[2011] UKFTT 593 (TC)
TC01436
Appeal number: TC/2009/15404
Income
tax – self assessment – surcharges for late payment – alleged oral agreement
with HMRC officer that not payable – whether officer empowered to enter into
such agreement – held, no – whether on facts any agreement entered into – no –
in absence of reasonable excuse, surcharges confirmed
Whether
return made on correct basis – doubtful – held, any corrective action under Sch
1AB TMA 1970 time barred and figures in return conclusive
FIRST-TIER TRIBUNAL
TAX
CHERIE
SMITH Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE)
SUSAN
HEWETT
Sitting in public at 45 Bedford Square, London WC1 on 29 June 2011
Philip Adkins of Philip Adkins
Tax Investigations for the Appellant
Colin Brown, Appeals and
Reviews Unit (Bristol), HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. This
appeal, which has had a complex and chequered history, is against the first and
second surcharges imposed under s 59C(2) and (3) of the Taxes Management Act
1970 (“TMA 1970”) following the late payment of tax by Mrs Cherie Smith for the
year ending 5 April 2006.
The facts
2. The
evidence consisted of two bundles of documents. Papers from earlier proceedings
before both the First-tier Tribunal and the Upper Tribunal were also available
to us. No oral evidence was given, but in presenting Mrs Smith’s case, Mr
Adkins provided information about the history of the matter. From this evidence
and information, we find the following facts. We consider disputed evidence
later in this decision.
3. Mrs
Smith’s mother, Mrs Nancy Wyld, owned and lived in a residential property.
Following advice from a firm of solicitors, the property was put into a
discretionary trust, of which the principal beneficiaries were her two
children, John Hitchen and Mrs Smith. The object of putting the property into
trust was to protect the property from Inheritance Tax. Mrs Wyld continued to
live in the property until her death in 2004.
4. It
appears that Mrs Wyld was treated as having reserved a benefit over the
property, presumably on the basis that she had not paid a full rent; (there was
no specific evidence to establish the reason). The whole value of the property
was subject to an Inheritance Tax charge, on the basis that the transfer into
the trust had been a gift with reservation of benefit.
5. After
Mrs Wyld’s death, Mr Hitchen moved into the property. He obtained a valuation from
the District Valuer and agreed to purchase the property at that value
(£325,000). In a letter from a different firm of solicitors (“the second
solicitors”) dated 26 January 2006 to Riley & Co, reference was made to a
proposal to terminate the discretionary trust by an appointment in favour of
the two beneficiaries, Mr Hitchen and Mrs Smith. The precise details of the
transaction which actually occurred were not set out in the evidence, and it
was not therefore clear why the disposal was not treated as having been made by
the trustees, with the trustees in that capacity being responsible for the
payment of capital gains tax on that disposal of 100 per cent of the property. The
second solicitors expressed doubt whether private residence relief would be
available in respect of Mr Hitchen’s share, and considered that the only
exemption available would be the Trustees’ exemption on any disposal.
6. The
second solicitors wrote on 15 May 2006 to Riley & Co, referring to the
trust never having been registered with a trust company and thus to all intents
and purposes having stood in the joint names of Mr Hitchen and Mrs Smith. The
solicitors expressed the hope that in the event of any difficulties arising
they would be able to persuade HMRC that there had never actually been a trust
as such. (We consider below the implications of the existence or non-existence
of any trust.)
7. In
a much later letter to the Respondents (“HMRC”) dated 15 August 2008, Mr Adkins
referred to the trust as having been “incorrectly set up”. Whether this meant
that the trust had been completely invalid, or merely that it had not had the
effect of saving Inheritance Tax, is not clear from the correspondence
available to us.
8. As
part of his agreement to purchase the property, Mr Hitchen agreed to pay out to
Mrs Smith what Mr Adkins described in his letter as “her half share of
£162,500”. In addition he agreed to indemnify her against any further Capital
Gains Tax to which she might be liable in respect of her share. The date of the
transaction or transactions resulting in Mrs Smith giving up her interest in
the property for that sum was not stated, but we find that it fell within the
year to 5 April 2006.
9. According
to a letter dated 22 July 2008 from the second solicitor’s firm to Mrs Smith,
the firm had written to Mrs Smith and her brother on 14 March 2006 advising
each of them to make any necessary report [ie in connection with the disposal
of their mother’s property] when completing their returns in April 2006. (The
actual letter dated 14 March 2006 was not included in the evidence.)
10. On 3 July 2008
HMRC wrote to Mrs Smith to indicate that they had received information
suggesting that she had disposed of a residential property in the year ended 5
April 2006 but had not been able to trace anything to indicate that the disposal
had been declared for taxation purposes. They asked for information about her
disposals in that year. Mrs Smith passed the letter to the second solicitors,
who wrote to HMRC on 22 July 2008. HMRC wrote to Mrs Smith on 24 July 2008 to
explain that as they did not hold her signed authority for them to communicate
with HMRC about her affairs, they could not reply direct to them.
11. Shortly
afterwards, Mrs Smith appointed Mr Adkins to act in place of the second
solicitors in relation to the issues raised by HMRC’s letter. He telephoned Mrs
Studholme of HMRC’s CGT Team at Shipley to explain that he would be acting on
Mrs Smith’s behalf. He explained that he had sent by fax to HMRC’s Longbenton
office a Form 64-8. Subsequently it turned out that this was not accepted as
valid, as it had been faxed.
12. On 4 August 2008
Mr Adkins wrote to Steve Sunderland, an officer of HMRC at the Shipley office,
enclosing a cheque for £10,000 on behalf of Mrs Smith in respect of her capital
gains tax liability. Mr Adkins then spoke to Mr Sunderland on 12 August 2008 to
explain the position. Mr Sunderland informed him of the need for a signed form
64-8, and was therefore prepared to have only a limited conversation about the
case. Mr Adkins explained that the property had gone into a trust, and had come
out again into joint ownership between Mrs Smith and her brother.
13. On 14 August
2008 Mr Adkins again telephoned Mr Sunderland. Part of Mr Sunderland’s note of
the conversation stated:
“The way he sees it, if it went into a discretionary
trust in 1999, came out and went into joint names and then Smith sold her half
to the person living in it then it’s all capital gains for her. Seems fine.
All this talk of solicitors and suing solicitors is
irrelevant. Not sure what he was driving at.
I need to know when she inherited her interest in
the property and at what value; followed by the amount she sold her interest
for and in what amount. We should then be able to see if there is any capital
gains tax to pay.
If we can agree it all, he can have a cheque from
her within a week and it proves that she’s been co-operating. So, all he’s
worried about is the penalty position.”
14. On 15 August
2008 Mr Adkins wrote to Mr Sunderland setting out information concerning the
history of Mrs Smith’s interest in the property and enclosing various copies of
correspondence relating to her interest. Mr Adkins stated:
“Solicitors, law advice centres, accountants have
looked at this, and have given different opinions. However, it is my opinion
that the trust may have been a sham, but it is clouding the issue. Mrs Smith
has sold an asset that falls into C.G.T. in 2006. So C.G.T. is now due. My
computations are overleaf.”
15. His figures
showed the acquisition value on 9 December 1999 as £190,000, and the later
value on 29 August 2004 (the date of Mrs Wyld’s death) as £325,000. He
calculated the profit as £135,000, and Mrs Smith’s share as half of this, ie
£67,500. After taking account of the 2006 annual allowance of £8,500, £59,000
was liable to capital gains tax. At a rate of 18 per cent, this produced a
liability of £10,620.
16. On 1 September
2008 Mr Adkins telephoned Mr Sunderland, who confirmed that he had received Mr
Adkins’ letter but because of leave, had not been able to do anything with it.
Part of Mr Sunderland’s note of the conversation was as follows:
“He thinks the ‘trust’ was a sham and she thought
the indemnity worked. My thought is that if the trust was a sham the indemnity
would be a sham. In any case, if she thinks the indemnity works, she should
give the bill to her brother to pay – it won’t stop HMRC pursuing her for the
debt. We cannot become involved in a potential family dispute.
If he thinks she owes £10k, it would be wise of her
to pay £10k now to save over £2 per day in interest charges. As far as his figure
of £10k is concerned, I don’t think 18% is correct (could be 10, 20 and 40%
bands to be included) but I couldn’t give any more detail.
My initial thoughts are that we would be unlikely to
be looking for a penalty. She thought it was taken care of and legal advice had
been taken (however poor) but that would not be for me to decide. It would,
however, be considered at the relevant time (and an early payment could only be
seen as continuing goodwill).”
17. On 17 September
2008 Mr Sunderland wrote to Mrs Smith. He explained that although he had no
doubt that she had asked Mr Adkins to assist her with her tax affairs, there
was no indication that the form of authority which she had completed for him
had been received by the relevant HMRC team. Mr Sunderland was not able to
accept as a valid authority the facsimile copy which Mr Adkins had sent. Mr
Sunderland enclosed a further form of authority, and asked Mrs Smith to
complete this if she was content to allow HMRC to deal with Mr Adkins in
respect of her affairs.
18. Mr Sunderland
also indicated that, based on the information which Mr Adkins had provided,
there was a considerable liability to capital gains tax for the year ended 5
April 2006. He mentioned that any such liability was her responsibility,
regardless of any claimed indemnity that might have been put in place. He
acknowledged the £10,000 on account of her liability, but stated that she would
need to complete a self assessment tax return for that year. He enclosed the
return form and notes for her to complete and return to him at his new office
address by 24 December 2008.
19. In October 2008
Mr Adkins on behalf of Mrs Smith sent an additional cheque for £1,511 in
respect of her tax liability.
20. After resolution
of some confusion as to whether Mr Adkins had been registered with HMRC as Mrs
Smith’s agent, Mr Adkins submitted the return form. Mr Sunderland wrote to him
on 18 November 2008 to point out that the form had not been signed by him or by
Mrs Smith. The return could not be accepted as valid and Mr Sunderland could
take no action in relation to any of the information within it. He therefore
sent it back to Mr Adkins for signature by Mrs Smith, or by her attorney once
appointed.
21. Mr Sunderland
emphasised the time limit for submitting the fully completed and correctly
signed return. He then stated:
“I would mention here that, whenever it is possible
to be done, the figures from any tax return that we receive will be accepted
and recorded without correction. The tax liability will be calculated from the
figures that are provided and will form the basis of any payment request that
is subsequently made.”
He also emphasised the nature of interest on tax as a
statutory charge, and that it was thus not negotiable. If interest was due
because tax was not paid on time, for whatever reason, it would be charged and
payment would be pursued.
22. On 25 November
2008 Mr Adkins telephoned Mr Sunderland to indicate that he had received Mr
Sunderland’s two letters, one that of 18 November and the other relating to
other years. Mr Sunderland recorded the following as part of his note:
“At the end of it I think it unlikely that penalties
will be charged (not because we sent anything back but because of the Trust
problem) and that we will be looking for interest only plus surcharges if appropriate
– it should have been paid nearly two years ago, after all – but the decision
on that will be for someone else, not me.”
23. With an undated
letter received by HMRC on 2 December 2008, Mr Adkins enclosed two returns
signed in person by Mrs Smith. One of these was the return for the year to 5
April 2006. This showed the taxable capital gains after allowable losses and
taper relief as £54,000.
24. HMRC’s tax
calculation showed the gain after the annual allowance of £8,500 as £45,500;
the tax amounted to £11,511.
25. On 2 January
2009 Mr Sunderland wrote to Mr Adkins to confirm that the 2006 (and 2007)
returns had been processed and the figures had been transferred to HMRC’s
systems without any corrections.
26. In April 2009,
HMRC’s Leicester Group office issued a Notice of Surcharge for late payment of
tax by Mrs Smith for the year ended 5 April 2006. The Notice referred to two
surcharges, both at 5 per cent of £11,511, totalling £1,151.10.
27. Shortly
afterwards, followed up by a letter dated 28 April 2009 asking about the
progress of the appeal, Mr Adkins appealed against the surcharge notice, on the
grounds that it had been agreed by Mr Sunderland six months or more beforehand
that “penalties, or a surcharge would not be made”; Mr Adkins indicated that he
had already appealed the interest charges on the grounds of the way in which
HMRC had handled Mrs Smith’s tax affairs.
28. On 11 May 2009
an assistant officer in HMRC’s Cardiff office wrote to Mr Adkins to indicate
that his appeal had been sent to a technical support officer to consider, and
to ask for a copy of the letter from Steven Sunderland confirming that
penalties and surcharges would not be made.
29. In a letter
dated 12 May 2009 from the Cardiff office, an officer set out HMRC’s views in
respect of the appeal. An appeal against interest and surcharges could only be
considered if there was a valid excuse for the tax having been paid late. None
of the reasons given fell into this category. The officer stated:
“The Capital Gain has been correctly charged on her
as I understand that there was no valid trust and interest and a surcharge has
[sic] correctly been levied as the tax was not paid at the correct
time.”
30. On 13 May 2009
an assistant officer from the Cardiff office set out HMRC’s view that Mrs Smith
did not have a reasonable excuse for the late payment of the tax, and offered a
review.
31. On 17 May 2009
Mr Adkins responded to the 11 May letter from the Cardiff office. He explained
that Mr Sunderland had not sent a letter concerning the penalties and
surcharges. Mr Adkins stated:
“It was agreed verbally on the telephone that Mrs
Smith would not be charged penalties and surcharges.”
Mr Adkins set out detailed further comments on the
history of the matter.
32. On 18 May 2009,
Mr Adkins telephoned Mr Sunderland to tell him that Mrs Smith had been notified
of a liability of approximately £2,500 of interest and surcharges. In his note
of the conversation, Mr Sunderland expressed the opinion that the interest
charge was absolutely correct and should be paid. He confirmed to Mr Adkins the
amount outstanding on that date. Mr Sunderland referred to a record of an
appeal against the surcharges, and expressed the opinion that the surcharges
were correctly due and payable because there did not seem to be any reasonable
excuse lasting from 31 January 2007 to December 2008, although he acknowledged
that the reviewer might decide otherwise.
33. Mr Adkins sent to
HMRC’s Leicester Group office further payments of £600 on 12 June 2009, £400 on
10 July 2009, £110 on 14 October 2009 and £330.16 on 27 October 2009, on
account of Mrs Smith’s liabilities. After continuing correspondence, Mr Adkins
notified the appeal to the Tribunals Service on 15 October 2009. (According to
a statement of account subsequently sent by HMRC to Mr Adkins on 23 November
2009, this left outstanding as at the latter date a balance of £1,167.80; we
find that the latter sum was made up of the two surcharges and further interest
outstanding.)
34. The appeal was
allocated to the default paper category and the appeal was considered by reference
to the papers. The summary decision dismissing the appeal was released on 13
April 2010. After Mr Adkins had notified his request to appeal to the Upper
Tribunal, a request for full facts and findings was made. The full decision was
released on 13 May 2010, and sent to Mr Adkins under cover of a letter dated 18
May 2010. On 6 July 2010 the application for permission to appeal was refused.
Mr Adkins then applied on 13 July 2010 to the Upper Tribunal for permission to
appeal. On 26 July 2010 an Upper Tribunal Judge refused the application for
permission to appeal. Mr Adkins accordingly applied for an oral hearing of the
application.
35. On 16 March 2011
the oral hearing took place before Upper Tribunal Judge Sir Stephen Oliver QC.
HMRC had indicated that they would not attend the hearing. In his Decision
Notice, the Judge was satisfied that there had been procedural irregularities
that affected the allocation of the appeal to the default paper category. The
second of these, which in effect invalidated the decision itself, was that the
Tribunal Chairman (a non-legal member) was not authorised to decide the appeal.
The Judge was also satisfied that Mr Adkins had understood that the case would
proceed on the agreed basis that his account of there having been an agreement
that no “penalties” would be imposed was to be taken as an undisputed fact; on
that basis he had wrongly allowed the appeal to be dealt with as a default
paper case.
36. The Judge
directed that the application for permission to appeal to the Upper Tribunal be
allowed, that the decision of the First-tier Tribunal be set aside, and that
the appeal be relisted as a basic category appeal at a London venue to be heard
by a differently constituted Tribunal.
37. The present
hearing took place before us in accordance with the latter Direction; it had
been listed for hearing by us in Southampton on 10 June 2011, but was relisted
for hearing in London on 29 June, presumably in order to comply with the terms
of the Direction.
The law
38. The relevant
parts of s 59B TMA 1970 provide:
“59B Payment of income tax and capital gains tax
(1) Subject to subsection (2) below, the
difference between—
(a) the amount of income tax and capital
gains tax contained in a person's self-assessment under section 9 of this
Act for any year of assessment, and
(b) the aggregate of any payments on
account made by him in respect of that year (whether under section
59A of this Act or otherwise) and any income tax which in respect
of that year has been deducted at source,
shall be payable by him or (as the case may be)
repayable to him as mentioned in subsection (3) or (4) below . . .
. . .
(3) In a case where the person—
(a) gave the notice required by section
7 of this Act within six months from the end of the year of
assessment, but
(b) was not given notice under section 8
or 8A of this Act until after the 31st October next following that year,
the difference shall be payable or repayable at the
end of the period of three months beginning with the day on which the notice
under section 8 or 8A was given.
(4) In any other case, the difference shall be
payable or repayable on or before the 31st January next following the year of
assessment.”
39. Section 59C TMA
1970, to the extent relevant to the present appeal, provides:
“59C Surcharges on unpaid income tax and capital
gains tax
(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 per cent of the unpaid tax.
(3) Where any of the tax remains unpaid on the day
following the expiry of 6 months from the due date, the taxpayer shall be
liable to a further surcharge equal to 5 per cent of the unpaid tax.
. . .
(5) An officer of the Board may impose a surcharge
under subsection (2) or (3) above; and notice of the imposition of such a
surcharge—
(a) shall be served on the taxpayer, and
(b) shall state the day on which it is
issued and the time within which an appeal against the imposition
of the surcharge may be brought.
(6) A surcharge imposed under subsection (2) or (3)
above shall carry interest at the rate applicable under section 178 of the
Finance Act 1989 from the end of the period of 30 days beginning with the day
on which the surcharge is imposed until payment.
(7) An appeal may be brought against the imposition
of a surcharge under subsection (2) or (3) above within the period of 30 days
beginning with the date on which the surcharge is imposed.
(8) Subject to subsection (9) below, the provisions
of this Act relating to appeals shall have effect in relation to an appeal
under subsection (7) above as they have effect in relation to an appeal against
an assessment to tax.
(9) On an appeal under subsection (7) above that is
notified to the tribunal section 50(6) to (8) of this Act shall not apply but
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.
. . .
(11) The Board may in their discretion—
(a) mitigate any surcharge under
subsection (2) or (3) above, or
(b) stay or compound any proceedings for
the recovery of any such surcharge,
and may also, after judgment, further mitigate or
entirely remit the surcharge.”
Arguments for Mrs Smith
40. Mr Adkins had
set out the following grounds of appeal in the Notice of Appeal:
(1)
The two surcharges were never mentioned;
(2)
In fact the agreement was that if Mrs Smith paid the outstanding capital
gains tax, no other penalty would be made;
(3)
“The continual desultory way [HMRC] have handled the matter.”
41. For the reasons
which we give later in this decision, we do not set out here Mr Adkins’
arguments relating to the latter ground of appeal.
42. In opening his
argument on behalf of Mrs Smith, he explained that she was disabled and needed
help with her affairs. This was relevant to the way in which her affairs had
been handled by HMRC.
43. Mr Adkins
stressed the “verbal agreement” which he submitted had been arrived at with Mr
Sunderland. This was that if Mrs Smith paid the capital gains tax, no charges
other than interest would be payable.
44. He contended
that Mr Sunderland should have been produced as a witness; Mr Adkins strongly
asserted that agreement had been reached in the form just described. The
surcharge had come “out of the blue”; Mr Sunderland was not present to enable
the position to be considered.
45. In reply to Mr
Brown’s submissions, Mr Adkins argued that there had been a reasonable excuse;
at all times, Mrs Smith had thought that she was covered by the trust.
46. On the question
of interest on the surcharges, if contrary to his case they were found to be
due, Mr Adkins submitted that interest should not run from the date of the
Tribunal decision on 18 May 2010.
Arguments for HMRC
47. Mr Brown
reviewed the background behind the appeal and its history. He referred to the
obligation under s 7 TMA 1970 to give notice of chargeability; Mrs Smith had
given no such notice. The due date for the tax was set by s 59B TMA 1970;
because s 59B(3) did not apply because Mrs Smith had not given notice under s
7, the position was governed by s 59B(4), so that the due date was 31 January
2007.
48. Surcharges were
imposed under s 59C. Under s 59C(2), a 5 per cent surcharge had been incurred
at the end of February 2007. The date specified in s 59C(3) was six months from
the due date, so that the second surcharge had been incurred on 1 August 2007.
Mr Brown referred to s 59C(5) and (9). The tax had been paid on 15 October
2008, so that the period of default ended the day before. HMRC were ignoring a
small sum of £2.18 outstanding from an earlier year; they accepted that Mrs
Smith was intending to pay the full amount of the capital gains tax.
49. He referred to
the burden of proof. It was for HMRC to show that payment had been made late;
this had been established. It was then for Mrs Smith to show reasonable excuse.
HMRC relied on particular documents for its view that there was no reasonable
excuse. The first was the note of a meeting at the second solicitors’ office on
10 January 2006 referring to the possibility of liability to capital gains tax;
Mrs Smith had signed a copy of the note. The second was the reference to the
advice given by the second solicitors on 14 March 2006 (see paragraph 9 above).
Mr Brown then referred to Mr Sunderland’s note of the telephone conversation
with Mr Adkins on 25 November 2008 (paragraph 22 above).
50. For the appeal
to succeed, it was necessary for Mrs Smith to show that she had had a
reasonable excuse for the late payment and that this had continued through
until 14 October 2008.
51. In HMRC’s view, on
the basis of the documents mentioned, Mrs Smith was aware of her obligation to
complete a return. She should have asked for advice from HMRC or a professional
adviser. Mr Brown submitted that she had failed to exercise due care, and had
thus been negligent; he referred to Blyth v Birmingham Waterworks [1856] EWHC Exch J65. She had failed to act in respect of notice of chargeability, and
by the first day of the period of default, having been aware of the position
nine months previously, should have acted immediately.
52. He submitted
that if there were any grounds for complaint about HMRC’s handling of the case,
this was not a matter for the Tribunal.
53. In respect of
the conversation between Mr Adkins and Mr Sunderland on 1 September 2008 (see
paragraph 16 above), Mr Brown submitted that the note was correct; there was a
difference between penalties and surcharges. In any event, a later event could
not explain the earlier failure to act. There had been no reasonable excuse for
the previous period. The position was not affected by the conversation. In
addition, Mr Sunderland had said that it was not for him to decide.
54. Mr Brown asked
for a series of findings to be made; we consider these below.
Discussion and conclusions
55. At first sight,
this appeal might seem to relate to two questions concerning liability to the
surcharges; first, whether Mrs Smith had a reasonable excuse for late payment,
and secondly, the extent to which liability to the surcharges might be affected
as a result of the discussions between Mr Adkins and Mr Sunderland. On closer
consideration, however, we consider that the appeal can be dealt with on two
levels. One, looking at the matter as it initially appears, is to accept the
return as valid. However, we think it more appropriate to examine the other
level first, and then to return to that “surface level”.
56. At this other
level, the question is whether the information given in the return prepared for
Mrs Smith by Mr Adkins was submitted on the correct basis; if it was not, and
correcting the position would have the effect of reducing or eliminating Mrs
Smith’s liability to tax, the consequence would be that the liability to
surcharges would be correspondingly reduced or eliminated. We therefore
consider the basis on which the return was prepared and submitted.
57. The acquisition
cost of the property was given as that at the time when the property was put
(or purported to be put) into the trust; Mrs Smith’s acquisition cost was
treated as half of that amount. The disposal proceeds were calculated as half
of the probate value as at Mrs Wyld’s death. The resultant calculation of the
gain produced the £54,000 gain as mentioned above. The question for
consideration is whether this approach was correct.
58. If the trust was
valid, any liability to CGT on the appointment of the property to the
beneficiaries would appear to be that of the trustees, whether these were Mrs
Smith and her brother or some other person or persons. (It appears from the
correspondence that the trustees may have been different persons, but the
position is not definitively established.) It is not clear why the absence of
registration of the trust would have had any effect on its validity, despite
the comments in the second solicitors’ letter dated 15 May 2006. The trustees’ gain
would presumably have been calculated on the difference between the acquisition
value and the value at the date of the appointment, which would not necessarily
have been the same as the probate value on Mrs Wyld’s death. The liability
would not have fallen on Mrs Smith in her personal capacity, whether or not she
had responsibility for the gain in the different capacity of trustee. As
indicated by the second solicitors, the trustees’ gain on the whole property
would not appear to have qualified for any private residence relief by
reference to Mr Hitchen’s occupation; we are not in a position to make any
finding one way or the other. The trustees would have been obliged to give
notice of chargeability and to complete a return including their computation of
the gain. As these steps have not been taken, the trustees would be in their
own default for failure to comply with their obligations and to account for the
tax due.
59. If the trust was
not valid, the property would appear at first sight to have remained in Mrs
Wyld’s estate. On this basis, it would be regarded as transferred to the
beneficiaries of her estate at probate value, giving them a base cost for
capital gains tax purposes equal to their respective shares of the estate. According
to the second solicitors’ letter dated 13 October 2005, Mrs Wyld had made a
will, and Mrs Smith was one of the executors. Although it might be assumed that
her estate passed to Mr Hitchen and Mrs Smith in equal shares, in the absence
of evidence as to the provisions of the will, it is possible that the estate
was subject to other dispositions; the only information available is contained
in this letter, in which the value of her estate is stated as having been £31,522
(ie not including the property at its probate value of £325,000). This suggests
that although the value of the property was included in her estate for
Inheritance Tax purposes, the existence of the trust was not disregarded for
the purposes of the administration of her estate. We therefore find ourselves
unable to discover the precise basis for the suggested approach of treating the
trust as somehow invalid or never having been entered into.
60. If, despite
appearances, the property did pass to Mrs Smith and her brother in equal shares
in the absence of a valid trust, the result would have been that Mrs Smith’s
base cost for her share of the property was £167,500. Unless the value at the
time of the transfer of her half share was significantly greater than that
figure, she would either have made no capital gain, or her gain would have been
well within the annual exempt amount for capital gains purposes.
61. On either of
these hypotheses, Mrs Smith in her personal capacity would not have made a
capital gain in excess of the annual exempt amount for the relevant year in
respect of her share in the property, rendering it inappropriate for her to
complete a return. The result would be that the return prepared for her by Mr
Adkins would not have been correct, and that she would have had no liability to
capital gains tax for the year to 5 April 2006.
62. We have not
considered whether any other combinations of circumstances might have occurred
other than, or beyond the scope of, the above two hypotheses. On the basis of
our comments above, or the possibility of such other circumstances, we have
very considerable doubts whether Mrs Smith’s return was prepared on the correct
basis. Mr Sunderland’s letter dated 18 November 2008 emphasised (see paragraph 21
above) that in normal circumstances it was not up to HMRC to seek to correct a
taxpayer’s self assessment return. In the light of his comments in the
telephone conversation dated 14 August 2008 (see paragraph 13 above) concerning
acquisition and disposal values, it appears that he may have had some question
in his mind as to the basis on which the return had been submitted. In the
absence of evidence, we are unable to make any finding to this effect.
63. Even if the
return was not made on a correct basis, it stands until any action is taken to
correct it. Under paragraph 3 of Schedule 1AB TMA 1970, which applies to claims
made on or after 1 April 2010, a claim for repayment of tax under that Schedule
may not be made more than four years after the end of the relevant tax year. In
Mrs Smith’s case, this is the year to which the return relates, ie to 5 April
2006. It is therefore too late to take corrective action in respect of Mrs
Smith’s capital gains tax, even if her return was submitted on an incorrect
basis.
64. If the time
limit for making such a claim had not expired, we would have been prepared to
stay the appeal for an appropriate period to allow the position to be
investigated and a claim made if justification had been established. However,
it is too late for this course to be followed, and we have to deal with the
liability arising in consequence of Mrs Smith’s return on the assumption that
it was correct.
65. We therefore return
to the “surface level”. We accept Mr Brown’s submissions as to the matters to
be proved, and as to the burden of proof. We are satisfied that the tax was
paid late, and that Mrs Smith is therefore liable to the two surcharges unless
she can prove that she had a reasonable excuse for the late payment. However,
we do not consider that we are confined to consideration of the “reasonable
excuse” question. The points raised by Mr Adkins require us to examine the
further questions whether an officer of HMRC can dispense with liability to
surcharges in an individual case whether or not there is a reasonable excuse,
whether there was an agreement that Mrs Smith should be absolved from liability
to the surcharges, and whether there is some more general power given to HMRC
to dispense with surcharges.
66. Dealing first
with s 59C(9) TMA 1970, we consider whether throughout the period of default
Mrs Smith had a reasonable excuse for not paying the tax. In the absence of any
evidence to show that she was not liable for the tax, and taking into account
the basis on which her return had eventually been prepared and submitted, we
have to assume that she was liable to pay the tax. We accept Mr Brown’s submission
that Mrs Smith was aware on the basis of the second solicitors’ advice given on
14 March 2006 that appropriate information needed to be given to HMRC when Mrs
Smith and Mr Hitchen completed their returns in April 2006. If Mrs Smith was
not expecting to complete a return, we accept that she needed to take advice
either from HMRC or from a professional adviser to establish what she needed to
do in respect of her possible liability to capital gains tax. (Had proper
advice been taken at that stage, it could have been established who was
required to give notice to HMRC of the disposal of the property, and what was the
proper basis for liability.)
67. Our conclusion
is that on the basis of the second solicitors’ advice given at the time, Mrs
Smith was aware of the need to take action. She did not do so. We accept Mr
Brown’s submission that this inaction amounted to negligence. If notice had
been given to HMRC by 31 October 2006, a return could have been completed and
submitted by or before the normal filing date, and the tax could have been paid
on time. As this failure to act preceded the period of default in relation to
the payment of the tax, we find that at no stage during the period of default
did Mrs Smith have a reasonable excuse for not paying the tax.
68. Mr Adkins’ case
was that there was a “verbal agreement” [ie an oral agreement] with Mr
Sunderland that no surcharges would be imposed. Before considering the factual
position, we need to examine s 59C TMA 1970. Sub-sections (2) and (3) both use
the words “the taxpayer shall be liable”. This appears to us to be mandatory,
particularly when viewed in the wider context of the self assessment system and
the general requirement for taxpayers to comply with their obligations to pay
tax on time. Although sub-s (5) uses the words “An officer of the Board may
[our emphasis] impose a surcharge under subsection (2) or (3) above”, we
interpret this as being the method of empowering an officer of HMRC to take the
appropriate actions under the section consequential on the taxpayer having
failed to pay tax by the due date. We do not consider that “may” implies any
form of discretion on the officer’s part. Any question of discretion only
arises under sub-s (11); we would not expect this discretion to be exercised by
an officer in Mr Sunderland’s position.
69. We do not
consider, therefore, that Mr Sunderland had power to dispense with the
surcharges in the absence of his being satisfied that Mrs Smith had a
reasonable excuse for the defaults. From his note of a telephone conversation with
Mr Adkins on 18 May 2009 (which we accept was much later than the conversations
on 1 September and 25 November 2008), we consider it unlikely that Mr
Sunderland would have taken that view:
“Per SA notes he has made an unsuccessful appeal
against surcharges (whilst providing evidence that Smith knew in March 2006
that CGT would be due but did nothing about it!).”
70. Although we do
not consider that Mr Sunderland had the power to enter into an agreement with
Mr Adkins, we turn to the factual question raised in the appeal, namely whether
there was such an agreement. The only items of evidence available in this
connection are the notes of telephone conversations kept by Mr Sunderland; Mr
Adkins did not provide any form of note or record to support his contention. We
consider that he was therefore relying purely on his memory of the
conversation; he did not specify the date when it had taken place.
71. Having reviewed
Mr Sunderland’s notes of the conversations, we consider that Mr Adkins must
have misunderstood what Mr Sunderland said to him. There is no suggestion in
those notes that interest or surcharges would not be payable; Mr Sunderland
simply expressed the view that penalties were unlikely. There is a clear
distinction between penalties and surcharges. There is no suggestion that Mr
Adkins asked for confirmation that if the tax was paid, nothing would be
chargeable other than interest; indeed, in later correspondence with HMRC, he even
questioned whether interest was payable.
72. We find that
there was no agreement that surcharges would not be payable. Had it been
possible to reach such an agreement, we find it inconceivable that HMRC would
not have recorded such an agreement in writing.
73. Mr Brown asked
us to make a number of findings. Although we have set out various findings
above, we agree that these requested findings represent a fair summary of what
we have found:
(1)
Tax of £11,511 payable by Mrs Smith was due on 31 January 2007, on the
basis of the return submitted;
(2)
The tax was paid on the following dates and in the following amounts: £10,000 on 5 September 2008; the balance of £1,511 on 15 October 2008;
(3)
The period of default was therefore 31 January 2007 to 14 October 2008;
(4)
From around March 2006 or shortly afterwards, it was reasonable to
expect that Mrs Smith would have sought advice from HMRC or a professional
adviser;
(5)
Following on from that, the failure in question was the failure to
exercise due care and diligence, and amounted to neglect;
(6)
As a consequence, there was no reasonable excuse for the failure either
on the first day of default or subsequently.
74. Under s 59C(9)
TMA 1970, in the absence of any reasonable excuse, we confirm the imposition of
the two surcharges. They were correctly imposed and therefore remain payable by
Mrs Smith. The only basis for any action to mitigate or remit the surcharges is
the power of HMRC under s 59C(11). Whether there is a case for such action is a
question outside our jurisdiction.
75. Mr Adkins asked
that interest on the surcharges should not run for the period from the Tribunal
decision on 18 May 2010. Although we understand his reasons for making this
request, we do not consider that we have any power to adjust the interest. As
discussed in the correspondence between HMRC and Mr Adkins, the obligation to
pay interest is a statutory obligation. It therefore remains due, unless under
some residual power HMRC decide to remit any part of it.
76. A significant
part of the evidence and Mr Adkins’ submissions related to the question of
HMRC’s handling of the matter. As this is not a matter within our jurisdiction
on this appeal, we have not made any findings relating to this issue. It was
accepted by Mr Sunderland in his letter dated 18 November 2008 that the service
had not been of the highest order (although he emphasised the need to quote the
full reference at the beginning of any letter to HMRC, rather than simply the
name of the officer concerned). Mr Brown in his submissions to us acknowledged
that HMRC “had not covered themselves with glory”. We do not consider that in
this whole lengthy process Mrs Smith has been well served by any of her
advisers, or in consequence by the self assessment system and HMRC’s operation
of it in her case, nor by the appeals system before these Tribunals. If these
matters had been properly considered in 2008, there would have been time to
submit a claim under Schedule 1AB TMA 1970. The history of the whole matter has
been very unfortunate. In particular, advice from appropriately qualified
persons should have been taken at a much earlier stage.
77. For the reasons
we have given, we are unable to take any action to enable Mrs Smith’s position
to be remedied. Mr Adkins indicated in correspondence that he wished to take
matters further through avenues other than HMRC or the tribunal appeals
procedure. Before he does so, we would recommend that he considers carefully
the implications of this decision; we think it inappropriate to comment
further.
78. In the
circumstances, we have no alternative course to follow; the appeal must be
dismissed.
Right to apply for permission to appeal
79. 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.
JOHN CLARK
TRIBUNAL JUDGE
RELEASE DATE: 12 September 2011
