The first-tier tax tribunal showed real compassion when deciding the difficult case of a woman whose partner controlled every aspect of her life, including her income and tax returns.
Rebecca Vowles (case TC06123) left her husband for Max Walker, with whom she initially lived happily. In 2005, around the time she became pregnant with their first child, Walker began to abuse her physically and psychologically. Among other things he became a “control freak”: he took charge of her bank accounts, only permitting her to spend money with his permission (and spending her money lavishly on himself as though it were his own). He forbade her to write letters herself and drafted all her correspondence, including to HMRC.
Vowles was the owner of what had been her marital home, and half owner of Florida Cottage, which had been her father’s home. The former marital home and her half of Florida Cottage were let. On several occasions, unbeknown to Vowles, Walker remortgaged both properties to raise money for his own purposes and included all the loan interest payments on her tax returns.
In 2006 Walker (who had been disqualified from acting as a director) persuaded Vowles to act as sole director for his new company. He failed to tell her that she was also its sole shareholder. She did not read closely what she was signing, as he routinely presented her with documents to sign unread.
Substantial expenditure by Walker flowed through a director’s loan account of the company, which was cleared by dividends declared in Vowles’ name. The company also provided a car, use of which was shared between Vowles and one J Bell, a business associate of Walker. Vowles’ use of the car was only when Walker permitted it. Walker included some of the dividends and benefits on Vowles’ tax returns.
Following enquiries, HMRC concluded that Vowles had under-declared income from dividends, benefits in kind and rents, and over-claimed in respect of mortgage interest on her rental properties.
They raised tax assessments and penalties totalling £176,888.
The FTT took a step back from the tax charges and looked at the fundamental issues of the case, including whether the dividends and benefits were properly assessable on Vowles.
The basis of charge to tax on dividends is given by ITTOIA 2005 s.385(1):
“The person liable for any tax charged under this Chapter is
(a) the person to whom the distribution is made or is treated as made..., or
(b) the person receiving or entitled to the distribution”.
The dividends were paid into Vowles’ director’s loan account in order to settle expenditure incurred by Walker. To the extent that these funds benefited Vowles the FTT concluded: “this was at Mr Walker’s choice and as his partner and mother of his children, in order that they could live, and it was not money paid to her by the company as a shareholder”.
So as far as payment goes, the dividends were effectively paid to Walker. But what of entitlement? The FTT found that: “while in law she was the shareholder, in equity it is clear that she held that share on trust for Mr Walker”.
On either of the two arms of ITTOIA 2005 s.385, the tax on the dividends was clearly the liability of Walker. The tribunal judge was critical of HMRC for not having considered the possibility that the dividends were not taxable on her: “if HMRC had actually listened to what Ms Vowles has quite clearly been saying to them for years, they should have realised that, on her version of events, Mr Walker was the one with the tax liability on the dividends”.
Benefits in kind
ITEPA 2003 s.114 makes a charge to tax if a car available for private use is provided to an officer or employee by reason of their employment. There was no doubt that Vowles was an officer and employee of the company, and that the car was available for private use, but was it provided “by reason of her employment”?
Her access to the car was irregular, and purely at Walker’s whim. On a proper reading of the facts, the company: “made the car available to Mr Walker and he made it available (when it suited him) to Ms Vowles. Mr Walker ought to have been taxed on the car benefit rather than Ms Vowles”.
Rents and mortgage interest
There had been errors in Vowles’ returns, as some of the rental income had been omitted. It was also clear that most of the mortgage interest had to be disallowed, as the remortgages had been essentially to support Walker’s lifestyle. The interest was thus not incurred wholly and exclusively for the purposes of the letting business, as required by ITTOIA 2005 s.34.
Looking at the wider picture, the FTT found that, while Vowles had under-declared rental income in her returns, she had over-declared dividends and benefits in kind (since none should have been assessed on her, but rather on Walker).
In fact, if every element of her returns had been made correctly, the true tax liability would have been lower than her self-assessed tax liability. Since the penalty legislation only applies to errors where tax is under-assessed, not to errors leading to an over-assessment, the penalty assessments for most years must be discharged. Overall, she might also be entitled to a refund of the excessive tax she paid.
The FTT declined to rule on whether HMRC should, in fact, make this repayment (this being the province of the County Court), but offered to make a ruling if the parties failed to reach an agreement.
As FTT decisions are not binding on future cases, and as the circumstances in Vowles’ case are hopefully rare and extreme, this case may not have much application going forward. However, it does illustrate how tax law can be applied in a rational and compassionate manner and provides a critique of HMRC for being over-simplistic.
As the tribunal judge said: “the outcome of this appeal may come as a surprise to HMRC. … [They] should have paid more attention to Ms Vowles’ story and to have realised that, if what [she] said was true, it was Mr Walker who was liable … HMRC should have protected the public purse by making an alternative assessment on Mr Walker.”