CONTENTS
DECISION
Introduction
1.
These are three consolidated appeals categorised as complex
(TC/2012/08472; TC/2012/09576 and TC/2013/01500). Together, they raise a
variety of issues flowing from two Notices of Regulation 80 Determinations
dated 8 April and 5 September 2012 (relating to PAYE) and two Notices of
Decision (relating to National Insurance Contributions) issued on the same
dates.
2.
The issues in the appeal raise questions relating to the accounting
treatment of certain transactions of the Appellant (the Company) during the tax
year 2004/05, the effect of subsequent dealings between the Appellant and the
Respondents (HMRC), and the consequent fiscal liability, if any, of the Company
arising out of those transactions and dealings. These, in turn, raise a number
of public law issues. However, the principal issue relates to the liability,
if any, of the Company to pay PAYE and NIC in respect of entries in the
Company’s accounts recording and reflecting, to put it broadly meantime, a
bonus of £900,000 to Mr Thomas and his brother, and wages and salaries of
£178,230.
3.
The appeal was heard at Edinburgh on 4, 5 and 6 February, 4, 8, 9 and 28
April and 9 May 2014. Michael Upton, Advocate, appeared on behalf of the
Company on the instructions of Russell & Aitken, solicitors, Edinburgh. He
led the evidence of Roderick Thomas (Mr Thomas), the director of the Company.
Iain Artis, Advocate, appeared on behalf of HMRC on the instructions of the
Office of the Advocate General. He led the evidence of James Edward Cashmore,
a chartered accountant with Special Investigations, a directorate of HMRC, and
Anthony Stewart, an experienced tax inspector. The witnesses amplified their
written statements and Mr Cashmore spoke to a report dated 14 January 2014
which he had prepared for the purposes of these proceedings.
5.
A Statement of Agreed Facts (SOAF) was produced by the parties. In
order to retain some sort of logical and chronological sense to this decision
we have incorporated the various agreed facts at suitable points in the
decision rather than set it out in its entirety. A bundle of documents was
also produced and added to from time to time during the Hearing.
5.
At the outset of the Hearing, there was an opposed application to allow
certain documents to be received late. We heard parties at some length,
adjourned and gave our decision later in the morning. The result was that a
number of documents were allowed but some were excluded. It is unnecessary to
identify them specifically, except to note that of the proposed Inventory of
Productions Nos. 139-151, Nos. 140-143, 145 and 147 were excluded and the
remainder allowed. Two further documents proposed by the Company were allowed,
namely a Report by Michael Taub dated 20 December 2013 and HMRC Code of
Practice No 8 (No 153).
Other Procedural Matters
6.
By Direction dated 12 December 2012, Judge Mosedale consolidated appeals
TC/2012/08472 and TC/2012/09576 and directed that they be referred to under
case reference TC/2012/8472 (the 0 seems to have been omitted). The Direction
also categorised the consolidated appeal as complex. By Direction dated
17 January 2013 the same judge directed at the request of the Company and with
the consent of HMRC that the Company’s previous intimation of opting out of the
complex case cost regime was in effect withdrawn and directed that the Tribunal
would have power to make awards of costs under Rule 10(1) in relation to any
costs incurred at any time in respect of this appeal to the same extent as if
there had never been an opt out.
General Background and Issues
Background
7.
The background to these appeals and the issues raised are complex. We
discuss the necessary detail below. In order to understand the detail, it
should be helpful to describe and summarise the essentials. Some of the facts
on the basis of which the Company presents its case are accepted by HMRC only
for the purposes of these appeals. There are other appeals pending by members
of the Thomas family and what might loosely be described as their companies
and businesses in which different facts are asserted or disputed. Appendix 1,
provided by HMRC, summarises the other appeals currently open.
8.
The Company was incorporated in Scotland on 13 March 1998 with the name
Tunevoice Ltd which it changed to Spring Salmon & Seafood Ltd on 24 April
1998. The share capital in the Company in the period to the conclusion of tax
year 2004/05 comprised authorised capital of 1,000,000 ordinary shares of £1,
of which 200,000 ordinary shares of £1 were allotted, issued and fully paid
up. The Company’s issued shares were in the tax year 2004/05 held by Bala Ltd,
a company incorporated in the British Virgin Islands and at that time
administered in Guernsey. The Company’s financial year ended on 31 July in
each year save 2005.
9.
The Company carried on business as suppliers, distributors and
processors of seafood between 1998 and about 31 January 2005 when it declared
that it had ceased trading. Whether it actually stopped trading or continued
to operate for some time thereafter is unclear, notwithstanding the agreement
between the parties on this point (see paragraph 16 below). Mr Thomas has been
a director throughout.
10.
Mr Thomas and his brother Stuart also carried on business in partnership
under the name S&R Thomas (the Partnership) as consultants and seafood
dealers. Much of the business of the Partnership appears to have been with the
Company and Thomas Lindh Ltd (formerly known as Spring Salmon Ltd), a Thomas
family company.
The rationale for the existence of the Partnership and how its business
differed from or complemented the business of the Company or Thomas Lindh Ltd
was not discussed in evidence or submissions.
11.
In 2002, the Partnership apparently ceased trading and sold or purported
to sell its business to the Company for £2,835,000 made up of trading stock
valued at £35,000 and the goodwill of its business valued at the sum of £2.8m.
The fiscal effect of any such transaction has been the subject of dispute. In
judicial review proceedings in 2007, HMRC asserted that the trading activities
of the Partnership lacked any obvious commercial purpose and that its true
purpose was to allow Mr Thomas, his brother and the companies controlled
by them to obtain a series of tax advantages.
12.
In or about August 2006, the Company, acting through Mr Thomas,
resolved, retrospectively, to make a payment of a bonus (described as a fish
stock bonus) of £900,000 to Mr Thomas and his brother Stuart Thomas at some
unspecified date in the future. This sum was reflected in the Company’s
cessation accounts which covered the 18 month period between 1 August 2003 and
31 January 2005. No written minute of the Company’s proceedings records this
decision.
13.
Those accounts also made provision for what was described as Staff Costs
(wages and salaries) of £178,230.
14.
Those accounts were submitted to HMRC on 30 August 2006 along with tax
returns for the period 1 August 2003 to 31 July 2004, and 1 August 2004 to
31 January 2005.
15.
During the period between 1 August 2003 and 31 January 2005, the Company
declared and paid no PAYE and accounted for no national insurance contributions
in respect of any director or employee. The payments noted above were not
mentioned in the personal tax returns of Mr Thomas or Stuart Thomas for the tax
years 2003/04 or 2004/05.
16.
It is a matter of agreement between the parties that the Company ceased
trading on 31 January 2005.
17.
On 4 January 2007, HMRC opened enquiries in relation to the Company’s
accounting periods between 1 August 2003 and 31 January 2005. Those enquiries
were closed in March 2011. HMRC also opened enquiries into the 2003/04
personal tax returns of Mr Thomas and his brother Stuart. These enquiries were
closed in July 2007.
18.
The Company contends that in about July 2007, it entered into a binding
agreement with HMRC whereby no PAYE or NIC would be demanded in relation to the
payment of the sum of £900,000. The existence and effect of the alleged
agreement was one of the grounds of appeal and was the subject of evidence and
detailed submissions which we discuss below.
19.
On 8 August 2007, the Company was struck off the Register of Companies
under s652(5) of the Companies Act 1985 and dissolved by notice in the
Edinburgh Gazette dated 17 August 2007.
HMRC subsequently applied to the Court of Session for its restoration. Mr
Thomas originally opposed the petition but it was eventually granted on 16
March 2011 following a proof in July 2010 and a reclaiming motion. The Company
founds on a written undertaking given on behalf of HMRC in 2010 in the course
of the restoration proceedings that, the Company contends, disables HMRC from
pursuing PAYE and National Insurance contributions in relation to the two sums
mentioned above. The effect of this undertaking was also one of the grounds of
appeal and although not the subject of any detailed evidence (essentially
because the dispute was not about whether it was given, but what it meant) it
was the subject of detailed submissions which we discuss below.
20.
In 2011, HMRC issued PAYE notices of determination and National
Insurance Contributions decisions in respect of these two sums (£900,000 and
£178,230). It is these notices and decisions and their confirmation on review,
actual or deemed that are the subject of these appeal proceedings.
21.
The Company also alleges that the enforcement of the notices and
decisions is time-barred.
Issues
22.
The principal issues ultimately canvassed before us were (i) whether the
sums of £900,000 and/or £178,230 are sums in respect of which PAYE and NIC are
payable at all ie whether the underlying determinations and decisions are
sound; (ii) whether the notices and determinations are otherwise time-barred;
(iii) whether an alleged agreement in 2007 bars HMRC from pursuing the PAYE and
NIC liabilities specified in the determinations and notices insofar as relating
to the sum of £900,000; and (iv) whether an undertaking given in the
restoration proceedings in 2010 bars HMRC from pursuing these liabilities.
23.
The onus of proof rests on HMRC in relation to time bar in respect of
PAYE. They invoke s36 TMA which, applies to PAYE (but not to NIC; see below at
paragraphs 242-248). That section enables HMRC to issue notices and
determinations within 20 years of the year of assessment in issue where the
loss of tax sought to be recovered is brought about deliberately by the taxpayer.
A different argument, based on the general law of prescription and limitation,
has been presented by the Company in relation to the NIC decisions.
24.
The onus of proof on all other issues (should the PAYE time-bar argument
be repelled) lies on the Company. There is, however, a dispute between the
parties as to whether the onus in relation to time bar requires HMRC to prove a
loss of tax, ie to establish the underlying soundness of the determinations and
decisions and thus, in effect, place the onus of proof in these appeals
entirely on HMRC. It is settled law that the normal rule is that the onus lies
on the taxpayer to prove, on a balance of probabilities, that a valid
assessment is excessive and what the correct or approximately correct amount
should be, otherwise it stands good. No question of best judgment arises here.
Other Proceedings
25.
One of the difficulties for this Tribunal has been to identify the
detail of the relevant background to the fiscal affairs of the various Spring
Salmon companies, Mr Thomas and his brother as individuals and Mr Thomas
and his brother in the guise/shape of a partnership known as S&R Thomas
Partnership, which we have already mentioned (see paragraph 10 above). There
have been many transactions involving one or more of them. Funds, assets,
rights and obligations have been (or claim to have been) transferred among them
sometimes in a somewhat loose and casual manner. The paperwork produced has
been limited and leaves many questions either unanswered or which have to be
answered by inference. Had proper records been produced (we cannot say whether
they exist) our task might have been less onerous.
26.
We should also mention that there have been numerous decisions of the
tax tribunals since 2005 if not earlier, in which much of the background to
this appeal is set out to a lesser or greater extent. Appendix 2 specifies and
summarises all or at least most of the decisions in tax appeals relating to Mr
Thomas, his brother, the Partnership and the companies controlled by them. We
mention some of these later in this Decision. It would have been in the
interests of all if a more comprehensive statement of agreed facts (and there
are many which are either indisputable or are not controversial) had been
prepared. This would have shortened the length of the proceedings, this
Decision and the time it has taken to produce it. However, it is perhaps not
surprising that parties are cautious about reaching agreement on some factual
matters. The relationship between HMRC and Mr Thomas, who seems to deal with
most of the correspondence and negotiation with HMRC himself, and acts as the
advocate in these tribunals from time to time, is probably best described as
strained. In short, there has been a war of attrition between certain members
of the Thomas family and their various businesses on the one hand, and HMRC on
the other hand. The administrative cost to the general taxpayer in the form of
HMRC time and effort, and tribunal costs, has been very substantial compared
with the relatively small amounts of tax collected over the years. Most
adverse decisions by HMRC are appealed by the Thomas family and their various
businesses. The same background facts are canvassed but many matters while
aired, remain obscure and unresolved.
Statutory Background
PAYE
27.
The principal charging provisions are Regulations 69, 80 and 68 of the
Income Tax (Pay As You Earn) Regulations 2003. Regulation 69 requires an
employer to account to HMRC for PAYE within specified periods. Regulation 80
enables HMRC (that is to say gives them a discretion) to determine to the best
of their judgment the amount of unpaid tax payable by an employer under
Regulation 68 in a tax year; and entitles them to serve a notice of
determination on the employer. Regulation 68 sets out how the amount an
employer must pay is to be determined. Regulation 21 requires the amount to be
deducted from the payment made to the employee (by reference to the employee’s
code if he has one). Regulations 7 and 8 specify what is meant by code.
28.
By Regulation 80(5) the assessment, appeals, collection and recovery
provisions of the Taxes Management Act 1970 apply (subject to certain
exceptions) as if the determination were an assessment and the amount of tax
were income tax charged on the employer.
29.
Our jurisdiction to determine whether the Company has been overcharged
derives from TMA s31(1)(d) [appeal against any assessment to tax which is not a
self-assessment], 49G(2) [appeal after HMRC review] & 49G(4) [tribunal’s
obligation to determine the matter], 50(6) and 50(8) [power to reduce
assessment].
30.
ITEPA 2003 chapter 3 Part 1 sets out how tax is charged on employment
income. Section 18 sets out rules for determining when general earnings
consisting of money are to be treated as received at the earliest of various
specified times, eg when the payment is made of or on account of earnings; when
a person becomes entitled to payment of or on account of earnings; where an
employee is a director of a company, when the sum on account of earnings is
credited in the company’s accounts or records. By s19, general earnings not
consisting of money are to be treated as received when the benefit is provided
(subject to exceptions not material for present purposes).
31.
As a practical matter, an employer’s annual return (known as a P35)
requires to be submitted to HMRC by 19 May following the end of the tax year in
question. Such return along with forms required to be submitted with it (P14
and P60), should contain a summary of employees, their address, with details of
the total payments made and the tax deducted, together with the employee’s
code.
National Insurance Contributions (NIC)
32.
Sections 6 and 7 of the Social Security Contributions and Benefits Act
1992 make provision for payment by an employer of secondary Class 1
contributions in respect of earnings paid to or for the benefit of an earner
in his employment. By section 3, earnings includes any remuneration or
profit derived from an employment. Employed earner is defined in s2.
Section 9 specifies how secondary Class 1 contributions are calculated.
Section 8 of the Social Security Contributions (Transfer of Functions etc) Act
1999 enables an officer to decide whether a person is or was liable to pay
contributions of any particular class and the amount he is liable to pay.
Payment of NIC by an employer is due by the 19th of the month after
that in which he made the payment which gave rise to the obligation to pay the
NIC. By Regulation 3 of the Social Security Contributions (Decisions and
Appeals) Regulations 1999, such a decision is to be made to the best of the
officer’s information and belief. There is also power to vary a decision
(Regulation 5).
33.
Our jurisdiction derives from s11 and 12 of the Social Security
Contributions (Transfer of Functions etc) Act 1999 [right of appeal to the
tribunal], the Social Security Contributions (Decisions and Appeals)
Regulations 1999, Regulation 7 and the Transfer of Tribunal Functions and
Revenue and Customs Appeals Order 2009. Power to vary the decisions is given
by Regulation 10 of the 1999 Regulations.
Time Bar
34.
TMA s34 contains a general provision that an assessment to income tax
may be made at any time not more than four years after the year of the
assessment to which it relates. That general principle is subject to later
provisions in the Act and to any other provisions of the Taxes Acts.
35.
Section 36 TMA provides inter alia as follows:-
(1)
An assessment on a person in a
case involving a loss of income tax … brought about carelessly by the person
may be made at any time not more than 6 years after the end of the year of
assessment to which it relates (subject to subsection (1A) and any other
provision of the Taxes Acts allowing a longer period).
(1A) An assessment on a person in a case involving
a loss of income tax…..
(a)
brought about deliberately by the
person
……………
may be made at any time not more than 20
years after the end of the year of assessment to which it relates (subject to
any provision of the Taxes Acts allowing a longer period).
(1B) In subsections (1) and (1A) references to a
loss brought about by a person who is the subject of the assessment include a
loss brought about by another person acting on behalf of that person.
36.
The foregoing provisions apply to liability of an employer for PAYE.
However, they do not apply to the liability of an employer to pay NIC. The
general law of prescription and limitation applies to NIC liability.
37.
English law, in terms of the Limitation Act 1980, appears to restrict
the time allowed to enforce payment of a debt by civil proceedings to six years
from the date when liability first arose. There are exceptions where fraud or
concealment are involved.
38.
In Scots law, an obligation to pay NIC is subject to extinction by
prescription, ie the passage of time. The short negative prescription under
section 6 of the Prescription and Limitation (Scotland) Act 1973 is, broadly,
five years from the date on which the obligation became enforceable. Section 6
applies to the obligations specified in Schedule 1 to the 1973 Act. The
obligation to pay NIC or any tax is not therein specified.
39.
An obligation such as an NIC debt which does not prescribe under s6,
will prescribe under s7 after 20 years from the date on which it became
enforceable.
40.
The parties are in dispute as to whether Scots law or English law should
apply to the question of prescription/time bar.
Other Relevant Statutory Provisions
41.
TMA s29 (as in force when the 2010 undertaking was given) enables a discovery
assessment to be made after the statutory period for enquiry into the
taxpayer’s return has expired or been closed, where there has been an
insufficiency of tax brought about carelessly or deliberately by the taxpayer
or where the insufficiency could not reasonably have been expected to have been
identified in time on the basis of the information provided by the taxpayer in
his return or other related documents.
42.
Part of the background to this appeal relates to the dissolution of the
Company in 2007 and its restoration to the Register of Companies in 2011.
Section 653 of the Companies Act 1985 provided that the court may, in certain
circumstances, on the application of inter alios a creditor, order a
company’s name (that has been struck off the register under s652) to be
restored to the register.
43.
S1032 of the Companies Act 2006, which was in force when the restoration
provisions were before the court in 2010 and 2011, provides that the general
effect of such an order for restoration is that-
(1)
… the company is deemed to have
continued in existence as if it had not been dissolved or struck off the
register.
44.
The court may also
(2)
…give such directions and make
such provision as seems just for placing the company and all other persons in
the same position (as nearly as may be) as if the company had not been
dissolved or struck off the register.
Company Accounts
45.
We heard evidence about accounting practice in relation to the treatment
in the Company’s accounts of the sum of £900,000 referred to above, and the
subsequent alteration of such accounts. The Companies Act 1985 requires, by
s228(2), a company to prepare accounts in which the balance sheet gives a
true and fair view of the state of affairs of the company as at the end of its
financial year; and the profit and loss account shall give a true and fair view
of the profit or loss of the company for the financial year.
46.
Section 245 of the 1985 Act (repealed with effect from 6 April 2008) and s454 of the
Companies Act 2006 provide that if it appears to the directors that any annual
accounts or any directors’ report did not comply with the requirements of the
Act, revised accounts or a revised report may be prepared correcting the
non-compliance. The effect of revision of defective accounts appears to be
retrospective (The Companies (Revision of Defective Accounts and Reports)
Regulations 2008, as amended).
47.
We discuss the published practice in relation to this topic at paragraph
91 below.
Records
48.
It is also worth bearing in mind that there are various statutory
obligations in relation to record-keeping. Section 12B TMA provides, in
effect, that a taxpayer keep and preserve for a specified number of years, all
such records as may be necessary for the purpose of enabling a correct and
complete return to be delivered for the year or period in question. Particular
types of records required are described in primary and secondary legislation
and include records of all amounts received or expended in the course of trade.
Facts
The Company - general history and background
49.
Mr Thomas has been the sole director of the Company since its
incorporation in 1998. Stuart Thomas was appointed the Company’s secretary on
23 May 2004. Neither had a formal service contract with the Company. Both were
active participants in the running of its business. Stuart Thomas dealt with
sales and the bulk of the purchases. Mr Thomas dealt with accreditation (for
supermarket purposes) food hygiene and other matters. He also prepared
accounts and tax returns and negotiated with HMRC from time to time on behalf
of the Company, on behalf of the partnership, on behalf of his brother and on
his own behalf, all on a whole range of issues, including technical tax issues
relating to the transactions of the Company and other businesses controlled by
the Thomas family. Neither brother received a regular salary from the
Company.
50.
In proceedings in the Court of Session by the Company against a third
party with whom it had done business, Stuart Thomas, who gave evidence (but Mr
Thomas did not) was described by the Lord Ordinary, Lord Clarke, in his Opinion
dated 29 September 2004, following proof, as the managing director of the
Company. Lord Clarke records that a good deal of the facts he found
were not in dispute and came from correspondence passing between the parties
(see paragraphs 2 and 5 of the Opinion). Of Mr Stuart Thomas, Lord Clarke,
said that the impression he formed from his evidence as a whole, was that he
was something of an opportunist and while opportunism may to some extent be the
life-blood of successful commerce, it is not a quality which sits well with the
giving of evidence as to actual circumstances which have occurred in the past
(paragraph 53).
51.
According to the evidence of Mr Thomas, which on this point we accept,
Stuart Thomas played an active and important role in directing the Company’s
operations. All others working for the Company did so in an administrative
capacity. Stuart Thomas was a director of the Company in all but name.
52.
On 28 July 2002, the Company purchased as a going concern the business
and certain assets of S&R Thomas Partnership (an English partnership of
which Mr Thomas and his brother Stuart were the partners) for the sum of
£2,800,000 for the goodwill and £35,000 for the stock. This was paid for by a
credit to the director’s loan account in the books of the Company. This
transaction, recorded in a Minute of Agreement dated 24 July 2002 between
S&R Thomas (the Partnership) and the Company has been the subject of much
controversy. A similar transaction occurred
in 2004 (discussed below). The commercial purpose, if any, of these
transactions (other than to secure tax advantages for the Thomas family, and
companies and businesses controlled by members of that family) was not
discussed before the Tribunal and is therefore unknown.
53.
The shares of the Company were owned by Bala Limited, a company incorporated
on 27 August 1997 in the British Virgin Islands and administered in Guernsey. Bala Ltd was, in turn, owned by a family trust known as the Maclennan Trust.
Its origins, beneficiaries, status and fiscal liabilities, and even its
description as a family trust have been the subject of much discussion with
HMRC over the years. The Company’s accounts for the year ended 31 July 2003
disclose, on page one, that Mr Thomas was a potential beneficiary in a trust
which owned the entire issued share capital in the Company’s ultimate holding
company. This is plainly a reference to the Maclennan Trust and Bala Ltd. In
recent email correspondence (produced to the Tribunal) Mr Thomas acknowledged
that he and his brother were to be treated as the settlors of the Maclennan
trust (email from Mr Thomas to Mr Stewart of HMRC 30/4/12).
54.
Sarah Thomas (wife of Mr Thomas) and Rebecca Thomas (wife of Stuart
Thomas) worked in the Company’s business until about March in 2004 when they
ceased to work for the Company, and began to work for the Company’s successor
Spring Seafoods Ltd (subsequently renamed Spring Capital Ltd in 2010).
55.
HMRC have accepted that they each received non-taxable termination
payments of £30,000 and that these sums amounting in total to £60,000 form part
of the sum £178,230 mentioned in the Company’s accounts, discussed below at
paragraphs 157-165.
56.
In May 2004 an Agreement was entered into with HMRC to facilitate the
break-up of the Maclennan Trust. This is described below at paragraphs 79-81.
57.
On 22 September 2004, the assets and business of the Company were
transferred to the Partnership. On the same day, those assets and business
were transferred to Spring Seafoods Ltd (now known as Spring Capital Ltd; we
shall refer to this company as Spring Seafoods/Capital). The value of the
goodwill so transferred is the subject of a tax appeal pending before the
First-tier Tribunal in London. This transfer of assets is not disclosed in the
accounts of the Company discussed below. No documentation in relation to
either transfer has been produced. However, for the purposes of this appeal,
HMRC accept that the transfers occurred. In the course of the proceedings
before us, the Company, on 9 May 2014, produced a letter dated 5 March 2007 to
HMRC from Spring Seafoods/Capital to HMRC in relation to its corporation tax
returns for the “periods ended 9/3/05 and 30/4/05. In that letter,
Mr Stuart Thomas, on behalf of Spring Seafoods/Capital intimated that during
the period ended 9 March 2005, it took over and began carrying on the trade
previously carried on by the Company and amended its returns so as to claim the
terminal losses of the Company whose business it had acquired. Mr Stewart was
not aware of this letter at the time and had no reason to be aware of it. The
letter was sent to a different tax district in connection with another
company. He cannot be deemed to have knowledge of every document sent to
HMRC. The earliest date he could have become aware of the transfer was April
2009 when he was in correspondence with Mr Norris (see paragraph 66 below).
58.
Following its restoration to the Register of Companies in 2011, the
Company does not appear to have traded. As already noted, it is a matter of
agreement between the parties that the Company ceased trading on 31 January
2005. This is in spite of the finding by Lord Glennie in the restoration
proceedings in the Court of Session that it was admitted that at the time the
Company was struck off the Register, it was still in operation (Opinion
(undated) amplifying ex tempore judgment on 14 July 2010 paragraph
4(14)).
Other
related companies and businesses
59.
The Company is the successor to the business of Spring Salmon Ltd.
Spring Salmon Ltd was a seafood trading company and dealt mainly in salmon. It
was a commodity type trading business. Much of its business was done over the
telephone. Various family members worked in the business including Sarah
Thomas, who is Mr Thomas’s wife and Rebecca Thomas who is Stuart Thomas’
wife. Spring Salmon Ltd subsequently changed its name to Thomas Lindh Ltd.
The share capital of that company was or is held in trust for the minor
children of Mr Thomas and those of his brother, Stuart.
60.
Spring Seafoods/Capital was incorporated and began trading in March
2004. It changed its name to Spring Capital Ltd on or about 23 February 2010.
Mr Thomas is or was the company secretary and a shareholder. He became a
director in 2010. His brother Stuart took the lead role in that company. The
reason for this is unknown.
61.
Spring Seafoods/Capital’s Corporation tax self assessment, accounts and
tax computations all for the period ended 30 April 2007 were submitted to HMRC
on or about 28 April 2008. The return was signed by Mr Thomas. It disclosed
turnover of £2,338,437 and trading losses of £144,835.
62.
The accounts of Spring Seafoods/Capital for the year ended 30 April 2007
disclose turnover of £2,338,437. It appears that the business of the Company
had been transferred to Spring Seafoods/Capital, together with the liability of
the Company for the director’s current account amounting to £1,557,991. No
documents have ever been produced to support these entries.
63.
The acquisition appears to consist of the purchase by Spring
Seafoods/Capital of goodwill at the price of £1,557,991. This sum is paid for
by crediting the same sum (£1,557,991) to the director’s current account with
Spring Seafoods/Capital. It is unclear, to say the least, how this figure was
arrived at. The Company had already transferred its business (which would
include goodwill, whether or not formally identified or valued) to the
Partnership in September 2004 who immediately transferred it to Spring
Seafoods/Capital. It appears that the intention was to reflect the transfer of
business and assets by the Partnership. Spring Seafood/Capital returns and
accounts covering 2004, 2005 and January to April 2006 were not produced,
although we have noted that Mr Upton made reference to the 2005 and 2006
returns in his closing submissions.
64.
We have been provided with some papers relating to Spring
Seafoods/Capital conjoined appeals (reference TC/2011/01784). These disclose
that the claim relating to the goodwill of the Company’s business and its
amortisation and consequent claim for relief does not appear until the appeal
relating to the return for the period ended 30 April 2007; and not any earlier
return.
65.
The accounts of Spring Seafoods/Capital for the year ended 30 April 2007
disclose inter alia the following:-
65.1 Stuart
Thomas was the director throughout the year. Mr Thomas was the secretary from
12 February 2007. The bankers were Nordea Bank Finland plc. The accounts were
prepared by D Norris CA, Reading. He was instructed by Spring Seafoods Ltd but
did not act for the Company. The accounts were not audited.
65.2 The
principal activities of the company are described as the purchase and
distribution of seafood and money lending as a trade.
65.3 The
turnover of the company was £2,338,437 with an operating profit of £629,864.
Note 3 to the accounts shows administrative expenses of £239,937 and director’s
remuneration of £5,000.
65.4 The
balance sheet shows intangible assets at £1,335,421. The previous year,
2006, shows no intangible assets of any value. Note 8 to the accounts
provides inter alia as follows:-
Cost Goodwill Total
£ £
Additions 1,557,991 1,557,991
At 30 April 2007 1,557,991 1,557,991
Depreciation
For the year 222,570 222,570
At 30 April 2007 222,570 222.570
Net Book Amounts
At 30 April 2007 £1,335,421 £1,335,421
The Director has elected to
write off goodwill over 7 years in equal instalments.
65.5 Under the
heading other creditors is shown the figure £1,756,484, an increase from
the previous year (£187,395) of £1,569,089.
66.
In the accounts for the year to 30 April 2007 and the year to 30
April 2008, Mr Norris is identified as Spring Seafoods/Capital’s accountant.
Accompanying a letter by Mr Norris to Mr Stewart dated 3 April 2009,
are two manuscript notes in relation to the 2007 accounts. The first note,
headed Goodwill states that the trade of the Company was transferred to
Spring Seafoods/Capital together with a liability on the director’s loan
amounting to £1,557,991. The note states that The goodwill is the balancing
entry in the accounts.
67.
The second note is headed Other Creditors, and records the following
in manuscript:-
“Director’s current account
Mr S Thomas 1,741,798.46
Salaries 2005/06
14,685.60
1,756,483.96
Includes liability transferred
from Spring Salmon & Seafoods (sic) Ltd
of £1,557,991 on transfer of the trade to Spring Seafoods (sic) Ltd”
68.
The accounts of Spring Seafoods/Capital for the year ended 30 April 2008
(which bear the date 25 February 2009), show inter alia a turnover of
£2,041,705, an operating profit of £816,827, administrative expenses of
£40,631, director’s remuneration of £11,000 and other creditors at
£1,401,664. The previous year’s figure for other creditors is the sum
of £1,756,483.96.
69.
We note in passing that as the Company ceased to trade at the end of
January 2005, and had already transferred its business to a or the Thomas
partnership in September 2004, it is difficult to understand what goodwill it
had in 2006 or 2007 to transfer to Spring Seafoods/Capital who already had and
presumably were carrying on the business formerly carried on by the Company.
According to the evidence of Mr Stewart, which we accept, the accounts of
Spring Seafoods/Capital for the year to 30 April 2006, which were not lodged as
productions, made no reference to the acquisition of the trade or business of
the Company.
70.
There do not appear to be any documents vouching the sale of goodwill in
2006 or 2007. This particular transaction is the subject of appeal proceedings
under reference TC/2011/01784. If, as Mr Thomas appears to contend in his
letter dated 26 May 2011 to Mr Stewart, that the business of the Company,
transferred to the partnership in September 2004, was immediately transferred
to Spring Seafood/Capital, then one would expect that significant event to be
noted in Spring Seafood/Capital’s accounts covering September 2004 and not
their accounts for 2007 or 2008. No such accounts were produced.
71.
Spring Seafoods/Capital have written down or amortised the value of the
goodwill (£1,557,991) over seven years claiming a deduction against profits of
£222,570 per annum. Moreover, the sum shown in the director’s account in the
books of Spring Seafoods/Capital has been drawn on although Spring
Seafoods/Capital have never declared any PAYE or NIC obligations or made any
such payments.
72.
Accordingly, what was said to be a £900,000 paper exercise in the
form of a bonus may have been converted into capital and is being repaid to Mr
Thomas and his brother as capital at their discretion. (see paragraphs 119-142
below).
73.
The accounts for Spring Seafoods Ltd for the period ended 30 April 2008,
submitted to HMRC in April 2009, show that the director had drawn down on the
credit balance of £1,757,484 reducing it by £355,820 to £1,401,664. The sum of
£900,000 thus appears to have found its way into the director’s account of
another Thomas family company.
74.
The foregoing information about Spring Seafoods/Capital is relevant, at
least indirectly to the question whether a liability on the part of the Company
to pay PAYE and NIC exists at all.
Fish Stock and Employees - early discussions with HMRC
75.
As long ago as 2001, the business affairs of the Thomas family had come
under the scrutiny of HMRC (then the Inland Revenue). Mr Thomas along with an
accountant represented Spring Salmon Ltd at a meeting with HMRC officials on
28 February 2001. The purpose was to discuss the business of Spring
Salmon and the Company. Enquiries had been opened into various returns of
these companies as well as the return of the Partnership and the personal
returns of various members of the Thomas family. Payments to employees of
Spring Salmon by way of transfer to them of fish stocks were discussed. Mr
Thomas accepted that this practice was carried out to avoid the burden of
operating the PAYE system. The HMRC officials did not believe that the scheme
worked. No conclusion or agreement on this was reached, but the Minutes record
that such a scheme did not work with effect from April 2000 due to a change
in legislation. Mr Thomas indicated that the Company would be operating
PAYE.
76.
A further topic of discussion at that meeting was termination payments
of £30,000 paid to employees as compensation. The HMRC official expressed
doubt as to whether the exemption could be allowed twice to the same members of
the Thomas family where the employers were companies under common control.
HMRC also expressed a concern that there were no proper records.
77.
The Minutes of the meeting were sent in early March 2001 to the
accountant who attended the meeting with Mr Thomas. He responded in May 2001
with various comments which are not directly relevant for present purposes
although he stated that the Company acquired almost all its stocks from the
Partnership. The commercial rationale for such an arrangement was not
disclosed.
78.
A further meeting took place on 23 October 2002 between HMRC officials
and the accountants. There was further discussion about fish stock bonuses and
compensation payments. Such bonuses had been credited to the directors’ loan
accounts in the accounts of Spring Salmon Ltd. At that stage, HMRC were of the
view that these were paper transactions between the Thomas family and their
companies.
2004 Tax
Settlement
79.
In May 2004 following extensive investigations, HMRC reached agreement
with inter alios the Company, a company known as Thomas Lindh Ltd, the
S&R Thomas Partnership, Mr Thomas and his brother Stuart Thomas. These
parties offered to make payment of £525,000 in settlement of a wide range of
tax liabilities covering the period between 1997 and 2003. Each of these
parties acknowledged that tax was unpaid by reason wholly or in part of their
default. HMRC accepted the offer and the tax was paid. The purpose of the
agreement was to put to an end a long running series of fiscal disputes. The
Trust was eventually wound up and the shares in the Company transferred to Mr
Thomas and his brother in equal portions in February 2007. However, numerous
fiscal disputes have continued to arise and a number are still current.
80.
The 2004 Settlement is discussed in Thomas v HMRC SC/3012/2008
and SC 3013/2008 by Judge Berner on 6/3/13. That decision concerned
preliminary issues in appeals against closure notices and amendments to
self-assessment returns of the two brothers in respect of the tax year 2002/03;
the amendments related to the sale of goodwill for £2.8m by the Partnership to
the Company. One of the questions was whether a letter dated 30 May 2012 from
Mr Stewart to Mr Thomas constituted a section 54 agreement of the brothers’
personal tax assessments for the tax year 2004/05 as the brothers argued. In
the event the tribunal did not need to consider that argument as there was
ultimately no outstanding issue in relation to the tax year 2004/05 (paragraph
14). All the other preliminary issues were decided in favour of HMRC.
Permission to appeal against the decision has been granted.
81.
That same letter was deployed in the Grounds of Appeal in the present
proceedings to advance the argument that it constitutes an agreement that no
tax of NIC was due. It no longer features in the Answers or the Note of
Arguments prepared by counsel for the Company and has now been expressly
departed from.
The Company Accounts (Financial Statements) for the 18
months ended 31 January 2005
82.
Some of the arguments presented to us discussed the Company’s accounts
in some detail. It is therefore necessary to make various findings of fact
about the Company, its business and accounts.
83.
The Company’s accounts for the year ended 31 July 2003 show the
director’s current account at £360,687 as at 31 July 2003 and £1,586,170 as at
31 July 2002. The Company’s accounts for the period 1 August 2003 to 31
January 2005 describe its principal activity as seafood suppliers. It is noted
that the Company ceased to trade on 31 January 2005. It is recorded that the
accounts were not audited.
The accounts, signed by Mr Thomas are, in accordance with company law, said to
contain a true and fair view of the state of affairs of the company and of the
profit and loss of the company for the period in question.
84.
These accounts were submitted by Mr Thomas to HMRC under cover of a
letter dated 30 August 2006 which also enclosed the Company’s tax returns for
the period 1/8/2003 to 31/7/04 (dated 30/8/06) showing a turnover of £1,689,231
and a trading loss of £686,526; and for the period 1/8/04 to 31/1/05 showing no
turnover and trading losses of £2,144,192. The letter discussed some technical
aspects of the figures contained in the returns and the accounts. The Company
claimed that it was entitled as at the end of the period (31/1/05) to recover
corporation tax of £642,835.
85.
At the balance sheet date, Bala Ltd, a company registered in the British Virgin Islands, was the beneficial owner of all the issued ordinary share capital
of the Company.
86.
In the profit and loss account, beside the heading Administrative
Expenses the sum of £1,181,690 is recorded. This sum includes the sums of
£178,230 and £900,000 mentioned below. In the Notes to the Financial
Statements, the following is recorded:-
“1 ACCOUNTING POLICIES
……
Goodwill
Goodwill, being the amount paid
in connection with the acquisition of a business in 2002, was being written off
evenly over the estimated usual life of seven years. In view of the company’s
cessation of trade on 31 January 2005 the remaining balance has been fully
written off.
………………..
2 STAFF COSTS 31.1.05
Wages and salaries £178,230
Accrued bonuses (180 tonnes
of fish stocks) £900,000
£1,078,230
The average monthly number of
employees during the period was as follows:-
31.1.05 31.7.03
Management &
productive 5 7
3 OPERATING PROFIT
The operating profit is stated
after charging/ (crediting) 31.1.05
…………….
Goodwill written off
£2,394,521
Director’s emoluments £9,215
Accrued fish stock bonus to
director £450,000
6 TAXATION
…..
UK corporation tax terminal
loss relief £605,875)
…..
In the opinion of the Director,
the amortisation of goodwill is allowable as a deduction against profits for
tax purposes. The goodwill was acquired from The S&R Thomas Partnership,
which is not connected with the beneficial owners of the company. Accordingly,
amortisation of £2,394,521 (2003-£400,000) has been treated as tax deductible
in these accounts.
11 CREDITORS: AMOUNT
FALLING DUE WITHIN ONE YEAR
31.1.05 31.7.03
Corporation Tax £54,492
Director’s
current accounts (including related parties) £1,557,991 360,687
Accruals
and deferred income - £255,350
14 RELATED PARTY
DISCLOSUERS
During the period the company
was under the control of its ultimate parent company Bala Ltd.
At the balance sheet date, the
company owed its director, Mr RC Thomas, and his brother Mr SJ Thomas
£1,557,991 (31.7.03-£360,687) on a director’s loan account. The amount is
secured by a floating charge on the assets of the company.”
87.
The Company neither owned nor possessed stocks of fish on 31 January
2005 or 24 August 2006, when the accounts were signed by Mr Thomas. This is
reflected in the Balance Sheet on page 4 of the accounts. The accounts were
prepared by Mr Thomas with the assistance of an accountant named Fieldhouse.
No adequate explanation for such entry has been disclosed in the voluminous
correspondence or in the evidence at the hearing before us.
88.
There is no minute or other record that it was contemplated by Mr
Thomas, his brother, or the shareholders of the Company (Bala Ltd) in 2006 when
the accounts were signed that the Company would or even might re-commence
trading. Subsequently, Mr Thomas resisted (unsuccessfully) HMRC’s petition in
2007 to resurrect the Company.
89.
The effect of these entries in the accounts is that the Company is
stating that an obligation existed on its part to pay £450,000 to each of Mr
Thomas and Stuart Thomas. It is being shown as an expense in the profit and
loss account within the accounting period. It is said to be an accrual, and if
it had not been paid, it would also appear in the balance sheet as an
outstanding liability. It does not so appear. Instead it was credited to the
director’s current account (including related parties [ie Stuart Thomas]. The
revised accounts referred to below at paragraphs 90-93 confirm this analysis.
Revised Accounts and Accounting Practice
90.
The Company issued revised accounts on 25 June 2013 (when they were
approved by Mr Thomas as director) for the period between 1 August 2003 and
31 January 2005. We refer to paragraphs 188-190 below. These accounts
excluded the accrued bonuses of 180t of fish stocks of £900,000 within Staff
Costs. The sum stated as Administrative expenses has been reduced by £900,000
from £1,181,690 to £281,690. The balance outstanding on the director’s current
account (including related parties) was reduced by £900,000 to £657,991 from
£1,557,991. Neither the revised nor the original accounts have been audited.
Nor have they been lodged at Companies House. No attempt has been made to use
these accounts to amend the Company’s corporation tax returns covering the
period between 31 July 2003 and 31 January 2005.
91.
In relation to the revision of accounts, we heard some evidence on this
topic from Mr Cashmore under reference to a document entitled Revision of
Defective Accounts IFRS and UK GAAP Factsheet December 2010. We accept the
evidence of Mr Cashmore as reliable. Broadly, the accepted practice having
regard to the provisions of the Companies Act 1985 s245, re-enacted in the
Companies Act 2006 s 454, is that a voluntary revision is permitted in any
case where it appears to the directors that inter alia the company
accounts or directors’ report, or the summary of the financial statement of the
company do not comply with the relevant statutory requirements. The Factsheet
notes that a company cannot use the legal procedure simply to change
something it decides it does not like or in some way improve the accounts or
reports; the original accounts must be in breach of the CA 2006, which includes
compliance with accounting standards.
92.
It has not been suggested that the entries in the cessation accounts in
relation to the sums of £900,000 and £178,230 are contrary to the requirements
of company law. They may now be regarded as ill-advised but that does not
justify treating them as varied, where they have been submitted to HMRC and
represented as containing a true and fair view of the state of affairs of the
Company.
93.
The change in the cessation accounts of the Company has not been given
effect to elsewhere. In tax appeal proceedings at the instance of Spring
Seafoods/Capital, no account appears to have been taken of these revisions.
94.
The failure to record the 2004 transfer of business in the cessation
accounts was contrary to standard accounting practice. According to Mr
Cashmore’s evidence, which we accept, it would have been standard accounting to
note within the accounts, as a minimum, the 2004 transfer and its effect on the
Company’s performance. There is no such entry in the cessation accounts. It
is difficult to see how in those circumstances the accounts give a true and
fair view. We find that they do not.
Thomas Family Personal Tax Returns
95.
The Self Assessment tax returns of Mr Thomas and Stuart Thomas for the
tax years 2003/04 (signed by Mr Thomas on 31 January 2005) and 2004/05 (signed
by Mr Thomas on 27 January 2006) did not disclose any income from the
Company. Mr Thomas’s 2003/04 return discloses that he was employed by
Thomas Lindh Ltd until 31 July 2004. It discloses no income from that
employment, but does disclose a termination payment of £30,000. His 2004/05
return discloses the Company as his employer. The income from that employment
is disclosed as nil.
96.
The return of Stuart Thomas for the tax year 2003/04 (signed by him on
27 January 2005) discloses Thomas Lindh Ltd as his employer. No income
from that employment is disclosed. A claim for relief of £30,000 is also
claimed.
97.
Sarah Thomas is married to Mr Thomas.
Her tax return for the tax year 2003/04 discloses remuneration from the Company
of £4,600 (which would not be taxable) plus a termination payment of £30,000.
She received the termination payment in March 2004. The sum of £38,600 was
credited to her account with the Nationwide Building Society on 16 March 2004.
HMRC appear to accept that the termination payment is included within that sum.
98.
Rebecca Thomas is married to Stuart Thomas. Her tax return
for the same tax year discloses remuneration from the Company of the same
amount. She also received a termination payment of £30,000 in March 2004. The
sums of £30,000 and £4,600 were credited to her account with the Nationwide
Building Society on 16 March 2004.
99.
Mrs Sarah Thomas’s tax return for the tax year 2004/05 discloses Spring
Seafoods Ltd as her employer. Income from that employment is disclosed as nil
Company Returns
100. The
Company submitted nil P35 forms (Employer’s Annual Return) for the tax
year 2002/03 in May 2003 and for the tax year 2003/2004 in October 2004. HMRC
have accepted that the related P14 forms (which provide details of employees)
would also have been submitted. The Company was thus asserting that it had no
PAYE or NIC obligations in respect of employees for those two tax years. Page
1 of the 2003 P35, signed by Mr Thomas, and pages 1 and 4 of the 2004 P35 were
produced at the hearing. Page 4 was also signed by Mr Thomas. This was said
to be a nil return disclosing no liability to account for any PAYE. Mr
Thomas so described it in an email to HMRC on 11 October 2004. That was
prompted by receipt by the Company of a penalty notice issued by HMRC following
upon the failure by the Company to submit the employer’s annual return by 19
May 2004. There was no evidence of any such returns having been submitted since
then in relation to the Company. We infer that none was submitted. The
cessation accounts record that during the period between 1 August 2003 and 31
January 2005, the Company had an average of five employees.
101. In their
corporation tax returns for the periods ending on 31 July 2004 and
31 January 2005 a claim is made that terminal losses be set off against
profits for the purposes of calculating its corporation tax liabilities. The
Company’s losses at 31/1/05 were said to amount to £2,483,777. These losses
are said to have arisen from the writing down of the value of the goodwill
acquired by the Company from the Partnership in 2002 (see paragraph 11 above).
On 4 January 2007 HMRC opened an enquiry into the Company’s return for the
period to 31 January 2005. In their closure notices dated 25 March 2011 they
concluded that the true losses were £141,515 for the final six months of the 18
month period, and £424,544 for the first 12 months. The Company has appealed
against these closure notices (TC/2011/6273). These appeals have been
consolidated with the appeals against the closure notices relating to the
Company’s returns for the years to 31 July 2002 and 31 July 2003 referred to
below. All these appeals remain open.
102. Moreover
in proceedings, raised in the Court of Session in August 2011, the Company has
sued HMRC for what is described as a refund of the sum of £642,835. The
sum is claimed as a debt owed by HMRC to the Company. The justification for
the action is averred to be the protection of the Company’s rights against extinction
by prescription. The action relates to the effect of the 2004 Agreement which
settled or at least purported to settle a number of long running disputes
between HMRC and the Thomas family and various family businesses and companies
controlled by them. Broadly, the dispute concerns the reach of the 2004
Agreement and whether it covers tax liabilities in respect of periods after 31
July 2001. The sum of £642,835 is averred to comprise corporation tax of
£599,855 and interest of £36,960 and a tax credit of £6,020. These sums are
averred to relate principally to corporation tax liability of the Company in
the tax years 2000/01, 2001/02 and 2002/03. They are said to form part of the
tax paid in accordance with the settlement Agreement in April and May 2004.
£400,000 was paid to HMRC on 20 April 2004.
103. HMRC in
their defence to the Court of Session action, assert that the terms of the 2004
Agreement bar the Company from claiming relief or repayment of any payment made
under or referred to in the 2004 Agreement. HMRC say that the 2004 Agreement
settled the corporation tax liabilities of the Company for the return periods
ending 30 April 1999, 31 July 1999, 31 July 2000 and 31 July 2001. The
Agreement did not cover any later periods. They argue that the claims have no
validity because they are based on payments made in April and May 2004 in terms
of the 2004 Agreement. They also assert that the court has no jurisdiction to
adjudicate upon these claims which, if valid at all, fall to be determined by
the statutory appeal process within the tax tribunal system.
104. The object
of the claim for terminal loss relief is to eliminate any corporation tax
liability on the part of the Company for the tax periods ending 31 July 2002
and 31 July 2003. On 26 October 2004, HMRC opened enquiries into the Company’s
returns for these periods. On 25 March 2011 (following the restoration of the
Company to the Register of Companies) HMRC issued a closure notice for the
period ending 31 July 2002 specifying the Company’s tax liability at
£287,769.30; £50,979.73 of that sum has been paid. On the same date, they
issued a closure notice for the period ending 31 July 2003 specifying the
Company’s tax liability at £288,866.30; no part of that sum has been paid. As
noted above, the Company has appealed against these closure notices and the
appeals remain open. They all relate to the sale of the goodwill of the
Partnership to the Company, and its fiscal effect, if any.
105. Standing
back from this bewildering complexity, it appears that the Company and others
came to an agreement with HMRC in 2004 and settled various contentious tax
liabilities. The settlement (as relating to the Company) covered periods
between 1 May 1998 and 31 July 2001. In their corporation tax returns
covering the periods ending 31 July 2004 and 31 January 2005, the Company seeks
to set off losses of £2,483,777 against profits. This is said to affect the
Company’s returns for the periods ending 31 July 2002 to 31 July 2003 and would
reduce to nil the Company’s profits during those periods. In their calculation
of the refund of tax of £642,835, which they claim, they have treated the sum
of £525,000 paid in terms of the 2004 Agreement or at least £400,000 thereof as
tax paid by the Company in the tax years 2001/2 and 2002/3, the reality being
that it was the sum or part of the sum paid by or on behalf of the Company and
others in settlement of tax liabilities for other (earlier) periods. This, on
the face of matters, insofar as relevant to the current proceedings, seems to
be a wholly illegitimate exercise.
Enquiries Opened
106. On 26
October 2004 an enquiry was opened into the Company’s returns for the periods
ending 31 July 2002 and 31 July 2003.
107. On 30
August 2006, Mr Thomas sent to HMRC the Company’s accounts for the 18 month
period ended 31 January 2005 and the Company’s corporation tax self assessment
tax returns for the periods 1/8/2003 to 31/8/2004 and 1/8/04 to 31/1/2005.
108. On 4
January 2007, HMRC wrote to the Company intimating that they intended to
enquire into the Company’s tax returns for the period ended 31 July 2004 and 31
January 2005 submitted by Mr Thomas on or about 30 August 2006. The enquiry was
to be conducted under Code of Practice 8. Code of Practice 8 covers all
the taxes and duties for which HMRC are responsible.
109. HMRC’s
letter raised a variety of matters on which information and documents were
requested. In particular, the following was requested:- (i) a copy of the
directors’ current accounts for the 18 month period, (ii) identification of the
employees and the amounts paid which made up the sums of £178,230 and £900,000
referred to in the accounts, and whether PAYE and NIC had been charged in
relation to that sum of £900,000 (no details of these directors’ accounts were
ever produced; the names of the employees were not initially identified); and
(iii) confirmation that forms P35 and P14 had been submitted for the year
2004/05. The enquiry was eventually closed on 25 March 2011.
110. The letter
dated 4 January 2007 also provided inter alia as follows:-
4 Note
11 to the accounts indicates that the directors’ current accounts (including
related parties) were in credit in an amount of £1,557,991 as at the 31 January
2005. Note 14 indicate that debt relates wholly to Mr RC Thomas and his
brother Mr SJ Thomas.
(a) Can
I have a copy of the directors current accounts (to include those for related
parties) for the 18 month period to the 31 January 2005 to show the date and
amount of each transaction, debit or credit, where more than £1000 was involved
and where are not obvious the name of the payer or payee.
(b) Note
14 states that the amount is secured by a floating charge on the assets of the
company. Can you please provide copies of all documents in relation to this
floating charge. If not obvious, will you say what assets of the company the
liability is secured against?
5
As regards the analysis of staff costs at note 2 to the accounts
(a) I
have had some difficulty in retrieving copies of the forms P35 and P14
submitted for 2004/05 within HMRC. Can you confirm that Form P35 and Forms P14
have been submitted by the Company for that year? If so can you please provide
a copy of the P35 and the P14’s to identify the names of the employees and
amounts paid/charged and leading to the total of £178,230 for wages and
salaries?
(b) Will
you provide a similar analysis of the £900,000 relating to accrued bonuses to
show the names of the employees involved. Can you confirm that PAYE and NIC
have been charged in relation to the £900,000. If not can you please explain
why not.
111. HMRC
opened an enquiry into Spring Seafoods/Capital’s return for the period to 9
March 2005. That return included a claim for £326,862. Subsequently, HMRC
issued a closure notice on 28 November 2008. Spring Seafoods have appealed against
the closure notice and the appeal is open. Enquiries have been opened and
appeals taken against consequent closure notices in relation to Spring
Seafoods’ returns for the period to 30 April 2005, and the years to 30 April
2006, 2007, 2008, 2009 and 2010. All these appeals have been consolidated and
remain open (TC/2011/11784). All these appeals raise essentially the same
principal issue, namely the fiscal effect of the sum of £1,557,991 for goodwill
in the Balance sheet of Spring Seafoods/Capital’s accounts for the year to 30
April 2007.
112. HMRC
opened enquiries into the 2003/04 personal returns of Mr Thomas and his
brother, and closed those enquiries on 10 January 2007 without making any
amendments to their returns of employment income or otherwise.
113. By letters
dated 10 January 2007, Mr Stewart on behalf of HMRC, opened enquiries under s9A
TMA into the personal tax returns of Mr Thomas and Stuart Thomas for the tax
year 2004/05. In relation to both brothers, HMRC raised the fact that his
return reflected no emoluments. At paragraph 3 of his letter to Mr
Thomas, Mr Stewart stated.
2)…….That
term (sc emoluments) is defined as including “all salaries, fees, wages,
perquisites and profits whatsoever”. Payment would be regarded as made if an
amount was, for example, credited to a current or loan account. Can you
confirm that no emoluments were paid to you within the meaning described above
in year ended 5 April 2005?
114. By letter
in reply, dated 27 February 2007, Mr Thomas stated inter alia
2)
No such emoluments were paid to me within the meaning described in your letter
in year end 5/4/05
115. The
correspondence continued. By letter to Mr Thomas dated 27 March 2007, Mr
Stewart expressed his understanding of the letter dated 27 February 2007 to
mean inter alia that Mr Thomas was asserting that he received no
emoluments in the year ended 5 April 2005. By letter to Mr Stewart dated 2
April 2007, Mr Thomas, in relation to the question of emoluments,
responded to Mr Stewart’s intimation that further research would be carried out
and said
Are
you calling me a liar? I have applied to the General Commissioners in Reading for a closure notice direction in respect of this year of enquiry and intend to
question you in public as to the basis on which you have called into question
the truthfulness of my statement in response to your enquiry. In the interim
would you please forward to me by return the evidence you have in your
possession to support your view that my statement as regards emoluments in tax
year 2004/05 is inaccurate ……….
116. A similar
reply was sent by Stuart Thomas on the same date. In responses to both
brothers dated 27 March 2007, Mr Stewart indicated that he was carrying out
some further research on the question of emoluments paid by the Company in the
year ended 5 April 2005.
117. Mr Stewart
responded by letter dated 20 April 2007. He pointed out that it had been
confirmed to him that no P35 return for the tax year 2004/05 had been received
from the Company. Yet, the Company accounts included a charge for staff costs
of over £1m including £900,000 for something described as accrued bonuses. He
also noted that the credits to directors loan account in the period to 31
January 2005 were at least £1,197,304. He indicated that he was entitled
to seek to reconcile those facts and, in particular, ask where the money came
from or the nature of the credits into the company. He maintained that there
were reasonable grounds for not issuing closure notices (in relation to the
personal returns of Mr Thomas and his brother).
118. Although
Mr Thomas was largely responsible for the Company’s financial affairs he
replied on 26 April 2007 by stating that it was for the Company to comment on
such enquiries.
Proceedings before the General Commissioner 15 June
2007
119. These
related to applications by Mr Thomas and his brother for closure notices in
respect of the enquiries opened in relation to their personal returns for the
tax year 2004/05. In spite of the terms of his letter dated 2 April 2007 to Mr
Stewart in which he stated that he intended to question Mr Stewart in public
as to the basis on which you have called into question the truthfulness of my
statement in response to your enquiry, Mr Thomas did not ask Mr Stewart any
questions. This typically aggressive, belligerent and wholly unjustified
comment and its insinuation has its origin in the enquiry letter dated 10
January 2007 in which Mr Stewart politely sought information about emoluments
for the tax year 2004/05. He was, in effect, investigating a taxpayer’s bare
assertion which did not appear to be reconcilable with other information in his
possession. He was plainly entitled to do so.
120. At the
hearing before the General Commissioners, Mr Stewart produced a written
submission and read it out. It had been intimated to Mr Thomas on or about
8 June 2007 and provided to the clerk to the Commissioners about the same
time.
121. The
hearing was concerned to a significant extent with income and gains arising
within Bala Limited and the Maclennan Trust, and, in particular, whether Mr
Thomas and his brother were settlors in the Trust that ultimately owned the
Company. Lengthy Minutes of the meeting were prepared by Mr Stewart. We have
no reason to doubt their accuracy.
122. The
Minutes record inter alia that, in the course of the proceedings, the
sum of £900,000 was mentioned, as was the net increase of nearly £1.5m in the
amount owed by the Company to the brothers, standing at credit in the
director’s current account. Mr Thomas said that neither he nor his brother had
the £900,000. When asked who had been paid this money he said that the
£900,000 was an accountancy accrual; a paper exercise. The source of
Company funds was also discussed. It was agreed that Mr Thomas would provide
the bank statements that would evidence the source of the monies going into the
Company and credited to the directors current account. Neither Mr
Thomas nor his brother identified the source. They were ordered to produce
evidence of the origin of the sum of £1.2m of capital injected into the
business of the Company.
123. The staff
costs of £178,230 were also discussed. Mr Stewart expressed the view that some
of this money may be been credited to Mr Thomas and his brother.
Mr Thomas disputed this and said that the monies had gone to persons who
were not liable to tax or to other family members.
124. The
conclusion and directions of the General Commissioners appear to have been that
Mr Thomas should provide all other relevant documentation to reconcile company
accounts with personal returns. They were also directed to provide evidence of
the net sum of about £1.2m of capital paid into the Company’s business.
125. The
foregoing is reflected in a letter dated 15 June 2007 to Mr Thomas from the
clerk to the General Commissioners.
126. Subsequently,
Mr Thomas produced a bank statement (with the heading Credit Advice) from the
Company’s Banker (Nordea Bank Finland plc, who have a branch in London) showing
that on 25 March 2004, the Company’s account was credited with the sum of
£300,000 paid by the Partnership; and that on 29 October 2004, the Company’s
account was credited with the sum of £900,000. No explanation was ever given
as to why these payments were being made by the Partnership to the Company,
particularly as the Partnership transferred its business to the Company in 2002
and ceased trading. And, in addition, in September 2004 the assets and
business of the Partnership were apparently transferred to the Partnership, and
the Partnership immediately transferred them to Spring Seafoods/Capital.
127. Mr Stewart
raised various queries in a letter dated 2 July 2007 to Mr Thomas. The heading
of the letter was “RC THOMAS AND SJ THOMAS SECTION 9A ENQUIRIES 2004/2005”.
This suggests that the primary focus was the personal tax returns of the Thomas
brothers. However, in the context of clarifying the source of various
substantial sums, Mr Stewart, in the letter, asked whether Mr Thomas was
prepared to provide details of credits and debits to the director’s current
account with the Company for the 18 months to 31 January 2005 where more than £10,000
was involved. He stated that he was left to conclude that the £900,000 accrued
bonuses had been credited to the director’s account, even although Mr Thomas
had stated in his letter dated 27 February 2007 that no such emoluments were
paid to me within the meaning described in your letter in year ended 5 April
2005. The letter being referred to by Mr Thomas was the letter to Mr
Thomas dated 10 January 2007 opening an enquiry into his personal tax return
for the tax year 2004/05, which we have mentioned above. That letter notes
that Mr Thomas’s return for that tax year reflected no emoluments. Mr Stewart
expressly pointed out that payment would be regarded as made if an amount was
credited to a current or loan account. By that stage, Mr Thomas had already
signed off the Company’s accounts for the period 1 August 2003 to 31
January 2005, which contained the £900,000 fish stock bonus as an accrued bonus
under the heading STAFF COSTS. Those accounts had also recorded under the
heading wages and salaries the sum of £178,230.
128. In the
letter dated 2 July 2007, Mr Stewart also referred to previous discussions
about bonuses in 2001. He requested copies of all documentation relating to
the payment/crediting of the £900,000 bonuses. He noted that if the bonuses
are not subject to PAYE and NIC then the sum would fall to be disallowed in the
Company accounts.
Subsequent Discussions July 2007
129. Mr Thomas
and Mr Stewart had a telephone conversation on 6 July 2007. In an internal
note prepared by Mr Stewart he records that Mr Thomas said that the charging of
the £900,000 accrued bonuses in the accounts was not part of an avoidance
scheme; it was no more than an accountancy accrual; and that they had not had
the money. Mr Thomas was prepared to agree on a without prejudice basis that
section 43 of the Finance Act 1989 (which would disallow the bonus as a
deductible expense for Corporation Tax purposes) applied (if HMRC agreed not to
apply PAYE or NIC to the £900,000). Mr Stewart recorded that he could agree to
the proposal and said that he would write to Mr Thomas confirming his
agreement.
130. In a
letter to Mr Stewart also dated 6 July 2007, Mr Thomas recorded his
understanding of the agreement noting that the Company had agreed that the
deduction in the accounts of the accrued fish stocks would be disallowed for
Corporation Tax purposes and HMRC agreed that in return they will not impose
PAYE, NIC or income tax charges on either the Company, Mr Thomas or his brother
Stuart.
131. For his
part, Mr Stewart responded to that letter on 17 July 2007 by writing first to
the Company (and subsequently to Mr Thomas on 19 July - see below) in inter
alia the following terms (the letter was addressed to Mr R Thomas, Spring
Salmon & Seafood Ltd):-
You
have said that the charging of the £900,000 was not part of an avoidance scheme
but rather was no more than an accrual for accountancy purposes. Emoluments
are normally treated as received when credited in company accounts/records, for
example to director’s current account; but the true legal nature of these
accrued bonuses has not been established and I have agreed that I would not
seek to charge PAYE or NIC if you agree that the amount was not to be allowed
in the company accounts in any event in accordance with Section 43 FA 1989. I
can confirm that I am prepared to proceed on that basis although I think that
the implications or potential implications should be a matter of record.
No
part of the £900,000 has actually been paid; it has not been withdrawn from the
company back account, in which case, although you have not explicitly said so,
the credit for the £900,000 has been to director’s current account. The trade
ceased on 31 January 2005 in which case this amount will never fall to be
allowed against company income. With no assessment there is therefore a debit
of £900,000 that has and will have no tax effect, but on the other hand a
£900,000 credit to director’s current account which may or may not have a tax
effect. Whilst the £900,000 is exceeded by the over £1.5 million credit on director’s
current account reflected in the accounts at 31 January 2005, that account may
have been overdrawn for a time and there may have been a Section 60 liability,
before the credit of £900,000 on the 29 October 2004 and the further £900,000
for the accrued bonuses at some point after 31 January 2005. You know that I
have been seeking an analysis of the director’s current account in
correspondence elsewhere and that in the absence of that analysis I am having
to draw conclusions on the basis of information. I am prepared to agree on a
without prejudice basis that I will not be pursuing Section 160 liability on
account of the agreement referred to above. I cannot allow a situation though
where a debit is disregarded on one hand but where the other side of the
bookkeeping, the credit of £900,000 is allowed on the other. The disregarding
of the credit has no impact as matters stand at the moment. The credit on
director’s current account is simply reduced at 31 January 2005. I should
make it clear that there could ultimately be a tax effect, liability under
Section 419 there is a further need to consider the possible re-writing of the
director’s current account following the final determination of the question of
the nature of the payment/credit of £2.8M on
the 26 July 2002.
132. It can be
seen that the letter records that Mr Stewart had been seeking an analysis of
the director’s current account. The Company never produced sufficient
information to enable a complete analysis to be made.
133. On 19 July
2007, Mr Stewart replied to the letter from Mr Thomas dated
6 July 2007 (not the Company). The heading of the letter referred to
Closure Notices 2004/2005. Most of the letter related to matters with which we
are not concerned but on page four, Mr Stewart said this:-
2 I agree that the Commissioners
directed that you provide evidence of the origin of the some £1.2 M capital
injected into the business, but they also directed that you provide all other
relevant documentation whether specifically requested by the or not. My
concern, if you recall, was that the £1.2M net increase in the amount
outstanding to you and “related parties”. I referred in my last letter to the
£1M withdrawal from the Spring Salmon & Seafood Limited account to the RC
and SJ Thomas account in October 2003 in which case the credits to directors
current account with at least £2.2M. I believe that part of the difference
relates to the £900,000 accrued bonuses that have been credited to your
director’s current account. Is this correct?
(a) S & R Thomas
partnership bank account apparently remained open after July 2002 when the
partnership ceased. You have confirmed that the interest arising has been
included in the personal returns for 2004/05.
(b) I
see that the RC and SJ Thomas bank account from which the £900,000 was
transferred to the company is another account held by yourself and Stuart and
that the interest has been included in your personal returns for 2004/05.
(c) I
do not know what other transactions had taken place in the director’s current
account in 18 month period. The £900,000 accrued bonuses though seem to have
been credited as at 31 January 2005 ie 2004/05. If this is not the case please
let me know. In the meantime I have asked you to explain your previous advice
in writing that no emoluments were paid to you in year ended
5 April 2005 despite my earlier clarification that they would be
regarded as paid is credited to the director’s current account. I asked you to
explain because on the face of it I have been misled. You have refused to
respond. I believe that there are implications and I reserve the right to come
back to this at a later date.
(d) As
you say; you have agreed that the £900,000 charged to the company accounts is
to be disallowed if I for my part agree that I will not impose PAYE/NIC on the
company, Stewart, or yourself on this sum. I have already written to you under
separate cover with that confrontation.
(e) I have since my last letter had
further research carried out as regards the company PAYE scheme for 2003/04 and
2004/05. Note 2 to the company accounts for the 18 months to 31 January
2005 refers to 5 employees. I asked my PAYE colleague to provide a record of
employees advised to her. There is a record of 3 being yourself plus two
family members. One of the family members is noted as having commenced 2004
the other in 2007 (after the trade ceased). The charge to wages and salaries
for the 18 months is the £178,230 on which no PAYE or NIC has been paid.
You received NIL and even if for example the £178,230 is allocated equally
between a further 4 individuals that is £44,557 each. Yet there is no tax or
NIC? There are tax implications and I will be assessing accordingly. Before I
do so can you confirm absolutely that no part of the £178,230 has been credited
to your director current account eg for related parties? If not can you say
what amount has been credited and why?
I
have been directed by the Commissioners to issue Closure notices by 31 July
2007 and will be doing so. I have no alternative but to issue armaments to the
returns to take account of the issues raised above.
134. It can be
noted that the letter dated 19 July 2007 confirms the conditional nature of the
agreement relating to the sum £900,000. It is clear that it does not relate to
the sum of £178,230, in respect of which Mr Stewart states, and we accept, that
no PAYE or NIC was paid in respect of that sum.
135. In his
letter to Mr Thomas dated 19 July 2007, Mr Stewart noted that the £900,000
bonus seemed to have been credited in the director’s current account in the
company accounts as at 31 January 2005. He asked Mr Thomas to let him know if
that was not the case. Mr Thomas did not do so and we infer that he accepted
Mr Stewart’s assumption as correct.
136. Mr Stewart
also pointed out that he did not know what other transactions had taken place
in the director’s current account in the 18 month period between
1 August 2003 and 31 January 2005. The Company did not enlighten him
with any degree of clarity. No full or complete information was ever produced.
137. By letter
dated 19 July 2007, Mr Stewart also wrote to the clerk to the General
Commissioners stating that he and Mr Stewart had been able to determine the tax
treatment of the £900,000 accrued bonuses. He stated that the charge was to be
disallowed.
138. By letter
dated 26 July 2007 in reply, Mr Thomas confirmed that no part of the amount of
£178,280 shown in those accounts relates to his or his brother’s earnings in
the relevant period. He also confirmed that no part of that sum had been
credited to his director’s loan account with the Company. However at no
subsequent stage including the proceedings before this Tribunal has the Company
provided an explanation as to how the whole (as opposed to part) of the sum of
£178,230 was made up.
139. The credit
of £1,557,991 on the director’s current account was never reduced until 2013,
when the revised cessation accounts of the Company, mentioned above, were
produced. By that stage it was too late for such accounts to have any effect
on the corporation tax returns covering the period 1 August 2003 to 31 January
2005.
140. On 31 July
2007, HMRC issued closure notices in relation to the enquiries opened for the
tax year 2004/05 to Mr Thomas and Stuart Thomas in accordance with the
directions of the General Commissioner following the hearing before him on 15
June 2007. The letters noted that, as Mr Thomas had previously stated, no part
of the sum of £178,230 had been credited to his director’s current account with
the Company or paid to him, that matter was being left out of account in
revising the personal returns. Accordingly, the enquiries were closed without
making any amendment to the returns of employment income of Mr Thomas or his
brother.
141. However,
amendments to the returns, relating to the Maclennan Trust and Bala Limited
were issued seeking additional tax. The conclusion was that the Thomas
brothers were liable to tax on the income arising from the trust, and on gains
arising from disposals. In the letter to Mr Thomas dated 31 July 2007, Mr
Stewart also noted that he had not heard from Mr Thomas on behalf of the
Company.
142. By letter
dated 23 August 2007, Mr Thomas and his brother appealed against these closure
notices (2004/5). The appeal related to their dealings and relationship with
the Maclennan Trust and Bala Ltd (see paragraphs 113 and 133).
Source of Funds
143. In 2004
the Company had an account with Nordea Bank Finland, at its London branch. On
24 March 2004, the Company’s account was credited with the sum of £300,000.
This originates from an order by S&R Thomas. On 29 October 2004,
the Company’s account was credited with the sum of £900,000. This originates
from an order from RC and SJ Thomas. This is the same amount as the
disputed fish stock bonus. Whether it is the same sum is another matter. In
spite of being requested to do so on numerous occasions, the Company has never
provided complete and comprehensive records relating to the transactions on the
director’s current account over the period covered by its cessation accounts.
Relationship of tax relief and loss claims of the
Company and Spring Seafoods/Capital
144. Following
enquiries into Spring Seafoods/Capital’s tax returns for periods ended 9 March
2005, 30 April 2005 and 30 April 2006, closure notices were issued rejecting
claims for relief for a loss transferred from the Company. The basis of
rejection was that the loss reflected in the Company’s corporation tax
assessment was founded on an invalid claim for loss. No such loss had ever
been determined.
145. By letter
to Spring Seafoods/Capital dated 8 April 2010, HMRC opened an enquiry into that
company’s Corporation Tax Self Assessment for the period 1 May 2007
to 30 April 2008. The letter noted that the enquiry would be conducted under
Code of Practice 8. It further noted that Spring Seafoods/Capital’s accounts
for the period ended 30 April 2007 reflected the acquisition of goodwill
costing £1,557,991; and that a claim for intangibles relief for writing down
part of that goodwill (£222,570) had been made. HMRC dispute the validity of
such claims.
146. The
enquiry letter also challenged a credit in the directors’ current account of
£1,756,484 in Spring Seafoods/Capital’s 2007 accounts. HMRC took the view that
SJ Thomas had withdrawn at least £354,820 from that company which should
have been subject to PAYE/NIC.
147. Currently,
there are before the First-tier Tribunal appeals by Spring Seafoods/Capital in
respect of the return periods ended 9 March 2005 through to the period ended 30
April 2010. They all relate principally, if not exclusively to the alleged loss
brought forward from the Company, and intangibles relief claims for goodwill
relating to the sum of £1,557,991, the exact amount which stood at credit of
the director’s account in the Company’s cessation accounts. These appeals have
all been conjoined and are being case-managed in London. The total amount of
tax at stake appears to be in the order of £1m. The disputes centre on the
market value of the goodwill said to have been acquired from the Partnership on
22 September 2004. Spring Seafoods/Capital seek to rely on the May 2010
Undertaking on the basis of some third party right as Spring Seafoods/Capital
was not a party to the restoration proceedings and is not mentioned in the
Undertaking.
148. HMRC say
that the claim for loss relief cannot be fully finalised until the Company’s
appeals in relation to corporation tax have been decided. Most of the losses
claimed have already been claimed by the Company and the maximum balance
unrelieved loss (assuming the claim to be good) is £317,851. HMRC say that the
maximum relief across both companies is £424,544 and this has already been
claimed by the Company by way of terminal loss relief and therefore presumably
cannot be claimed again by Spring Seafoods/Capital.
149. HMRC in
the Spring Seafoods/Capital appeals say that the claims for intangibles relief
are not valid, and some are out of time. More fundamentally, HMRC say that
there was no business acquisition in September 2004, and therefore no
entitlement to intangibles relief. This is essentially based on the lack of
documentation and the fact that the transaction is not properly accounted for
in any business accounts and records. Spring Seafoods/Capital at one stage
asserted that the goodwill was properly valued at £20m. They have produced a
report (from Michael Taub dated 20 December 2013) which places a figure of
£6,390,000 on goodwill. On the assumption that there is goodwill to be valued,
HMRC’s figure is £200,000.
150. Spring
Seafoods/Capital are presently claiming a tax loss of £2.4m. Part of that sum
appears to be calculated on the basis that it is obtaining relief in respect of
the £900,000.
151. It can be
seen that the relationship between the various claims and liabilities of the
Company and Spring Seafoods/Capital is not straightforward. On the basis of
the information provided to us, we regret that we cannot provide any clear
explanation. Fortunately a clearer explanation is not required to enable us to
make the necessary decisions on the issues raised in the appeals presently
before us.
Restoration of the Company to the Register of
Companies.
152. The
Company was struck off the Register of Companies under section 652(5) of the
Companies Act 1985 on 8 August 2007 and was dissolved on 17 August 2007. On 22
July 2008, HMRC presented a petition in the Court of Session for restoration.
Mr Thomas lodged Answers.
153. After
sundry procedure there was a procedural hearing on 19 May 2010. Mr Thomas
withdrew one aspect of his Answers (relating to oppression). On that date HMRC
gave an undertaking in the following terms:-
That
upon the restoration of the Company to the Register HMRC will forthwith (that
is to say as soon as is practicable within the requirements of the Taxes Acts
and applicable regulations and procedures) issue closure notices and
assessments in respect of the outstanding enquiries into the Company’s
liabilities. The Revenue will a) make no further demands of the Company’s
officers or any other person in relation to the said outstanding enquiries, and
b) raise no further enquiries into the Company’s trade to the date that ceased
namely 31 January 2005. The Company may appeal any assessments made on the
issue of the said closure notices, if so advised. Apart from assessments made
on the closure of the said enquiries the Revenue will have no power to, and will
not, raise any assessments on the Company in relation to the said trade to the
said date save on the discovery of fraudulent or negligent conduct on the part
of the taxpayer within the meaning of s. 29 of the Taxes Management Act 1970,
and has no present reason to anticipate making any such discovery or discovery
assessment.
154. On 14 July
2010. Lord Glennie ordered that the Company be restored to the Register. In
his subsequent (undated) Opinion, Lord Glennie noted inter alia that (i)
it had been admitted that when the Company was struck off, it was still in
operation (paragraph 4(14), 6 and 10); and (ii) Mr Thomas was concerned that if
the Company were restored and a liability to tax established, he and other
directors would be held accountable (paragraph 9; [the tax under consideration
was corporation tax (see paragraphs 4(5), 4(8) and 4(15)] ).
155. At some
stage during the proceedings in the Outer House, a Minute of Amendment (drafted
by the same counsel appearing in these Tribunal proceedings) was presented to
the Court. Paragraph 5 of the Minute of Amendment averred that One of the
purposes for which the petitioner seeks to restore the company to the Register
is in order for HMRC to assess its liability for employees’ PAYE Income Tax….
In the event that following restoration HMRC assess the company as liable to
make such payments, payment may be sought personally from the third respondent
(sc Mr Thomas). He would consequently be prejudiced. For reasons which we
need not explore, the third respondent’s pleadings were not allowed to be
amended (see Lord Glennie’s Opinion at [2010] CSOH 82 30 June 2010 at
paragraphs 19 and 20; his Lordship held that Mr Thomas had neither title nor
interest to resist the restoration petition). On 14 July 2010, Lord Glennie granted
the prayer of the petition ([2010] CSOH 117) and ordered that the Company name
be restored to the Register of Companies in Scotland (paragraphs 10 and 11).
156. Mr Thomas
reclaimed and represented himself in the Division. The reclaiming motion was
refused on 4 March 2011. The Company was restored to the Register of Companies
on 16 March 2011
Staff Costs – Wages and Salaries- the sum of £178,230
157. The
Company’s cessation accounts contain an entry for Wages and Salaries
£178,230. In the enquiry notice letters dated 4 January 2007, Mr Stewart
requested the Company inter alia to identify the names of the employees
and amounts paid/charged and leading to the total of £178,230.
158. The
Company declared and paid no PAYE in respect of any emoluments paid to a
director or employee in the periods ended 31 July 2004 and 31 January 2005.
The Company declared and accounted to HMRC for no national insurance
contributions in respect of the earnings of any director or employee in the
periods ended 31 July 2004 and 31 January 2005. A nil P34 return
was submitted by the Company to HMRC in October 2004.
159. In his tax
return for the year ended 5 April 2004, dated 31 January 2005, Mr Thomas
declared that he was employed by Thomas Lindh Ltd but the only employment
income declared was a claimed exempt payment of £30,000. In his tax return for
the year ended 5 April 2005, dated 27 January 2006, Mr Thomas declared that he
was employed by the Company and declared his income from employment to be nil.
160. In Stuart
Thomas’s tax return for the year ended 5 April 2004, dated
27 January 2005, he declared that he was employed by Thomas Lindh Ltd
but the only employment income declared was a claimed exempt payment of
£30,000. In his tax return for the year ended 5 April 2005, dated 27 January
2006, he declared that he was employed by the Company and declared his income
from employment to be nil.
161. At the
hearing before the General Commissioners, Mr Thomas stated that the £178,230
had gone to persons who were not liable to tax or to other family members.
Further correspondence ensued on this topic. In a letter dated 19 July 2007 to
Mr Thomas, Mr Stewart noted that HMRC had records showing that the Company
had three employees, namely Mr Thomas plus two family members. He sought
confirmation that none of the £178,230 had been credited to the director’s
current account.
162. In a
letter to Mr Stewart dated 26 July 2007, Mr Thomas confirmed that no part of
the sum of £178,230 related to any earnings of his or his brother and that no
part of it had been credited to the Company director’s loan account. He did
not, however, provide any explanation as to how the sum of £178,230 had been
calculated or who the employees were.
163. As we have
already noted, HMRC have accepted that the wives of the Thomas brothers each received
non-taxable termination payments of £30,000. This is no doubt because there
has been produced in these proceedings a Nationwide Building Society account in
the name of Mrs RM Thomas showing a credit entry dated 16 March 2004 for
£30,000. Her tax return, dated 27 January 2005, for the year ended 5 April
2004 mentions her employer as being the Company and in manuscript there is
reference to a £30,000 termination payment. There is also a Nationwide
Building Society statement in the name of Mrs SJ Thomas showing a credit entry
of £36,000 on 16 March 2004. Her tax return, dated 27 January 2005, for the
same tax year also shows a manuscript reference to £30,000 Termination.
164. Accordingly,
as HMRC accept, that accounts for £60,000 out of the £178,230. In a letter
dated 13 April 2011 to Mr Stewart, Mr Thomas asserted that neither Sarah nor
Rebecca Thomas was an employee of the Company during the period
6 April 2004 to 31 January 2005 and did not receive any earnings from
the Company during that period. In a further letter dated 13 May 2011, Mr
Thomas stated that the whole amount of £178,230 was paid in the tax year
2003/04; he asserted that the whole amount was paid to five employees each of
whom received payment of £30,000 as compensation for loss of office. In an
email dated 1 May 2013 to Mr Stewart, he stated that the Company did not incur
any liabilities to PAYE/NIC in respect of any of the payments it made to the 7
employees in 2003/04 and 2004/05. Neither Mr Thomas nor the Company has
ever identified these five (or the seven) employees and never has. Neither he
nor the Company has ever vouched these five payments. No contracts of
employment were ever exhibited. What these five employees were engaged to do
within the Company has never been revealed. No records have been produced.
165. It is
plain that any reasonable and honest business man would have readily responded
to the reasonable requests of HMRC. It seems to us that Mr Thomas, in this
aspect of the appeal has simply strung HMRC along for as long as he could. It
is surprising, some might say astonishing that HMRC have regarded the
termination payments in favour of the wives of the brothers as genuine. This
is particularly so having regard to the apparent generosity on the part of
Thomas family companies towards its family member employees over the years,
with regard to payment of tax free payments as compensation for loss of office,
all as set forth in Mr Stewart’s letter to the Company dated 3 June 2011. This
letter prompted a very indignant 11 page letter in response by Mr Thomas on
behalf of the Company. However, neither in that letter nor anywhere else has
he provided the information reasonably requested by HMRC. Any reasonable and
honest businessman keeping even the most modest records would have been able to
provide and would have provided the information requested.
Notices of Determination and Decisions issued
166.
On 25 March 2011, HMRC closed the Company enquiry opened on 4 January
2007.
The closure notice letter proceeded on the basis that the Company was entitled
to relief for the £900,000 and the sum of £178,230. On that basis, these
payments were subject to payment by the Company of PAYE and NIC.
167.
On or about 8 April 2011, HMRC served a Regulation 80 Notice of
Determination on the Company in the sum of £423,861.86 relating to PAYE for the
tax year 2004/05.
168. It
referred to Pay for which tax remains unpaid as follows:-
Mrs SJ Thomas £89,115
Mrs RM Thomas £89,115
Mr RC Thomas £450,000
Mr SJ Thomas £450,000
The
two sums of £89,115 make up the sum of £178,230 referred to in the Company’s
accounts for the period from 31 July 2003 to 31 January 2005. Likewise, the
two sums of £450,000 make up the sum of £900,000 referred to in the same
accounts. The resulting tax payable was calculated on these figures.
The
Determination, which relates to the tax year 2004/05 was subsequently amended.
169. On the
same date, HMRC issued Section 8 NIC Notices of Decision in relation to NIC as
follows:-
£64,142.69
(in respect of Rod Thomas),
£14,340.56
(in respect of Rebecca Thomas)
£64,142.69
(in respect of Stuart Thomas) and
£14,340.56 (in
respect of Sarah Thomas)
The Decisions, which all
relate to the tax year 2004/05 were subsequently varied.
170. The
Company appealed the April 2011 determination and decisions on 13 April 2011.
Following an internal appeal, appeals were lodged with the Tribunal on
7 September 2012 under reference TC/2012/08472 (the first
appeal), and 8 October 2012 in relation to the internal review under
reference TC/2012/09576 (the second appeal).
171. On 5
September 2012, HMRC served a further Regulation 80 Notice of Determination
reducing the 8 April 2011 Notice by £15,861.86 to £408,000. This was
achieved by deleting the sums attributable to Mrs SJ Thomas and Mrs RM Thomas,
and by increasing the sums attributable to Mr Thomas and his brother, for which
tax remained unpaid, from £450,000 to £510,000.
172. On the
same date, HMRC issued Notices
varying the Notices of Decision dated 8 April 2011 (Section 8 NIC Notices of
Decision in relation to NIC) increasing the sums in the Notices dated 8 April
2011
1) in respect of Mr Thomas
to £72,422.69
2) in respect of Stuart
Thomas to £72,422.69
and reducing the sums in the
Notices dated 8 April 2011
1) in respect of Rebecca Thomas
to Nil
2) in respect of Sarah
Thomas to Nil
The total sum payable under the
varied Decisions was therefore £144,845.38.
173. These sums
were determined partly on the basis that the £900,000 constituted accrued bonus
paid to Mr Thomas and Stuart Thomas as they were credited to the current
account of the director (and related parties) in the accounts of the Company
for the period 31 July 2003 to 31 January 2005 and were available for drawing.
174. With
regard to the treatment of the sum of £178,230, Mr Thomas eventually provided
further information. In a letter dated 13 May 2011 to HMRC, Mr Thomas stated
that the sum of £178,230 was paid to five employees in the year 2003/04. He
asserted that £150,000 of that sum was paid as tax exempt compensation for loss
of office and so was not subject to PAYE or NIC. He stated that £30,000 had
been paid to his wife, Sarah Thomas. He did not at that stage provide the
names of the other employees who received similar payments. This was still the
position in August 2012 (see for example Mr Stewart’s letter dated 9 August
2012 to the Company) and April 2013 (see his letter to the Company dated 5
April 2013).
175. In the
absence of any further information about the remaining £120,000 (£150,000 less
£30,000), HMRC attributed it equally between Mr Thomas and his brother. This
led HMRC to revise upwards the two figures in the Notice of Determination of
£450,000 by £60,000 to £510,000 and to delete the figures attributable to Mrs
SJ Thomas and Mrs RM Thomas. On the same basis, the NIC payable in respect of
Mr Thomas and his brother was increased and the NIC payable in respect of their
wives was deleted in the varied Notices of Decision in September 2012.
176. The
Company appealed the September 2012 determination and decisions on 14 September
2012. Following an internal appeal, appeals were lodged with the Tribunal on 1
March 2013 under reference TC/2013/01500 (the third appeal).
177. As a
result of evidence led on behalf of the Company at the Hearing before this
Tribunal, HMRC have further revised their calculations. They have accepted
that two non-taxable termination payments of £30,000 fell to be taken into
account. HMRC had originally said £150,000 of the £178,230 had to be accounted
for. This proceeded on the view that a somewhat generous amount is allowed for
the personal allowances of five employees, namely £28,230.
178. £60,000 of
that £150,000 was therefore accounted for because HMRC now accept that there
were two non-taxable termination payments of £30,000 ie £60,000 in total. This
left £90,000 out of the £150,000 to be accounted for. Dividing that equally
between the Thomas brothers adds £45,000 to each of the sums of £450,000
specified in the April 2011 Notice of Determination. Putting it another way,
this reduced the revised figures of £510,000 by £15,000 (£30,000/2) in the
September 2012 Determination to £495,000 and the tax payable to £380,412. This
constitutes a reduction of £27,588 from the sum of £408,000 and restricts the
amount claimed to £380,412.
179. The varied
Notices of Decision have also, for the same reason been restricted by £4,140
from £144,845.38 to £140,705.38.
Further Correspondence
180. A
closure notice was issued to the Company on 25 March 2011. It proceeded on the
basis that the Company was entitled to relief for the £900,000 and the sum of
£178,230 (as deductible expenses from income). Parties continued to exchange
views and arguments following the issue of the Notices of Determination and
Decisions.
181. In a
letter dated 13 May 2011 to Mr Stewart, Mr Thomas stated that as regards the
amount of £178,230 included as staff costs in the accounts for the period ended
31 January 2005. None of this amount was paid to anyone in the tax year
2004/05. The whole amount was paid in 2003/04 to five employees each of whom
received a tax exempt payment of £30,000 as compensation for loss of office.
No charge to PAYE or NIC arose in relation to any amount paid out to any
employee and the company made an accurate and complete Employer’s Return for
the year 2003/2004.
182. In his
letter to Mr Stewart dated 26 May 2011, Mr Thomas states The £1,557,991 is
not “after credit of £900,000 in respect of 180 tonnes of salmon fillet accrued
fish stock bonuses. As you well know the fish stock bonuses were never
transferred to us. If you review your records you may also recall that we
provided evidence, pursuant to the General Commissioners’ directions in June
2007, proving that we had injected a further £1.2m in the relevant period ended
31/1/2005. We provided bank statements showing two receipts of £300,000, and
£900,000 respectively, originating from our own personal bank account. You
wrote to the General Commissioners on 19/7/07 confirming that we had complied
with the directions.
183. By letter
to the Company dated 3 June 2011, Mr Stewart repeated the proposal contained in
his letter dated 17 July 2007 to the effect that the £900,000 credit on the
director’s current account was to be disregarded and the balance on that
account reduced accordingly; and the Company’s corporation tax profits for the
period ended 31 January 2005 were to be increased by £900,000 (ie there was to
be no relief in relation to the sum of £900,000; it was not to be a
deductible expense from income.
184. In his
letter dated 3 June 2011, Mr Stewart also drew attention to the statements made
by Mr Thomas in his letters dated 13 and 26 May to the effect that the sum at
credit in the director’s current account (£1,557,991) was not after credit
for the £900,000. He pointed out that if that were so then the corresponding
entry would be bank ie the Company actually paid the sum of £900,000.
The Company did not respond to this observation in any meaningful way which
provided an understandable explanation of the accounting treatment of the sum
£900,000 which identified a corresponding credit entry for the debit entry
which deducted the sum from trading income as an item of expense.
185. In an
email to Mr Stewart dated 1 May 2013, Mr Thomas repeated his position that
there has been no credit to any loan account and no payment in respect of
the fish stock accrual. He added that I confirm, once again, that no
part of the £178,230 was paid to Messrs RC and SJ Thomas and that the company
did not incur any liabilities to PAYE/NIC in respect of any of the payments it
made to the 7 employees in 2003/04 and 2004/05. The company has fulfilled all
of its obligations under the relevant PAYE/NIC regulations. You have provided
no evidence to the contrary. …. A company that sets out deliberately to
conceal a liability to PAYE/NIC does not prepare and send accounts to HMRC that
give express details of wages and salaries of £178,230 and bonus accruals
valued at £900,000… I could not have been more open in my approach to this
matter.
186. We note in
passing that the Company has never given express details of wages and
salaries. It has never given express details of bonus accruals. The
calculation of £178,230 is largely shrouded in mystery. Moreover, it is
perfectly conceivable that conduct may be open and yet deliberate. It is
abundantly plain on the evidence of Mr Thomas and a reading of the
correspondence in the joint bundles that the Company made the deliberate choice
of refraining from accounting for PAYE and NIC on either the sum of £178,230 or
the sum of £900,000. Perhaps buoyed with confidence from what they regarded as
victories over HMRC (or their statutory predecessor) or favourable settlements
in the past, they thought they could simply outwit HMRC and elide liability for
PAYE and NIC. To some extent they have succeeded because HMRC have
acknowledged on what appears to be the flimsiest of evidence that a substantial
part of the sum of £178,230 is not subject to PAYE or NIC. Had we been asked
to determine those aspects which HMRC have conceded in favour of the Company,
we would not have determined those aspects in favour of the Company having
regard to the oral evidence of Mr Thomas and the minimal documentary evidence
produced by the Company. We would not have accepted the bare assertions of Mr
Thomas. The documentary evidence was largely non-existent. We formed the view
that Mr Thomas was devious in his dealings with HMRC. He knew what to say to
raise doubts and ambiguities. He wrote many lengthy letters picking up and
making the most of a whole series of relatively minor matters. He skirted
around the basic issues and never provided any satisfactory evidence about the
two sums of £178,230 and £900,000. We found him to be generally unreliable,
particularly in relation to his evidence about these two sums.
187. Describing
a bonus as a fish stock bonus some eighteen months after the Company ceased
trading is of itself quite extraordinary and calls for an explanation. Nothing
sensible has ever been provided.
188. Somewhat
surprisingly, by email dated 27 June 2013 to Mr Stewart, Mr Thomas informed him
that:-
We
refer back to Roderick Thomas’s letter of 6 July 2007, your letters to us of 17
July 2007 and 3 June 2011, and your letter to the General Commissioners of 19
July 2007 have now taken advice and it now seems clear to us that the accounts
as prepared did not properly reflect the true position. The credit for
£900,000 should not have been to the director’s account but shown as an
accrual. We had not fully understood the relevant principles of accounting.
In implement of that correspondence, we attach amended accounts for the company
for the period to 31 January 2005 to the effect of removing the £900,000
of accrued bonuses previously credited to the director’s account, at note 2
“Staff costs”). We shall be grateful for an acknowledgement this allows matters
to proceed in terms of your letters.
189. These
accounts were produced. We shall refer to them as the “2013 Accounts.” They
bear to have been signed by Mr Thomas on 25 June 2013. We refer to paragraphs
90-94 above). They are not audited and do not disclose that they were prepared
by an accountant. The email dated 27 June 2013 refers to the £900,000 being
shown as an accrual. However, it is not shown as an accrual in the 2013
Accounts. Note 2 has removed the entries for Wages and Salaries of £178,230
and Accrued bonuses of £900,000. Note 3 has removed the entry for accrued fish
bonus to director of £450,000. Note 11 shows Creditors (amounts falling due
within one year) as including Director’s accounts (including related parties)
£657,991. This reduces the equivalent figure in the accounts submitted with
the Company’s returns in August 2006 by £900,000 to £657,991. Note 14
discloses that at the balance sheet date the Company owed its director, Mr
Thomas, and his brother, £657,991.
190. Lest it be
lost sight of, the 2013 Accounts are wholly inconsistent with the accounts of
Spring Seafoods/Capital for the year to 30 April 2007. These 2007 accounts
disclose or at least infer that liability for the director’s current account in
the sum of £1,557,991 was taken over by Spring Seafoods/Capital when it
acquired the goodwill of the business of the Company. The difference between
the two sums of £1,557,991 and £657,991 is £900,000. It will be remembered that
Spring Seafoods/Capital has been and is under the control and management of Mr
Thomas and his brother. It will be remembered, too, that Spring
Seafoods/Capital is relying on inter alia their accounts for the year to
30 April 2007 in relation to an appeal currently before another First-tier tax
tribunal.
191. It will also
be recalled that in his letter dated 26 May 2011 Mr Thomas made it clear that
the sum of £1,557,991 did not include the bonus of £900,000. It was asserted
that £900,000 came from sums provided by him and his brother, which were
vouched. This, too is wholly inconsistent with 2013 Accounts. It raises
serious questions about the source and destination of the two sums of £300,000
and £900,000. Mr Thomas has been adamant in correspondence that it was these
two sums that were part of the £1,557,991 set forth in the accounts submitted
in August 2006. Reference may also be made to his email dated 1 May 2013
referred to above. In evidence by contrast, Mr Thomas said that the reason for
the bonus was that neither he nor his brother had taken any significant remuneration
from the Company since its inception. We do not have to reconcile the
conflicting evidence.
192. In a
subsequent letter dated 19 July 2013 in response, Mr Stewart pointed out
correctly that Mr Thomas had long maintained that cash had been injected into
the Company (£900,000 on 29 October 2004; and £300,000 on 24 March 2004) making
up £1.2m which it was said formed part of the £1,557,991); and that now the
credit balance reflected in the 2013 Accounts was only £657,991.
Submissions
193. Counsel
amplified and refined their written Notes of Argument and made submissions on
the following topics, namely Time Bar PAYE, liability for PAYE and NIC
(merits), the 2007 “Agreement”, the 2010 Undertaking, Time Bar NIC. Within
these topics are various sub-topics. Mr Upton produced a very lengthy written
submission, which he revised and re-submitted to take account of HMRC
submissions. We shall summarise the main thrust of parties’ arguments in our
discussion of these topics below.
Discussion
General Overview
194. Mr Thomas
is and has been an experienced businessman for many years. He has corresponded
with HMRC on many technical tax matters. He has represented himself, the
Partnership and his brother from time to time in the tax tribunals advancing
technical arguments. He prepared many of the Company’s tax returns. He
prepared the accounts of the Company for the period from 1 August 2003 to 31
January 2005 with only limited assistance from an accountant. He has engaged
in lengthy and technical correspondence with HMRC over the years, some of which
we have referred to above.
195. We
conclude, and there really is no doubt that he, as director, was responsible
for the insertion of the various entries in the accounts, in particular the
entries relating to administrative costs of £178,230 and the bonus of
£900,000. He signed accounts as director. They were not audited and no
accountant put their name to them.
196. Mr Thomas
is also familiar with the PAYE and NIC systems. He was aware of and
participated in discussions with the Inland Revenue as far back as 2001 when
the tax treatment of fish stock bonuses arose. Mr Thomas was aware of the
Inland Revenue view that PAYE should be operated on fish stock bonuses. The
Minutes of the meeting record that he accepted that schemes to pay employees in
fish stocks to avoid the operation of PAYE no longer worked from April 2000 due
to changes in legislation. Whatever doubts there may have been in 2001, HMRC’s
hand was strengthened by legislative changes. The definition of readily
convertible assets in s203F ICTA 1988 was extended by s696 ITEPA.
197. With his
experience and practical knowledge of tax, any decision by him not to account
for PAYE on declared fish stock bonuses, can only be regarded as deliberate.
Any decision not to operate a PAYE (including NIC) system over the period 1
August 2003 to 31 January 2005, must have been deliberate with a view to the
Company not having to pay PAYE and NIC which ought normally to have been
deducted from wages, salaries and bonuses paid to administrative staff and
directors.
198. At no
stage after August 2006, when the accounts were signed and submitted to HMRC
with the Company’s corporate tax returns for the periods 1/8/2003 to 31/7/2004
and 1/08/2004 to 31/1/2005 did he submit any employer returns accounting for
PAYE on any part of the wages and salaries recorded in the accounts or on any
part of the £900,000 which may have been credited to the account of the
director and related parties (ie Stuart Thomas) or actually paid to them. No
explanation has been given for such conduct in relation to the whole of the sum
of £178,230 although at one stage it was suggested that it comprised in large
measure, several tax free termination payments of £30,000 paid to members of
the Thomas family. In the event, this has accounted for £60,000 out of
£178,230. Of the balance of £118,230, HMRC have acknowledged that some £28,230
is attributable to personal allowances (which spanned two tax periods), leaving
a residual sum of £90,000. There is no satisfactory explanation why PAYE was
not operated in respect of that sum. Mr Thomas knew his way around accounts
and many of the practical aspects of tax, including PAYE and NIC. He was not
slow to arrange, what we regard as questionable tax free termination payments
for family members. We consider that he knew full well what he was doing and
what the consequences of the entries in the accounts for administration
expenses were.
199. We
conclude that the omission to account properly for PAYE and NIC was
deliberate. There was nothing careless about his conduct. He was principally
responsible for the handling of the tax affairs of the Company. He ultimately
chose to rely on tax free termination payments. HMRC have accepted this to
some extent but this only partly accounts for the staff salaries and wages. No
basis for not operating PAYE on the balance has been established.
200. Section 36
TMA refers to loss of tax brought about deliberately. Any conduct bringing
about a loss of tax deliberately, does not have to be concealed or clandestine.
If we are wrong in that, it can readily be inferred that, by wrongly asserting
that the whole of the sum of £150,000 could be accounted for by reference to
five tax free termination payments, Mr Thomas, on behalf of the Company, was
deliberately concealing the true position.
201. Observing
Mr Thomas give evidence and having considered and reviewed that evidence and
the lengthy correspondence between him (either on behalf of the Company,
himself, his brother and/or the Partnership) and HMRC, our assessment of him is
that he has been devious, aggressive, and (as his brother was described in
commercial litigation in which he appears to have described himself as managing
director; see paragraph 50 above) opportunistic. He persistently declined to
provide basic information about the Company’s business and administration which
any reasonable, prudent and honest taxpayer with nothing to hide (although
perhaps not obliged to provide it) would readily have provided. We refer to
paragraph 165 above. Instead, he criticised the conduct of HMRC in relation to
a number of minor matters which, in the overall scheme of things, were not of
any great significance. By contrast, Mr Stewart was a model of restraint and
reasonableness. With hindsight, he may consider that a firmer approach might
have been preferable. In summary, we consider that the evidence of Mr Thomas
and the documents produced at the hearing do not provide credible or reliable
explanations of the sums of £900,000 and £178,230 specified in the cessation
accounts which would justify the notices and decisions being discharged.
202. As a
result of his deliberate conduct on behalf of the Company, tax has been lost.
That lost tax is, in part, the subject of the Notices of Determination and the
Notices of Decisions dated 8 April 2011 and 5 September 2012. That lost tax
relates to the sum of £178,230 (the entry in the accounts for wages and
salaries) for which at least £90,000 remains unaccounted for in the sense that
no justification has been established for failing to operate PAYE thereon.
203. On this
relatively straightforward basis, the Notices of Determination (original and
amended) are not time-barred. The onus therefore lies on the Company to show
that HMRC are precluded in some way from enforcing the Notices or to attack
successfully their underlying soundness by establishing, on a balance of
probabilities, that no sum was due or some lesser amount was due. The Company
has failed successfully to attack the underlying soundness of the Notices
although some restriction on the amount has been achieved. The appeal against
the amended Notices of Determination therefore fails unless the Company
establishes some other basis for discharging the amended Notices.
204. Finally,
in this general section, we record that it is unnecessary to make detailed
findings about the origins of the Spring Salmon companies. The ultimate owner
of the Company was at least at one stage the trustees acting under a trust
which according to Mr Thomas was set up by his brother-in-law, a Mr Lindh.
This was not vouched and we decline to make any findings of fact about it on
the basis of Mr Thomas’s evidence. It is unnecessary for us to do so for the
purposes of this decision.
Onus
205. Mr Upton
submitted that, with the exception of NIC, the burden of proof lies on HMRC in
respect of both the preliminary issue of time bar and the substantive question
of the merits of their determinations.
206. We do not
accept this argument. Insofar as it is necessary to prove loss of tax for
the purpose of eliding the time bar provisions of s36 TMA, HMRC have done so.
We refer to the previous section, and to the following section of this decision
entitled Payment.
207. However,
we do not consider that proof of loss of tax is the same as proof of the
underlying soundness of the PAYE determinations which are deemed to be
assessments for certain purposes. If that were so, then deliberate conduct
(under earlier legislation the extended period referred to loss of tax attributable
to fraudulent…. conduct) would have the beneficial effect of transferring
the onus of proof on the merits of the assessment from the taxpayer to HMRC, a
benefit attributable to or brought about by fraudulent or deliberate conduct,
or allegations of such conduct. Such a result makes no sense and cannot have
been the intention of Parliament.
Payment
208. The
Company now accepts that if payment was made (in the appropriate sense) within
the period between 31 July 2003 and 31 January 2005 then payment falls to be
treated as having been made in the tax year 2004/05.
209. Mr Upton
advanced an elaborate argument to show that HMRC had failed to establish that
payment of the sum of £900,000 was made to Mr Thomas and his brother, or that
the sum was at their disposal. There was therefore no loss of tax. No loss of
tax having been demonstrated, so the argument runs, the provisions of TMA 36 on
which HMRC rely, do not apply and the determinations are therefore time-barred.
Decision on Payment
210. The short
answer to this argument is to refer to two incontrovertible facts. The first
is the terms of the cessation accounts which make reference to the accrued
bonus of £900,000. It was credited to the director’s current account which
included related parties ie it was unreservedly at the disposal of Mr Thomas
and his brother. The Company would have no answer to a claim for payment by
either brother. If there is an answer, no one has suggested what it might be.
PAYE is deductible on such a bonus. The Company was not insolvent. There was,
in any event, no satisfactory evidence before us to demonstrate that it was
insolvent.
211. These
accounts were prepared largely by Mr Thomas. He had some assistance from an
accountant but the accountant did not put his name to them. They have not been
audited. They have not been lodged with the Registrar of Companies. They were
signed by Mr Thomas and are supposed to contain a true and fair view of the
state of affairs of the Company and of the profit or loss of the Company for
the period to which they relate. It can also be noted in passing that by
signing the accounts Mr Thomas acknowledged that it was his responsibility as
the director for keeping proper accounting records which disclose with
reasonable accuracy at any time the financial position of the Company.
212. The
analysis of the accounts is confirmed by the Company’s extraordinary attempt in
2013 to correct them. The corrections assume (contrary to previous assertions
by the Company) that the £900,000 bonus was indeed credited to the director’s
current account and formed part of the credit balance of £1,557,991. It is now
too late to amend the returns submitted in August 2006 which were based on the
cessation accounts (FA 1998 schedule 18 paragraph 15(4)).
213. Even if it
is accepted that the sum at credit of the director’s account in the cessation
accounts does not include the sum of £900,000, it is a reasonable inference (if
not the only conclusion which can be reached) that the money has been paid out
by the Company to Mr Thomas and his brother despite the former’s protestations
to the contrary. There has to be, in accounting terms, a corresponding credit
to the deduction (as an expense) in the accounts under the heading STAFF
COSTS. That credit would be a credit entry in the Company’s bank account; the
bank becomes a creditor of the Company to the extent of an additional
£900,000. The Company’s overdraft is increased or its bank balance is
reduced. Although requested to do so, the Company persistently failed to
provide a complete record of the transactions on its director’s account.
214. The second
incontrovertible fact is that during the period to which these cessation
accounts relate, the Company did not account to HMRC for any PAYE or NIC in
respect of the bonus of £900,000, or for a significant part of the wages and
salaries of £178,230 mentioned in the cessation accounts.
215. On the
basis of these two facts it is quite plain that for the purposes of the time
bar provisions of s36 TMA, payment has been made and a loss of tax has been
established. Leaving aside the arguments about the alleged 2007 agreement the
2010 Undertaking and the NIC time bar argument as to all which the onus rests
on the Company, the onus shifts to the Company to challenge the underlying
soundness of the determinations and decisions by demonstrating that nothing is
due or that what is claimed is excessive. They have not done so and
essentially rest their appeal on a series of highly technical arguments, one of
which they must establish to succeed.
216. Mr Upton
advanced a further argument based on HMRC v Forde & McHugh Ltd [2014] UKSC 14 on the basis that the sums at issue were only at the employees’ (Mr
Thomas and his brother) disposal on condition that the Company came by the
means to transfer value. The question was whether earnings were paid
(to use the language of the NIC legislation) or whether relevant
payments were made (to use the language of the PAYE legislation).
This occurred when the right comes to be discharged by a transfer of liquid
funds to the employees. As we understood it, the argument was that the
condition or contingency was not fulfilled so there could be no payment or
earnings or a relevant payment having been made and therefore no liability for
PAYE or NIC.
217. We cannot
accept this argument. No such contingency existed. The Company was not in
liquidation, receivership or in administration. The accounts cannot be relied
upon to determine solvency as they make no mention of the transfer of its
business in September 2004. Over the 18 month period of the cessation accounts
the Company had a turnover of £2,533,848 and a gross profit of £804,533. It
apparently sold its business to the Thomas partnership for a substantial sum.
Spring Seafoods/Capital was solvent and for aught yet seen remains solvent.
The so-called contingency has simply been created to fit an argument based on Forde
& McHugh. While we are bound by the ratio of Forde, it does not
appear to have any application here.
218. In any
event, we do not consider that the application of the Garforth test as
explained and amplified in Aberdeen Asset (see below) depends upon the
financial soundness of the employer from time to time.
219. Mr Upton
argued that the measure of what, if anything had been paid, was to be found in
Regulations 69 and 21 of the 2003 Regulations. The issue, he submitted, was
whether payment had been made to an employee. He accepted the applicability
and indeed founded upon certain dicta in Aberdeen Asset Management
plc v HMRC 2014 SLT 54. He submitted that the funds had to be available in
the sense that the Company had to be solvent and have the wherewithal to make
payment.
220. That case
concerned appeals against notices of determination (PAYE) and decisions (NIC)
relating to a tax avoidance scheme which failed. The scheme involved a series
of linked transactions based on an offshore employee benefit trust (EBT). The
object of the scheme was to pay senior employees and directors of the
appellants large sums of money tax free. The money passed from the appellants
to the EBT and thence to various companies (referred to as money box
companies), incorporated offshore for each of the beneficiaries, who held
either initially or eventually, all the shares in these cash rich companies,
but were not directors. The benefits received by the employees were expressly
provided to them as part of their overall remuneration. At the stage when the
money was passed to the employee, the assets of the company were effectively at
the disposal of the company. It was ultimately accepted by the appellants on
appeal that the sums paid to the employees were taxable. The dispute in the
Inner House was whether the liability to account for the tax fell on the
appellants or the benefitted employees individually. In resolving that dispute
in favour of HMRC, the court considered at some length whether a transfer of
the shares to an employee was a payment within the meaning of the fiscal
legislation relating to PAYE.
221. The court
considered that the correct approach was, in effect, to ask whether the
relevant statutory provisions, construed purposively, were intended to apply to
the transactions, viewed realistically (paragraph 25 especially at 60L;
paragraph 43 at 65B-C). The court noted that the intention of Parliament was
clearly that Schedule E tax should be payable on the whole of the financial
benefits earned by the employee as a result of his employment (paragraph 26 at
61B-C; paragraph 27 at 61F), the primary meaning being that an emolument is
received when payment is made or a person becomes entitled to payment,
whichever comes first (paragraph 26 at 61D). The court concluded (agreeing
with the First-tier Tribunal) that the transfer of shares in a money box
company to an employee was a payment within the relevant legislation
(paragraph 35 at 62J). The Court quoted from Garforth v Newsmith Stainless
Ltd [1979] 1 WLR 409, with apparent approval and concluded that the
fact that the employee has practical control over the disposal of the funds is
sufficient to constitute a payment for the purposes of the legislation (paragraph
34 t 63C; see also paragraph 36 at 63F).
222. The Court
in Aberdeen Asset also considered whether the funds transferred to the
money box companies were placed unreservedly at the disposal of the employees,
and concluded that they were (paragraph 37 at 63H, paragraph 38 at 64A-B). The
Court eschewed a concentration on strict legal form rather than the substance
of the transaction (paragraph 38 at 63 I-J); they viewed the transaction realistically
(paragraph 38 at 63J-K); and approved the test in Garforth by
observing that the focus is on the power that the employee has to make use
of the money as a medium of exchange (paragraph 43 at 65B). Lord Glennie,
in particular, observed that it was clear from the authorities to which (the
court was) referred that for the purposes of PAYE and national insurance
contributions “payment” can include the crediting of a bonus to a director’s
current account with the company (paragraph 65 at 69 I).
223. In Garforth,
the issue was whether the crediting of the accounts of two controlling
directors in the company’s books, of bonuses was the equivalent of payment within
the meaning of the PAYE legislation rendering the company liable for income tax
as employer (410F; 411E). The bonuses had been allowed against the company’s
corporation tax assessment. Walton J had no hesitation in concluding that when
money is placed unreservedly at the disposal of directors by a company, that is
equivalent to payment. (414A-B). That, according to him, was the simple
point in the case (415G) He quoted from an earlier case decided by an
experienced revenue judge that this was equivalent to putting the bonus to the
credit of what is equivalent to a banking account (414G-415A). Walton J
rejected the notion that whether there was payment or its equivalent depended
on the solvency of the company. Where the director left his money was his
choice. It made no difference whether the money was left standing at credit in
the company’s books and the company goes into liquidation, or whether it was
deposited in a bank which goes into liquidation (415B-D). What mattered was
that there was a clear legal right to payment (415H).
224. Neither
counsel submitted to us that there was any feature in the legislation
considered in Aberdeen Assset which distinguished the case or made its
approach inapplicable to the legislation and facts before us. We take the same
view. Moreover, no distinction was drawn between PAYE and NIC in the court’s
analysis. Mr Upton accepted that whether payment was made falls to be tested
in the same way.
225. On the
face of matters the bonus of £900,000 falls four square within Garforth, which
has been approved by the Inner House in Aberdeen Asset. According
to the Company’s accounts for the period 1 August 2003 to 31 January 2005, a
bonus was credited to the director’s account. It is clear from the evidence of
Mr Thomas that the bonus was to be divided equally between him and his
brother. Stuart, at the material time, was either an employee or a de facto
director. We have concluded that he was a director in all but name. These
accounts were prepared by Mr Thomas and signed by him (and not by any
accountant) and bear to represent a true and fair view of the state of affairs
of the Company as at 31 January 2005 and a true and fair view of the profit and
loss of the Company for that period. As in Garforth, the bonus payment
was claimed as an allowance against profits.
226. It does
not matter whether the Company was solvent or insolvent as at 31 January
2005 or at any stage during the period to which the accounts relate.
Mr Thomas and his brother chose to have the director’s account credited,
rather than receive payment or the transfer of fish stock (if it ever
existed). Mr Thomas, at 31 January 2005, would, by reference to the
accounts, have had a clear right to payment. His brother would also have had a
clear right to payment as an employee of the Company. Even if it could be said
that the enforcement of his right to payment might have been less
straightforward, it is unnecessary to dwell upon the precise exposition of
those rights. As Lord Drummond Young put it in Aberdeen Asset, it is
not appropriate to deconstruct the nature of the employee’s rights, drawing
fine distinctions according to the methods that he must adopt in order to use
the funds for his benefit. (2014 SLT at paragraph 34 at 63B-C).
227. The 2013 Accounts
assume that the bonus of £900,000 was indeed credited to the Director’s account
in the cessation accounts. As we have explained, even if it were to be
accepted that that is incorrect and the credit balance in the director’s
account is attributable not to the bonus of £900,000 but to some other
payments, the only conclusion to reach is that the sum of £900,000 was actually
paid. That could, or at least might, have been refuted by production of
complete and accurate details, suitably vouched, of the operation of the
Director’s account. Such details and similar information were requested in
January 2007 when HMRC opened enquiries into the Company’s returns (see
paragraphs 108-110 above), but were never produced. A taxpayer cannot be
allowed to produce two materially different sets of accounts (for the same
period) some seven years apart, and rely on one or other of them depending on
which way the wind is blowing. That is simply opportunistic. This is
particularly so here where the Company has purported to give fiscal effect to
the first set through the transfer of trade, the figures in respect of which
(£1,557,991) contain the £900,000. We refer here to the entries in Spring
Seafood/Capital’s accounts for 2007. The Company is also pursuing claims for
terminal losses which assume the accuracy of the first set of accounts (see
paragraphs 101 and 105).
228. We should
also add that we are by no means satisfied that the Company did not have the
means or could not acquire the means to make payment of the bonus, whether in
cash or on fish stock. It was apparent to us that the inflow of funds to the
Company and the outflow of funds from it were shrouded in mystery. Some of the
Company’s records were incomplete particularly and crucially on this aspect
bank statements and the dealings on the director’s current account. Although
the cessation accounts naturally record that the Company ceased trading on 31
January 2005, yet in the restoration proceedings, it was a matter of admission
that the Company was still in operation when it was struck off some two
and a half years later (see the Opinion of Lord Glennie paragraph 4(14)).
229. In his
reply to the submissions of Mr Artis, Mr Upton submitted that the Notices of
Determination (the PAYE) notices were invalid because there was no relevant
code and so liability could not be quantified. No codes appear to have been
issued. HMRC have not said what codes applied. He relied, in particular, on
regulations 21, 7, 8, and 58 of the PAYE Regulations, although he recognised that
the regulations made provision for emergency and basic rate codes (Regulations
48-50). He also criticised a revised (reduced) calculation produced by HMRC on
or about 22 April 2014 (between the penultimate and final hearings), based on
the assertion that basic rate code (22%) should be applied. This would reduce
further the Company’s PAYE liability to £217,000.
230. It seems
to us that, at best for the Company, the argument about PAYE codes relates to
quantum, which we consider below, and not to the validity of Notices of
determination.
231. Finally,
it was submitted that, if the appeals are refused, the Company would be
entitled to relief in respect of the PAYE and NIC for which it is liable. This
point had been raised in correspondence and Mr Stewart (in a letter to the
Company dated 20 July 2011), indicated that this would be so once the PAYE and
NIC have been paid. Any dispute about this is for another day in another
appeal.
Time Bar PAYE
Submissions
232. The
Company argues that the lawfulness of the PAYE determinations (but not the
decisions relating to NIC) depends upon s36 of TMA. The onus of proof is
demanding. Reference is made to Easow at paragraphs 79 and 127. HMRC
must show that the Company deliberately brought about a loss of tax. That, in
turn, means that they must show that there were payments that gave rise to a
tax liability. The onus lies on HMRC to prove the underlying soundness of the
PAYE determinations. It is doubtful whether deliberately causing a loss of tax
involves a different criterion to that of fraud. Here, it is said, that the
Company has frankly and candidly disclosed the relevant financial statements
and have not issued any deliberately inaccurate return or other document. They
have not concealed anything. As for the sum of £178,230, termination payments
were referred to in each of the returns of Mrs Sarah Thomas and Mrs
Rebecca Thomas for the tax year 2003/04. They each received these payments.
No enquiries were made into these returns.
233. As for the
£900,000 it was disclosed in the Company’s accounts submitted on or about 30
August 2006. It was submitted that Mr Thomas’ statements to the General
Commissioners that the entries relating to the sum of £900,000 were correct.
234. For HMRC
it was submitted that ss34 and 36 TMA were engaged and not s29 (Weight
Watchers UK Ltd v HMRC [2012] STC 265). While the burden of proof is on
HMRC it may be discharged by pointing to unexplained discrepancies (Hurley v
Taylor [1999] STC 1). Reliance was placed on the Company’s
knowledge from previous dealings with HMRC that PAYE should be operated on fish
stock bonuses, the nil return P35 submitted in October 2004, the actings of Mr
Thomas in prolonging the restoration proceedings and thus deliberately
prevented the recovery of tax within the ordinary time limit.
Decision (Time Bar PAYE)
235. In our
view, the facts as we have found them to be, show that there has been a loss of
tax deliberately brought about by the Company.
As soon as the accounts were signed and submitted to HMRC (both deliberate
acts) they reflected what the Company regarded as its financial transactions
during the period to which they relate. The submission of the nil return and
the consequent failure to lodge PAYE returns accounting for tax and NIC on the
sum of £900,000 were deliberate acts. If PAYE is due at all, its non-payment
has been brought about by the deliberate conduct of the Company acting through
the medium of Mr Thomas.
236. Mr Upton
argues that if payment was disclosed in the accounts, then there was no
deliberate concealment, as the relevant figures have been in those accounts
since their submission in August 2006 and bore the same interpretation then as
they do now.
237. While that
is correct in one sense that there was no deliberate concealment, it does not
provide an answer to the contention that the loss of tax was brought about by
deliberate conduct on part of the Company acting through the medium of Mr
Thomas. It is plain that between 1 August 2003 and 31 January 2005, the
Company did not pay PAYE or NIC on the sums of £900,000 or £178,230. The
Company has not at any stage paid PAYE or NIC on the sum of £900,000. The
Company eventually accounted for part of £178,230 by two exempt termination
payments of £30,000 to members of the Thomas family who were employees of the Company.
This proceeded on what seemed to us to be the flimsiest of evidence which HMRC
surprisingly accepted.
238. In
relation to the sum of £900,000, payment of that sum may not have been in
contemplation during the period between 31 July 2003 and 31 January 2005. It
is not therefore surprising that PAYE and NIC were not accounted for during
that period. It appears that at some point between 31 January 2005 and 26
August 2006 the Company decided to award the bonus. However, no steps were
ever taken to account for PAYE or NIC. In fact a nil return was submitted in
October 20004 for the tax year 2003/2004. No such return was submitted for the
tax year 2004/2005.
239. As we have
explained, £90,000 of the £178,230 for wages and salaries remains unaccounted
for, through what can only be described as the deliberate conduct of the
Company. That, of itself, is sufficient to render the Notices of Determination
timeous in terms of section 36 TMA. Such tax remains lost and is part
of the subject matter of the Notices of Determination and Notices of Decision
referred to above. The obligation on the part of the Company to make payment
in terms of the Notices relating to PAYE has not been extinguished and the
Notice of Determination dated 5 September 2012 is therefore enforceable.
240. However,
there is further deliberate conduct that is relevant. At the meeting before the
General Commissioners, Mr Thomas asserted that the entry in the cessation
accounts relating to the sum of £900,000 was a paper exercise. While it is not
clear on what precise basis that statement was made, it has turned out to be
incorrect. The Company and Spring Seafoods/Capital appear to have treated it
as a real transaction with significant fiscal effect.
241. Finally,
even if HMRC had been able competently to issue notices between 2006 and 2011
(when the Company had been struck off the Register) in anticipation that such
notices would have been retrospectively validated by the effect of s1032(1) of
the Companies Act 2006 or by a specific order under s1032(2) (see Joddrell v
Peaktone Ltd [2012] EWCA Civ 1035 at paragraphs 46-48, Rloans v Reg of
Cos ]2012] EWHC B33 (Comm) paragraph 52), that does not prevent them from
adopting nor does it invalidate the course of action they actually pursued.
Time-Bar and NIC
242. It was
common ground that s36 did not apply to decisions relating to liability for
NICs. This is because the legislation and regulations governing these
decisions do not deem them to be assessments to which the relevant parts of the
TMA apply, unlike the PAYE regulations.
Submissions
243. Mr Upton
submitted that the liability to pay NIC is a debt to which the English
limitation period of six years applies and has expired. The NIC claim is thus
time-barred.the English Limitation Act 1980 applied a six year period which had
elapsed and so the decisions could no longer be enforced. Mr Artis submitted
that Scots law applied, and under the Prescription and Limitation (Scotland) Act 1973, a prescriptive period of 20 years applied; liability for payment in
terms of these decision therefore subsisted.
Decision (Time Bar and NIC)
244. In our
view, the obligation on the part of the Company to make payment in terms of the
decisions relating to NIC has not been extinguished and is therefore
enforceable. Although we are a United Kingdom tribunal, we are sitting in Scotland. An appeal from our decision will normally be heard by an Upper Tribunal
consisting of a Senator of the College of Justice, usually sitting alone, or
with one or two others one of whom is qualified in Scots law. In our view,
therefore, questions of the substantive law of prescription (extinction of
rights and obligations) and the procedural law of limitation of actions would
normally be determined by Scots law. In many cases, the application of the
fiscal legislation will be the same whether Scots law or English law is
applied. Reports of decisions in tax cases from English tax tribunals and
courts are cited daily in Scotland and are usually followed. There may of
course be circumstances where foreign law (whether English law or some other
foreign law) is the applicable law of a contract material to the fiscal
dispute. In those circumstances, it is necessary to have expert evidence of
the foreign law. In the absence of such evidence, the general rule is that the
foreign law is deemed to be the same as Scots law.
245. There is
some difference of view as to whether that general rule applies to English law
where the tribunal (here the First-tier Tribunal (Tax Chamber)) has a UK wide jurisdiction. Whether it does or does not, we do not consider that we were
adequately addressed by either counsel on what the position is under the
Limitation Act 1980. Although a general period of six years applies, there are
exceptions (see for example s32 [postponement of limitation period in case of
fraud or mistake]; s37(2) [disapplication of the Act to proceedings by the
Crown for recovery of any tax or duty; tax does not appear to be
defined]).
246. We
consider that the appropriate course here is to apply Scots law, either because
Scots law is the applicable law or because English law in the absence of any
sufficient evidence or submissions about it, is deemed to be the same as Scots
Law.
247. Section 6
of the Prescription & Limitation (Scotland) Act 1973 does not apply because
the statutory obligation to pay tax in any shape or form is not one of the
obligations specified in Schedule 1 of the 1973 Act. That schedule identifies
the obligations to which the short negative prescription of five years
applies. Schedule 2 expressly excludes certain obligations from the
application of the short negative prescription, for example the obligation to
recognise or obtemper an order of a tribunal. The 1973 Act binds the Crown
(s24).
248. Section 7
of the 1973 Act (which relates to obligations of any kind, subject to
exceptions which are not material) therefore applies and provides for a
prescriptive period of 20 years. This conclusion is consistent with two cases
to which we were referred by Mr Artis. In the first (LA v Hepburn 1990
SLT 530), Lord Dervaird, in an action for payment for tax due under an
assessment, held that the obligation did not prescribe under s6 of the 1973 Act
(page 532J). In the second (Lord Advocate v Butt 1991 SLT 248 (Lord
Prosser) and 1992 SC 140 (Second Division)), the action was for payment of tax
and NIC and interest on the unpaid tax. The Lord Ordinary held that s6 applied
to interest. The Inner House disagreed, holding that under the TMA interest
fell to be treated as tax and could not be interest within the meaning of s6
and Schedule 1 to the 1973 Act (143-144; 146, 147).
The
July 2007 Agreement
Submissions
249.
Mr Upton, on behalf of the Company, submitted that (i) HMRC could enter
into a binding contract with a taxpayer which governed the taxpayer’s statutory
liability to tax - under reference to Southern Cross Employment Agency Ltd v
HMRC [2014] UKFTT 088 (TC); (ii) an agreement was entered into between Mr
Stewart on behalf of HMRC and Mr Thomas on behalf of the Company; reliance was
placed on Mr Stewart’s note of a telephone conversation with Mr Thomas on
6 July 2007, the letter of the same date from Mr Thomas to Mr Stewart, and Mr
Stewart’s letter to the Company dated 17 July 2007; (iii) the HMRC assertion in
their Statement of Case that the agreement was without prejudice is a legal
nonsense, (iv) HMRC have failed to establish, the onus being on them, that the
agreement was vitiated by misrepresentation or otherwise; in particular, there
was no duty on Mr Thomas to disclose any plans to transfer the liability for
the bonus to Spring Seafoods/Capital, (v) even if there were some material
misrepresentation which induced HMRC to enter into the July 2007 agreement,
HMRC’s remedy is reduction; the contract is not automatically a nullity; it
would be voidable (Gloag & Henderson Introduction to the Law of Scotland
13th ed paragraphs 7.02, 7.03 and 7.33); (vi) insofar as
relevant the Company did not act inconsistently with the agreement; (vii)
reliance on the observation of the Lord Ordinary in the restoration proceedings
that at the time of the Company’s dissolution in August 2007, it had been
claiming a tax credit on the basis of charging the £900,000 to their profit and
loss account, was unjustified; it was not clear to what evidence the judge was
referring; the evidence before the Tribunal should be preferred, (viii) HMRC do
not assert that the agreement has been rescinded or repudiated (and the
repudiation accepted) so it remains binding, whatever parties’ beliefs,
intentions or communings inter se; (ix) the 2013 accounts reflect the agreement;
if there was no agreement they are simply academic.
250.
Mr Artis for HMRC submitted that (i) there was no binding agreement or
undertaking by HMRC; Southern Cross was distinguishable, as, there, the
agreement had been performed and the money paid; (ii) the context of the
discussion on 6 July 2007 and correspondence later that month were
critical; that context was the personal returns of Mr Thomas (and his brother)
not the corporate tax return of the Company (the letter dated 17 July 2007 contained
a conditional offer which was never accepted by the Company; those conditions
are set out in the letter), (iii) the letter dated 19 July 2007 is the reply to
Mr Thomas’s letter dated 6 July 2007; (iv) the Company is not asserting an
enforceable agreement but challenging HMRC’s management of tax and its future
tax treatment of the Company, which is a challenge which can be made by
judicial review but not before these tribunals (Hok Ltd [2012] UKUT 363 (TCC); HMRC have no power to agree in advance whether tax should be
assessed or determined; (v) that the statements made by Mr Thomas before the
General Commissioners on 15 June 2007 that the £900,000 was no more than a
paper exercise, induced Mr Stewart to agree on behalf of HMRC that the £900,000
would be disallowed as a deduction in the computation of the Company’ profits
and would be ignored for PAYE and NIC purposes; it also induced the General
Commissioner to direct the issue of closure notices in relation to the
enquiries opened into the personal returns of Mr Thomas and Stuart Thomas for
the tax years 2004/05; (vi) in spite of the agreement, the Company has
maintained in other proceedings that it is entitled to deduct that same
£900,000; the Company currently claims a tax credit of £642,885; that claim derives
in part from the loss of £2,858,130 shown in the Company’s accounts for the
period between 31 July 2003 and 31 January 2005; that loss is calculated by inter
alia making a deduction from profits of the £900,000, which according to
the agreement reached in July 2007, would be ignored. It was also submitted
that there was further evidence that the £900,000 entry was not a paper
transaction by reference to the accounts of Spring Seafoods/Capital.
251.
Mr Artis drew attention to the fact that as at 31 January 2005, the
director’s current account amounted to £1,557,991 (ie the sum owed by the
Company to Mr Thomas and his brother). That sum had grown by £1,197,304 from
the figure at which the account stood on 31 July 2003 (£360,687). Mr Thomas
and Stuart Thomas held a floating charge as security.
252.
Mr Artis further submitted that Spring Seafoods/Capital’s accounts for
the year to 30 April 2007 show additional goodwill valued at £1,557,991, which
is a balancing entry for Spring Seafoods/Capital having assumed the liability
of the Company to meet the sums due on the Company director’s current account.
253.
Spring Seafoods/Capital have written down or amortised the value of the
goodwill (£1,557,991) over seven years claiming tax relief therefor. Moreover,
the sum shown in the director’s account in the books of Spring Seafoods has
been drawn on although Spring Seafoods have never declared any PAYE or NIC
obligations or made any such payments. Accordingly, what was said to be a
£900,000 paper exercise in the form of a bonus has been converted into capital
and is being repaid to Mr Thomas and his brother as capital at their
discretion.
254.
In all these circumstances it is suggested that Mr Thomas misrepresented
the true position and thus HMRC are not bound by any agreement entered into in
July 2007. The accounts misrepresented the true position by omitting the
transfer of business; the assertion that the £900,000 bonus was a paper
exercise was incorrect; and the assertion that Mr Thomas and his brother did
not have the benefit of the sum of £900,000 was also incorrect. If there was
an agreement in 2007, HMRC were induced to enter it by reason of these material
misrepresentations. These misrepresentations vitiated any true consent as to
the nature of the entries in the accounts of the Company (Gloag &
Henderson paragraph 7.21, 7.26, 7.31; Morrison v Roberston [1908] SC 332; Earl of Wemyss
v Campbell (1858) 20 D 1090. These misrepresentations amount to deliberate
conduct. The Company took no steps to implement the agreement but continued to
insist on the deduction of £900,000 in their profit and loss account. In the
restoration proceedings, Mr Thomas continued to insist on the deduction. There
was no assertion that agreement had been reached (see the Opinion of Lord Glennie
where there is no mention of it). No such agreement was founded on.
255.
Mr Artis also submitted that the accounts were misleading and did not
represent a true and fair view. They failed to disclose the asserted transfer
of the business to the Thomas Partnership in September 2004. In appeals by
Spring Seafoods/Capital Mr Taub’s expert report dated 20 December 2013
describes the acquisition of the business of the Company by Spring Seafoods
Ltd/Capital, notes (at paragraphs 4.7 and 4.8) that the gross profit percentage
varied during the 18 month period of the accounts and records Mr Thomas’s
explanation, namely that for the last few months the Company purchased supplies
and sold them on to Spring Seafoods/Capital at no profit; this was another
matter that should have been mentioned in the accounts
256.
It was further submitted by Mr Artis that if HMRC were in repudiatory
breach, that breach was accepted by the Company by raising the action for
payment of £642,835 in 2011. Finally, it was submitted that the Company’s
argument did not apply to the £178,230 deducted from staff costs. This, we
understand, was not disputed.
257.
We should also note that if HMRC resist this aspect of the current
appeal and the result is that that £900,000 is treated as remuneration and therefore
subject to PAYE and NIC, then the Company is or at least may be justified in
taking into account the £900,000 in the calculation of the tax credit claim of
£642,835. HMRC seem to recognise this.
Decision
(July 2007 Agreement)
258. This
chapter of the appeal relates to the sum of £900,000 but not to the sum of
£178,230. If, in theory, there were an unqualified agreement between the
parties, the effect of which was that HMRC would not levy PAYE or NIC on the
sum of £900,000, such an agreement would be valid and binding on both parties
in 2007. The Company would be able to rely on it to resist an assessment to
recover PAYE and NIC. We accept the Company’s argument, relying on Southern
Cross that such an agreement would relate to an existing liability, although
the precise amount of that liability had not, when the agreement was entered
into, been determined. Such an agreement would not relate to future liability
or constrain the future management of tax collection. By virtue of regulation
68 of the 2003 PAYE Regulations, the obligation to pay arises in the tax year
in question, here, agreed to be (if liability arises at all) 2004/05.
Similarly, the obligation (if there is one) to pay NIC is agreed to arise in
the same tax year. The result is that the Company relies on the equivalent of
a back duty agreement. We therefore reject the HMRC argument that the
agreement concerned the future treatment of the Company’s tax liabilities. As
a matter of fact, if there was such an agreement, it was not regulating future
liability but past liability. The public law arguments that any such agreement
would be void or ultra vires, advanced by Mr Artis and the cases cited
by him such as Fayed v AG for Scotland [2004] STC 1703 need not be
considered although we note that the court in Fayed made no adverse
comment on a back tax agreement where the taxpayer has already incurred the tax
liability but its amount has not been determined.
259. The
question is, therefore, whether there was an agreement, conditional or
unconditional and if so, whether its terms enable the Company to resist
liability for PAYE and NIC. We propose to examine (a) the relevant facts and
circumstances in order to determine the terms and conditions of the agreement,
(b) whether these conditions were fulfilled and (c) whether the agreement
was implemented, ie whether the entries in the cessation accounts relating to
the sum of £900,000 were treated as having no fiscal effect or as having real
fiscal effect.
260. The
entries in the Company’s accounts for the period 31 July 2003 to 31 January
2005 are the starting point. These accounts were submitted to HMRC on or about
30 August 2006. These were submitted late. At the outset of his evidence Mr
Thomas was at pains to point out that the decision to award a bonus was made
shortly before the accounts were signed by him. That may be so but as an
experienced business man he must be taken to know that the bonus referred to in
the accounts would be treated as having been made during the period to which
those accounts relate and that the Company cannot suggest otherwise. The same
applies to the administration expenses of £178,230 (wages and salaries).
261. We have
set out the correspondence above. Our assessment of the correspondence, the
note of the telephone conversation on 6 July 2007 and the oral evidence we
heard about these matters, is that no binding agreement was entered into
between the company and HMRC which disables HMRC from pursuing PAYE and NIC in
relation to the sum of £900,000.
262. It can be
noted that the agreement not to seek to charge PAYE or NIC was conditional on
the Company agreeing that the amount was not to be allowed in the Company
accounts as a deduction from profits. It can be noted, too, that the giving of
that agreement by HMRC proceeded on the basis that (i) no part of the £900,000
had actually been paid, (ii) as the Company had ceased to trade, that sum would
never fall to be allowed against income of the Company, (iii) the £900,000 was
credited to the director’s current account at some point after 31 January
2005. That basis was derived from information provided by the Company through
Mr Thomas. It was also derived from the fact that at the General
Commissioners’ meeting in 2007 and subsequently until about May 2011 (see
paragraphs 182-192 above), the Company did not dispute that the bonus had been
credited to the director’s current account. Such conduct can only be described
as deliberate. If it had been established that the bonus had not been credited
to the director’s account the only conclusion would have been that it had been
paid as there had to be a corresponding credit entry in the accounts, the only
one being bank ie the money had been withdrawn from the Company’s bank
account thus making the bank a larger creditor; thus bank is
credited. We also refer to paragraph 213 above.
263. On the
first or superficial reading of Mr Stewart’s letter to the Company dated 17
July 2007, it might appear that HMRC had irrevocably agreed that no PAYE or NIC
would be levied on the sum of £900,000. However, it seems to us that whatever
agreement may have been given, it was given in guarded and qualified terms. It
is clear that Mr Stewart was uneasy about the accuracy and completeness of the
information being provided by Mr Thomas. Mr Thomas, of course, was privy to
the whole affairs of the Company and had access to all the detail of the
operations on the director’s current account.
264. In his
letter dated 17 July 2007, Mr Stewart points out that he has been seeking an
analysis of the director’s current account and has had to draw conclusions on
the basis of incomplete information. His letter concludes with the statement
that he could not allow a situation where a debit is disregarded on the one
hand and a credit (£900,000) is allowed on the other hand. He proceeded on the
basis that the director’s current account was simply to be reduced by
£900,000. That seems to us to impose a significant qualification or condition
to the agreement which might otherwise have thought to have been entered into.
265. There does
not appear to be any reply by or on behalf of the Company to the letter dated
17 July 2007. Mr Thomas has subsequently denied, on behalf of the Company,
that the sum of £900,000 was ever credited to the director’s account. This, of
course, is entirely at odds with what the Company attempted to do when
purporting to revise its accounts in 2013, and with the assertion earlier in
2007 that the accounts submitted with the tax returns in August 2006 reflected
a paper transaction with no fiscal consequence.
266. Thus, in
the event, what Mr Stewart was at pains to avoid, occurred. The credit entry in
the Company, although said to be a paper exercise, was a real
transaction. Instead of disregarding the bonus of £900,000, it has continued
to be treated in the Company’s accounts as a liability of the Company owed to
the Thomas brothers and reflected in the director’s current account. Moreover,
it continued to be shown as a deductible expense from the Company’s profits.
The Court of Session action, whatever its merit or purpose, raised by the
Company in August 2011 against HMRC for repayment of allegedly undue tax,
relies on the sum of £900,000 being a valid deduction from expenses in
calculating the Company’s profits and losses. We refer to paragraphs 101-105
above). on In addition, the liability of the Company for the amount at credit
of the director’s account appears to have been transferred to Spring
Seafoods/Capital. That company, in turn, has deployed that liability in an
attempt to reduce its fiscal obligations to HMRC. We refer to paragraphs 65-74
above.
267. There is
no letter from Mr Thomas, on behalf of the Company accepting the conditions.
The Company did not remove the deduction of £900,000 from its accounts by
reducing the amount standing in the director’s current account by £900,000 and
by removing that sum as a deductible expense against income. It did not write
to HMRC accepting the condition. (Mr Stewart in his letter dated
31 July 2007 (referred to below) notes that he had not heard from Mr
Thomas on behalf of the Company). There was sufficient time before the Company
was struck off for it to write accepting the conditions proposed. It was not
apparently trading. Its director, Mr Thomas, was in the habit of responding to
Mr Stewart’s letters speedily and often with detailed explanation. The
conditions could have been accepted after the Company had been restored to the
Register in 2010 or following the refusal of the Reclaiming Motion on 4 March
2011. An offer to that effect was made by Mr Stewart by letter dated 3 June
2011. The offer was not accepted.
268. Either the
Company breached the agreement and, so on the common law principle of mutuality
of contract cannot enforce it or rely on it, or the conditional or qualified
nature of the agreement was never purified and so the agreement cannot
be relied upon because no binding rights or obligations were created. Either
way, the Company has failed to establish that the 2007 agreement
provides a sound ground of appeal in the present proceedings.
269. Notwithstanding
the line being pursued by Mr Thomas on behalf of the Company in 2007 that the
entry in the accounts (£900,000) was a paper exercise; and that it would not be
paid or otherwise drawn down, it appears that by the end of April 2007 (if the
2007 Spring Seafoods/Capital accounts are accepted as being accurate) the sum
at credit of the Director’s account in the Company cessation accounts had been
transferred to the director’s account with Spring Seafoods/Capital although the
fact that the business of the Company had been or had purported to have been
transferred to Spring Seafoods/Capital had not been disclosed to Mr Stewart
until at least 2009. It was thus available to be drawn down and was in fact
being drawn down to some extent without any PAYE or NIC being accounted for
thereon.
270. The onus
lay on the Company to demonstrate that the appeals fell to be allowed on the
basis of the 2007 Agreement. The Company has failed to discharge that
onus. Any agreement was conditional or qualified. The conditions were
not all purified. Accordingly, it does not bind HMRC. It did not preclude
them from issuing the Notices of Determination and the Notices of Decisions.
It is therefore unnecessary to consider submissions on the effect of
misrepresentation, or the remedy of reduction in relation to voidable
contracts. Nor is it necessary to consider the submissions on the effect of
post July 2007 conduct of the Company. Overall, we find it difficult to
conclude that the Company’s conduct has been consistent. It seems to us that
the Company has simply adopted from time to time whatever stance might yield
the best fiscal advantage. We rest our decision on the view that any agreement
was conditional, the conditions were not purified and so there was no
enforceable agreement which the Company could deploy as a shield against
liability for the sums specified in the Notices insofar as relating to the sum
of £900,000. Moreover, any such agreement was not implemented. The
Company has treated the entries as having real fiscal effect in their dealings
with HMRC and with Spring Seafoods/Capital.
The 2010 Undertaking
Submissions
271. While Mr
Upton originally restricted his arguments to the alleged payment of the sum of
£900,000 he now extends it to the sum of £178,230. He submits that the Company
is entitled to enforce the Undertaking. It was binding on HMRC (Southern
Cross above). It was truly addressed to the Company even although it was
not then in existence but subsequently was deemed to have been in existence.
It was intended to benefit the Company on the assumption that it was restored.
The real question was what was meant by outstanding enquiries tested as
at 19 May 2010. He submitted that the phrase covered enquiries which
had been drawn to the attention of Mr Thomas and were formally afoot and
notified as such. The enquiry into the Company’s corporation tax return opened
by letter dated 4 January 2007 was the only outstanding enquiry. The scope of
such an enquiry did not extend to PAYE or NIC but was restricted to corporation
tax (Finance Act 1998 Schedule 18 paragraphs 18, 24, and 25). The Company’s
returns made no mention of (and were not required to mention) PAYE or NIC. The
fact that the letter dated 4 January 2007 asked questions about PAYE was in the
context of liability for corporation tax. The statutory limit of formal
enquiries was important. A taxpayer was entitled to know what the Revenue’s
object was so that he could react appropriately eg by instructing suitable
experts. Reference was made to Funnell on HMRC Investigations & Enquiries paragraph 1.52. Finally, the apprehension of Mr Thomas, expressed in proposed
pleadings in the Court of Session restoration proceedings was irrelevant.
272. Mr Artis
submitted that the Undertaking was given to the Court and not to the Company.
The Company was not a party to the Undertaking and was not a beneficiary. The outstanding
enquiries were those relating to corporation tax. PAYE does not require an
enquiry. The reference to trade does not relate to PAYE. The
Undertaking has nothing to say about PAYE. Where there is a legitimate
corporation tax enquiry, HMRC can use what they learn in relation to other
taxes. The reference to Code of Practice 8 in the letter opening the enquiry
gives the company fair notice. PAYE was not in contemplation when the
Undertaking was being discussed.
273. Both
counsel originally submitted that nothing turned on the reference in the
Undertaking to s29 of TMA. In his reply to the submissions of Mr Artis, Mr
Upton submitted that as s29 applied to non-corporation tax issues, the
Undertaking covered more than corporation tax and thus extended to PAYE and
NIC.
Decision (The 2010 Undertaking)
274. The
Undertaking is set out above in the context of the restoration proceedings
(paragraphs 152-156). As now presented, Mr Upton’s argument, if sound, applies
to both the PAYE determinations and the NIC decisions. We consider that the
Company plainly has title and interest to rely on and enforce the 2010
Undertaking. It was obviously intended to confer a benefit on the Company in
the sense of restricting the scope of its liabilities and providing some degree
of immunity from the fruits of further investigation. S1032 of the Companies
Act 2006 deems the Company always to have been in existence. That cures any
difficulty that might have arisen because the Company had not been restored to
the Register when the Undertaking was given.
275. If it is
correct to give the word enquiries a technical meaning, as submitted, in
effect, by Mr Upton, then it seems appropriate to give the phrase any
assessments (in the fifth last line of the document as produced) a
technical meaning too. The liability on the part of the Company for PAYE flows
from the issue of Notices of Determination. The liability on the part of the
Company for NIC flows from the issue of Notices of Decisions. Neither is an
assessment, although the Notices of Determination are deemed to be assessments
for certain purposes. Neither flows from the closure of a statutory enquiry.
They relate to the remuneration by the Company to its employees. On that
basis, the liability for PAYE and NIC is simply not dealt with by the
Undertaking. Accordingly, issuing the Notices of Determination and Decisions
does not breach the Undertaking as they are not assessments. The
reference to s29 actually confirms that the Undertaking does not cover PAYE or
NIC. S29 is not concerned with such liability (see Weight Watchers at
paragraphs 16 and 17). The suggestion that the reference to s29 extends the
Undertaking to PAYE and NIC is the very opposite of what can be taken from that
reference.
276. If, on the
other hand, the phrase outstanding enquiries is given a broader meaning,
then it is apt to cover the queries already raised about PAYE and NIC. A
broader meaning can be justified because the phrase outstanding enquiries refers
to the Company’s liabilities which is general and is not and does not
need to be restricted to corporation tax liability.
277. Mr Thomas
was plainly concerned about this aspect (PAYE and NIC liability of the Company
and, as a consequence, his own possible personal liability) as he mentioned it
in a pleading document in the restoration proceedings. The document, drafted
by or at least running in the name of the counsel representing Mr Thomas, uses
the word assess in connection with the Company’s liability for PAYE.
The fact that the document did not ultimately form part of his formal pleadings
does not matter. It was intimated and lodged in Court. This forms part of the
surrounding circumstances (known to all concerned) and forms the context for
ascertaining what a reasonable person would understand was meant by the words
used in the composition of the Undertaking.
278. However,
that approach does not necessarily change the interpretation of any
assessments referred to above. On that basis, the issuing of the Notices
of Determination and the Notices of Decision still do not amount to the raising
of any assessments within the meaning of the Undertaking. HMRC are, on
that basis, entitled on conclusion of outstanding enquiries to issue notices of
determination and decisions in relation to the Company’s outstanding
liabilities for PAYE and NIC which had been the subject of earlier enquiry.
279. Even if
the phrase any assessments is construed in a non-technical sense, this
does not assist the Company. The phrase would then cover PAYE and NIC
liability. The assessments, in the form of a notice of determination and
notices of decision were raised in respect of outstanding enquiries into the
Company’s liabilities. They were issued or raised forthwith upon the
restoration of the Company to the Register (the Company was restored to the
Register on 4 March 2011 when the reclaiming motion against Lord Glennie’s
interlocutor was refused). The notices were issued on 8 April 2011;
they were thus issued on (ie following shortly on) the issue of the closure
notice on 25 March 2011. In doing so, they raised no further enquiries into
the Company’s trade.
280. Standing
back, it seems to us to be obvious that the purpose of the restoration petition
was to enable HMRC to force the Company to implement its fiscal obligations, of
whatever nature to HMRC. It also seems surprising that, given the fact that
the liability of the Company for PAYE and NIC had been expressly raised in the
course of the proceedings, an Undertaking should be construed as excluding
entirely, for no apparent reason, that liability. The language of the
Undertaking does not compel us to do so. Rather, it points to the conclusion
we have reached. Finally if one views the Undertaking as a clause limiting
liability, construing it strictly, as one might well do (if the meaning is
doubtful or ambiguous by construing it against the party relying on it - here
the Company), does not assist the Company.
281. If our
view is sound, it is unnecessary to consider the submission on the statutory
limit of formal enquiries. The Notice of Enquiry letter dated 4 January 2007,
intimated that HMRC intended to enquire into the Company’s Tax Returns for the
period ended 31 July 2004 and 31 January 2005. The letter made express
reference to Code of Practice 8.
282. Code of
Practice 8 covers all the taxes and duties for which HMRC are responsible where
they believe there may have been a serious loss of tax. The Code notes that it
is issued because the enquiry is being directed and co-ordinated by Specialist
Investigations, usually as part of a larger project. It also notes that it can
become necessary to enquire into issues other than those identified at the
outset.
283. The letter
(4 January 2007) itself raised questions about PAYE. It could therefore come
as no surprise to the Company that the enquiries might ultimately lead to the
conclusion that PAYE and NIC was outstanding as well as additional corporation
tax. HMRC have general powers of administration, management and collection of
tax. It may simply be expedient in cases of this nature (complex, dearth of
documentation, inconsistencies, and business arrangements which have
questionable commercial rationale, and an underlying suspicion of serial and
serious tax abuse) for HMRC to intimate the commencement of wider enquiries in
parallel with the express statutory enquiries under the corporation tax
regime. If the argument is one of fair notice, as it seemed to be, then it is
plain that fair notice was given that the enquiry might range beyond the extent
of liability for corporation tax.
Quantum
284. As we have
explained, HMRC have restricted the sums being claimed. They produced a
revised calculation. We refer to paragraphs 166-179.
285. In a short
document, lodged at the hearing on 9 May 2014, the Company asserts that HMRC
have used different PAYE codes. The Company says it requested details of the
Codes applied but HMRC have not responded. The Company contends that basic
rate (BR) code should be applied. This is the default code applied by
Regulation 49 of the 2003 Regulations. This requires a deduction of 22%. 22%
of £495,000 is £108,900. The total liability is therefore 2x£108,900 ie
£217,800.
286. We are not
entirely sure what HMRC’s position on this is. However, the grounds of appeal
in each of the appeals before us make no mention whatsoever of best
judgement or quantum. No application to amend the grounds of appeal has
been made. We therefore do not consider that the Company should be allowed to
develop this particular argument on quantum. On the first day of the Hearing,
Mr Upton intimated that the only issue on quantum related to the two
termination payments to Rebecca and Sarah Thomas. Evidence was led on this
aspect without objection. The fact that, in the course of the Hearing, HMRC
have restricted the sums claimed in the Notices, does not open up the appeals
so as to enable the Company to present additional arguments on separate aspects
of quantum, particularly ones that could have been raised at the outset or at
least at a much earlier stage than the final day of the hearing.
287. We
therefore do not propose to consider the question of Codes further or call for
further evidence or submissions. The effect of the HMRC calculations is that
the sum specified in the Notice of Determination dated 5 September 2012 is
further varied by reducing it to the sum of £380,412. The Notices of
Decision dated 5 September 2012 in respect of the earnings of Mr Thomas and
Stuart Thomas are further varied by reducing the sum specified in each Notice
to £70,352.69 (ie a total of £140,705.38).
Summary
1 In
terms of the cessation accounts, the accrued bonus of £900,000. was
unreservedly at the disposal of Mr Thomas and his brother (paragraph 210).
2 Even
if it is accepted that the sum at credit of the director’s account in the
cessation accounts does not include the sum of £900,000, it is a reasonable
inference (if not the only conclusion which can be reached) that the money has
been paid out by the Company to Mr Thomas and his brother despite the former’s
protestations to the contrary. There has to be, in accounting terms, a
corresponding credit to the deduction (as an expense) in the accounts under the
heading STAFF COSTS. That credit would be a credit entry in the Company’s bank
account; the bank becomes a creditor of the Company to the extent of an
additional £900,000. The Company’s overdraft is increased or its bank balance
is reduced. Although requested to do so, the Company persistently failed to
provide a complete record of the transactions on its director’s account
(paragraph 213).
3 Any
decision not to operate a PAYE (including NIC) system over the period 1 August
2003 to 31 January 2005, must have been deliberate with a view to the Company
not having to pay PAYE and NIC which ought normally to have been deducted from
wages, salaries and bonuses paid to administrative staff and directors
(paragraph 197).
4 During
the period to which the cessation accounts relate, the Company did not account
to HMRC for any PAYE or NIC in respect of the bonus of £900,000, or for a
significant part of the wages and salaries of £178,230 mentioned in the
cessation accounts (paragraph 214).
5 The
submission of the nil return and the consequent failure to lodge PAYE returns
accounting for tax and NIC on the sum of £900,000 were deliberate acts. If
PAYE is due at all its non-payment has been brought about by the deliberate
conduct of the Company (paragraphs 237 & 238).
6 £90,000
of the £178,230 for wages and salaries remains unaccounted for through what can
only be described as the deliberate conduct of the Company. Such tax remains lost
and is part of the subject matter of the Notices of Determination and
Notices of Decision referred to above. That, of itself, is sufficient to
render the Notices of Determination timeous in terms of section 36 TMA.
(paragraphs 197, 214 & 239).
7 The
obligation on the part of the Company to make payment in terms of the Notices
relating to PAYE has not been extinguished and the Notice of Decision dated 5
September 2012 is therefore enforceable (paragraph 239).
8 The
obligation on the part of the Company to make payment in terms of the decisions
relating to NIC has not been extinguished and is therefore enforceable
(paragraph 244).
9 The
onus lay on the Company to demonstrate that the appeals fell to be allowed on
the basis of the 2007 Agreement. The Company has failed to discharge that
onus. Any agreement was conditional. The conditions were not all purified.
Accordingly, it does not bind HMRC. It did not preclude them from issuing the
Notices of Determination and the Notices of Decisions (paragraph 261).
10 Either
the Company breached the 2007 agreement and so, on the common law
principle of mutuality of contract, cannot enforce it or rely on it, or the
conditional or qualified nature of the agreement was never purified and so the
agreement cannot be relied upon because no binding rights or obligations were
created. Moreover, any such agreement was not implemented. Either way, the
Company has failed to establish that the 2007 agreement provides a sound
ground of appeal in the present proceedings (paragraphs 268 and 270).
11 The
issuing the Notices of Determination and Decisions does not breach the 2010
Undertaking (paragraphs 274 – 279)
12 The
sum specified in the Notice of Determination dated 5 September 2012 is further
varied by reducing it to the sum of £380,412. The Notices of Decision dated 5
September 2012 in respect of the earnings of Mr Thomas and Stuart Thomas are
further varied by reducing the sum specified in each Notice to £70,352.69 (i.e.
a total of £140,705.38) (paragraph 287).
Result
288. The sum
specified in the Notice of Determination dated 5 September 2012 is further
varied by reducing it to the sum of £380,412. The Notices of Decision
dated 5 September 2012 in respect of the earnings of Mr Thomas and Stuart
Thomas are further varied by reducing the sum specified in each Notice to £70,352.69
(ie a total of £140,705.38).
289. All
questions of expenses are meantime reserved.
290. 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.
J GORDON REID QC FCIArb
TRIBUNAL JUDGE
RELEASE DATE: 11 September 2014
APPENDIX 2 (see
paragraph 26)
Roderick and Stuart Thomas
SC/3012/2008; SC/3013/2008 Judge Berner 2013
1.
This appeal relates to the tax returns of Mr Thomas and his brother for
the tax year 2002/03. These tax returns showed a chargeable gain of £1.4m.
This related to the sale of the goodwill of its business to the Company on 26
July 2002 for £2.8m. HMRC say that these sums are in fact distributions
chargeable to income tax. Closure notices were issued on 31 October 2007. A
closure notice in respect of the partnership was also issued on 12 December
2007.
2.
Enquiries had also been opened into the brothers’ tax returns for the
tax year 2004/05. A closure notice was issued on 31 July 2007 (see above at
paragraph 140).
3.
This case discussed the preliminary issue whether a letter written by
HMRC dated 30 May 2012 constituted an agreement of their personal tax
assessments for the tax year 2004/05 (this is the same letter referred to in
the Grounds of Appeal in the appeals before us. That ground has been
abandoned). In the course of the hearing that issue was resolved. There were
no other outstanding issues for the tax year 2004/05. However, an issue arose
in relation to the effect of the settlement agreement of 24 May 2004. In
particular, in relation to the tax year 2002/03, the Tribunal considered
whether it had the same effect as a closure notice for the year ended 5 April
2003, and whether HMRC had power to issue further closure notices on 31 October
2007 in respect of the tax year 2002/03.
4.
The Tribunal noted various provisions of the settlement agreement and
the resolution of disputes about its interpretation. The General
Commissioner’s decision in relation to applications for closure notices in
respect of the periods 2001/02 and 2002/03 was that HMRC were not entitled to
open a further enquiry into the 2002/03 period. That decision was quashed
after an application for judicial review was made to the High Court HMRC v
Gen Comm [2007] EWHC 871 (Admin). The Court declared that the 2004
settlement agreement did not in any way prevent enquiries in respect of the tax
year 2002/03 except only “actual or potential liabilities arising from the
affairs of Bala Ltd or the Maclennan Trust”. The First-tier Tribunal regarded
itself as bound by the decision of the High Court. It noted that the
settlement agreement expressly carved out from those settled liabilities any
liability that might arise in relation to the acquisition of the partnership
business by the Company (paragraphs 25, 29. 31, 33).
5.
It was also argued by Mr Thomas that a binding agreement had been
reached with HMRC at a case management hearing that any distribution income
included in the closure notices for the year 2002/03 was to be treated as
income arising under the Maclennan Trust. If so, it would then be argued that
such a liability had been settled under the settlement agreement of 24 May
2004. The First-tier Tribunal rejected the assertion that such an agreement
had been reached at the case management hearing. Permission to appeal was
granted. Mr Thomas represented the Appellants and Mr Stewart represented HMRC
6.
According to information provided by HMRC, these appeals are now closed.
Petition
of the Company for Judicial Review, Lady Smith 20/2/04
7.
This petition sought to set aside the enquiry notice issued in relation
to the Company’s tax return for the period 1 August 1999 to 31 July 2000,
lodged on 31 July 2001. The argument was the notice ought to have been,
but was not served at the Company’s registered office. Having found that the
notice did not even require to be in writing, Lady Smith had no hesitation in
concluding that the notice did not require to be served on the Company’s
registered office (paragraph 27 and 33). She also rejected an argument that
sending a copy of the notice to the Company’s agents was not valid service.
She also found that the Company had agreed at an earlier meeting with the
Revenue that sending the notice to their agents would suffice (paragraph 38).
The Court also accepted the Revenue’s personal bar argument, that Mr Thomas was
aware of the arguments advanced at the outset but simply waited for the 12
month period to expire before raising it, with a view to preventing a second
(valid) notice being issued timeously, and in the meantime instructed his
agents to correspond with the Revenue giving the impression that the notice was
being treated as valid (paragraph 39).
8.
This case seems to us to be typical of how the Company conducts its
fiscal affairs.
The
Company v HMRC [2005] STC (SCD) 830
9.
This case related to appeals against enquiry notices in relation to the
Company’s returns for the years to 31 July 2002 and 2003. The background was
that the returns and accompanying accounts disclosed that by a Minute of
Agreement dated 24 July 2002 the Company purchased the entire business and
assets including goodwill of the S&R Thomas Partnership for £2,835,000,
being £2,800,000 for goodwill and £35,000 for the stock. The partnership was
said to have ceased trading after the sale. Each partner declared a capital
gain of £1,400,000 for the year of assessment ended 5 April 2003. They sought
business taper relief. The Company in its returns for the accounting periods
ended 31 July 2002 and 2003 treated the goodwill acquired as an
intangible asset for which relief was available.
10.
The Revenue were challenging the Company’s entitlement to relief on the
basis that relief may not be available for the goodwill; the transaction was
not at arm’s length and the goodwill was overvalued; the sale was part of a tax
avoidance scheme; the overvaluation represented disguised remuneration paid by
the Company to the brothers Thomas which attracted PAYE and NIC; alternatively
the overvaluation paid was a distribution for which no relief was available.
11.
The Company raised various grounds of appeal and sought closure
notices. The Decision itself is primarily concerned with the nature and extent
of the documents which were discoverable. However, the Judge (J Ghosh QC)
records information provided by the Revenue to the effect that the
partnership’s accounts disclosed that 97.1% of the partnership’s purchase were
from Thomas Lindh Ltd (previously Spring Salmon Ltd), a company owned by the
Thomas family and 86.4% of the partnership’s sales were to the Company. The
enquiry notices were upheld subject to some modification.
12.
It is of some interest to note that the Special Commissioner observed
that for a hearing that would have been heard by the General Commissioners in
Scotland an appeal is conducted before the Special Commissioners on the prima
facie basis that submissions on Scots law are made as legal submissions and
submissions on English law are made as submissions of fact (paragraphs 40 and
42).
R
v Gen Comms and Mr Thomas, SJ Thomas, and the Partnership [2007] EWHC 871 (Admin)
13.
The Revenue sought judicial review of decisions by the General
Commissioners. These related to s19A TMA notices served on Mr Thomas and his
brother requiring the production of documents. These related to their returns
for the tax year ended 5 April 2003. Enquiries had been opened in relation to
the tax returns of the brothers and the partnership for that tax year. These
notices were resisted on the basis that that tax period was covered by the
Agreement/Settlement dated May 2004. The General Commissioners agreed and
closed the enquiries (paragraph 2).
14.
The Judge considered the interpretation of the May 2004 Agreement. He
construed the 2004 Agreement as meaning that for the tax year 2002/2003, the
liability of the brothers covered by the Agreement was restricted to the actual
or its potential liabilities arising from the affairs of Bala Ltd or the
Maclennan Trust (paragraph 45). The liability of the partnership for the tax
year 2002/2003 was also not covered by the 2004 Agreement. The General
Commissioners erred in law and their decisions were quashed (paragraphs 46, 50
and 51).
The
Brothers v HMRC [2011] UKFTT 82 (TC)
15.
This was an application for a closure notice and related to the tax year
ended 5 April 2007. The brothers appeared in person. Mr Stewart appeared
for HMRC. The background was the activities of the Maclennan Trust and the
brothers’ interest in it. In relation to certain gains on share disposals by the
Trust, HMRC considered that the brothers were the settlors of the Trust and
liable for tax on the gain. Assessments were raised charging the full amount
of the gain (£393,984) in the tax year ended 5 April 2006 (paragraph 18).
16.
The enquiry notices for the tax year ended 5 April 2007 requested
details of disposals and acquisitions of the Trust together with its financial
statements. At the hearing the brothers provided some information. HMRC’s
dilemma was that it was not clear whether gains assessed arose wholly in the
tax year 2005/06 or partly in that year and partly in the following tax year
(paragraph 22). The brothers made various allegations of delay on the part of
HMRC in having the question whether the brothers were settlors of the Trust, an
issue which arose in respect of appeals relating to the 2003/04 tax year.
17.
The Tribunal refused the application for a closure notice (paragraphs 30
and 31). The brothers had not provided sufficient information relating to
disposals and capital gains and other matters
18.
The appeals to which this decision relates (TC/2010/07697 and
TC/2010/7244) are still open. These relate to a CGT loss claim of £3.5m and
are stayed behind appeals TC/2010/6253 and TC/2010/6254 which relates to the
tax year 2005/06 and the question whether the brothers are settlors of the
Maclennan Trust. Those latter two appeals are still open and hearings have yet
to take place.
Spring
Capital Ltd v HMRC [2013] SFTD 570
19.
This appeal (TC/2012/4103) related to Spring Capital’s tax return for
the accounting period ending 30 April 2010 (it will be remembered that Spring
Seafoods Ltd changed its name to Spring Capital). The return claimed £2m for
amortisation of goodwill, and intangibles relief. HMRC opened an enquiry.
Spring Capital appealed to the Tribunal on the basis that the HMRC notice was
also a closure notice and if not, it was an amendment or assessment. In
considering HMRC’s application to strike out the appeal on the ground of no
jurisdiction, Judge Mosedale held that the notice was not a closure notice; nor
was it an amendment to the tax return or an assessment. The Tribunal therefore
had no jurisdiction to hear the appeal which was struck out. It was also noted
that an information Notice served under para 1 of Schedule 3 to the Finance Act
2008 relating to the amortisation and the goodwill had not been complied with.
Once again Mr Thomas appeared for the appellant and Mr Stewart for HMRC. We
have been informed that this decision is under appeal but no hearing has yet
taken place before the Upper Tribunal
Company
v HMRC 24/5/13 (TC/2011/6273) Judge Mosedale
20.
The proceedings under consideration were an appeal against amendments in
closure notices relating to enquiries opened on 28 October 2004 into the
Companies returns for the accounting years ended 31 July 2002 and 31 July
2003. Both returns had claimed relief for amortisation of goodwill. It was
also noted that in August 2006 returns for the accounting years ending 31 July
2004 and 31 January 2005 were also submitted. Enquiries were opened into
these returns on 4 January 2007.
21.
Closure notices were issued in respect of the 2002 and 2003 returns on
25 March 2011. These closure notices refused the claim to amortisation of
goodwill and stated that HMRC did not accept that the Company had paid the tax
it claimed to have paid. This argument relates to the effect of the 2004
Settlement (see paragraphs 101-105 above). At the same time closure notices
were issued in relation to the enquiries opened into the 2004 and 2005 returns.
These closure notices denied the Company’s claim to terminal loss relief made
in those returns which had been said to arise out of the amortisation of the
goodwill. On 12 April, the Company appealed against all four closure notices.
It lodged an appeal to the tribunal in respect of the closure notices relating
to 2002 and 2003 returns but not in respect of the closure notices relating to
the 2004 and 2005 returns.
22.
The tribunal raised two questions of jurisdiction. The first was
whether the tribunal had jurisdiction to consider the Company’s claim that it
had already paid the tax owing. The second was whether the tribunal could
consider the question whether the Company’s claim to terminal loss relief was
final.
23.
The Company’s argument was that it made its terminal loss relief claim
not in its returns but by separate letter. HMRC had power to open an enquiry
into that claim but did not do so. The claim was therefore final. On that
basis, as the claim had not been met, the Company raised proceedings to preserve
their rights of recovery against the possibility of prescription. HMRC assert
that the claim was made in the returns which include the accompanying documents
and enquiries were duly opened and closed by disallowing the claim for terminal
loss relief. The Company advanced an alternative argument that in refusing the
claim to terminal loss relief, HMRC were in breach of the 2010 Undertaking (see
paragraphs 274-283 above). They also said the tax had already been paid as
part of the settlement agreement in 2004.
24.
After reviewing various statutory provisions and authority on
jurisdiction, Judge Mosedale concluded that the First-tier Tribunal had
jurisdiction to determine the validity of claims to terminal loss relief
(paragraphs 51-53, 121). She raised a doubt whether the tribunal had
jurisdiction to determine the question whether there had been a breach of the
2010 Undertaking on public law grounds but expressed no concluded view
(paragraphs 54 and 55).
25.
Judge Mosedale noted that the validity of the 2004 and 2005 closure
notices had not been challenged by appeal to the tribunal. She rejected the
argument that they were void. Rather, they were voidable (paragraphs 77 and
81, and 83, 85, 87, 91). As the procedure for challenging them (through the tribunals)
has not been followed they stand effective to deny the terminal loss relief
claim. The terminal loss relief claim could not therefore form part of the
proceedings before her. The Court of Session would, she thought, come to the
same conclusion (paragraphs 86, 88, 122).
26.
Judge Mosedale also concluded that the tribunal had jurisdiction to
determine whether the tax claimed to have been paid, had been paid; and as the
tribunal had such jurisdiction, the courts did not (paragraphs 110-113, 123).
She also noted that as Judge Ghosh had already decided that the 2004 Agreement
did not extend to the periods ended 31 July 2002 and 31 July 2003, raising the
issue of the scope of the 2004 Agreement, while not precluded by the doctrine
of res judicata, may nevertheless be an abuse of process (paragraphs
119, 124).
27.
A further hearing is expected to take place later this year.
Brothers
v HMRC 2014 UKFTT 273 (TC), TC/2013/04284 and TC/2013/04283
28.
This appeal relates to discovery assessments issued in April 2013 in relation
to the tax year 2008/09. The brothers applied to have HMRC barred from taking
further part in the proceedings on the grounds that they had no reasonable
prospects of success. The assessments related to the gains of the Maclennan
Trust. Judge Kempster refused the application.
29.
Judge Kempster noted that HMRC had conceded defeat in relation to
appeals against closure notices for 2002/03; that the tribunal had determined
that there were no gains in respect of the tax year 2004/05 and income tax had been
de minimis; appeals against assessments for 2005/06 were stayed pending
determination of the settlor issue in relation to 2002/03. In relation to
2006/07, after a very long enquiry, HMRC accepted there was no net liability to
tax. In relation to 2007/08 HMRC opened enquiries out of time.
Brothers
v HMRC 2014 UKFTT TC/2010/06254 & TC/2010/06253 (Judge Berner)
30.
These appeals relating to discovery assessments issued in relation to
the Tax Year 2005/06. The appellants (represented by Mr Thomas) sought to have
HMRC barred from taking further part in these proceedings. The application
arose out of a section 54 agreement made in respect of Tribunal proceedings in
relation to the tax year 2002/03. The general background was whether the
brothers were settlors of the MacLennan Trust. HMRC had agreed that they would
treat a determination by the Tribunal of the settlor issue in relation to
2002/03 as binding in respect of the 2005/06 appeal. Subsequently HMRC chose
not to pursue further the appeal assessments in relation to 2002/03. A section
54 agreement was entered into.
31.
The argument for the appellants appears to have been that as the 2002/03
appeal, which included the settlor issue, and been resolved, HMRC were bound by
that settlement and could not argue the settlor issue in relation to the tax
years 2005/06. However, Judge Berner concluded, as a matter of construction of
the section 54 agreement, that it contained no express agreement of the settlor
issue; indeed the very basis of the section 54 agreement was that the settlor
issue remained to be determined by the tribunal in respect of other years under
appeal including 2005/06 (paragraph 14).
32.
The application that HMRC be barred from taking further part in the
proceedings therefore failed.
