First-tier Tribunal (Tax)

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URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00048.html
Cite as: [2009] SFTD 184, [2009] UKFTT 80 (TC), [2009] STI 1926

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Adams v Revenue & Customs [2009] UKFTT 80 (TC) (30 April 2009)
CAPITAL GAINS TAX/TAXATION OF CHARGEABLE GAINS
Trusts

TC00048

Appeal number: SC/3161/2008

CAPITAL GAINS TAX – Disposal of shares – Majority shareholder in unquoted company – Consideration included earn-out rights – Whether valid election under TCGA 1992 s.138A – Return with computation on basis that election although no election in terms – No other possible explanation for computation – Held valid election – Appeal allowed

Neglect – No negligent conduct by agent in return – In any event TMA s.36(3) would have covered late election at appeal

FIRST-TIER TRIBUNAL

TAX CHAMBER

DAVID ADAMS Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE

ADRIAN SHIPWRIGHT

Sitting as Special Commissioners in public in London on 16 to 18 March 2009

Julian Ghosh QC and Elizabeth Wilson, instructed by Deloitte LLP for the Appellant

Thomas Ellis, Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

This was an appeal against an assessment for £246,465.80 capital gains tax for the year 1999-2000. The assessment was issued on 8 November 2006 under section 36 of the Taxes Management Act 1970 ("TMA") on the basis of negligent conduct by the Appellant or of a person acting on his behalf.

Although heard in London this was a Scottish appeal.

Since the appeal involved an allegation of negligent conduct involving persons who were not parties to the appeal, we agreed to anonymise their names in this decision.

The dispute arose out of the submission by the Appellant's then tax agents on 15 November 2000 of a return signed by the Appellant showing the gains on the disposal of business assets comprising shares in MPM Adams Ltd ("MPMA"), an unquoted company in which Mr Adams was majority shareholder. Schedules accompanying the return showed that the disposal proceeds of the shares, cash and deferred consideration. The capital gain was calculated on the cash element only, thus excluding the shares and deferred consideration.

It was an agreed fact that the return was made on the basis that an election had been made under section 138A of the Taxation of Capital Gains Tax Act 1992 ("TCGA").

The assessment was made on the basis that no valid election under TCGA, s.138A was made and that the value of the right to the deferred consideration should have been included in the return. On 11 January 2007 Mrs Julie Graham who raised the assessment wrote that the assessment was to make good tax underpaid by reason of the Appellant's negligent conduct in submitting an incorrect tax return in that it did not include all the consideration due on disposal of the shares; on 29 January she wrote a further letter stating that the assessment was raised under TMA s.36 to make good a loss attributable to Mr Adams' negligent conduct or the negligent conduct of a person acting on his behalf.

In his skeleton argument Mr Ellis said this at paragraph 27(a),

"Mr Adams submitted a return as if an election under s.138A had been made and as no election had been made, the return was incorrect in that Mr Adams omitted to report a gain on the disposal of shares … The submission of the incorrect return was in this case prima facie neglect … by either Mr Adams or his advisers as no person who had taken reasonable care to ensure that they were properly advised, who had received such advice and acted on it, would have made the error that has led to the tax loss."

During his opening Mr Ellis put it somewhat differently saying the negligent conduct was by the person who completed the return : by way of making of the entries as opposed to signing the return. He did not pursue the allegation against Mr Adams personally.

The evidence and the facts

There was a statement of facts not in dispute and a common bundle. Mrs Graham, Inspector of Taxes, and Christopher Bienkowski, Inspector of Taxes and a Lead National Technician, gave evidence and were cross-examined. There were no witnesses for the Appellant.

There was no real dispute as to the primary facts.

On 23 April 1999 the then appointed tax advisers of both the Appellant and the company applied to the Capital Gains Tax Clearance Section of the Inland Revenue for clearance under section 138 of TCGA for clearance in respect of the proposed acquisition of MPNA by Capita Group plc in exchange for cash and shares. The letter asked for confirmation,

"that the Board are satisfied that the provisions of section 137 TCGA 1992 will not apply to affect the operation of section 135 TCGA 1992 as extended by section 138A to the transactions … at steps 3 and 4 above."

Step 4 stated that the shareholders of MPNA would acquire the right to the earn out to receive further shares up to the value of £2 million contingent on performance targets. A schedule was enclosed showing the tax districts and references for each of the shareholders with details of their holdings including the Appellant.

Clearance was given on 30 April 1999 restricted to the question whether the conditions of section 137(1) were satisfied. It stated that whether section 135 actually applied and all other taxation consequences remained for the determination of the Inspector after the transactions.

The sale and other transactions proceeded as described in the clearance application. The contract was completed on 6 May 1999.

On 15 November 2000 the Appellant's tax agents, who were not the firm who had made the clearance application, sent the Tax Return for 1999-2000 together with computations to the Appellant's Tax District in Salford. The return was signed by the Appellant. The figures were typed. Page CG2 showed the cash element of the disposal proceeds. Under column G "Enter details of any elections made, reliefs claimed or due and state amount (£)" was entered "VCT deferral relief 80,000". That entry referred to payments for shares in Venture Capital Trusts. The accompanying computations included a schedule showing the proceeds received by the Appellant as £1,661,716 in cash, £553,907 in shares and "Deferred Consideration £913,572".

No enquiry was made into that tax return.

In his return for 2002-03 to Salford the appellant included the disposal of Capita Shares received on the earn out. Page CG2 of the Return showed disposal proceeds of £913,000 on quoted shares or securities on an asset described as "Capita Earn out"; the accompanying computation showed a disposal on 6 April 2002 of Capita Earn out. The return was agreed to have been on the basis that an election had been made earlier under section 138A.

On 23 December 2004 Mrs Graham gave notice of an enquiry into the 2002-03 return. She wrote from the complex Personal Return Team at East Kilbride and stated that the enquiry would cover capital gains. The file had been passed to her around September 2004. A letter on the same day to the Appellant's tax agents included the question, under Capita Earn Out, "Does your client expect to receive any further deferred consideration?"

On 21 April 2005 Mrs Graham wrote stating that an election under section 138A was not made within the time allowed.

On 14 June 2005 Mrs Graham wrote that the clearance application did not constitute a valid section 138A election and observed,

"However I can appreciate that you may feel that such an election was made on time."

In the following paragraph she wrote that it was irrelevant whether a valid election was made or not because under the sale agreement there was a cash alternative.

After further correspondence the assessment was issued, having been authorised by Mr Bienkowski. An appeal was lodged by Deloitte, who were by then representing the Appellant.

On 28 September 2007 Deloitte wrote that there was no possibility of negligence on Mr Adams' part. He had at all times consulted with tax advisers in relation to the preparation and submission of his returns.

On 15 November 2007 there was a meeting at which the Appellant, representatives of Deloitte, Mr Ellis, who had taken over from Mr Bienkowski, and Mrs Graham were present. Mrs Graham took a note. She noted the appellant as saying that when the return was completed his tax agents told him that the paperwork had been lodged with HMRC at the appropriate time. Later a representative of Deloitte was noted as saying that the Appellant was told by his advisers that the issue had been dealt with. Mrs Graham noted that Mr Ellis had said that he felt that he would have to take further specialist advice. Her note said that this was on the question whether an election had been made; Deloitte understood that this included the question as to the basis for contending that anyone had been negligent.

During the hearing Mr Adams served a notice of election in these terms,

"Re: Assessment issued by HMRC re 1999/2000

Assessment issued by notice on 8/11/06.

Mr Adams hereby requires that in determining the tax to be charged for the above period under the assessment issued on 8/11/06 effect be given to the relief which would be allowed by an election under section 138A."

The issues

We identify the following issues:

(1) Whether a valid election was made under section 138A either (a) by the Tax Return including the computation or (b) by the Tax Return and computation together with the clearance application;

(2) If there was no valid election, whether there was negligent conduct of a person acting on the Appellant's behalf;

(3) If there was otherwise a loss of tax, whether the Appellant was entitled to rely on TMA s.36(3) to make a late election;

(4) If there was no election, there was negligent conduct and the Appellant was not entitled to invoke section 36(3), whether there was a loss of tax attributable to the negligent conduct.

Was there a valid election?

Mr Ellis said that an election had to be contained in a notice by the taxpayer that section 138A was to apply, although it did not have to be in any prescribed form and did not have to be in the return. He said that the Notes on Capital Gains to assist in filling in the capital gains pages said that an election such as that under section 138A should be made by giving details in Column G on page CG2; Help Sheet IR 285 said that an election in respect of an earn out right should be in column G. He accepted that the notes and Help Sheet did not have legal force. He said that a notice of election could be in the box headed "Additional Information" on the return and accepted that it could be in a schedule or in a separate document. He said that there was no notice in the return or in any other document.

He said that the clearance application was made by MPNA and was not a notice by the shareholders listed in the appendix. The shareholders had a right of election independently of the company and might not wish to use it. The reply had stated that clearance was restricted to the question whether the conditions for section 137 were satisfied and that all other taxation consequences were for determination after the transactions; there was no mention of the Appellant in the reply. He relied on evidence by Mr Bienkowski that information as to clearance was sent to the companies' districts at the time : the instruction in CT 3688 referring to Districts was referring to the companies' districts, not that of the shareholders; there were thousands of clearance applications each year and it was not practical to notify individual districts.

Mr Ellis said that for a return relying on section 138A to be correct the election must be before or at the time of the return. If the election was after, the return should be amended.

He distinguished Gallic Leasing Ltd v Coburn [1991] STC 699 on which the Appellant relied, on the basis that it concerned making a claim not an election. There it was sufficient that the Inspector was under no misapprehension, there had been a clear reference to group relief. Here there were no explanation with the computation. He accepted that there was no other possible explanation for excluding the deferred consideration in the computation. He said that it was not necessary for the Revenue to infer an election when it was not made expressly. The Revenue must be alerted to section 138A. It was not enough for a taxpayer to make a return giving effect to an election if he did not do so in terms.

Mr Ghosh submitted that the Tax Return and computations read together with the Clearance Application constituted an election under section 138A which was notified under subsection (5). The computation was an irrevocable election by the Appellant.

He said that when a company makes an application for clearance under section 138 it has no effect on the company's tax position; the relevance of the clearance was to the shareholders on the paper for paper exchange. The section did not permit the shareholder to make the application; only the acquiring company and the target company could do so. For this reason the details of the shareholders and their tax districts were provided. It was not the taxpayer's problem if one Revenue office had not informed another.

Mr Ghosh relied on the decision of the House of Lords in Gallic Leasing [1991] STC 699 submitting that the reasoning of Lord Oliver was directly applicable. He derived five principles from that case : (i) where there is no prescribed form for a claim it is up to the taxpayer how to claim; (ii) documents can amount to a claim even where on their face they do not purport to be a claim; (iii) the test is whether the Revenue are alerted to the fact that the taxpayer in seeking the treatment resulting from a claim; (iv) it is sufficient if the inspector could not be under any misapprehension; (v) where there is no prescribed form, no minimum information is required. He said that there was no prejudice to the Revenue in Gallic Leasing, nor was there in this case. Mr Bienkowski had accepted in evidence that the clearance application and the return read together made the position clear. The clearance application specifically referred to section 138A.

He said that there was no difference in substance between a claim and an election. Both involve a unilateral option by a taxpayer to chose a particular treatment. The treatment in question here was a form of roll-over relief although not labelled as such : roll-over relief under section 152 is on a claim. He said that section 42(10) of the Taxes Management Act 1970 applies section 42 to elections as it applies in relation to claims. All of Lord Oliver's observations apply in principle to an election as well as to a claim. Mr Ellis had advanced no submission as to why they are different. Neither claim nor election is a term of art.

Conclusions as to a valid election

Section 138A(5) of the TGCA provides so far as relevant,

"(5) An election under this section in respect of any right must be made by a notice given to an officer of the Board –

…

(b) … on or before the first anniversary of the 31^st January next following the year of assessment in which that right is conferred."

The last date for an election was therefore January 2002. At the relevant time a taxpayer had to make an election in order for section 138A to apply. From 9 April 2003 an election has to be made if the treatment under section 138A is not to apply.

The indefinite article before "notice" indicates that some form of document is required. Oral notice would not in our view suffice. Apart from that, the only indication of the necessary content was in section 138A(2)(c) and (4)(c). Subsection (2)(c) referred to the seller electing for the earn-out right to be treated as a security of the new company. Subsection (4)(c) had the same effect since the person on whom the new right was conferred was the seller.

The effect of treating the earn-out right as a security of the new company (here Capita) was that section 135 applied to the earn-out right so that sections 127 to 131 applied as if there had been a reorganisation of the share capital of the one company and so no charge to capital gains tax arose on the receipt of the earn-out right as there was no disposal (see section 127).

Mr Ellis accepted that there was no possible explanation for the exclusion of the deferred consideration of £913,572 in the computation accompanying the return other than the application of section 138A. He also accepted that notice of the election did not have to be given in the return. Although he said at different times that it should be made expressly or in terms, we did not understand him to contend that there must be a document containing the word election or the equivalent or a reference to section 138A. He did not contend that the election must reproduce or paraphrase the wording in section 138A(2)(c).

We accept the submission of Mr Ghosh that the reasoning in Gallic Leasing applies to the election in the present case. We can see no difference in principle between "the making of a claim" under section 258(1) of the Income and Corporation Taxes Act 1970 and "an election … by a notice given to an officer of the Board" under section 138A(5). The reference to an officer of the Board does not make any difference; Mr Ellis did not suggest that a claim to group relief could be made otherwise than to an officer of the Board. In the present case the computation with the return provided more information as to the result of an election than was provided in Gallic Leasing in that the computation showed the capital gain which the Appellant considered had been realised on the footing that the deferred consideration was deferred.

The only possible distinction between Gallic Leasing and this case is, in our view, that the communications there were to the same office, whereas the clearance application and the return went to different offices. The Revenue's argument as to administrative convenience which was not accepted in Gallic Leasing is not quite the same as here. However an administrative convenience argument is undermined as regards section 138A since the need for a positive election has since been removed.

In our judgment, to adapt the words of Lord Oliver at page 703e of Gallic Leasing, the requirement for a notice of election served "no other purpose than that of alerting the inspector to the fact that reliefs" were sought by the Appellant. Any officer with sufficient knowledge of the law who received the return with the computation could not have been under any misapprehension that the Appellant wished section 138A to apply, even if unaware of the clearance application.

We conclude that a valid election was made.

For the avoidance of doubt we record that Mr Ellis did not rely on the argument raised at an earlier stage that a valid election could not be made because there was the possibility of a cash alternative. He accepted at the outset of the hearing that if the Appellant succeeded as regards the application of section 36, the enquiry into the 2002-03 return would be accepted without amendment. The same result must logically follow in the light of our conclusion that there was a valid election.

Conclusions on the other issues

We are satisfied that, on any view, there was no negligent conduct by the Appellant personally. He was fully entitled to rely on his professional advisers. Once it was clear at the meeting on 15 November 2007 that he had relied on advice any allegation against him personally should have been withdrawn. It might have been another matter if he had acted without professional advice.

As far as the advisers were concerned, Mr Ghosh contended that any allegation of negligent conduct should have been particularised specifying the agent and the conduct. We see no reason why such an allegation should not be put in the alternative; in fact it was not wholly clear whether the allegation was against the agent who completed the return or the advisers who submitted the clearance application. We took the allegation to be against the former. Even if we had concluded that there was no valid election we accept the submission of Mr Ghosh that the tax agents who completed the return and submitted it were entitled to consider that the return did comply with section 138A. The fact that the Revenue disagreed with them does not mean that they were guilty of negligent conduct. Although a finding of negligent conduct may follow from a conclusion that a return was incorrect as in McEwan v Martin [2005] STC 993, whether such a finding follows will depend on the circumstances of the case in particular the nature of the error. The fact that Mrs Graham wrote as she did in June 2005 (see paragraph 16 above) and that Mr Ellis felt at the meeting in November 2007 that he felt that he needed further specialist advice support the argument that any error by the Appellant's agents was not unreasonable. We can see no reason why an experienced Inspector would have needed specialist advice on whether anyone had been negligent which was essential a question of fact.

More importantly, we conclude that if the Revenue were otherwise entitled to raise an assessment under section 36(1), the Appellant was entitled to require effect to be given to a late election under section 138A and that he was entitled to make the requirement at the hearing as he did in fact. We accept the submission of Mr Ghosh that the words "on a claim or application" in section 36(3) encompass an election, an election under section 257A of the Income and Corporation Taxes Act being expressly excluded. The opening words of section 36(3) "if the person on whom the assessment is made so requires" and the words "to which he would have been entitled" clearly predicate that the relevant claim or application was not made before the section 36 assessment. In the present case the result is that even if an assessment based on negligent conduct could have been made otherwise, by reason of the requirement pursuant to section 36(3) there was no loss of capital gains tax to the Crown. The only possible loss was that of the capital gains tax which would otherwise have been due by reason of the failure to notify an election.

The last question would only arise if we were incorrect on all of our earlier conclusion. It arose in part out of the different ways in which the allegation of negligence was put. If the negligence consisted in failing to give notice of election the result would not have been a loss of tax but a gain. However once the negligence is identified in making the return on a wrong basis, the casual connection would be present.

The result is that the appeal is allowed.

THEODORE WALLACE

ADRIAN SHIPWRIGHT

JUDGES OF THE FIRST-TIER TRIBUNAL

RELEASED: 30 April 2009