement" ("the Statement"). The timing is important. This Statement was issued 10 days after HMRC had written to the Appellant on 18 September 2008 telling her that they were opening an enquiry into her tax return for the year ended 5 April 2007.
12.	The Statement referred to the £90.45 overpayment in respect of the Appellant's return in respect of the tax year ended 5 April 2008 in respect of which a repayment was made. The Statement concluded with the words in bold type: "You have nothing to pay". Other than the reference to the £90.45 overpayment, there was no indication of the tax year to the Statement related.
13.	HMRC issued a closure notice on 24 November 2009. HMRC's enquiry concluded that the Appellant's tax return for the year ended 5 April 2007 was incorrect as regards the computation of the capital gain in respect of the Property. In HMRC's view the capital gain should have been computed in accordance with section 58 Taxation of Chargeable Gains Act 1992. The full text of this provision is set out below, but in short section 58 provides that on a transfer between a husband and wife who are living together (the Appellant and her husband were living together at the relevant time and continue to do so) the transferee acquires the asset at a value which produces neither gain or loss for the transferor. In other words, broadly speaking, the Appellant acquired the Property for a tax base cost equal to a 50% share of her husband's base cost when he inherited the property in 1986 ie 50% of the probate value of £40,000.
14.	HMRC also computed indexation and enhancement expenditure and included this in the final calculation.
15.	HMRC computed the Appellant's chargeable gain in respect of her share of the Property as £112,642, resulting in additional capital gains tax of £39,126.80.
16.	In addition, a surcharge was levied under the section 59C TMA (5% of the outstanding amount) because the tax was not paid within 28 days of the due date. The surcharge amount is £1,945.37. HMRC have noted that a second surcharge is due six months later but has not yet been charged.
17.	The Appellant has given the money that she received from the disposal of her share in the Property to her daughters. She saw no reason to retain funds for the payment of tax on the Property because she believed, in reliance upon HMRC's Statement of 28 September 2008, that there was no tax to pay.
18.	In his evidence, Mr Godfrey, a retired solicitor, stated that he had paid capital gains tax of £45,067.36 on 14 January 2008 in respect of his share of the sale proceeds of the Property. He explained that he had transferred a half interest in the Property to his wife in November 2005 in order to reduce inheritance tax.
19.	The Appellant appealed against the closure notice on 8 December 2009 and, after an unsuccessful review process, appealed to this Tribunal on 25 February 2010.
The legislation
20.	Section 58 TCGA, so far as is relevant, provides:
"(1) If, in any year of assessment, --
 (a) an individual is living with his spouse or civil partner, and
 (b) one of them disposes of an asset to the other,
both shall be treated as if the asset was acquired from the one making the disposal for a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal."
21.	Section 9A TMA, as it was enacted at the relevant time, allowed an officer of the Board to enquire into a return within a specified time. Subsection (2)(a) stated that the time allowed in which HMRC could start an enquiry, where the return was delivered on or before the filing date (31 January), was  any time up to the end of the period of 12 months after the filing date. In other words, in this case, HMRC could enquire into the Appellant's tax return for the year ended 5 April 2007 at any time up to 31 January 2009.
22.	Section 28A TMA contains provisions in relation to closure notices in respect of personal tax returns:
"(1) An enquiry under section 9A (1) of this Act is completed when an officer of the Board by notice (a "closure notice") informs the taxpayer that he has completed his enquiries and states his conclusions.
(2) A closure notice must either –
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued."
23.	As regards the surcharge, section 59C TMA provides:
"(1) This section applies in relation to any income tax or capital gains tax which has become payable by a person (the taxpayer) in accordance with section 55 or 59B of this Act.
(2) Where any of the tax remains unpaid on the day following the expiry of 28 days from the due date, the taxpayer shall be liable to a surcharge equal to 5% of the unpaid tax.
(3) Where any of the tax remains unpaid on the day following the expiry of six months from the due date, the taxpayer shall be liable to a further surcharge equal to 5% of the unpaid tax.
(5) -- (8)....
(9) On appeal ... the tribunal may –
(a) if it appears that, throughout the period of default, the taxpayer had a reasonable excuse for not paying the tax, set aside the imposition of the surcharge; or
(b) if it does not so appear ..., confirm the imposition of the surcharge."

Arguments for the Appellant
24.	The Appellant argued that her acquisition cost of the Property for capital gains tax purposes was not derived from her husband's original base cost. She says that she was not party to the valuation of the Property in 1986. She argues that her acquisition cost is the market value at the date when her husband transferred a half interest in the Property to her, viz £225,000.
25.	In addition, the Appellant argues that the Statement issued by HMRC on 28 September 2008 stated that she had no tax to pay. She assumed that the enquiry that had been opened by HMRC's letter of 18 September 2008 had been concluded in her favour. Since the Statement said that she had no tax to pay she had relied on this and given the proceeds of sale to her daughters. She says that HMRC cannot now change their minds and tell her that she has further capital gains tax to pay in respect of the Property.
26.	The Appellant argued that no surcharge was payable because there was no capital gains tax due for the year ended 5 April 2007.
Arguments for HMRC
27.	Mr Reading submitted that the enquiry had been correctly opened under section 9A TMA. We understood that this was not in dispute.
28.	He submitted that pursuant to section 58 TCGA the Appellant's acquisition cost in respect of the Property was derived from her proportionate share of the original probate value of the Property -- since this would give rise to neither a gain or loss on the transfer of the half share of the Property to her -- and was not determined by reference to the market value of the property on 9 November 2005.
29.	As regards the Statement issued on 28 September 2008, this was not a closure notice within the meaning of section 28A TMA. It did not state the conclusion of the enquiry. The Statement, showing no tax payable, was issued automatically following the submission of the Appellant's tax return for the year ended 5 April 2008. It did not refer to the tax year ended 5 April 2007, which was the year under enquiry.
30.	Mr Reading referred to HMRC's "Code of Practice -- Self-Assessment: Local offers enquiries" which was enclosed with HMRC's letter of 18 September 2008, opening the enquiry. In particular, Mr Reading referred to the paragraph under the heading "What happens if you find nothing wrong during your enquiry?" which reads as follows:
"If we find nothing wrong, we will tell you and let you know that our enquiries have finished.
We will send you a letter called a 'closure notice'. You have the right to appeal against our conclusion in the closure notice. If we have found nothing wrong we will not change anything in your tax return or claim."

31.	Mr Reading also referred to a subsequent paragraph under the heading "What happens if you find something wrong?" which reads as follows:
"If we find something wrong in your tax return, or claim, we will
•	suggest changes we consider reasonable in the light of all the information we have
•	try to agree with you any changes that are needed to your own figures, and
•	explain how we arrived at the figures we put forward. If you do not understand them you should let us know.

32.	Mr Reading referred to another section of the Code of Practice which reads as follows:
"What happens at the end of your enquiry?
We normally issue a formal "closure notice" and this will give our conclusions. In our conclusions we will explain any changes that we feel are needed to your return or claim, if any.
If we think changes are needed, the closure notice will make those changes to your return or claim and it will include a revised calculation."
33.	Mr Reading also drew attention to the paragraph in the HMRC letter of 18 September 2008 which referred the Appellant to the relevant part of HMRC's website which contains similar information to that described above.
34.	Mr Reading submitted that HMRC had brought to the Appellant's attention the fact that there would be a formal closure notice.
35.	Mr Reading submitted that the surcharge was properly imposed under section 59C TMA. He also noted that a surcharge was imposed every six months and that another surcharge was probably due.
36.	Finally, Mr Reading submitted that the onus of proof was on the Appellant. 
Discussion
37.	The Appellant has, in our view, made an honest mistake on her tax return for the year ended 5 April 2007 and compounded that mistake by erroneously believing that the Statement of 28 September 2008 concluded the enquiry into her tax return for the year ended 5 April 2007, which had been opened on 18 September 2008.
38.	There is no doubt that the Appellant's computation of her capital gain in respect of the property was incorrect. Section 58 TCGA expressly provides that in a transfer between a husband and wife the transferee takes over, so to speak, the acquisition cost of the transferor. The intention of the provision is to prevent capital gains arising on transactions between spouses. It operates to defer a gain arising until the transferee spouse disposes of the asset. It is not the intention of section 58 TCGA to make part of the gain disappear from the charge to tax. Mr Godfrey paid capital gains tax on his share of the disposal proceeds of the Property and it would be a strange conclusion indeed if the Appellant were not similarly liable. Section 58 TCGA has the effect that an equivalent liability arises for the Appellant.
39.	We sympathise with the Appellant in her confusion as to the import of the Statement of 28 September 2008 telling her that she had no tax to pay. This could not, however, reasonably be regarded as a closure notice bringing the enquiry to a close. There is no suggestion on the face of the Statement that it applies to the tax year ended 5 April 2007. There is no statement that the enquiry has ended or what the conclusion of the enquiry has been. If the Appellant had read the information provided by HMRC in their letter of 18 September 2008 it would have been self-evident that the Statement was not a closure notice. The Statement simply did not comply with the requirements of section 28A TMA with regard to a closure notice.
40.	It follows, therefore, that the additional tax imposed by the closure notice which is the subject matter of this appeal was correctly charged. It also follows that the surcharge was also correctly imposed. The capital gains tax due was not paid within 28 days of the due date. We do not consider the Appellant's misapprehension as to the meaning of the Statement of 28 September 2008 or as to the application of section 58 TCGA to constitute a reasonable excuse within the meaning of sections 59C(9) and 118 (2) TMA. Whilst we appreciate that the Appellant made a genuine mistake in her tax return and in her understanding of the Statement of 28 September 2008, we do not think that these mistakes can amount to a reasonable excuse. As HMRC pointed out in relation to the effect of the Statement of 28 September 2008, the Appellant should have appreciated from the material provided to her in HMRC's letter of 18 September that the Statement did not constitute a closure notice bringing the enquiry to an end. Moreover, the Appellant's mistake in her tax return was a simple mistake as to the law and that cannot constitute a reasonable excuse.
Decision and further observations
41.	Our decision is that the appeals against the closure notice and the surcharge should be dismissed.
42.	Having considered the facts of this case very carefully there are some further observations that we wish to make.
43.	The Appellant and her husband are elderly and in poor health. We can see how the statement, in the Statement of 28 September 2008, that she had nothing to pay, following shortly after the opening of an enquiry into her tax return for the year ended 5 April 2007, caused confusion. In particular, it is our recommendation that such Statements of Account should make clear the tax year in respect of which it is issued or in respect of which statements contained therein relate. 
44.	We further note that the Board may in their discretion, pursuant to section 59C(11) mitigate any surcharge. We have no jurisdiction over how the Board exercises this discretion. This is entirely a matter for the Board. The Board, however, may consider that this case recommends itself as one where merciful treatment could be appropriate.
45.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

GUY BRANNAN

TRIBUNAL JUDGE
RELEASE DATE: 30 November 2010