First-tier Tribunal (Tax)

[2010] UKFTT 272 (TC)

TC00566

Appeal number: TC/2009/13343

Income tax – Appellant claimed relief against other income for losses incurred in a trade of manicure, pedicure and make up largely carried on by his wife – whether Appellant was carrying on a trade – no – whether any such trade would have been “carried on on a commercial basis” (s 384 ICTA) or “commercial” (s 66 ITA) – no – whether HMRC barred from raising a discovery assessment (s 29 TMA) in view of the information already supplied to Inland Revenue about the conduct of the trade in an earlier enquiry – in relation to 2003-04 yes, otherwise no –  appeal allowed in part.

 

FIRST-TIER TRIBUNAL

TAX

JOHN CREE LOCKE AGNEW

Appellant

 

-and-

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

Respondents

 

 

TRIBUNAL:

KEVIN POOLE  (TRIBUNAL JUDGE) WILL SILSBY CTA

 

 

Sitting in public in Birmingham on 18 May 2010

 

The Appellant appeared in person

Colin Williams, Higher Officer, appeared for the Respondents

 

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.               This appeal concerns a claim for relief under s 380 Income and Corporation Taxes Act 1988 (“ICTA”) (in respect of the years ended 5 April 2004, 2005, 2006 and 2007) and s 64 Income Tax Act 2007 (“ITA”) (in respect of the years ended 5 April 2008 and 2009).  The Appellant maintained that he was carrying on a trade throughout those years, in which he incurred losses which he sought to set against his income from employment.

2.               HMRC argued that either the Appellant was not carrying on a trade at all or, if he was, he was not carrying it on on a commercial basis.  They also sought to disallow the wages paid by the Appellant to his wife, which they argued were not expended or incurred “wholly and exclusively for the purposes of the trade”

3.               An issue also arose as to the ability of HMRC to raise assessments in relation to some or all of the years in question due to the fact that much information had been given to the Inland Revenue in an earlier enquiry, a method of calculating allowable costs had been agreed at that time and the Appellant contended that he had simply been following that basic method in subsequent years.

The facts

4.       The Appellant has at all material times been married and his wife is an experienced manicurist, pedicurist and cosmetic make-up artist.  She holds City & Guilds certificates, issued in 1992, in relation to cosmetic make-up and manicure.  She worked for a while in a professional beauty salon, then took a break to have children.  She returned to working part time in 1999, operating from the matrimonial home as a manicurist, pedicurist and beautician. 

5.       From the time of her return in 1999, the Appellant maintains that she has been working as his employee in a self-employed trade which he started to carry on at that time, which trade has incurred losses in every year of its operation. 

6.       The trade (if that is what it was) was extremely simple and only took up part of Mrs Agnew’s time (ten hours per week was historically accepted by HMRC, though from the evidence before the Tribunal, that would appear to be a very generous estimate).  The activities of the trade consisted of:

a.        carrying out manicures, pedicures and facials/make-up;

b.       taking telephone bookings (and the occasional unplanned visit from established customers); and

c.        buying the necessary treatment products.  

7.       Very little promotional activity was undertaken and all the operations were carried out at or from the matrimonial home, without any separate business premises or separately allocated accommodation.  The Appellant himself devoted very little of his own time to the trade as his wife effectively ran it on her own.

8.               Over the four years ended 5 April 2000, 2001, 2002 and 2003, the Appellant claimed losses from this trade totalling £26,906.  During 2004, the Inland Revenue opened an enquiry into the 2003 return, which culminated (following a meeting between the Appellant and a Mrs Foley of the Inland Revenue’s Compliance Unit on 4 October 2004) in an amendment to the Appellant’s self-assessment for the year ended 5 April 2003 and an agreement for the basis of calculating his self-employed expenses for the purposes of his return for the year ended 5 April 2004. 

9.               The expenses claimed in the 2003 return were reduced from £9,065 to £3,884, resulting in a reduction of the trading loss from £8,357 to £3,176 and a correspondingly increased tax liability of £1,139.82 for that year.  The main disallowances were the cost of two foreign trips (which were found to have a mixed private holiday/business purpose) and a reduction in his wife’s wages from approximately £4,500 to £2,880 (10 hours per week at £6 per hour with four weeks’ unpaid holiday); there were some other minor adjustments.

10.            At the 4 October 2004 meeting, Mrs Foley also apparently raised the question of whether the Appellant was trading with a view to profit.  He explained that he was ill during 2003-04, so the income was reduced because his wife spent more time looking after him.  Mrs Foley warned that his trade would be “reviewed for profitability” in the year ended 5 April 2005.

11.            The Appellant then carried on as before, claiming relief for trading losses as summarised in the table set out at [16] below.

12.            On 14 January 2009, a different Inspector of Taxes, Mr M G Smith, wrote to the Appellant, notifying him of HMRC’s intention to carry out a full enquiry into his returns for the years ended 5 April 2007 and 2008.  On 14 May 2009, Mr Smith wrote again, notifying the Appellant of HMRC’s intention to carry out a full enquiry into his return for the year ended 5 April 2009.

13.            After obtaining more information from the Appellant about the conduct of the business and the expenses claimed, and after the Appellant had declined to attend a meeting on the basis that the business had not changed since Mrs Foley’s review in 2004, Mr Smith formed the view (expressed in a letter to the Appellant dated 27 July 2009) that the wages paid to Mrs Agnew should be disallowed as expenses of the trade, as their payment was not made “for business purposes but due to the relationship between you”, and they represented “merely a transfer of income” between the Appellant and his wife.  He also expressed the view that “if the wages were paid to an independent person the business would have closed down many years ago as the income generated is insufficient to cover expenses.”

14.            HMRC then issued assessments to recover the tax underpaid as a result of disallowance of the loss relief claims in full for the years ended 5 April 2004, 2005 and 2006; they also issued closure notices setting out amendments to the Appellant’s self-assessment returns in respect of the years ended 5 April 2007, 2008 and 2009 for the same purpose.  All these assessments and notices were issued on 13 August 2009.  In the closure notices (in relation to the later three years), Mr Smith stated under the heading “My conclusion”:

“I am not satisfied that a business is carried on by you, if a business is carried on it is not run on a commercial basis and I also consider that the expenses claimed are not wholly and exclusively incurred for business purposes.”

15.            There was no similar wording in the letters of assessment in relation to the three earlier years, but the Tribunal is satisfied that the basis for these assessments would have been clear when read with the closure notices in relation to the later years.

16.            The information which was available in relation to the losses claimed, the wages paid to Mrs Agnew, the reported income of the business and the cost of purchases claimed is summarised in the following table (where the income minus purchases and wages do not agree with the losses claimed, it is presumably because the evidence provided to the Tribunal is incomplete):

 

	Loss claimed	Wages to Mrs Agnew	Income reported	Purchases and other expenses (exc wages)
Year to 31.3.03[1]	£3,176	£2,880	£708	£1,004[2]
Year to 31.3.04	£3,713[3]	No evidence	No evidence	No evidence
Year to 31.3.05	£3,997	No evidence	£695[4]	£880.48[5]
Year to 31.2.06	£3,352	No evidence	£654[6]	£230.28[7]
Year to 31.3.07	£4,145	£3,900	£432[8]	£377.69[9]
Year to 31.3.08	£5,289	£4,800	£991.50[10]	£843.21[11]
Year to 31.3.09	£4,797[12]	£4,800	£648[13]	No evidence

17.            From the Appellant’s evidence that the business was carried on in much the same way from Mrs Foley’s visit in 2004 up to the present time, the Tribunal infers that Mrs Agnew’s wages in the years ended 31 March 2004, 2005 and 2006 would have been somewhere between the £2,880 agreed in 2004 to the £3,900 reported for the year ended 31 March 2007

18.            Copy notebook entries covering the period January (expenses)/February (sales) 2004 to March 2009 were produced by the Appellant (listing treatments given by date and summarising expenses).  They showed that in a typical month, Mrs Agnew would provide between two and seven treatments.  In two months, she provided as many as nine treatments.  The highest monthly income received from customers during the period was £145.50.

19.            The Appellant produced copy insurance documentation and some customer testaments in relation to the business.  The insurance provided was in the name of Mrs Agnew “Trading as Beautiful Nails”, and shows employer’s liability and public liability cover (amongst other things) for the year commencing 28 September 2009 at a premium of £231.47.  There was evidence of insurance having been taken out at a similar cost in at least two earlier years.  The Appellant explained that the main concern was to cover the risk of claims from customers from adverse skin reactions to cosmetics and other chemicals used.  He gave evidence that the reason for the insurance being in his wife’s name rather than his own was that this would make any claims simpler.  A secondary purpose, he said, was that some wholesalers would only offer discounts to businesses that could produce evidence of insurance.  He emphasised (and the Tribunal accepts) that the insurance was paid by direct debit from his own bank account and not from his wife’s.

20.            There were three written customer testaments.  The first one (from a Mrs Routley) says she is a longstanding client of Mrs Agnew “who runs her own business known as ‘Beautiful Nails’”.  The second (from a Ms Wakeman) states “I have been a client of [Mrs Agnew] for approximately five years”.  The third (from a Mrs Clement) starts: “This lady has been manicuring my nails for 10 plus years”.  Whilst all three letters are very complimentary of the services supplied by Mrs Agnew and her professionalism, none of them show any evidence of knowledge that the business is actually run by the Appellant, indeed their natural assumption is that the business appears to be Mrs Agnew’s.

21.            We were also provided with a copy of a business card of Mrs Agnew’s, headed “Artistic Nail Design”, which contains no reference to the Appellant.  Finally, the Appellant produced a price list, which contained no reference to him or Mrs Agnew, the only helpful wording in it being: “Let me pamper you for any occasion...” which the Appellant agreed referred to his wife.

22.            The Appellant gave evidence that he had carried out some promotional work for the business.  This took the form of some leafleting and the provision of free promotional vouchers (as a raffle prize for a good cause).  He maintained that it was he who contracted with customers rather than his wife, and said he believed some were aware it was his business rather than his wife’s, but he rapidly went on to say that the customers were aware a business was being run and it did not matter to them who was running it.  He likened his situation to Marks & Spencer, where a customer would deal with a sales assistant without giving a second thought to the fact that she was actually contracting with the company owning the shop.  The Tribunal finds that none of the customers of the business would have been aware of any intention on the part of the Appellant that they should regard themselves as dealing with him rather than with his wife.

23.            The Appellant confirmed that the business had never made a profit and indeed there was not a single month since its commencement in 1999 when the income from customers had been greater than the wages paid to his wife.  As can be seen from the table in [16], he accepted that in the years ended 31 March 2007 and 2008, the amounts spent on cosmetic supplies (£377.69 and £843.21) were roughly similar to the total payments received from customers for treatments (£309.50 and £871.50).

24.            The Appellant’s evidence on how the actual payments were made to his wife was unclear.  Some copy bank statements were provided and the Appellant attempted to trace a clear payment of the monthly wages to his wife in them, but without success.  He eventually accepted that the various payments shown in the statements could not be directly linked to monthly payments of wages, and no other records were maintained to show how the payments disclosed in the statements linked back to the alleged monthly payment of wages.  The Tribunal did not consider the documentary evidence disclosed any real degree of formality, consistency or clarity in the payment of wages and the answers given by the Appellant to questions about the frequency of and basis for salary reviews were wholly unconvincing.  Mrs Agnew’s evidence was that there was no particular salary review date and her husband pays her what he does because he thinks she does the job properly.  The Tribunal finds that the Appellant fixed the wages by reference initially to what had been accepted by Mrs Foley in 2004 and thereafter raised it arbitrarily for no discernible commercial reason.

25.            The Appellant confirmed he had never operated PAYE in relation to the wages he had paid to his wife, on the grounds that they never exceeded her personal allowance income tax relief.

26.            When it was put to the Appellant that there was no realistic prospect of the business making any profit as currently constituted, he disagreed.  He maintained that he planned to commit himself full time to the business once he retired from his current employment and it would be possible to turn the operation into profit within a matter of months at that time.  In the meantime he said he wanted to keep the business running, albeit at a loss, in order to preserve it for his retirement.  He accepted that it would be possible to move the business into profit by reducing his wife’s wages, but he did not wish to do so.  He said he had done some advertising and promotional activity with a view to increasing the turnover, but the details were vague and the activity in question was clearly very limited.  He said he had investigated the possibility (at some unspecified time in the past) of acquiring premises to operate from, but the expense involved clearly made any such action unviable.  There has been no change to the treatments offered since the business was started.

27.            The Appellant also gave evidence that the benefits of running the business were not entirely financial.  He referred to one situation, when a customer sent her husband to help to mend a fence damaged in a storm, and another where a carpet was fitted free of charge by the husband or other relative of another customer.  He also said there was a benefit in terms of his wife’s self-esteem, in that she earns her own income and does not need to ask him for support.

Arguments of HMRC

28.            HMRC argued three bases for dismissing the appeal:

a.        The Appellant did not carry on a trade at any material time.  They submitted the evidence showed that if a trade was carried on at all, it was carried on by Mrs Agnew.  In the absence of a trade, the Appellant could not have suffered losses from that trade.

b.       If the Appellant did carry on a trade:

                                        i.            it was not carried on on a commercial basis and with a view to the realisation of profits (s 384 Income and Corporation Taxes Act 1988 (“ICTA”)) during the period up to 5 April 2007 and therefore any losses arising were not eligible for relief under s 380 ICTA; and

                                      ii.            it was not “commercial” within the meaning of s 66 Income Taxes Act 2007 (“ITA”) during the period after 5 April 2007 and therefore any losses arising were not eligible for relief under s 64 ITA.

Sub-section 384(1) ICTA applied in relation to periods up to 5 April 2007 and, so far as relevant, provided at the relevant time:

“(1)     Subject to subsection (2) below, a loss shall not be available for relief under section 380 unless, for the year of assessment in which the loss is claimed to have been sustained, the trade was being carried on on a commercial basis and with a view to the realisation of profits in the trade...

(9)     Where at any time a trade is carried on so as to afford a reasonable expectation of profit, it shall be treated for the purposes of subsection (1) above as being carried on at that time with a view to the realisation of profits.”

Section 66 ITA applied in relation to tax years commencing on or after 6 April 2007 and, so far as relevant, provided:

“(1)     Trade loss relief against general income for a loss made in a trade in a tax year is not available unless the trade is commercial.

(2)     The trade is commercial if it is carried on throughout the basis period for the tax year—

(a)     on a commercial basis, and

(b)     with a view to the realisation of profits of the trade.

(3)     If at any time a trade is carried on so as to afford a reasonable expectation of profit, it is treated as carried on at that time with a view to the realisation of profits.”

Here HMRC relied on Wannell v Rothwell (HM Inspector of Taxes) [1996] 68 TC 719, and in particular the comments of Robert Walker J at p 733:

“...the best guide is to view “commercial” as the antithesis of “uncommercial”... A trade may be conducted in an uncommercial way either because the terms of trade are uncommercial (for instance, the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and variable costs of the enterprise) or because the way in which the trade is conducted is uncommercial in other respects (for instance, the hobby art gallery or antique shop where the opening hours are unpredictable and depend simply on the owner’s convenience).  The distinction is between the serious trader who, whatever his shortcomings in skill, experience or capital, is seriously interested in profit, and the amateur or dilettante.”

HMRC also sought to distinguish the present case from Delian Enterprises v Ellis (Inspector of Taxes) [1999] STC (SCD) 103: in that case, an unemployed man took up trade as a saw doctor in 1981.  He made small profits for 5 or 6 years (until 1986 or 1987), then traded at a loss (initially on his own and later in partnership with his wife) for some 11 or 12 years before returning to small profits (in 1998).  The Inland Revenue sought to disallow the relief claimed for the partnership’s losses from 1990-91 to 1996-97 on the basis that the trade was not being carried on on a commercial basis.  The Special Commissioner allowed the appeal, finding on the facts that the partnership had been trading on a commercial basis.

c.        Even if the HMRC failed on (a) and (b) above, the expenses claimed (in particular, the wages of the Appellant’s wife) in computing the losses were not incurred wholly and exclusively for the purposes of the trade.

Arguments of the Appellant

29.            The Appellant argued he was indeed carrying on a trade, it was carried on on a commercial basis (or, for the relevant years, it was commercial) and all the expenses he claimed (including his wife’s wages) were incurred wholly and exclusively for the purposes of the trade.  

30.            In relation to his wife’s wages in particular, he maintained that Mrs Foley had accepted in 2004 that it was appropriate to pay his wife for 10 hours per week (for 48 weeks per year) and that the hourly rate he was paying had only gone up by a small amount from the £6 per hour agreed with Mrs Foley in 2004 to £10 per hour in 2007-08 and 2008-09.  If the payment of wages to his wife was not for business purposes, he enquired, what other purpose was he paying her for?

31.            The Appellant pointed to the enquiry that had taken place in 2004 and the agreement that he had reached with Mrs Foley about the basis of calculation of his allowable expenses for the years ended 5 April 2003 and 2004.  He maintained that he had simply carried on his trade in later years in the manner seen and approved by Mrs Foley, and calculated his expenses on the basis agreed with her.  HMRC must therefore be taken to have agreed with this approach and could not now renege on that arrangement.

32.            The Appellant maintained that simply failing to make a profit was not the test of whether a trade was being carried on, or as to its commerciality.  He pointed to numerous examples of well known companies making losses, and maintained that his position was analogous to theirs.  He was able to sustain the losses due to his other income and his ultimate intention, he said, was to generate profits.

33.            The Appellant also maintained that HMRC had failed to follow their own guidance in the way they had selected his returns for enquiry and then pursued that enquiry.  He considered they had not followed their stated policy on “Openness and Early Dialogue”.  When invited to develop this point, he was unable to provide a legal argument as to why this should undermine HMRC’s case in the present appeal, whatever rights of complaint he might have about the issue through other channels.

34.            Whilst the point had not been specifically raised by the Appellant, the Tribunal also invited submissions on the question of whether HMRC was within time to raise the assessments in relation to the years ended 5 April 2004, 2005 and 2006.  It was clear that these assessments were being raised as “discovery” assessments under s 29 Taxes Management Act 1970 (“TMA”) and the Tribunal was concerned to establish whether there was a sufficient discovery to entitle HMRC to re-open self-assessments which would otherwise be out of time for amendment. 

35.            As at 13 August 2009, the date of the relevant assessments, s 29 TMA provided (so far as relevant to the present appeal):

“(1)     If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—

(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or

(b)     that an assessment to tax is or has become insufficient, or

(c)     that any relief which has been given is or has become excessive,

the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.

(2)     .....

(3)     Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—

(a)     in respect of the year of assessment mentioned in that subsection; and

(b)     in the same capacity as that in which he made and delivered the return,

unless one of the two conditions mentioned below is fulfilled.

(4)     The first condition is ....

(5)     The second condition is that at the time when an officer of the Board—

(a)     ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or

(b)     informed the taxpayer that he had completed his enquiries into that return,

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.

(6)     For the purposes of subsection (5) above, information is made available to an officer of the Board if—

(a)     it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;

(b)     it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;

(c)     it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer; or

(d)     it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—

(i)     could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or

(ii)     are notified in writing by the taxpayer to an officer of the Board.

(7)     In subsection (6) above—

(a)     any reference to the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—

(i)     a reference to any return of his under that section for either of the two immediately preceding chargeable periods; and

(ii)     ....

(b)     any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.”

36.            Here HMRC relied on Langham (Inspector of Taxes) v Veltema [2002] 76 TC 259, and in particular the following passage from Auld LJ’s judgment (at [36]):

“It seems to me that the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under [s 29 TMA] only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a s9A [TMA] enquiry, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question.”

Question 1 – was the Appellant carrying on a trade?

37.            The Tribunal finds that there was a trade, but on the facts it considers that the trade was carried on by Mrs Agnew and not the Appellant.  She gave all the treatments, dealt with all the bookings, bought most of the relevant supplies, had insurance in her own name and insofar as any promotion of the business was involved, it was promoted in her name as her business.  The Appellant’s role was limited to some minor promotional activity (which the Tribunal finds to have been carried out on behalf of his wife) and converting his wife’s records of sales and purchases into rudimentary accounts.  No evidence was produced to show that any customer or supplier of the business would have been aware of the Appellant’s involvement in it, indeed all the evidence produced pointed in the other direction.

Question 2 – if the Appellant was carrying on a trade, was it carried on on a commercial basis/was it commercial?

38.            There are two tests to be applied here.  The first is the test under sub-s 384(1) ICTA for the tax years up to and including 2006-07.  The second is the test under s 66 ITA 2007 for the later years.  There is no practical difference in substance between the two tests in the present case (except as mentioned in the following paragraph).

39.            The first test applies to each “year of assessment” and requires the trade to have been carried on on a commercial basis “for the year of assessment”, regardless of the fact that (as in the present case) the basis period was a different time.  In the present case, the difference is only a few days and nothing hangs on the distinction as the Tribunal finds the activities to have been carried on unchanged in all material respects throughout the whole period.  The second test is applied by reference to the basis period rather than the year of assessment (or in re-write parlance, the tax year).  There is a transitional provision to address this slight discrepancy, to be found in para 20 of Schedule 2 ITA, but the circumstances of this case do not bring that provision into play.

40.            In the present case, and applying the statements of Robert Walker J in Wannell set out above, the Tribunal finds that if it is wrong in its conclusion that the Appellant was not carrying on a trade at any relevant time, then any such trade was not being carried on on a commercial basis and with a view to the realisation of profits for the purposes of either s 384 ICTA or s 66 ITA.  Further, for the purposes of sub-s 384(9) ICTA and sub-s 66(3) ITA, the Tribunal finds that the trade was not carried on so as to afford a reasonable expectation of profit.

41.            The Tribunal considers this case to be distinguishable from Delian in some important respects.  In that case, there were some initial profits before the lengthy period of losses and some further profits thereafter; in the present case there has never been a profit.  In that case the trader did not pay wages to anyone; in the present case the Appellant has continued to pay wages which are clearly unjustifiable on any commercial basis.  The Tribunal does not accept that the Appellant’s motive in paying these wages is to keep the business ticking over until he retires from his employment and puts his full time and effort into it.  That could be more simply achieved by the Appellant’s wife simply carrying on the business on her own account.

42.            Standing back and viewing the situation in the round, the Tribunal considers that if the Appellant were found to be operating a trade, it would certainly not be on a commercial basis. 

43.            Whilst the activities of his wife, viewed in isolation, might be argued to be “on a commercial basis”, there would be some doubt even about that, given the desultory nature of the business and the fact that the profits, year on year, would be zero or minimal even after taking her wages out of the equation. 

44.            But if one is looking at the putative trade carried on by the Appellant, with the extra overhead of the wages paid to his wife, then it is clear that the trade is structured in such a way that it is never likely to make a profit.  It has never made a profit in its ten years or more of operation.  The Tribunal finds that any person running such a business on a commercial basis would take steps to reduce the losses and the Appellant has refrained from taking the obvious step of doing so by reducing the payments to his wife, which are clearly out of all proportion to the sales achieved.  It would be difficult to escape the conclusion that the Appellant has run the business in this way specifically in order to generate the trading losses to set against his other income year on year whilst taking advantage of his wife’s personal allowance.  Vague and unsubstantiated “plans” to expand the business and make it profitable when he retires would not, in the Tribunal’s view, constitute a commercial basis for running the business at a continuing loss for many years beforehand, especially when there would be a much simpler means of keeping the business ticking over up to his retirement (by means of his wife running it and then either transferring it to him or taking him in as a partner when he retires).

45.            The Tribunal notes and agrees with the Appellant’s argument that simply making losses – even over a number of years ­– does not mean you are not trading on a commercial basis.  However, when the business is structured voluntarily over a period of many years in such a way that it is incapable of making a profit, the Tribunal considers such arguments to be irrelevant.

Question 3 – If the Appellant was carrying on a trade on a commercial basis, were the payments made to his wife incurred wholly and exclusively for the purposes of the trade?

46.            Because of the answers which it has reached on the first two questions, the Tribunal has not considered this question in detail.  The payments made to the Appellant’s wife are so central to the Tribunal’s conclusion on Question 2 that it is difficult to envisage how this question might be meaningfully answered negatively if the Tribunal had answered both Questions 1 and 2 in the affirmative.

Question 4 – Given that the Appellant calculated his profit and made his returns on substantially the same basis as that agreed with Mrs Foley in 2004, can HMRC now renege on that agreement and disallow his losses for subsequent years?

47.            The Appellant cited no authority in support of his argument on this question.  The Tribunal accepts that in 2004 Mrs Foley agreed a basis for calculating the Appellant’s net losses, and agreed that the Appellant could be regarded as trading on a commercial basis; however those agreements related solely to the period up to (and including) 5 April 2004.  Her note of the meeting with the Appellant on 4 October 2004 (which was not challenged by the Appellant) contains the following crucial section:

“We also discussed [the taxpayer] trading with a view to profit and [the taxpayer] said that during [2003-04] he was ill so income down, also wife could not take on much work as looking after him.  He believed that for the current tax year [2004-05] the situation would have improved as no trips abroad and no expensive furniture.  I advised that I would not look at [2003-04] with a view of agreeing losses but only available to be set against OE but [2004-05] will be reviewed for profitability.”

48.            The Tribunal finds that Mrs Foley made it clear to the Appellant in October 2004 that any agreement she reached with him would apply specifically only to the years ended 5 April 2003 (the subject of her original enquiry) and 5 April 2004 (where, although the Appellant had not by then submitted his tax return, she had accepted his explanation for the low turnover and expected losses which it would show).  She was very clear, however, that in relation to subsequent years, profitability would be reviewed as part of deciding whether the Appellant was trading with a view to profit (and therefore on a commercial basis) in those years.  Any agreement about the method of calculation of allowable expenses was subsidiary to this point.

49.            The Tribunal holds therefore that any agreement which Mrs Foley may have made with the Appellant can only have been relevant for the periods up to 5 April 2004.  In relation to the year ended 5 April 2004, the Tribunal does not consider it necessary to examine the question more closely because of the conclusion it reaches in relation to that year under Question 5 below; in relation to subsequent periods, the Tribunal finds that the terms of any agreement between Mrs Foley and the Appellant (even if the Appellant could rely on it as a proper ground of appeal) were not such as to prevent HMRC from raising the arguments that (a) the Appellant was not in fact carrying on a trade or (b) that any such trade was not being carried on on a commercial basis.

Question 5 – Are HMRC out of time in raising the assessments/closure notices in relation to any of the years under appeal?

The 2006-07, 2007-08 and 2008-09 assessments

50.            HMRC commenced the enquiry into the Appellant’s tax returns for the years ended 5 April 2007 and 2008 by letter dated 14 January 2009, within the time limits set out in sub-s 9A(2) TMA.  They commenced the enquiry into his return for the year ended 5 April 2009 by letter dated 14 May 2009, also within the normal time limit.  No question of breach of time limits therefore arises in relation to any of these three years.

The earlier assessments – the general position

51.            In relation to the earlier years, however, no enquiry was opened but HMRC simply issued “discovery” assessments under s 29 TMA.  The question arises as to whether they were entitled to do so.

52.            The assessments for each of the three years ended 5 April 2004, 2005 and 2006 were notified to the Appellant on 13 August 2009, well within the time limit laid down in s 34 TMA.  But the key question is whether, given the information that had been made available to the Inland Revenue during the 2004 enquiry, it could be said that HMRC had made a sufficient “discovery” to entitle them to raise assessments based on s 29 TMA.

53.            Relevant extracts from s 29 TMA are set out at [35] above.

54.            HMRC argued, based on Langham v Veltema, that the information obtained by Mrs Foley in 2004 should not shut them out from raising discovery assessments in 2009.

55.            Where (as here) a taxpayer has made a return under s 8 TMA and no enquiry has  been raised under s 9A TMA, a “discovery” assessment under s 29 TMA can only be raised if one of two conditions is satisfied:

a.        The under-assessment is attributable to fraudulent or negligent conduct on the part of the taxpayer or his agent 

(No such conduct is alleged here); or

b.       At the time when the normal enquiry window closed without an enquiry being raised (i.e. in this case, 31 January 2005 for the 2003-04 return, 31 January 2006 for the 2004-05 return and 31 January 2007 for the 2005-06 return), an officer of HMRC could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the under-assessment (sub-s 29(5) TMA).

56.            Sub-section 29(6) lists the information that is regarded as “made available” for this purpose.  HMRC argue (and the Tribunal accepts) that based on Auld LJ’s judgment in Langham v Veltema (in particular at [36]), sub-s 29(6) is to be regarded as an exhaustive list of the information so available.

57.            Sub-sections 29(6)(a) and (b) refer to information actually contained in a tax return or a claim for a year of assessment (and any accompanying accounts, statements or documents).   By virtue of sub-s 29(7), information contained in the returns for the previous two chargeable periods (plus accompanying accounts, statements or documents) are also regarded as “made available”.  It was not argued before the Tribunal that any tax return of the Appellant (or, if any existed, any accompanying accounts, statements or documents) contained relevant information for this purpose.

58.            Sub-section 29(6)(c) provides that information “contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer” is regarded as “made available”.  By virtue of sub-s 29(7) TMA, information contained in any such documents, accounts or particulars produced or furnished for the purposes of enquiries into the returns for the previous two chargeable periods are also regarded as “made available”.

59.            As a matter of interpretation, the Tribunal considers that the word “particulars” in sub-s 29(6)(c) is apt to cover not just written material but also material conveyed orally at a formal meeting such as the one which was held between the Appellant and Mrs Foley on 4 October 2004 to discuss her enquiries into his 2002-03 return.

60.            Sub-section 29(6)(d) makes it clear that any information whose existence and relevance are notified in writing to HMRC is regarded as “made available”, as is any information whose existence and relevance can reasonably be inferred from information regarded as “made available” by falling within sub-sections 29(6)(a) to (c).  The Tribunal does not consider there to be any relevant information under this heading.

61.            Clearly in the context of the enquiry into the Appellant’s 2002-03 return, he provided detailed information about the manner in which his alleged trade was carried on, including the basis for calculation of his wife’s “wages” and  the other expenses he claimed, and the loss-making nature of the business (at least up to 5 April 2004).  This information must clearly therefore be regarded as “made available” under sub-s 29(6)(c) and sub-s 29(7) in connection with his 2003-04 and 2004-05 returns.  Insofar as Mr Smith could reasonably be expected, on the basis of that information, to be aware of the under-assessment in 2003-04 and 2004-05, his “discovery” assessments for those years may be shut out. 

The 2003-04 assessment

62.            So far as the 2003-04 assessment is concerned, the Tribunal finds that all relevant information (including the expected continuing losses and the uncommercially high “wages” paid to the Appellant’s wife) was contained in the particulars which the Appellant had supplied at his meeting with Mrs Foley on 4 October 2004 in connection with the 2002-03 enquiry.  Based on that information, all of which was available before the normal s 9A TMA enquiry window closed for the 2003-04 return on 31 January 2005, any officer of HMRC could have reasonably been expected to be aware at that time of the insufficiency of the 2003-04 assessment.  Accordingly, the Tribunal finds that the raising of the 2003-04 assessment was not permitted by s 29 TMA and it must therefore be discharged.

The 2004-05 assessment

63.            So far as the 2004-05 assessment is concerned, it would be superficially attractive to come to the same conclusion.  However this would, in the Tribunal’s view, be based on a less than rigorous analysis of the actual information which was provided by the Appellant during the enquiry into his 2002-03 return.

64.            The crucial distinction is that the Appellant, during the course of the 2002-03 return enquiry, clearly told Mrs Foley that the losses were continuing in 2003-04, and gave an explanation as to why (his illness and the reduction in his wife’s work while she looked after him).  It is clear however that the Appellant was not saying to her that the business would be carried on in exactly the same way in 2004-05 (including the uncommercial “wages” for his wife, leading to continued losses as before): Mrs Foley’s notes of their meeting in October 2004 show that she warned the 2004-05 results would be “reviewed for profitability” and this comment is inconsistent with the Appellant having made any such statement.

65.             Accordingly the Tribunal finds that the information contained in the particulars which the Appellant provided at the October 2004 meeting did not include the information that the business would be carried on in future just as unprofitably as before.  In the absence of this piece of information, the Tribunal is satisfied that no HMRC officer would, by 31 January 2006, have had information clearly alerting him to the inadequacy of the Appellant’s 2004-05 self-assessment (to paraphrase the wording used by Auld LJ in Langham v Veltema at [36]). 

66.            To put it another way, the Tribunal is satisfied that no officer of HMRC could have been reasonably expected, on the basis of the information made available to him before 31 January 2006, to be aware of the insufficiency in the Appellant’s self-assessment for the year 2004-05.

67.            Accordingly it follows that the 2004-05 assessment was properly issued under s 29 TMA and, given the Tribunal’s conclusions on Questions 1 and 2, should be upheld.

The 2005-06 Assessment

68.            The information contained in the particulars provided by the Appellant at the October 2004 meeting is not regarded as having been made available under s 29(6)(c) and 29(7) TMA in connection with the year ended 5 April 2006.  There were no claims that any other relevant information had been supplied (and the Tribunal finds that no other relevant information was supplied) by 31 January 2007.

69.            Accordingly it follows that the 2005-06 assessment was properly issued under s 29 TMA and, given the Tribunal’s conclusions on Questions 1 and 2, should be upheld.

 

 

Summary

70.            The Tribunal finds that the Appellant did not carry on a trade at any relevant time during the period 6 April 2003 to 5 April 2009.

71.            If the Tribunal is wrong in this conclusion, it finds that any trade carried on during that time was not carried on on a commercial basis with a view to the realisation of profits, and accordingly no losses arising during the period 6 April 2003 to 5 April 2009 are eligible for relief under s 380 ICTA or s 64 ITA.

72.            The assessments in respect of the years 2004-05 and 2005-06 and the amendments to the Appellant’s self-assessments for the years 2006-07, 2007-08 and 2008-09 are therefore upheld.

73.            The assessment raised by HMRC in respect of the year 2003-04 must be discharged as it does not satisfy the requirements of s 29 TMA.

74.            The appeal is therefore allowed in relation to the 2003-04 assessment but dismissed in relation to the assessments for 2004-05 and 2005-06 and is also dismissed in relation to the amendments to the Appellant’s self-assessments for 2006-07, 2007-08 and 2008-09.

75.            This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

TRIBUNAL JUDGE

RELEASE DATE: 14 June 2010