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Tribunal decides taxpayers must pay more

In an unusual case where taxpayers unsuccessfully tried to pull out of a tribunal hearing, HMRC won its day in court and collected more tax than originally assessed. 

15th Nov 2019
Tax writer
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Lady Justice
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Vantis Tax sold a tax avoidance scheme which required taxpayers to make a gift of shares to a charity, and then claim tax relief for the value of gift under ICTA 1988 s587B (now ITA 2007 s431). 

The shares were in companies which owned rights to some software called QARIA, and were listed on the Channel Islands Stock Exchange (CISX) shortly before the dates of the gifts to the charity. The value of each claim was based upon the placement price which, in turn, was based on a valuation provided by Vantis (disputed by HMRC). 

HMRC challenged the claims on the basis that the placement price was artificially inflated, and issued closure notices substituting a much lower valuation. 

The taxpayers appealed against these closure notices. The cases of five taxpayers: Patel, Venkataraman, Foster, Freeman and Jakeway, were selected as lead cases to be heard before the FTT: Patel and Others TC07404. Numerous similar appeals were stayed pending judgment of this hearing.

Potential tax increase 

HMRC’s original closure notices charged tax, which was now seen (based upon more recent expert valuation opinion) to be insufficient. It was in HMRC’s interests that the appeals against those closure notices should not be allowed to lapse, and the FTT should have the opportunity to consider the recent expert valuation.

Patel and Venkataraman applied to the FTT to withdraw their appeals, but were opposed by HMRC. The taxpayers then reinstated their appeals and chose to be professionally represented at the hearing.

Accept original bill

Foster and Freeman failed to comply with directions from the FTT to provide evidence or skeleton arguments in support of their appeals. As a result, a judge (at HMRC’s behest) struck out their appeals. Foster and Freeman wrote to the FTT confirming they were content for their appeals to lapse, and to pay the tax based upon HMRC’s closure notices.

However, at the hearing HMRC applied to have these appeals reinstated, in the hope of charging additional tax. The judge decided that a previous order of the FTT could only be set aside or varied in very exceptional circumstances, and determined that the appeals remained struck out.

Unsuccessful withdrawal

Jakeway also applied to withdraw his appeal (and, unlike Patel or Venkataraman, declined to reinstate it when asked) but found himself in the same position as the taxpayer in HMRC v C M Utilities Limited [2017] UKUT 305 (TCC)

In this instance, the Upper Tribunal ruled that the FTT had a duty to deny the taxpayer’s application to withdraw in situations where someone was "undercharged by the original assessment or determination”. 

Jakeway was now unable to limit his exposure to additional tax by withdrawing his appeal against the closure notices. 

Share valuation

The independent expert witness on the share valuation was Daniel Ryan. Although he had been called by HMRC, the Civil Procedure Rules allowed the FTT to regard him as impartial and to place a particularly strong reliance on his testimony.

Ryan drew attention to the fact that the share price in each of the companies increased significantly in a matter of days after their listing on the CISX. These increases – by comparison with “the private placement price paid by shareholders approximately one month before” – were significant:

Clerkenwell Medical Research: 1500%

Modia, Signet Health International, Your Health International: 1000%+

Ryan observed that there were “no announcements or new information or any other rational explanation for the increase in the values of the shares.” 

These two to three days trading that resulted in significant increases in the share prices were followed by no further trading in any of the companies’ shares for some period of time.

During the period between listing and the share donations, none of the companies had spent any significant sums towards developing the software (which was their principal asset) into a marketable product.

Taking account of the above information, Ryan concluded that “at all the gifting dates a prudent purchaser would not pay more for the software than it would have cost to develop up to that point”.

The effect

Applying Ryan’s valuations, the judge increased the assessments:

Patel from £38,696.23 to £39,576.23 

Venkataraman from £76,890 to £80,454

Jakeway from £28,622.76 to £30,022.76

Conclusion

Artificially massaging a share price is unlikely to stand up against serious expert analysis.

Withdrawing an appeal may not work if the effect is to leave you still under-assessed (as for Jakeway).

If, on the other hand, the FTT strikes out your appeal, HMRC cannot wangle it back into consideration (as for Foster and Freeman).

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