McCashin v Revenue & Customs (INCOME TAX/CORPORATION TAX : Pension scheme) [2018] UKFTT 625 (TC) (18 October 2018)

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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> McCashin v Revenue & Customs (INCOME TAX/CORPORATION TAX : Pension scheme) [2018] UKFTT 625 (TC) (18 October 2018) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06776.html Cite as: [2018] UKFTT 625 (TC)

DECISION

Preliminary Issues

1. The appellant’s two very late applications for postponement having been refused he attended the hearing.

2. The Notice of Appeal in this matter is dated 20 August 2014 and stated that it related to a decision of the respondents (“HMRC”) dated 18 July 2014. That meant that the appeal was technically out of time. HMRC consented to the late lodgement of the appeal.

3. HMRC referred to the recent decision in Monaghan v HMRC[1] (“Monaghan”) which has been appealed but had not been listed for hearing. In the circumstances they requested permission to lodge written submissions as to the timing and competency of the discovery assessment. The appellant offered no objection and an oral Direction was issued granting HMRC a period of two months within which to lodge with the appellant and the Tribunal a written submission. The appellant did not wish a right of response since it was a technical issue with which he was not conversant.

The issues

4. This appeal has had a long and chequered procedural history but, ultimately, there are three issues namely whether:

(a) Payments made out of the IPS Pension Builder Scheme (“the Scheme”) are unauthorised payments in terms of Chapter 3 Part 4 Finance Act 2004 (“FA 2004”);

(b) The assessment raised under section 29 Taxes Management Act 1970 (“TMA”) is in time and competent and, if so, whether it should be increased to £452,675; and

Substantive Background

5. The Scheme is a Self-Invested Pension Plan. The appellant became a member on 11 September 2001. He was a member and joint Trustee, with Union Trustees Limited (“UTL”), of his arrangements within the Scheme. The Scheme’s administrator was IPS Pensions Limited (“IPS”). That company has changed ownership at least once between 2001 and 2009.

6. In 2001, a contribution of £100,000 was made to the Scheme and the Scheme then borrowed a further £250,000 from Clydesdale Bank plc (“the Bank”). During November 2001 all of the funds held by the Scheme were invested in two commercial properties in Glasgow which were then leased to the appellant’s business McCashin’s Service Stations Limited (“the Business”). The Business owned a further four properties.

7. In the first instance, the rents received from the Business were utilised to pay interest on the loan from the Bank.

8. In or about 2005 the appellant decided to sell the Business and emigrate to Gibraltar. In order to qualify for CAT 2 status in Gibraltar he needed to demonstrate net worth of approximately £2m. He consulted lawyers in Gibraltar, namely, Hassans, the partners of which owned multiple companies which were investment vehicles. He sought advice from Hassans and his own accountants. His own accountants “signed off” the statement of his net worth.

9. The Bank was prepared to lend him substantial funds for investment in Gibraltar on the understanding that the proceeds of the sale of the assets of the Business and the proceeds of the pension fund were utilised to repay those loans. The monies from the Bank were then utilised in the investment vehicles furnished by Hassans.

10. IPS was aware of his intention to invest in Gibraltar. It is less than clear whether they knew that the investment would not be through the Scheme or into another pension scheme. It is certainly clear that when they discovered in January 2009, when under new management, that the funds had been expatriated they had no detail about that in their files and they embarked on an investigation with which the appellant did not co-operate.

11. The appellant had to be resident in Gibraltar by 31 March 2006 and the Bank sent the loan financing direct to Gibraltar.

12. As each of the Business’s properties was sold the free proceeds were remitted to the Bank.

13. The two properties owned by the Scheme were the last to be sold. During July 2007, the two properties were sold for considerations, including VAT, of £593,375 and £705,000. On the second property, the purchaser also paid an additional sum of £8,123.15 in respect of rent, penalty interest and compensation.

14. When they were sold, the free proceeds of £571,145.16 (being £273,375 for one property and £297,123.15 plus a further £647.01, for the other property) were paid to the appellant who promptly paid the Bank. In addition an earlier deposit of £50,000 for the first property was not paid to the Scheme but presumably to the appellant. At the same time the solicitors involved remitted £270,000 and £415,000 to the Bank to “redeem” the mortgage on each property. In fact the total mortgage for both properties had only ever been £250,000 so the balance in excess of that of £435,000 was all utilised to repay the loans provided for the Gibraltar investments. All of these sums were therefore diverted from the Scheme on the appellant’s instructions.

15. In October 2007 the appellant repaid £193,375 to the Scheme bank account and the Scheme then settled the outstanding VAT payable to HMRC.

16. On 13 May 2008, the appellant filed his tax return for the year ended 5 April 2008. That return disclosed no taxable income or gain. There was no entry in Box 19 for “Any other information” where an unauthorised payment should be entered.

17. On 13 January 2009, IPS emailed the appellant asking for clarification about a number of transactions and requesting payment for services rendered.

18. On 11 February 2009, IPS explained to the appellant that the assets sold belonged to the Scheme and did not form part of the Business. The letter requested that the funds removed from the Scheme be returned and pointed out that the funds had to be used to provide retirement benefits. It was pointed out that it appeared that there had been an “unauthorised payment” which would result in a tax charge. Details from the HMRC technical pages detailing the rates of charge were enclosed and the appellant was warned that HMRC would have to be advised of the position.

19. On 22 July 2009, IPS wrote to the appellant asking about the whereabouts of the funds and stating that in the absence of a reply HMRC would be contacted and asked to investigate.

20. The appellant telephoned IPS on 24 July 2009 and stated that he had authorised the movement of the funds offshore and they were now invested there. He was told that that was wrong as the funds could not be transferred out of the Scheme.

21. On 27 July 2009, IPS contacted HMRC Pension Scheme Services to report that the commercial properties held by the Scheme had been disposed of during July 2007 and the monies received as proceeds of the disposals had been released by the solicitors on the sole instructions of the appellant. Despite requests nothing had been returned to the Scheme.

22. HMRC then proceeded to investigate but, having failed to obtain relevant information, wrote to IPS requesting submission of a tax return. HMRC were only able to open an enquiry on 29 June 2010 once a tax return had been lodged. The delay was caused because the Scheme administered thousands of pension schemes so the submission of a tax return involved substantial effort.

23. On 30 July 2010, HMRC wrote to the appellant in his capacity as trustee requesting information. Nothing was forthcoming and therefore on 10 September 2010 a Schedule 36 Finance Act 2008 Information Notice was issued to him. The appellant’s response was to telephone HMRC on 11 October 2010 and state that he had moved his pension scheme to a scheme in Gibraltar. He was advised that unless the transfer was to a Qualifying Recognised Overseas Pension Scheme (“QROPS”), which it was not, then it was an unauthorised payment. The appellant did not accept that advice stating that he was resident overseas so there was no issue. He suggested that the fact that he had fully settled the VAT liability in October 2007 showed that he had not intended to “rip-off” the Scheme.

24. HMRC then endeavoured to obtain information from both IPS and the solicitors. IPS provided their file of correspondence. That made it clear that the appellant had not provided the requisite information to them.

25. The solicitors did not cooperate and Information Notices were served on them. Ultimately HMRC decided that nothing further could be achieved with the solicitors since they might rely on Legal Professional Privilege.

26. Officer Smith then decided that she had sufficient information to enable her to raise an assessment based on the information in the papers provided by IPS. She did so on 29 March 2012 in the sum of £389,081. That was based on unauthorised payments totalling £707,421, comprising the free proceeds from the two property sales, plus a sum of £136,276 which HMRC said the appellant had withdrawn from the Scheme bank account on 10 July 2007.

27. At that stage she did not know enough about the payments which were said to have been made to redeem the mortgage to decide whether they were unauthorised payments and if so to what extent.

28. The appellant appealed, primarily on the basis that he was non-resident, and following correspondence, the appellant instructed Hassans who wrote to HMRC on 15 March 2013 confirming that:

(a) The appellant had believed that he could make all the investment decisions which is why he had met the unpaid VAT liability of £193,375 in November 2007.

(b) The appellant had believed that the Scheme funds could be moved to Gibraltar.

(c) He had invested in Gibraltar companies which subsequently invested in residential properties to be rented on a commercial basis.

(d) The investments in those companies were a mixture of the appellant’s own funds and the funds from the Scheme.

(e) The investments failed.

(f) At all material times the appellant had believed that since he was not resident in the UK and he was investing for his retirement and acting as a Trustee there was no issue.

(g) He had not obtained “proper” legal advice.

(i) It was accepted that the payments highlighted by HMRC were unauthorised payments and whilst there was a liability it should be reduced to £282,275 [sic – the calculation should have been £282,725] plus interest and penalties. This was based on reducing the total unauthorised payments by the £193,375 VAT settlement which Hassans said had been met out of the total sums received.

(j) The appellant did not have the funds to meet that liability.

29. HMRC requested evidence about the £193,375 and that was furnished on 11 November 2013.

30. On 8 January 2014, Officer Smith wrote to the appellant confirming that the total would be reduced to £282,725 being an unauthorised payment charge of £205,618 and an unauthorised payment surcharge of £77,107.

31. The appellant responded on 19 February 2014 appealing the position and at that point it became clear from paragraph 3 of his email that the “mortgage” repayments following the sale of the properties had included repayment of loans for the Gibraltar investments.

32. That was treated as a review request. HMRC’s review conclusion letter dated 17 June 2014 intimated that the excess mortgage payments amounting to £435,000 were unauthorised payments, as was the transfer of the free proceeds less the repayment for the VAT and that totalled £377,770. Lastly, the withdrawal of £136,276.15 from the Scheme bank account was reduced by a compensating receipt, on the same day, of £126,000 – leaving a net additional unauthorised payment of £10,276.15. The nature of those withdrawal and receipt payments was unexplained and it was not clear from the evidence that they bore any connection to the property transactions. It is not known why the missing £50,000 deposit was not included by HMRC as another unauthorised payment. The total of unauthorised payments is £823,046.

33. The total tax charge is therefore £452,675 being an unauthorised payment charge of £329,218 and an unauthorised payment surcharge of £123,457.

Discussion

34. Right up until, and in the hearing, the appellant believed that because he was non- resident, paid tax in Gibraltar and all funds were intended for his retirement, he had no exposure to UK tax. He was wrong.

35. Naturally, we were not referred to the case but as Lord Sumption stated in Lowick Rose LLP (in liquidation) v Swynson Limited[2]

“The distinct legal personality of companies has been a fundamental feature of English commercial law for a century and a half, but that has never stopped businessmen from treating their companies as indistinguishable from themselves … is not the first businessman to make that mistake and doubtless he will not be the last.”

Of course we are in Scotland and we are dealing with a pension scheme but the principle is the same. In our view that is precisely the situation in this matter. The appellant viewed the Scheme, which he administered, as being his to control. It was not.

Unauthorised payments

36. Section 160 FA 2004 provides that where a payment is made to or in respect of a member and it is not an authorised payment in terms of Section 164 FA 2004 then it is an unauthorised payment. The payments identified at paragraph 32 above are unauthorised payments. In fact, we find that there are more unauthorised payments, such as, for example, the £193,375 which was repaid for the VAT, but since Officer Smith indicated that by concession she had not pursued that, we have not added that.

37. We agree that the total tax charge is therefore £452,675 being an unauthorised payment charge of £329,218 and an unauthorised payment surcharge of £123,457.

Validity of the Assessment

The law

38. So far as material, section 29 TMA (“section 29”) provides as follows:

29 Assessment where loss of tax discovered

(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—

(a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) …

the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax…

(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—

(a) in respect of the year of assessment mentioned in that subsection; and

(b) in the same capacity as that in which he made and delivered the return

unless one of the two conditions mentioned below is fulfilled.

(4) The first condition is that the situation mentioned in subsection (1) above [was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf.

…

(5) The second condition is that at the time when an officer of the

Board—

(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or

(b) informed the taxpayer that he had completed his enquiries into that return,

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.

(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if—

(a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;

(b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;

(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or…”.

39. Where a registered pension scheme makes an unauthorised payment, the member is chargeable to income tax in terms of sections 208, 209 and 210 FA 2004.

40. Therefore the appellant should have declared the payments in his tax return as he was liable to the unauthorised payments charge and surcharge. He did not.

41. Furthermore, on 11 February 2009, IPS told him that he would be exposed to a tax charge and provided him with information about it. He could have amended his self-assessment tax return at any point up until 31 January 2010 but he did not do so.

42. We are in no doubt that, because there were unauthorised payments which amounted to almost the full value of the Scheme and because those payments were in respect of the appellant, there has been a loss of tax.

43. At the outset of the hearing, given that the appellant was unrepresented, we pointed out that the burden of proof is on HMRC to satisfy the Tribunal that the requirements of section 29 TMA are met and we referred to Burgess and Brimheath Developments v HMRC[3], where the Upper Tribunal made it very clear that that burden extends beyond addressing points positively raised by the taxpayer. In particular the Tribunal must look at the competence and timing of any assessment.

44. As we indicate above, the decision in Monaghan addresses some of the issues arising in this appeal. Firstly, since it is a First-tier Tribunal decision it is not binding on us and secondly, and crucially, it is predicated on different facts. In that case the taxpayer’s appeal against a discovery assessment in respect of an unauthorised payment was allowed on the basis that section 208(8) FA 2004 states that such a payment is not to be treated as income for tax purposes, and that means that an assessment cannot be made under section 29(1)(a), because that refers to a discovery that “income” has not been assessed.

45. Although the wording in section 29(1)(a) has been modified under the Registered Pension Schemes (Accounting and Assessment) Regulations 2005[4], in a way that might have addressed the issue, that modification is stated to apply only where the person liable to the charge is a company rather than an individual. Our understanding is that HMRC is seeking to appeal Monaghan on this issue, on the basis that the FTT’s approach took the statutory deeming in section 208(8) too far and that on a purposive construction “income” in section 29(1)(a) was a shorthand for any amount subject to income tax.

46. In Monaghan this issue was found to be fatal to the validity of the assessment. However, the facts in this appeal are different. In Monaghan the taxpayer had not made a self-assessment return (see paragraph [78] of the decision). In this case the appellant had done so. That means that HMRC do not need to rely on section 29(1)(a), because section 29(1)(b) applies in the alternative on the basis that HMRC concluded that an assessment to tax (being the self-assessment contained in the appellant’s return) had become insufficient.

47. We were not referred to any other relevant case law on either competency or timing but this was also the approach taken at paragraph 15 in Clark v HMRC[5]. In these circumstances it is not necessary to decide whether the approach taken in Monaghan was correct and we do not propose to do so.

48. The second issue we considered was whether the discovery assessments had been made sufficiently promptly after the relevant discoveries were made. The point here is that there are a number of references in the case law to a requirement for “newness”. This can be seen in the references to “newly” in Cenlon Finance Co Ltd v Ellwood[6] where Viscount Simonds explained at 794:

“I can see no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered. The words are apt to include any case in which for any reason it newly appears that the taxpayer has been undercharged and the context supports rather than detracts from this interpretation.”

49. That was expanded upon by the Upper Tribunal in Charlton v HMRC[7] at paragraph 37 which reads:

“In our judgment, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight. The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment. But that would not, in our view, include a case, such as this, where the delay was merely to accommodate the final determination of another appeal which was material to the liability question…”.

50. This point was discussed in more detail in the recent Upper Tribunal decision in HMRC v Tooth[8] where this passage from Charlton was referred to in the following terms at paragraph 79 (footnotes omitted):

“Broadly speaking, we agree with this statement of the law. However, for the purposes of determining this case, it is necessary to consider the question of ‘newness’ and its corollary ‘staleness’ in a little greater detail:

(1) The ‘discovery’ in section 29(1) TMA relates to one of the three situations set out in section 29(1)(a), (b) or (c). If it is discovered that such a situation pertains (or may pertain: all that is required is for the officer to act honestly and reasonably), then the officer is at liberty to make an assessment under section 29 TMA.

(2) We should say that we see no reason why one officer cannot make the discovery and delegate to another officer the making of the assessment. That is what occurred in this case… However, it is important, we consider, to bear in mind that section 29 TMA envisages two stages – (i) the discovery and (ii) the making of the assessment consequent upon the discovery.

(3) We entirely agree with the Upper Tribunal in Charlton that on making a discovery, HMRC must act expeditiously in issuing an assessment. If, to use the words of Charlton, an officer has made a discovery, then any assessment must be issued whilst the discovery is ‘new’.

(4) It follows from this that the same officer (or officers) cannot make the same discovery twice. We see no reason, however, why the same officer cannot, for different reasons, discover that one of the situations set out in section 29(1)(a), (b) or (c) pertains a second time. Suppose an officer discovers that an assessment to tax has become insufficient for a certain reason, but HMRC decides not to issue an assessment because the point is controversial and the amount small. Suppose that officer then – for different reasons – discovers that the assessment has become insufficient. We consider that this, second, discovery could justify the making of an assessment.

(5) The position is, obviously, a fortiori where two different officers are independently involved. Again, provided the basis for the discovery is different, there is a statutory basis under section 29(1) for issuing two assessments.

(6) What, however, if two different officers independently make the same discovery? In our judgment, as a matter of ordinary English, a discovery can only be made once. We accept that section 29(1) TMA is framed by reference to the subjective state of mind of an officer or the board, but what is a ‘discovery’ is an objective term. It seems to us that in this case, the first officer makes the discovery; the second officer simply finds out something that is new to him. In particular if one officer is made aware of, and accepts, the conclusion of another officer it cannot be said that the first officer made a discovery.

(7) We consider that such a construction is necessary for the protection of both the taxpayer and officers of HMRC:

(a) The taxpayer, as we have found, should be protected from stale assessments. It follows that, if the first officer – for whatever reason – having made the discovery and (following the two-stage process we have described in paragraph 79(2) above) having determined not to issue an assessment, that outcome ought to be binding on HMRC. No doubt such an officer would record his discovery, and the reason for not issuing an assessment, in the files.

(b) As to HMRC's position, in their own interests, officers need to have clarity as to what constitutes a ‘discovery’ for the purposes of section 29 TMA. For example, any second officer making a ‘discovery’ in succession to another officer might, should an assessment be issued, be faced with a contention that his ‘discovery’ was in some way an illicit attempt to re-open a stale point. Inevitably, there would have to be questions regarding what the second officer knew of the first officer's work, and whether the second officer's ‘discovery’ was related to that of the first officer and so not his own at all…”.

51. In this appeal the relevant discovery can only be that there was an unauthorised transfer out of the Scheme. On being contacted by IPS on 27 July 2009, HMRC took immediate action and on receipt of the tax return opened an enquiry on 29 June 2010 and on 30 July 2010 contacted the appellant. They acted promptly.

52. Given the lack of co-operation from the appellant as evidenced by the issue of Information Notices and the fact that further information continued to come to light even after the assessment was issued resulting in amendments thereto (and the issue of a further assessment which has since been withdrawn), we find that the assessment was raised timeously. The assessment was made within the four-year time limit in section 34 TMA.

53. We have no doubt that at best the appellant was careless and that the under-assessment to tax in the first instance was caused by that carelessness.

54. We agree with Judge Berner in Anderson v Commissioners for HMRC[9] where he stated:-

“The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.”

55. We agree with HMRC that a prudent and reasonable person would have taken steps to check the position both before completing the tax return and, of course, immediately following receipt of the letter from IPS.

56. The appellant’s tax return for the year ended 5 April 2008 is silent on his pension arrangements. There was no other information available which would have alerted an officer of HMRC to the loss of tax at a time before an enquiry could have been opened into his return.

57. The assessment made on 29 March 2012 was for £389,081 and took into account all of the information known at that time.

58. The further information ultimately provided by the appellant in support of his appeal request has been reviewed by HMRC and we agree that in terms of section 50(7) TMA the assessment should be increased to £452,675.

Section 268

59. The only remaining question for the Tribunal was whether or not the appellant could make an out-of-time application under section 268 FA 2004. The relevant legislation reads:-

“(2) The person liable to the unauthorised payment surcharge may apply to the Inland Revenue for the discharge of the person’s liability to the unauthorised payment surcharge in respect of the unauthorised payment on the ground mentioned in subsection (3).

(3) The ground is that in all the circumstances of the case, it would not be just and reasonable for the person to be liable to the unauthorised payment surcharge in respect of the payment”.

60. In error HMRC advised the appellant that he could make an application on 3 December 2014 and he attempted to make such an application on 6 January 2015. However, in terms of the Registered Pension Schemes (Discharge of Liabilities under sections 267 and 268 of the Finance Act 2004) Regulations 2005, Regulation 3 which provides:-

“(1) Any section 267 application or section 268 application must be made in writing—

(a) In the case of a company, not later than six years after the end of the accounting period to which it relates; or

(b) In the case of any other applicant, no later than five years after the 31^st January next following the year of assessment to which it relates.”

61. There is no provision to allow a late application nor any appeal rights to allow a late application to be made. In this case the time limit had expired on 31 January 2014.

62. We have no jurisdiction to consider any such application.

Decision

63. The Tribunal confirms that the payments made out of IPS to or on behalf of the appellant are unauthorised payments, that the assessment is in time and competent and that it should be increased to £452,675. The appeal is dismissed.

64. 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.

	ALLAN McCASHIN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S	Respondents
	REVENUE & CUSTOMS

First-tier Tribunal (Tax)

ANNE SCOTT

TRIBUNAL JUDGE

RELEASE DATE: 18 October 2018

TRIBUNAL:	JUDGE ANNE SCOTT
	MEMBER: IAN SHEARER