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TaxZone Newthwire 55: Important Tax Cases

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1st Jan 2005
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TaxZone Newthwire
Issue 55 - 5 July 2004 - Important Tax Cases
Available on subscription at:
https://www.accountingweb.co.uk/premium_content/newthwire


Editorial note
John Newth
Commonsense and taxation have very little in common, and the former is no longer politically correct. Taxation is imposed by the government of the day to further its own political and economic needs. It is imposed first by statute law and then established case law. Secondary legislation in the form of Statutory Instruments then comes into play. Also at a lower level are Tribunal decisions in the form of published Special Commissioners' eterminations.

That is not the end of the matter as we then have various other
means by which the Inland Revenue sets out its views. These
include Codes of Practice, The Revenue Manuals, Revenue
Interpretations, Statements of Practice and Extra-Statutory
Concessions. It must be remembered that none of these are law.

Do you get the picture? Tax is not an exact science, and there
are plenty of grey areas. Even if the law and practice say one
thing, occasionally the taxpayer and their adviser may receive a
'personal' concession that is quite unexpected.

In this wire I intend to highlight and review some important tax
cases and Commissioners' decisions, with a short commentary
applying to each one. New decisions are published regularly, and
I am therefore limited to those published online in Simons Tax
Cases up to 24 June 2004.

The cases I will highlight are those that appeal to me
personally in my line of business and practice. Others may well
have different priorities. They do not include any VAT cases,
which could well merit a further wire written by someone else.

Regards,
John T Newth
mailto:[email protected]

Disclaimer
==========
No responsibility for loss occasioned to any person acting or
refraining from action as a result of any information in this
wire is accepted by the author or AccountingWEB. In all cases,
appropriate professional advice should be sought before making
a decision.

Recent cases
============
The following cases have been reported in Simon's since 1
January 2003:

# Mansworth v Jelley [2003] STC 53
This was an important decision regarding CGT and share options,
which spawned a good deal of controversy and further legislation.

# R v Foggon [2003] STC 461
This was a criminal prosecution case, where the taxpayer pleaded
guilty to cheating the public revenue, and received a two-year
prison sentence. The interesting part was that the judge made a
confiscation order for just over 1m pounds. The taxpayer
appealed on the basis that he should only pay over the tax lost
of about 450,000 pounds, but the court held that he should part
with the amount from which he had benefited.

# CIR v George and another (Exors of Stedman deceased) [2003]
STC 468 [2004] STC 147
The late taxpayer owned a share in a caravan park run
commercially. As well as site rents, the business also derived
income from other sources such as caravan sales, and the sales
of other items on the site. The Special Commissioners had
determined that IHT Business Property Relief was due, but the
High Court reversed this decision. Happily for the taxpayer, the
Court of Appeal restored the findings of the Commissioners.

# Synaptek Ltd v Young [2003] STC 543
This is the first and only IR35 case yet to reach the High
Court. Unfortunately the taxpayer's appeal was rejected. The
taxpayer had appeared personally before the General
Commissioners, and the High Court was bound by their findings of
fact. The taxpayer's engagement had also commenced before the
2000 Budget, and the contract did not contain the necessary
clauses of self-employment.

# CIR v Eversden and another [2003] STC 822
A deceased taxpayer had gifted 95% of his home into trust, but
retained 5%. In an IHT gifts with reservation case, the court
found in favour of the arrangement. This particular loophole has
now been closed by subsequent legislation.

# R (on the application of Wilkinson) v CIR [2003] STC 1113
A taxpayer claimed the equivalent of widower's bereavement
allowance on the basis of human rights legislation. His appeal
was dismissed.

# R v Gill and another [2003] STC 1229
This case centred on whether evidence obtained at a previous
'Hansard' interview was admissible in a subsequent trial
concerning cheating the public revenue. The court admitted the
evidence, but the decision resulted in a major change to the
Hansard procedure, which now incorporates a formal caution and
tape recording of the initial meeting.

# Slattery v Moore Stephens [2003] STC 1379
This was a professional negligence case against a firm of
accountants, who were accused of giving unsatisfactory advice to
a former client who was resident but not ordinarily resident in
the UK. The claim succeeded, but the taxpayer was deemed to be
50% responsible for the tax lost in one of the years under
review.

# Langham v Veltema [2004] STC 54
A property was transferred to a director, based on an agreed
valuation of 100,000 pounds. This amount was included on the
P11D and the self-assessment enquiry window expired on 31
January 2000. Subsequently the value was established to be
145,000 pounds. The court held that the Revenue were entitled to
make a discovery under section 29, TMA 1970.

# Venables v Hornby [2004] STC 84
The taxpayer was an executive director and chairman of his own
company. He retired early on the grounds of ill health, but
continued as a non-executive director. In a case which reached
the House of Lords the court held that the retirement benefits
paid to him on early retirement were not taxable.

# Wilson v Clayton [2004]
A compromise agreement was agreed by an Employment Tribunal
where a taxpayer was dismissed and then re-engaged on less
favourable terms. The financial result of this was that the
employee received 5,060 pounds. The court held that this amount
was within the tax-free exemption limit of 30,000 pounds.

# Christensen v Vasili [2004]
A director of a company had a 5% financial interest in a car,
the other 95% being owned by his company. The court held that
this was sufficient to exempt him from a car benefit charge.

Recent Special Commissioners' decisions
=======================================

# Lime-IT Ltd v Justin SpC 342
This was an IR35 appeal by the taxpayer, Lisa Fernley, that
succeeded after a long battle with the Revenue, which is
recorded on the company's website. Miss Fernley had other
clients, purchased a number of computers for the particular
contract and continues to operate in a businesslike manner. A
claim for compensation against the Inland Revenue was also
involved.

# Tilbury Consulting Ltd v Gittins SpC 379 and SpC 390
Tilbury Consulting was another IR35 case. The first appeal
concerned a witness summons, which required a director of the
client company to give evidence, following the Revenue's failure
to effect this in Lime-IT. In the event a valid substitution
clause, lack of control and the fact that the taxpayer was not
'part and parcel of the organisation' clinched the case in
favour of the taxpayer.

# Osborne v Dickins SpC 393
A taxpayer had effected a capital gain, but had only submitted a
repayment form R40 to the Inland Revenue. The Commissioner held
that the form R40 was not a return for the purposes of the Taxes
Acts.

# Alcock v King SpC 396
For the purposes of establishing whether an employee was 'higher
paid' one had to aggregate salary, car benefit, fuel benefit and
credit card payments to purchase fuel, even though this was
illogical and resulted in a double charge for the fuel.

# Usetech Ltd v Young SpC 404
This time the Revenue succeeded in an IR35 case. The taxpayer
was a software specialist in connection with oil rigs and oil
wells. He had some flexibility of working hours, but there was
control by the client company's manager. Although the contract
had a substitution clause, it was held to be illusory. However
there was no sick pay or holiday pay entitlement. This was a
disappointing decision for the taxpaying community.

# Future Online Ltd v Faulds SpC 406
The Revenue succeeded again in another IR35 appeal. There were
similarities to the Synaptek case, as the taxpayer worked on a
contract at the DWP. He was a systems leader in charge of a
team, and was held to be 'part and parcel of the organisation'.
There was also control by the test manager, and no substitution
was ever sought. The 'mutual obligations' were well above the
irreducible minimum.

# Lord Hanson v Mansworth SpC 410
The former executive chairman of Hanson plc benefited from
special security arrangements arranged by the company in order
to meet a perceived threat from the IRA. The Revenue assessed
Lord Hanson to a benefit for the years 1989/90 to 1997/98,
but the appeal that equivalent deductions could be claimed under
section 50, Finance Act 1989 succeeded. However the taxpayer
should have disclosed the benefit and deductions in his return.

Well-known cases
================
We now turn to other cases, which are legion. I propose to
refer to those that I have selected under headings relating
to the particular tax issue addressed.

Tax Avoidance
-------------
With the recent announcement in the 2004 Budget that tax
avoidance schemes must undergo Inland Revenue approval, it is
worth reviewing case law on this subject.

# Duke of Westminster v CIR 19 TC 490
This case contained the immortal words of Lord Tomlin 'every man
is entitled if he can order his affairs so that the tax
attaching under the appropriative Acts is less than it otherwise
would be'.

# Ayrshire Pullman Motor Services & Ritchie v CIR 14 TC 754
Here again Lord Clyde's judgment contained the well-know dictum
'no man in this country is under the smallest obligation, moral
or other, so as to arrange his legal relations to his business
or to his property as to enable the Inland Revenue to put the
largest possible shovel into his stores'.

Both of these cases were decided about 70 years ago, and current
public and government opinion is somewhat opposed to the views
of these two judges. Consequently more modern judgments have
adopted a more hawkish stance. A selection of these are:

W T Ramsay Ltd v CIR [1981] STC 174
Furniss v Dawson [1984] STC 153
CIR v Plummer [1979] STC 793
CIR v McGuckian [1997] STC 908
Ingram v CIR [1985] STC 835
CIR v Willoughby and another [1997] STC 995
Ensign Tankers (Leasing) Ltd v Stokes [1992] STC 226
CIR v Burmah Oil Co Ltd [1982] STC 30

Dual Purpose Expenditure
------------------------

# Mallalieu v Drummond [1983] STC 665
In a case beloved by the Revenue a practising lady barrister
attempted to claim for clothing worn only in court. The claim
failed on the grounds that the clothing was capable of being
worn on other occasions.

The Business Base
-----------------

# Horton v Young 47 TC 60
A self-employed bricklayer travelled from his home to various
sites in connection with his work. He regarded his home as his
business base and kept his books there. The court held that
motor and travelling expenses between home and the various sites
were claimable for tax purposes.

# Jackman v Powell [2004] STC 645
In a case with unusual facts a self-employed franchise milkman
kept his milk float at home, as he was forbidden to keep it at
his depot. He claimed the home to depot expenditure undertaken
each morning before he commenced his round. This was accepted by
the Special Commissioner (see SpC 338), but the decision was
overturned in the High Court.

Benefits in Kind
----------------

# Pepper v Hart & Others [1992] STC 898
Schoolmasters at a public school were able to arrange education
of their own children at the school at a concessionary reduced
rate. The Inland Revenue sought to impose benefits in kind
assessments on the various taxpayers. The House of Lords was
referred to the Hansard Statement that preceded the legislation,
and the court agreed that any assessment should be based only on
the marginal cost to the employer. This case has very important
principles applicable to similar and comparable situations.

Private Use Adjustments
-----------------------

# Sharkey v Wernher 36 TC 275
The court held that horses withdrawn from a stud farm should be
valued at market value and not cost. This case has had far-
reaching consequences for many years. The owner of a general
stores who uses some sweets, for instance, must credit them in
his turnover at market value and not cost. The rationale of this
case has been questioned recently in the professional press,
with the view that this decision is increasingly out of date.

Business Economics
------------------

# Mr & Mrs Scott t/a Farthings Steakhouse SpC 91
In an investigation case, the inspector of taxes refused to
accept the veracity of the taxpayers' records and made
substantial additional assessments based on a business economics
exercise. A lawyer versed in criminal procedure represented Mr &
Mrs Scott before the Special Commissioner, and the Revenue's
case was demolished, with costs awarded to the taxpayers, and
the likelihood that a subsequent compensation claim would be
successful.

Tips and Troncs
---------------

# Figael Ltd v Fox [1992] STC 83
Regulation 49 determinations were made in a case where the
directors of a company operated a 'tronc' system. The court
confirmed the determinations, and this case underlines the
principle that an effective tronc arrangement must be operated
by someone other than the directors or management.

Business Travel and Subsistence
-------------------------------

# Caillebotte v Quinn [1995] STC 265
A subcontractor claimed for the excess cost of eating lunch away
from home, but this claim was rejected by the court. Mr Justice
Templeman (as he then was) held that 'a Schedule D taxpayer,
like any other taxpayer, must eat in order to live, he does not
eat in order to work'. Additionally, as the claim was for the
excess of cost only, it could not be incurred exclusively for
the trade. One feels that this decision owes much to the judge
who made it. Also, on the face of it, it puts the self-employed
taxpayer in a worse position than an employee.

# Elderkin v Hindmarsh [1988] STC 267
This case concerned an employee who was employed by a firm of
consulting engineers. The taxpayer spent long periods away from
home, and was paid an appropriate living allowance by his
employer. His claim that the expenses of living away from home
were incurred wholly, exclusively and necessarily in connection
with his employment was rejected by the court.

# Pook v Owen 45 TC 571
In a case decided on its own facts a doctor had his own practice
assessed under Schedule D, but also held a Schedule E hospital
appointment. He received a mileage allowance from the hospital
which covered part of his journeys to and from the hospital. The
House of Lords held that his hospital work commenced when he
received a telephone call, and that his travel expenses were
fully deductible, the hospital payment being a reimbursement of
expenses.

Appeals
-------

# Edwards v Bairstow & Harrison 36 TC 207
In this case Lord Radcliffe held that the 'Court can allow an
appeal from the Commissioners' determination only if it is shown
to be erroneous in point of law'. However the Court should
intervene where 'the facts found are such that no person acting
judicially and properly instructed as to the relevant law could
have come to the determination under appeal' and where 'the true
and only reasonable conclusion contradicts the determination'.
In the same case Viscount Symonds held that the courts should
only overturn a Commissioners' finding of fact 'if it appears
that the Commissioners have acted without any evidence or upon a
view of the facts which could not reasonably be entertained'.

# Associated Provincial Picture Houses v Wednesbury Corporation
2 All ER 680
In a back duty case the Inland Revenue issued additional
assessments, which were appealed. The Commissioners determined
all the assessments in reduced amounts. The Court of Appeal held
that the Commissioners' finding of fact could only be reversed
if it was unreasonable, which was not the case here. The trader
was not entitled to introduce additional evidence in the High
Court since he had failed to submit that evidence to the
Commissioners.

Accounting Principles
---------------------

# Threlfall v Jones, Gallagher v Jones [1993] STC 537
The taxpayers carried on a business of hiring out boats. They
leased boats under a 24-month lease, and paid a substantial
initial lease payment. The Revenue submitted that the lease
payments should be spread over the 24-month period, and the
court agreed.

# Herbert Smith (a firm) v Honour [1999] STC 173
A firm of solicitors which was vacating office premises claimed
a substantial provision for future rents, which were payable on
vacation. The court held that these were claimable under normal
accountancy principles.

Furnished lettings
------------------

# Griffiths v Jackson [1983] STC 184
Two chartered accountants let a number of properties to
students. They attempted to contend that the profits should be
assessed as trading under Schedule D, Case 1. The court
disagreed, confirming that profits from the exercise of property
rights were assessable under Schedule D, Case VI. Note that this
may not apply to furnished holiday lettings.

Home Expenses
-------------

# Gazelle v Servini SpC 48
An accountant worked at home part of the time, and also
entertained clients there. Two bedrooms out of three were used
for business purposes. A claim for 50% of the home running costs
of 16,000 pounds was denied, and the Special Commissioner
considered that the 20% allowance of 3,200 pounds granted by the
Revenue was 'not unreasonable'.

Wife's salary
-------------

# Moschi v Kelly 33 TC 442
The Inland Revenue, Commissioners and the court disallowed a
claim for wife's wages. Lord Justice Somervell observed that the
sums 'were merely book entries, and the amounts had not been
paid to her but had been credited to the appellant's drawing
account.'

Directors salaries
------------------

# Copeman v William Flood & Sons Ltd 24 TC 53
A family pig-dealing company paid what were then substantial
salaries to children of the controlling director. The Inland
Revenue only agreed to allow a small proportion of the sums for
tax purposes, and the court agreed. Mr Justice Lawrence observed
that 'it may very well be that there are sums paid to the
directors as remuneration for their services in accordance with
the articles of association and in accordance with a resolution
of the company, but it does not necessarily follow in the least
that they are sums which are wholly and exclusively laid out for
the purposes of the trade'.

CGT Lettings Relief
-------------------

# Owen v Elliott [1990] STC 469
A couple carried on a guest house business from the property in
which they also resided. The had lived in different parts of the
property from time to time. As well as an agreed one-third
exemption of the capital gain when the property was sold, the
couple claimed lettings relief under section 223(4), TCGA 1992,
which the Court of Appeal granted.

Normal expenditure
------------------

# Bennett & Others v CIR [1995] STC 54
A widow paid fairly substantial and regular payments to her
three sons, all out of income. The taxpayer was 87 and had a
settled lifestyle. The court held that the payments were normal
expenditure out of income, and therefore exempt from IHT.

Self Assessment
===============

Reasonable excuse
-----------------

# Creedplan Ltd v Winter SpC 54
A company's form CT200 was received late by the inspector, and a
100 pound penalty was imposed. The accounts were also submitted
separately. The company contended that the CT200 had been posted
earlier, but the Special Commissioner did not accept this
excuse, particularly as the return and accounts were not
submitted simultaneously.

# Akarimsons Ltd v Chapman SpC 116
A convoluted sequence of correspondence and a form CT200 ended
with the Revenue imposing a 200 pound penalty on the company. An
appeal for reasonable excuse on the basis of ill health of the
principal director and company secretary succeeded.

# Steeden v Carver SpC 212
A hairdresser's 1996/97 self-assessment tax return was delivered
by hand on the morning of 2 February 1998. The claim for
reasonable excuse for late filing was accepted, and this case
has resulted in a change of Revenue practice.

Surcharge on late payment
-------------------------

# Thompson v Minzly [2002] STC 450
A taxpayer paid their tax 29 days after the due date, and the
Revenue imposed a surcharge. The court held that the effect of
the legislation was that a surcharge could be imposed if the tax
remained unpaid at the beginning of the 29th day after due date.
The appeal therefore failed.

Validity of Enquiry Notice
--------------------------

# Wing Hung Lai v Bale SpC 203
A taxpayer received an enquiry notice under section 9A, TMA 1970
for the year 1996/97 on 2 February 1999, his accountant having
received a copy one day earlier. The appeal that the notice was
received late was accepted by the Commissioner. The date of
receipt of the notice had expired at midnight on 30 January
1999. The Revenue accepted this decision and opened the way for
other taxpayers to appeal their 1996/97 enquiry notices received
late.

# Holly & Laurel v H M Inspector of Taxes SpC 225
Similar facts and conclusions were reached in another case
concerning a 1996/97 return and intended enquiry.

Power to call for documents
---------------------------

# Self-Assessed v H M Inspector of Taxes SpC 207
The taxpayer received a notice under section 19A requiring him
to produce to the Revenue books and information within 30 days.
The taxpayer appealed, contending that he should have had 30
days from the receipt of the notice, and this contention was
accepted by the Commissioner. The Revenue have now altered their
procedures to ensure that taxpayers are given the required
period.

# Accountant v H M Inspector of Taxes SpC 258
An accountant was subject to an enquiry personally, and was
required to produce personal bank statements, and also those
relating to undesignated client accounts. He was also required
to produce a balance sheet. His appeal against having to produce
information regarding undesignated client accounts and a balance
sheet was rejected by the Commissioner.

# Guyer v Walton SpC 274
A similar decision was reached in respect of a solicitor, who
was required to produce his client accounts during a section 9A
enquiry. Section 19A, TMA 1970 did not incorporate legal
professional privilege, and the disclosure of the documents
would not contravene human rights legislation.

Ask a question
==============
Readers with a current case should post their query in Any
Answers.

JOHN T NEWTH
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By Sherlock
21st Jul 2004 12:37

Christensen v Vasili
Patricia Arnold of Patricia J Arnold & Co of Hexham has very kindly pointed out an error in this wire. The High Court judgment in Christensen v Vasili reversed the decision of the Special Commissioners (see [2004] STC 935), so that although Mr Vasili had 5% personal ownership of his company motor vehicle, he still came within the benefit in kind charging provisions.

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