[2013] UKFTT 517 (TC)
TC02905
Appeal number: TC/2012/08434
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Income tax – partial
surrenders of life policy – effect of chargeable events provisions in Chapter
9, Part 4 ITTOIA 2005 – partial surrenders carried out inadvertently in a way
which generated unnecessary tax liability – Tribunal has no power to correct
the mistakes – appeal dismissed
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FIRST-TIER TRIBUNAL
TAX CHAMBER
-and-
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THE
COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS
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Respondents
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TRIBUNAL:
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JUDGE KEVIN POOLE
WILL SILSBY CTA ATT
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Sitting in public in Priory Court, Bull Street, Birmingham on 22 March and 3 July 2013
Delwyn Davies of Holland Morgan
Limited, Independent Financial Advisers for the Appellant
Susanne Whitley Bennion,
Presenting Officer for the Respondents
Summary decision issued on 16 July 2013. This full decision
is issued following a letter of appeal from the Appellant’s representative in
response to that summary decision, which was treated by the Tribunal as an
application for full findings and reasons for the Tribunal’s decision, as a
first step in a potential application for permission to appeal.
©
CROWN COPYRIGHT 2013
DECISION
Introduction
1.
This is an appeal against an assessment raised by HMRC to recover income
tax supposedly due under the “chargeable events” legislation contained in
Chapter 9, Part 4 Income Tax (Trading and Other Income) Act 2005 (sections 461
to 546) in respect of two partial surrenders of a life insurance policy made
during the 2007-08 tax year.
2.
In brief, the Appellant does not dispute that the charge is correctly
imposed in line with the legislation, but he claims that it was only because of
mistakes in the partial surrender instructions that the partial surrenders were
effected in a way which generated the tax charge. He seeks retrospectively to
correct those mistakes, with a view to restructuring the partial surrenders in
a way which, whilst having exactly the same financial effect, would not trigger
the tax charge under appeal.
The facts
3.
On 28 March 2007 the Appellant invested £120,000 in a Sterling
Investment Bond (“the Bond”), issued by Zurich Assurance Limited (“Zurich”).
4.
The terms of the Bond provided that it was divided into 1,000 separate
insurance policies. It permitted partial encashments, and the terms and
conditions stated that:
“86 If you take a partial
encashment, we will cancel units to the value of the partial encashment from
all the Policies in your Investment Bond, proportionately from each fund.
87. Or, you may decide to
cash in whole Policies to make up the amount you wish to take. If you make
this request, whole Policies will be cashed in, and any balancing amount will
be taken by cashing in units in the manner described in 86.”
5.
Each of the 1,000 policies within the Bond was a policy of life
insurance falling within section 473 Income Tax (Trading and Other Income) Act
2005 (“ITTOIA”) and accordingly fell within the charging provisions of Chapter
9 of Part 4 ITTOIA.
6.
Shortly after making his investment, the Appellant wished to withdraw
some of it for private purposes and asked Mr Davies, his financial adviser, to
arrange it. A “Request for Full or Partial Surrender” form produced by Zurich was filled out by Mr Davies. He arranged for the Appellant to sign it on 19
December 2007 and then he submitted it to Zurich on 22 December 2007. It
requested a partial repayment of £60,000 and the method of surrender that Mr
Davies requested was “Method B – partially surrender £60,000 by surrendering
equally from all the individual contracts within the investment bond. Units to
be surrendered proportionately across each investment fund.” Mr Davies had
ticked the box to request this method, and we accept his evidence that it was a
simple error on his part, whether or not he was actually aware at the time of
the consequences of selecting that method.
7.
On or about 24 December 2007, Zurich sent the £60,000 requested to the
Appellant. Because he had apparently requested that it be sent by direct bank
transfer, an extra fee of £35 was charged and added to the amount of the
partial encashment
8.
Very shortly afterwards, the Appellant wished to withdraw a further
£20,000 for private purposes. He contacted Mr Davies and, as a result of a
telephone call with him, he submitted a simple letter to Zurich on 7 February
2008, requesting as follows:
“Please en-cash units to the value of £20,000 Net and
forward cheque to my address...”
9.
In response to this letter, Zurich sent the further requested cheque
very shortly afterwards.
10.
The Appellant made no mention of either of these partial surrenders on
his tax return for the year 2007-08.
11.
He heard nothing further on the matter until he received a letter dated
2 September 2011 from HMRC. They informed him they had received a “Chargeable
Event Certificate” from Zurich which showed that he had received a taxable gain
arising on chargeable events during the “policy year” ended 27 March 2008. The
amount of the taxable gain was £74,035 (being the £80,035 actually paid out
less the £6,000 tax-free amount available for the year at the rate of 5% of the
original investment). It also confirmed that a £14,807 tax credit at the rate
of 20% had accrued to him to set against his tax liability (i.e. £74,035 x 20%
= £14,807).
12.
These facts were confirmed and HMRC raised an assessment dated 22 March
2012 for £7,886.20. This was effectively the higher rate tax due at 40% (less
the tax credit at 20%) on what was now established to be the amount of the
Appellant’s total income subject to higher rate tax for the year (£39,431).
13.
The Appellant now appeals against this assessment.
The legislation
14.
There was no dispute about the effect of the tax legislation applying to
partial surrenders of life policies. We therefore do not set out that
legislation in full in this decision. Suffice it to say that Mr Davies
accepted that the calculation was properly performed and in accordance with the
legislation on the basis of a partial surrender of each policy within the
Appellant’s Bond.
Submissions
15.
Mr Davies argued that the instruction to deal with the first encashment
by way of a partial surrender of each policy within the Bond was a simple error
on his part. Such an error should, he submitted, be capable of correction by
the Tribunal.
16.
So far as the second partial encashment was concerned, he accepted that
there was no instruction given as to the method to be applied. It was clear on
the face of the terms and conditions of the Bond that in the absence of any
instruction to the contrary, a partial encashment would be dealt with as a
partial surrender of each policy within it. He could not therefore contest the
basis of the second encashment, except to say that it was clearly done in the
wrong way, would certainly not have been done in that way if the implications
had been known and again the inherent mistake should be capable of being
corrected.
17.
Mrs Bennion submitted that it was clear from the documents how the
partial encashments had actually taken place and that was conclusive. History
could not be changed, and unfortunately the Appellant was bound by the terms
and conditions of the Bond and the actual basis upon which the partial
encashments took place.
Discussion
18.
In relation to the first encashment, the instructions given were quite
clear and were acted on by Zurich. In relation to the second encashment it is
clear that, in accordance with the terms of the Bond, Zurich acted correctly in
dealing with it by way of a partial surrender of each policy within the Bond.
19.
The question of possible rectification has been considered by the
First-tier Tribunal (Judge Hellier) in Joost Lobler v HMRC [2013] TC02539.
We can only echo and respectfully agree with the analysis in that decision.
This Tribunal has no power to set aside and reconstitute a transaction that has
occurred on some basis different from that on which it did occur simply because
one of the parties to the transaction has realised that he made a mistake which
he now seeks to correct. On the basis of the events that actually took place,
unfortunately the Appellant has no answer to the assessment and the appeal must
be dismissed.
20.
We echo the comments of Judge Hellier as to the repugnance of this
result but, like him, find that we are unable to reach any other conclusion.
21.
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.
KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 3 October 2013
