Enter Your E-mail

Peter Vaines of Squire Sanders LLP considers some interesting tax cases in his monthly tax bulletin.

Loans to Participators

The Tribunal recently had occasion to consider whether a loan had been made to a participator within the meaning of ICTA 1988 s 419 (now CTA 2010 s 455) : Aspect Capital Limited v HMRC TC 2112.

The issue was whether an employee acquiring shares in the company under a facility provided by a third party and discharged by the company, was in receipt of a loan from the company. HMRC said this was a loan by the company to the employee and ICTA 1988 s 419 therefore applied giving rise to a 25% charge on the amount of the loan. The taxpayer said that there was no loan. The discharge by the company of the employees liability to the third party did not amount to a loan. There is clear House of Lords authority to that effect from Potts Executors v IRC (1950).

The Tribunal analysed the position fully and concluded that there was a loan. This seems unnecessarily controversial because they did not need to go that far; Section 419(2) provides an extended meaning of a loan for this purpose where the employee “incurs a debt” to the company and there seems little doubt that there was a debt between the employee and the company even though it arose via a third party.

However, although the outcome should perhaps never have been in doubt the taxpayer could perhaps be forgiven for feeling a bit paranoid when you consider that:

1. the Tribunal disregarded clear House of Lords authority on the point;
2. the Tribunal ignored the fact that another Tribunal had come to the opposite conclusion in the recent case of MJP Media (2010); and
3. in MJP Media HMRC had argued exactly the opposite.

The taxpayer may find all this a bit hard to swallow. However, for the rest of us, there is something extremely worrying if HMRC are able to advance completely opposite arguments in identical cases
and succeed on both.

Reasonable Excuse

The Tax Tribunal has recently had to consider the requirements for a reasonable excuse in connection with a surcharge for late payment of tax: Holly Chichester v HMRC TC 2081.

The Tribunal said that the well established jurisprudence is that an honest belief in a state of affairs can (and usually will) amount to a reasonable excuse. However, the issue was one of whether the honest and reasonable belief was to be determined subjectively or objectively. There is authority from Intelligent Management UK Limited v HMRC (2011) that there must be some reasonable basis for the honest and genuine belief - an irrational or unreasonable belief even if honest and genuine, would not be enough.

However, in the case of Holly Chichester, the Tribunal rejected this approach saying that the matter is purely subjective and the objective analysis was simply a matter of credibility - that is to say whether the person did in fact hold the honest belief that they claimed. The Tribunal said in the clearest possible terms:

"If a Tribunal finds that a person, as a matter of fact, held a particular honest and genuine belief, that may amount to a reasonable excuse (on appropriate facts) regardless of whether that belief would be characterised as irrational or unreasonable when viewed objectively."

This does seem uncommonly generous to me. After all we are looking here at a "reasonable" excuse and although an irrational and unreasonable (but honest) belief may well be an excuse, I would have thought that the requirement for the excuse to be "reasonable" imports a measure of objectivity into the determination. It does seem to be instinctively wrong for unreasonable and irrational behaviour to afford a defence.

In any event, this formulation seems to be intrinsically flawed. If the objective analysis goes solely to the issue of credibility - did the person really have an honest belief to that effect - whether you believe them or not will be based on an objective assessment of whether they could possibly have held that view. It is really saying that the belief cannot be so unreasonable or irrational that it could not objectively be the basis of the taxpayers belief.

Who knows whether HMRC will take this one further but it is very unsatisfactory that there are so many conflicting reasonable excuse cases. An aggrieved taxpayer really has no means of assessing the likely success or failure of an appeal. This uncertainty is not improved by Holly Chichester and that is only going to multiply the number of reasonable excuse claims.

With the enormous backlog of Tribunal cases, [see also Tax Tribunals on the Increase - Ed] this is the last thing we want. However, we could also do without cases which should never be brought by HMRC in the first place – such as Nataliya Geyko-Bisson TC2083. Mrs Geyko-Bisson sent in her 2009/10 tax return late. HMRC imposed a penalty of £100 despite the fact that the additional tax liability was only £15.80. TMA 1970 s 93(7) provided that a penalty would not exceed the amount of tax that would have been paid had the tax return been submitted on time. There seemed to be no dispute that the relevant tax would have been £15.80 and unsurprisingly, the Tribunal reduced the penalty to that amount. How or why this case ever reached the Tribunal is a mystery.