Iftikhar Hassan Bhatti v Revenue & Customs [2013] UKFTT 355 (TC) (19 June 2013)
DECISION
The Appeal
1.
The Appellant appealed against an amendment to the 2003/04 self
assessment return dated 19 December 2008 in the sum of ₤38,348.80 tax
due, and a discovery assessment for the year ended 5 April 2007 dated 18
November 2010 in the sum of ₤8,879.00. HMRC’s statement of case dated 25
May 2012 indicated that the amendment to the 2003/04 self assessment was now ₤10,536.
2.
The issue concerned the Appellant’s liability to pay capital gains tax
on the disposal of two properties, the Equinox building (2003/04), and the James
Nelson buildings (2006/07). The disposal in relation to the Equinox building
concerned an insurance payment following the building’s destruction by fire. The
parties agreed for the Tribunal to restrict its decision to one of principle,
namely, the question of liability.
3.
The Appellant argued that the Appeal was essentially a simple case.
According to the Appellant, the evidence conclusively showed that the Appellant
held no legal or beneficial interest in the two properties during the years in
question. The legal and beneficial interest in the said properties belonged to
his brothers, Messrs Ali Hassan (known also as Tony) and Maqbool Hussein Bhatti
(known also as Mike). Thus the Appellant could not have made a disposal of
assets within the meaning of the Taxation of Chargeable Gains Act 1992 (TCGA
1992). The Appellant asked the Tribunal to determine the disputed assessments
in a nil amount. The Appellant also requested the Tribunal to consider an award
of costs in his favour against HMRC.
4.
HMRC disagreed, stating that the three brothers were in partnership as
Central Properties from 24 April 1989, and that the said properties were
partnership property. The Appellant had signed the partnership self assessment
return for 2003/04 in his capacity as nominated partner and a self assessment
return for the same year in which he declared capital gains from the Equinox
building. The 2006/07 discovery assessment arose from a disclosure made by Mr M
H Bhatti’s agent, Pierce CA Limited, Chartered Accountants, which the Appellant
purportedly agreed to abide by. According to HMRC, a coherent picture had been
painted over many years of the Appellant being a partner of Central Properties,
and sharing in the profits and losses across the partnership activities. There
was no documentary evidence to substantiate the Appellant’s assertion that he
was an employee of the partnership. In those circumstances HMRC requested the
Tribunal to confirm its decision that the Appellant was liable for capital
gains on the disposals of the said properties in accordance with his share in
the partnership, namely one-third.
5.
The Appeal was heard over two days on 19 and 20 March 2013. The
Appellant’s case comprised a series of detailed submissions on law and fact
which Mr Webster, his representative, presented in the form of written
submissions with reference to eleven indexed folders. The Appellant provided
the Tribunal and HMRC with a statement of truth dated 5 October 2012 but did
not give evidence. Mr Webster advised that the Appellant did not understand the
technical issues raised by the Appeal, and that he was not fit to give evidence
because of ongoing medical problems, despite his attendance at the hearing.
6.
The Appellant initially intended to call a representative of Hacker
Young and Partners, Chartered Accountants, to give evidence. Hacker Young had
acted as Law of Property Act receivers for the Nationwide Building Society in
respect of the two properties. Hacker Young, however, indicated that it could
only adduce evidence confirming its understanding of the position as set out in
the correspondence already provided to the parties for which it would charge
₤650 per hour plus expenses. The Appellant’s representative pointed out in
a letter dated 10 January 2013 that his client was unable to fund the costs of
attendance of a Hacker Young representative, and respectfully asked the
Tribunal to consider accepting the validity of the legal position as confirmed
in Hacker Young’s correspondence.
7.
On 23 January 2013 the Tribunal responded:
“The Tribunal may not give either party advice about
how to conduct their case or what evidence may be needed to support their
position or what evidence will or will not be accepted by the judge at the
hearing or what evidence would be sufficient to support an assertion.
We are therefore unable to comment on whether or not
your client would be advised to call any witnesses or indeed any particular
witness, nor can we advise you as to whether the evidence by way of a document
will be challenged by HMRC or accepted by the judge at the hearing as to do so
might be to prejudge an issue which would not be appropriate.
If your client does wish us to issue a witness
summons, please let us know”.
8.
The Appellant did not request an issue of a witness summons and no
witness was called from Hacker Young.
9.
HMRC called David Ian Hughes as a witness following the issue of a
witness summons dated 1 March 2013. Mr Hughes was a Chartered Certified
Accountant who said that he acted for the partnership of Central Properties
comprising Mr M H Bhatti, Mr A H Bhatti and the Appellant since September 1997.
Mr Hughes ceased acting for the partnership on its cessation and for the
Appellant in June 2010 when he received a letter from Karl Jackson
Accountancy. The Tribunal admitted four bundles of documents in evidence.
10.
At the hearing Mr Webster objected to the late production of HMRC’s
bundle of authorities. The Tribunal offered Mr Webster an adjournment which was
declined. The authorities related to the statutory requirements of discovery
assessments, which were not a material issue in this Appeal.
11.
Mr Webster applied to make a claim under the error or mistake provisions
in respect of the alleged excessive assessment for capital gains tax on the
Equinox building pursuant to section 33 of Taxes Management Act 1970. HMRC
pointed out that the error or mistake provisions had been replaced by a new
section 33 inserted by schedule 1AB of the Finance Act 2009 which came into
force for any new claims for overpaid tax from 1 April 2010. Further HMRC stated
that under the new section a claim for relief for overpaid tax may not be made
more than four years after the end of the relevant tax in which case the
Appellant was time barred from pursuing such a claim. Mr Hall for HMRC,
however, invited the Tribunal to deal with the Appeal on its merits under
section 50 TMA 1970 as appeals against an amendment to a self assessment (section
28A TMA 1970) and against a discovery assessment (section 29 TMA 1970). Mr Hall
considered this course of action to be fair and just because HMRC had accepted
the Notice of Appeal, and the Appellant would suffer no prejudice if the Appeal
was dealt with it on its merits. The Tribunal adopted Mr Hall’s proposal.
12.
The Notice of Appeal was lodged on 23 February 2012 which was outside the
30 day time limit. The dates of the disputed decisions were 22 September 2009
and 18 November 2010. The Appellant requested permission for extending the time
limit in which to appeal, stating that he could not afford professional representation.
HMRC did not oppose the application. The Tribunal gives effect to the agreement
of the parties and extends the time limit for making the appeal until 23
February 2012.
Overview of the Law
13.
The dispute engaged the principles of partnership law, TCGA 1992 and law
of property.
14.
Section 1(1) of the Partnership Act 1890 defines partnership as the
relation which subsists between persons carrying on a business in common with a
view of profit. Section 45 states that the expression “business” includes every
trade, occupation or profession.
15.
Section 2 sets out three rules for determining whether a partnership
exists or does not exist. Joint tenancy, tenancy in common, joint property,
common property or part ownership does not of itself create a partnership as to
anything so held or owned. The receipt by a person of a share of the profits of
a business is prima facie evidence that he is a partner in the business.
16.
Partnership arises by agreement express or implied. Most partnerships
are produced intentionally by the express agreement of the partners. A formal
partnership agreement, however, is not necessary in law to form a partnership.
If two or more people are working together in such a way to bring their
association within section 1(1) of the 1890 Act, then they are partners in the
eyes of the law. As a general rule where people share in the profits and the
management of a business they are partners even if they do not realise it.
17.
Section 20(1) defines partnership property as
“All property and rights and interests in property originally
brought into the partnership stock or acquired, whether by purchase or
otherwise, on account of the firm, or for the purposes and in the course of the
partnership business, must be held and applied by the partners exclusively for
the purposes of the partnership and in accordance with the partnership
agreement”.
18.
What is partnership property is a question of fact. The crucial question
is what was intended by the partners (Barton v Morris [1985] 2 All ER
1032, [1985] 1 WLR 1257). Section 20(1) specifies three separate tests:
(1)
Was the property originally bought into the partnership stock?
(2)
Was it acquired by purchase or otherwise on account of the firm?
(3)
Was it acquired for the purposes and in the course of the partnership
business?
19.
Dissolution of a partnership may occur in several ways: by agreement of
all the partners, by the withdrawal of one partner (section 26 of the 1890 Act)
or by court order. After dissolution of a partnership the authority of each
partner to bind the firm, and the other rights and obligations of the partners continue
notwithstanding the dissolution so far as may be necessary to wind up the
affairs of the partnership, and to complete transactions begun but unfinished
at the time of the dissolution, but not otherwise (section 38 of the 1890 Act).
20.
The Partnership Act 1890 is merely declaratory (British Homes
Assurance Corpn Ltd v Paterson [1902] 2 Ch 404 at 410 per Farwell J) and,
except so far as they are inconsistent with the express provisions of the
Partnership Act 1890, the rules of equity and of common law applicable to
partnership are still in force (section 46). As a general rule, the terms of an
express partnership agreement will override the provisions of the 1890 Act.
21.
Section 1(1) of the TCGA 1992 provides for tax to be charged on capital
gains which is defined as chargeable gains computed in accordance with the 1992
Act and accruing to a person on the disposal of assets. Section 2 states that a
person shall be chargeable to capital gains tax in respect of chargeable gains accruing
to him in a year of assessment during any part of which he is resident in the
United Kingdom.
22.
Under section 21(1) of the 1992 Act, all forms of property are assets whether
situated in the UK or not. The central concept of disposal is not defined by
the Act. Disposal is said to include any form of transfer or alienation of the
beneficial title to an asset (whether legal or equitable) from one person to
another.
Under Section 21(2)(a) a part disposal occurs where on a person making a
disposal, any description of property derived from the asset remains undisposed
of. Section 22 extends the scope of disposal of assets to capital sums
received under a policy of insurance for any kind of damage or injury to, or
the loss of assets.
23.
The taxation of partnership capital gains is based on a body of HMRC
practice superimposed on the general capital gains rules. There are few
specific references to partnerships in the capital gains legislation. Where a
trade is carried on in partnership, tax is charged on each partner separately
in respect of chargeable gains on the disposal of partnership assets. Each
partner is treated as owning a fractional share of each asset (section 59).
Consequently, a transfer of an asset to a partnership as a capital contribution
by a partner is treated as a part disposal, and changes in sharing ratios
result in the disposal or acquisition of a share in partnership assets by each
partner as his share increases or decreases.
24.
Normally the quantum of each partner’s interest in the asset will be
determined by the terms of the partnership agreement but in default the
provisions of section 24 of the 1890 Act apply, namely, each partner has an
equal share in the partnership assets.
25.
Section 1(1) of the Law of Property Act 1925 provides that the only
estates in land which are capable of subsisting or being conveyed or created in
law are an estate in fee simple in possession or a term of years absolute.
Section 1(2) defines those interests or charges in or over land which are
capable of subsisting or of being conveyed or created at law and include
easements, rentcharges, charges by way of legal mortgage, land tax and rights
of entry. Section 1(3) states that all other estates, interests and charges in
or over land take effect as equitable interests. Section 53(1)(b) of the 1925
Act requires any private trust of land to be in writing.
26.
As regards registered land, the register records the ownership of the
legal estate, not the beneficial interests, and the Registrar is not affected
with notice of a trust (see section 78 of the Land Registration Act 2002). A
person dealing with the registered proprietors can assume that they have
unlimited power to dispose of the estate or charge concerned, free from any
limitation affecting the validity of the disposition, unless there is a
restriction or other entry in the register limiting their powers, or a
limitation imposed under section 26 of the Land Registration Act 2002. Thus if
two or more persons are registered as joint proprietors, a purchaser can safely
acquire the legal estate from the survivor of them, unless there is a
restriction to the contrary in the register. With private trusts, the duty of
applying for any necessary restrictions falls on the trustees, though a
beneficiary may also apply.
27.
Under section 22 of the Partnership Act 1890, real property belonging to
partners was regarded in equity as personalty subject to the expression of a
contrary intention. Section 3 of the Trusts of Land and Appointment of Trustees
Act 1996 repealed section 22 and abolished the doctrine of conversion under
which a beneficial interest under a trust for sale was deemed to an interest in
the monetary value of the land.
28.
Where a legal estate in land is vested in partners as part of their
partnership property, it is held by them as joint tenants. The legal estate in
the land is accordingly subject to the rights of survivorship which are
incident to a joint tenancy, but the beneficial interest in the partnership
property is held exclusively for the purpose of the partnership and in
accordance with the partnership agreement. Similarly where land which is
partnership property is vested at law in one partner, the other partner(s) has
an equitable right to his share and thus a right to have a share in the
proceeds of sale of the land.
29.
Until 1 December 2003 stamp duty was charged on specific categories of
instruments referred to in schedule 13 of the Finance Act 1999 including those
dealing with sales of land and bearer instruments referred to in schedule 15 of
the Finance Act 1999. The Finance Act 2003 abolished stamp duty in relation to
instruments dealings with interests in land, and was replaced by stamp duty
land tax. Stamp duty of £5 continued to apply until abolished in the 2008
Finance Act to a declaration of any use or trust of or concerning property except
a will unless the instrument constituted a conveyance or transfer on sale.
The Facts
The Disputed Transactions
30.
The Appellant declared in his self assessment tax return for 2003/04
that he was in a partnership known as Central Properties, and that he made a
gain on an asset known as the Equinox building, Market Street, Nelson which was
acquired on 16 March 1998 and disposed of on 6 April 2003. The disposal
proceeds for that asset was stated to be ₤335,405.99 against which the
Appellant set off losses arising from the disposals of 2,4, and 22-30 Market
Street, Nelson; 65 Scotland Road, Nelson and Unit 2 Lonsdale Street, Nelson.
The Appellant declared a total taxable gain after allowable losses and taper
relief of £36,569.30.
31.
The Appellant was also the nominated partner for the partnership tax
return for Central Properties. The Appellant included in the partnership return
for the year ending 30 April 2004 a sheet detailing the partnership disposal of
chargeable assets which stated that the partnership disposed of the Equinox
building, Market Street for £1,007,224.00. The disposal was described as a
partial disposal as a result of a fire.
32.
The Equinox building was originally described as the Grand Cinema. A
historical copy of the register of title LA 574212 dated 3 February 1997
described the freehold land in the registered title as being the Grand Cinema,
2, 4 and 12 to 30 (even) Market and 38 Cross Street, Nelson. The registered
proprietors as at 4 February 1997 were Maqbool Hussain Bhatti and Ali Hassan
Bhatti. The charges register contained an entry that a lease in respect of the
Grand Cinema was surrendered on 3 May 1994 with Unit 4 Cinemas as one party and
Ali Hassan and others (the Landlords). There was also a registered charge in
favour of the Nationwide Building Society dated 4 February 1997.
33.
The registered title for LA 574212 as at 20 March 2002 was restricted to
2, 4 and 12 to 30 (even) Market Street and 38 Cross Street, Nelson. The
registered proprietors of Maqbool Hussain Bhatti and Ali Hassan Bhatti remained
the same. Nationwide Building Society retained the registered charge over the
property.
34.
Subsequent enquiries of the Appellant and his agent, Mr Hughes revealed
that the partnership trading as Central Properties acquired the Equinox
building on 30 June 1989 at a cost of £344,955. Enhancements to the property in
the value of £26,280 were carried out on 30 April 1997. The Equinox building was
originally let to Apollo Cinemas and later let to TA Entertainment for use as a
nightclub. The Equinox building was destroyed by fire on 28 May 2000.
35.
Three payments were made by the insurance company following the fire to
the Equinox building which were £100,000 (20 October 2000), £350,000 (9 May
2001) and £807,390.33 (6 February 2002). The last two payments were made by
Salisbury Hamer Aspden & Johnson, Surveyors, Valuers, Loss Assessors,
Commercial Property Agents of 20-22 Hargreaves Street, Burnley to a client
premium account of Steele & Son, solicitors. The client premium account was
named as Bhatti TA Central Properties.
36.
The registered title for LA 574212 restricted to 2, 4 and 12 to 30
(even) Market Street was sold by Hacker Young, the law of property receivers for
Nationwide Building Society, for £118,000 to Pendle Borough Council.
37.
The dispute regarding the amendment to the 2003/04 self assessment
concerned the gain arising from the insurance pay out on the Equinox building,
and by implication the losses declared on the disposals of to 2, 4 and 12 to 30
(even) Market Street, 65 Scotland Road, Nelson (£35,000 on 11 July 2003),
and Unit 2 Lonsdale Street (£18,500 on 6 April 2003).
38.
The discovery assessment of 18 November 2010 arose from a disclosure made
by M H Bhatti’s representative, Pierce CA Limited,
which showed a chargeable gain of £144,555 split three ways equally between the
Bhatti Brothers on the sale of James Nelson Buildings. The taxable gain
attributed to the Appellant was £39,385 after the annual exemption of £8,800. According
to HMRC, the Appellant did not declare the taxable gain in his tax return for
2006/07.
39.
The James Nelson Buildings were registered under title number of
LA645545. The entry as at 29 November 2001 showed that Maqbool Hussain Bhatti
and Ali Hassan Bhatti were the registered proprietors, and that a purchase
price of £90,000 was paid for the property on 17 September 1996. Nationwide Building Society had a registered charge over the property dated 29 November 2001.
The Partnership
40.
According to HMRC, the Appellant submitted personal self assessment tax
returns for years 1996/97 to 2003/04 inclusive on which he declared
income/gains from the partnership Central Properties. HMRC adduced copies of
the partnership returns from 2000 to 2004 which named the Appellant as the
nominated partner. HMRC’s self assessment record of the partnership showed
three partners for Central Properties: Mr I Bhatti (the Appellant), Mr M H
Bhatti and Mr A H Bhatti, with a start date of 24 April 1989 and an end date of
23 November 2003. The partnership returns declared interest and other finance
charges as allowable expenses against the income of the partnership.
41.
Mr Sidat acted as the accountant for the Bhatti brothers trading as
Melbourne Guest House & Central Properties for the years ended 30 April
1992 to 30 April 1997. The income and expenditure accounts for the years ended
30 April 1992 and 30 April 1994 revealed two income sources, guest houses, and
property and market stall lettings. Loan interest was included in the overheads
for the partnership. The accounts stated that profit was allocated 40 per cent
each to the Appellant and Mr A H Bhatti with 20 per cent to Mr M H Bhatti. The
schedule of properties to the balance sheet as at 30 April 1994 contained an
entry of Central Properties and Markets at a value of £404,950. The Tribunal
understands that the Equinox building was part of Central Properties.
42.
Mr I Sagar, HM Inspector of Taxes, made enquiries of the partnership
accounts for the three years ending 30 April 1994. Mr Sagar pointed out that
the partnership should cease purchasing properties for business with a loan in
the MIRAS scheme. He also disallowed a claim by the Appellant for wages as a
rent collector on the ground that he was a partner in the business.
43.
Mr Hughes acted as the accountant for the partnership of Central
Properties comprising the Appellant, Mr A H Bhatti and Mr I H Bhatti from
September 1997 to 31 July 2009. Mr Hughes continued to act for the Appellant
until June 2010. Mr Hughes had no knowledge of the circumstances surrounding
the disposal of The James Nelson Buildings.
44.
At a meeting on 14 March 2007 with Miss Neczypor of HMRC, Mr Hughes and
Mr M L Bhatti explained that during the 1990’s the Bhatti brothers had bought
various properties around the Burnley/Nelson area using mortgaged finance from
The Nationwide, and HSBC. Originally some of the properties had traded as Bed
and Breakfast establishments but these had been sold and replaced by other
properties that were let normally. The partnership had encountered difficulties
in paying the mortgages, which resulted in the Nationwide appointing Hacker
Young as law of property receivers in February 2002, and HSBC appointing Robson
Rhodes as the receiver for Riverside Mills on 25 November 2003.
45.
According to Mr Hughes, the purpose of the partnership was to purchase
and develop properties for resale to third parties or for local council
partnership. Mr Hughes explained in evidence that he submitted partnership tax
returns as instructed and approved by the partners. The Appellant was selected
as the lead partner. Mr Hughes took the guidance of the partners on their
respective shares of the insurance proceeds. Mr Hughes also submitted the
Appellant’s self assessment tax returns with the Appellant’s approval as
attested by his signature on the returns.
46.
Mr Hughes was told by the Bhatti brothers that they operated as a
partnership. Mr Hughes was not aware of the existence of a formal partnership
agreement. Mr Hughes stated that none of the three brothers queried the capital
gain on the insurance pay out, and their respective shares of the gain.
According to Mr Hughes, the Appellant gave no intimation that he did not own
the properties.
47.
Mr Hughes accepted that he made no enquiries about the ownership of the
properties. Mr Hughes explained that the funds from the Nationwide mortgage
replaced the previous funding arrangements provided by the National Westminster
bank. Mr Hughes did not enquire about the arrangements of the Nationwide
mortgage. Mr Hughes was unable to give a specific example of a property
development undertaken by the brothers trading as Central Properties.
48.
Mr Hughes in a letter dated 6 November 2002 advised Mrs Tibbles of The
Abbey National that the Appellant was a partner in Central Properties along
with Mr M H Bhatti and Mr A H Bhatti, and that he had regular drawings of
£1,666.66 per month. The accounts for Central Properties from 18 December 2001
to 15 April 2004
confirmed that the Appellant and his two brothers were in receipt of monthly
drawings of £1,666.
The accounts also showed that each brother was allocated £50,000 each following
the payment of £771,800 from Salisbury Hamer in relation to the insurance claim
on the Equinox building.
49.
Mr Hughes provided a copy of an action plan for Central Properties
which was prepared in response to HSBC’s concerns about the business. The
action plan was addressed to the Bhatti brothers. The plan identified a range
of actions which included, amongst others, the writing of development plans
for each property, a trust deed and a partnership agreement to be signed by
each partner, and no decision made individually by each partner that would
affect the partnership. At D3.14 the document entitled Strategy for Petty’s referred
to the sale of James Nelsons’ land to a house builder, and the sale of 15
apartments in James Nelsons building or sale of building for apartment scheme
to a house builder.
50.
In February 2012 the Appellant brought a claim against Mr Hughes for
professional negligence in respect of his handling of the capital gains arising
from the insurance payout associated with the Equinox building. The claim was
being dealt with under Mr Hughes’ professional indemnity insurance.
51.
On 8 March 2012 Mr A H Bhatti contacted Mr Hughes asking him to act as
the accountant for his new company. Mr Hughes declined because of the
Appellant’s pending claim against him. Mr A H Bhatti considered the claim
ridiculous stating that
“I did tell you on many occasions to just get rid of
them two like I had too….. I am sure there is a partnership agreement at Steele
and Sons solicitors which states that all three brothers were responsible for
any liabilities together even though one may not have been on some of the
properties at the Land Registry. All profits from the sale of the properties or
from any insurance claims were divided equally as all liabilities were”.
52.
The bundle included the following documents with a heading of Central
Properties:
(1)
A letter dated 2 May 1997 to Nationwide Building Society from A H Bhatti
and M H Bhatti confirming the full and correct names of both partners.
(2)
A letter dated 17 June 1998 to Mr Wilcox of Nationwide from A H Bhatti
advising on various aspects of Central Properties’ business. The letter named A
H Bhatti and M H Bhatti as partners. The letter also stated that Mr I H Bhatti
and Miss V Ramirez now ran the management on a full time employment basis.
(3)
A letter dated 8 July 1999 to David Hughes setting out various matters
signed by the Appellant which named A H Bhatti, I H Bhatti and M H Bhatti as
partners. The address on the letter was James Nelson Sports Complex.
(4)
A second letter with an address of James Nelson Sports Complex dated 8
July 1999 to HM VAT signed by the Appellant who gave notification to waive
exemption (option to tax) in relation to the Equinox building.
(5)
A letter dated 13 May 2001 to Mr McBride setting out the time schedule
for the completion of office and warehousing accommodation at Livingstone Mill.
The letter was signed by the Appellant and named A H Bhatti, I H Bhatti and M H
Bhatti as partners.
(6)
A letter dated 4 June 2001 to Mr Alty referring to a revised lease
agreement for Units 4, 5 and 8 Livingstone Mill. The letter was signed by the
Appellant and named A H Bhatti, I H Bhatti and M H Bhatti as partners. The
lease was dated 25 June 2001 for a term of five years and granted by Central
Properties.
(7)
Faxes between the Appellant and A H Bhatti dated 17 and 19 September
2001 regarding the direction of the business for Central Properties. The strap
line read: Central Properties – Land, Residential, Industrial, Development
and Investment. The fax from A H Bhatti asked the Appellant to help the
partnership to refinance the whole portfolio through the Appellant’s contacts.
A H Bhatti requested the Appellant to keep all options open including any one
interested in taking out Nationwide, HSBC, and the reinstatement on Market Street and Connect 4.
(8)
Fax dated 6 January 2003 from A H Bhatti giving notice to the Appellant
and M H Bhatti to dissolve the partnership. M H Bhatti acknowledged receipt.
The Appellant did not.
53.
The bundle also contained correspondence between the brothers trading as
Central Properties with Barclays Bank dated 8 June 1993, and Halifax PLC dated
12 March 2001 regarding funding for the business.
54.
The Appellant supplied his representative (Mr Webster) with a statement
of truth dated 5 October 2012. The Appellant, however, chose not to give
evidence which affected the weight given to the statement.
55.
The Appellant stated that in 1996 the Nationwide took over the properties,
and made title absolute in February 1997. According to the Appellant, the
properties were charged to the Nationwide in the sole names of A H Bhatti and M
H Bhatti and not in the Central Properties trading partnership. The Appellant
asserted that he told Mr Hughes from the beginning that he did not own the
properties. When the Appellant received the tax bill in August 2008 Mr Hughes
told the Appellant that it had nothing to do with him and that his brothers
would be liable to any shortfall due to Nationwide. The Appellant stated that
he held no beneficial ownership in the properties and did not put any of his
own money into acquiring the properties.
56.
The Appellant asserted that in February 2002 the partnership ceased
trading, and the properties were taken into receivership by Hacker Young who
dealt with his two brothers and Mr Hughes direct. The Appellant pointed out
that he attended Mr Hughes’ office to sign the tax returns. The Appellant
simply relied on his professional competence to ensure the entries were
correct.
57.
On 10 September 2009 the Appellant met Ms Neczypor of HMRC to discuss
the capital gains computation relating to the Equinox building. The Appellant
believed that the purchase price of £344,955 was understated and that it should
be around £450,000. The Appellant also said that the disposal costs were
£150,000 not £1,007,000. Ms Neczypor pointed out that the disposal related to
the insurance pay out not the sale of the other properties to the Local
Authority. Finally the Appellant said that he had not received any money from
the sale of the Equinox building and that his name was not on the deeds for the
property.
The Funding of the Property Portfolio and Appointment of Receivers
58.
In June 1996 the Nationwide Building Society agreed to provide an
advance of £890,000 for a period of 240 months to M H Bhatti and A H Bhatti for
the following purposes:
(1)
To re-mortgage existing National Westminster Bank and Royal Bank of
Scotland loans for £660,000.
(2)
To repay the existing National Westminster Bank overdraft totalling
£80,000.
(3)
To provide £90,000 to purchase the freehold of James Nelsons Sports
Club.
(4)
To provide £40,000 to level the existing sloping floor and ceiling of
the Grand Cinema on Market Street, Nelson.
(5)
To provide £20,000 towards solicitors’ costs, valuation expense,
arrangement fees and other expenses.
59.
The Nationwide required A H Bhatti and M H Bhatti to provide security to
the loan in the form of the Market Street properties, 65 Scotland Road,
Prospect Buildings, Whitefield Mill, Units 1 & 3 Lonsdale Street, Bankfield
Flats, Melbourne House, Woodthorpe, Pendle Lodge, Oakdene, Prairy Guest House,
and James Nelson’s Sports and Recreation Club.
60.
It would appear that the Nationwide provided a further advance of
£30,000 on 19 February 1997 and altered the mortgage arrangement to a fixed
rate on 21 April 1997.
61.
On 28 July 1998 the Nationwide corresponded with A H Bhatti and M H
Bhatti about their discussions on a further advance. The Nationwide was not
convinced that further borrowing was the ideal solution. The Nationwide
perceived that the business was being squeezed for cash by the necessity to
fund ongoing developments at the same time as income was being reduced from the
residential investment properties. The Nationwide suggested that the two brothers
seek the advice of Hacker Young, Chartered Accountants, on the formulation of a
plan to redirect the business and bring a sharper focus on the profitable
areas, whilst exiting from those activities which represented a cash drain. It
is not clear whether the two brothers took up the offer of help from Hacker Young,
although the timing of the move away from bed and breakfast establishments
appeared to coincide with the advice.
62.
On 27 February 2002 the Nationwide appointed Hacker Young as Law of
Property Receiver for the portfolio of properties used as security for the
Nationwide mortgage. The portfolio at the time of the appointment comprised 2,4,
and 22 to 30 (even) Market Street, 38 Cross Street, 65 Scotland Road, Prospect Buildings, 3 Raglan Street, Unit 2 Lonsdale Mill (registered proprietor was
A H Bhatti alone), Whitefield Mill and James Nelson Sports Club.
63.
Hacker Young’s powers as a receiver under the Law of Property Act were
restricted to the properties which were the subject of the Nationwide’s legal
charge. The powers included sale, collecting rent and looking after the
properties, and did not extend to the business affairs of the partnership. Hacker
Young had a duty to act in the interests of the Nationwide.
64.
In a letter dated 20 April 2004 Hacker Young confirmed to Mrs Cowking of
Houldsworths, Solicitors
that Lonsdale Mill, 2,4 and 22-30 Market Street, and 65 Scotland Street had
been sold, and that Whitefield Mill, James Nelson and Prospect Buildings had been marketed. Hacker Young was unable to provide an accurate asking price for
James Nelson but had received offers in the region of £1.2 million. The
receiver’s receipt and payments account to 5 April 2005 showed receipts of £716
million and payments of £580 million. Hacker Young said that it had no involvement
with the partnership, and unable to confirm the level of partnership
liabilities.
65.
In a letter dated 12 December 2003 to Pollard Bower Solicitors, Hacker
Young confirmed again that the Appellant was not a party to the Nationwide loan
accounts or the receivership. Further A H Bhatti and M H Bhatti would be liable
for any shortfall owing to Nationwide after the sale of remaining properties.
66.
In a letter dated 19 February 2004 Hacker Young advised Mrs Cowking of
Houldsworths Solicitors that its Mr Cook and Mr Hancock were appointed as
receivers over the property portfolio subject to the Nationwide mortgage.
Hacker Young was unable to provide any further information as the appointment
related only to A H Bhatti and M H Bhatti and not to the Appellant.
67.
On 10 November 2011 Mr Hancock of Hacker Young wrote to the Appellant
saying that:
“You were not the legal owner of any of the
properties in the attached list and were not subject to the liability of the
mortgage either. At no time were we ever informed you were a partner, and
therefore never considered you as the owner of the properties or personally
liable under the terms of the mortgage due to the Nationwide Building Society”.
68.
On 25 November 2003 HSBC Bank PLC appointed Mr Escott of RSM Robson
Rhodes as Law of Property Act receivers in respect of legal charges over the
properties at Livingstone Mills and Riverside Mills. The legal title to
Riverside Mills was in the name of M H Bhatti who took out the mortgage on the
property. The legal title of Livingstone Mills was in the joint names of the
Appellant, A H Bhatti, and M H Bhatti. The mortgage for Livingstone Mills was
in the names of the three brothers.
69.
The Appellant and his solicitor engaged RSM Robson Rhodes in
correspondence between 23 February and 22 December 2004. In a letter dated 19
April 2004 RSM Robson Rhodes advised the Appellant’s solicitors that it had no
information on the total liabilities of the partnership as it was not appointed
in respect of Central Properties. Robson Rhodes confirmed that its appointer,
HSBC Bank Limited, was owed £379,273 in respect of the legal mortgages on
Riverside Mill and Livingstone Mill. On 22 September 2004 Robson Rhodes wrote
to the Appellant’s solicitors advising that it had written to all the partners
of Central Properties including the Appellant seeking their agreement to make
an initial distribution of £330,000 to be divided equally between the partners.
The distribution related to the sale proceeds of both Livingstone Mills and
Riverside Mills. On 17 November 2004 Robson Rhodes confirmed that it had made
an initial distribution of £330,000 divided equally between the three partners.
On 22 December 2004 Robson Rhodes stated that it had received approval from all
the partners concerning the receipts and payments account and the distribution
of the remaining funds.
Deed of Declaration
70.
Bundle part 4 of 4 included a Deed of Declaration of Trust dated 31 May
2001 between the three brothers. Steele and Son, solicitors, had supplied a
copy of the Trust Deed which was signed by the three brothers in the presence
of witnesses. The deed stated that the three brothers were trading together as
Central Properties.
71.
The recital to the deed stated that
(1)
The property described in the First Schedule hereto is vested in the
sole name of Maqbool Hussain Bhatti.
(2)
The properties described in the Second Schedule are vested in the joint
names of Maqbool Hussain Bhatti and Ali Hassan Bhatti.
(3)
The property described in the Third Schedule is vested in the joint
names of Maqbool Hussain Bhatti, Ali Hassan Bhatti and Iftikharul Hassan Bhatti
(the Appellant).
(4)
The parties hereto have traded as partners and have acquired the
properties in the First Second and Third Schedules as part of their partnership
assets subject to the various charges and encumbrances applicable thereto.
(5)
It has been agreed between the parties that the properties hereinafter
described in the schedules hereto shall be held on the trusts and terms
hereinafter declared subject to all existing encumbrances and charges.
72.
The Deed witnessed as follows:
(1)
Maqbool Hussain Bhatti declares that he holds the property in the First
Schedule upon the trusts herein set out.
(2)
Maqbool Hussain Bhatti and Ali Hassan Bhatti hereby declare that they
hold the properties in the Second Schedule upon the trusts herein set out.
(3)
Maqbool Hussain Bhatti Ali Hassan Bhatti and Iftikharul Hassan Bhatti
(the Appellant) hereby declare that they hold the properties in the Third
Schedule upon the trusts herein set out.
(4)
The respective parties hereto declare that they will hold the respective
properties as Trustees upon trust to sell the same with power to postpone such
sale and that they will hold the net proceeds of sale and net rents and profits
until sale upon trust for themselves as tenants in common in equal shares upon
the trusts applicable thereto as part of their subsisting partnership assets of
Central Properties.
(5)
The respective parties hereby declare that all liabilities attributable
to the properties shall also be borne by them in equal shares AND that they
will indemnify each other in the event that any of them makes or is called upon
to make any disproportionate payment or meet any disproportionate liability
limited to such equalising payment or liability.
(6)
The parties hereby undertake with each other to execute when called upon
so to do any deed charge transfer or other document necessary to give effect to
this deed at their joint expense.
73.
The properties in the various schedules were as follows:
(1)
The First Schedule: Riverside Mills
(2)
The Second Schedule: Grand Cinema, 2, 4 and 12-30(even) Market Street and 38 Cross Street, 65 Scotland Road, Unit 2 Lonsdale Street, Prospect Buildings and 3 Raglan Street, Wickworth Street, and Whitefield Mill.
(3)
The Third Schedule: Livingstone Mills.
74.
At the hearing on the 19 March 2013 Mr Webster for the Appellant argued
that the Deed of Declaration of Trust should not be admitted in evidence by
virtue of section 14(4) of the Stamp Act 1891 which provides that an instrument
shall not be given in evidence in civil proceedings unless it is duly stamped
in accordance with the law in force at the time. According to Mr Webster, if
the Trust Deed had been drawn up on the basis of a transfer of an equitable
interest or part ownership in the stated properties, stamp duty under the then
Stamp Act 1891 as applied by schedule 13 of the Finance Act 1999 would have
been payable.
75.
Mr Webster gave no prior notice of his application. Mr Hall for HMRC considered
that the document should be admitted in evidence as it was included in the
bundle of documents. The Appellant gave no evidence about the circumstances surrounding
the execution of the Deed even though he had signed it in the presence of a
witness. The bundle contained a photocopy of the Deed. The Tribunal was unaware
of any attempt by either party to obtain the original Deed to ascertain whether
in fact it had been stamped.
76.
The Tribunal is satisfied that the copy Deed was genuine it was signed
by the three brothers in the presence of witnesses, and prepared by solicitors,
Steele and Son. The solicitor’s letter dated 30 May 2001 addressed to Tony (A H
Bhatti) at Central Properties indicated that the Deed had been drawn up at the
behest of the three brothers, and that the Appellant held the original Deed for
signature.
77.
Mr Webster did not specify which head of charge under schedule 13 of the
Finance Act 1999 applied to the Deed but left it to the Tribunal to decide. The
Tribunal considers that it was more than likely that the Deed attracted a
charge, particularly as paragraph 17 of schedule 13 imposed stamp duty of £5 on
a declaration of trust concerning property. This charge was abolished in 2008
in respect of a Deed not constituting a transfer or conveyance on sale. The
Tribunal, however, takes the view when determining an application to exclude evidence
the onus was on the Appellant to prove what he asserted which would include the
specific head of charge.
78.
As at 2001 Inland Revenue had no power to impose a penalty for a failure
to stamp a document and could not sue for duty on unstamped documents. The
purpose of section 14(4) was to provide Inland Revenue with a means to enforce
the payment of the stamp duty. The irony with this application is that, if
successful, it may prevent HMRC from recovering tax.
79.
Rule 15(2)(a) of the Tribunal Procedure (First-tier Tribunal)(Tax
Chamber) Rules 2009 enables the Tribunal to admit evidence whether or not the
evidence would be admissible in a civil trial in the United Kingdom. This power
must be exercised in accordance with the overriding principle of treating cases
fairly and justly, which involves the Tribunal in weighing up a range of
competing factors.
80.
The Tribunal’s starting point is that all relevant evidence should be
admitted unless there is a compelling reason to the contrary.
The Deed contained declarations by the brothers about being in partnership and the
identity of properties acquired as part of their partnership assets. The
contents of the Deed were relevant to the issues in this Appeal. The admission
of the Deed, if chargeable with duty, would, however, undermine the statutory
policy enshrined in section 14(4), and potentially prejudice the Appellant’s
case.
81.
The Tribunal refuses the Appellant’s application to exclude from
evidence a copy of the Trust Deed dated 31 May 2001. The Tribunal is not satisfied
that the Appellant has made out the grounds of his application. He has not
produced the original Deed to establish whether it was stamped or not. The
solicitors at the time indicated that the Appellant held the original Deed.
Further the Appellant did not specify which head of charge under schedule 13 of
the Finance Act 1999 applied to the Deed.
82.
In the alternative, the Tribunal would have exercised its discretion
under rule 15(2)(a) to admit the copy Deed. The Tribunal considers that the
authenticity of the Deed, and its relevance to the dispute, together with the
Appellant’s reluctance to enlighten the Tribunal about the circumstances of its
making outweighed the potential prejudice to the Appellant, and the
compromising of the statutory purpose for section 14(4).
83.
Mr Webster made other submissions about the legal effect of the Deed,
which will be examined later in the decision.
The Grand Cinema Site (the Equinox building) and 12-20 Market Street
84.
In July 1999 the Appellant dealt with the voluntary registration of
Central Properties for VAT in connection with the letting of the Equinox
building as a nightclub. The Appellant declared himself as a partner in the
business when completing the questionnaire on the voluntary registration.
85.
On 10 May 2001 Salisbury Hamer who handled the insurance claim following
the fire at the Equinox building sent a fax to the Appellant and his two
brothers confirming that he had passed onto the insurance company their
willingness to accept a final settlement of all claims relating to this
incident, on the basis of a cash settlement at £1,250,000.
86.
On 8 December 2004 Inghams, solicitors, wrote to Mr Hughes advising him
that they acted on behalf of the three brothers in connection with the sale of
the Grand Cinema site in Market Street, Nelson. Mr Hughes was asked to confirm
that the brothers had not elected to charge VAT on the consideration, and are
not in fact VAT registered.
87.
On 20 December 2004 Inghams informed the Appellant that there was
£99,823.34 from the proceeds of the sale which was divisible between the
brothers. Inghams enclosed a cheque to the value of £33,274.4 payable to the
Appellant in respect of his one third share from the proceeds.
Consideration
88.
Section 1(1) of TCGA 1992 provides that tax shall be charged in respect
of capital gains accruing to a person on the disposal of assets. The Appellant
did not dispute that the assets which gave rise to the disputed assessments had
been disposed of, and that their disposals in the particular years resulted in
an overall capital gain.
89.
In the amendment to the 2003/04 self assessment, the disposal was the
receipt of a capital sum under a policy of insurance in relation to the damage
to the Equinox Buildings. Under section 22(4) of the 1992 Act the receipt of
such a capital sum constituted a disposal even though no asset was acquired by
the insurance company on payment of the sum of the money. The Appellant in his
2003/04 self assessment return set off the purported capital gains from the
insurance payment against losses in connection with the disposals of 2,4, and
22-30 Market Street, 65 Scotland Road, and Unit 2 Lonsdale Street. The fact of
those disposals was evidenced by the letter of Hacker Young at B1.13, and not
challenged by the Appellant.
90.
The 2006/07 discovery assessment involved the disposal of the James Nelson Buildings which was evidenced by means of a chargeable gain computation
supplied by M H Bhatti’s representative, Pierce CA Limited. Mr Webster for the
Appellant questioned whether Pierce CA Limited had the necessary authority to
release such information. The Appellant did not, however, challenge the fact of
the disposal.
91.
The issue in this Appeal was whether the Appellant was the person to
whom the capital gains accrued from the disposal of assets referred to in the
above two paragraphs. The Appellant contended that he had no legal title or
beneficial interest in the above properties, and that his representatives at
the times in question had erroneously attributed to him one third of the
capital gains arising from the disposal of the said properties. Thus the
Appellant did not own the assets, and not entitled to the proceeds of their
disposal.
92.
HMRC accepted that the legal titles to the Equinox building, James Nelson Buildings, 2, 4, and 22-30 Market Street, 65 Scotland Road, and Unit 2 Lonsdale
Street were registered in the names of the Appellant’s two brothers, A H
Bhatti, and M H Bhatti. HMRC, however, argued that the Appellant’s liability
for capital gains tax arose from his position as a partner in partnership with
his two brothers trading as Central Properties. According to HMRC, the assets
in question constituted partnership property, which meant that the Appellant
had a beneficial interest in the said assets. The Appellant was, therefore,
treated as disposing his fractional shares of the assets when they were disposed
to an outside party and liable to tax on a proportion of the gains made in
accordance with the ratio of his share in the assets.
93.
Mr Webster for the Appellant considered the partnership issue to be a
red herring which was introduced by HMRC as a deliberate act to mislead the
Tribunal.
94.
The Tribunal disagrees with Mr Webster’s assessment of the significance
of the partnership issue. The Tribunal considers the determination of this
issue central to the resolution of the dispute, involving the examination of
the following two questions:
(1)
Did the Appellant, A H Bhatti and M H Bhatti under the name of Central
Properties carry on a partnership within the meaning of the Partnership Act
1890?
(2)
Were The Equinox Buildings, James Nelson Buildings, 2, 4, and 22-30
Market Street, 65 Scotland Road, and Unit 2 Lonsdale Street partnership
property belonging to the three brothers?
Central Properties – a partnership?
95.
Mr Webster for the Appellant argued that the word “partner” had an
everyday usage. The mere fact that individuals who jointly owned property may
refer to each other as partners did not render them a partnership under the
Taxes Acts. Mr Webster referred to HMRC’s advice on When does a Partnership
Exist (PIM 1030) which said:
“Most cases of jointly owned property will fall
short of the degree of business organisation needed to constitute a
partnership. To accept that a partnership exists you would have to be satisfied
that there is a similar degree of business organisation as in an ordinary
commercial business. This means more than treating rental income as derived
from a business of letting property – it must be a business apart from that.
On the other hand, where it has been accepted that a
partnership already exists and has income from property belonging to the
partnership, the presumption would normally be that the letting is part of the
partnership business and there is more than mere joint ownership”.
96.
According to Mr Webster, the brothers trading as Central Properties did
not undertake any adventure in the nature of a trade. The brothers used Central
Properties as an administrative name for the purposes of collecting their own
individual legal entitlement to rental income derived from the letting of their
personally owned property. Mr Webster asserted that the brothers operated in a
personal capacity of landlord and carried out the letting of each property
using the name of Central Properties.
97.
Mr Webster contended that the income from the letting of properties was
not trading income for taxation purposes. Such income was assessed to tax under
Schedule A (section 15 of Income and Corporation Tax Act 1998), and now under
sections 268 to 272 of Income Tax (Trading and Other Income) Act 2005. Mr
Webster stated that in 1996 when the brothers gave up offering services of bed
and breakfast under the trading name of Melbourne Guest House they ceased to be
a trading partnership. Since that date the only source of income was from the
letting of properties, which did not constitute trading income within the
definition of section 45 of the Partnership Act 1890. Essentially Mr Webster’s
argument was that a partnership cannot exist if its only source of income was from
property because that did not constitute a trade within the meaning of the
Taxes Acts.
98.
Mr Webster also submitted that the Appellant in any event ceased to be a
partner with his brothers when the property portfolio was re-mortgaged with the
Nationwide. Mr Webster relied on correspondence from Hacker Young which stated
that the Appellant was not a party to the mortgage, and had no legal interest
in the properties given as security. Mr Webster also referred to a letter dated
17 June 1998 to Mr Wilcox of Nationwide which stated that the Appellant and
Miss V Ramirez ran the management of Central Properties on a full time
employment basis.
99.
The existence of a partnership depends upon whether the requirements of
the Partnership Act 1890 have been met. Section 1(1) of the Partnership Act
1890 defines partnership as the relation which subsists between persons
carrying on a business in common with a view of profit. Section 2(3) of the
1890 Act states that the receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner of the business.
100. R v Robson
(1885) 16 QBD 137 at 140 described a partnership as a joint operation for the
sake of gain. In Fenston v Johnstone (HM Inspector of Taxes) 23 TC 29 at
34 & 35 Mr Justice Wrottesley cited with approval a passage from Lindley
on Partnership:
“ Now turning to Lindley on Partnership, page 44 of
the Tenth edition, I find these words: An agreement to share profit and losses
in the sense of making good the losses if they are sustained, may be said to be
a type of partnership contract. Whatever difference of opinion there may be as
to other matters, persons engaged in any trade, business, or adventure upon the
terms of sharing the profits and making good all losses arising therefrom are
necessary to some extent partners in that trade, business or adventure, nor is
the writer aware of any case (unless it be Jane) in which persons who have
agreed to share profits and losses in this sense have held not to be partners”.
101. The
existence of a business is essential to a partnership, and for this purpose
business includes every trade, occupation or profession (section 45 of the 1890
Act). Thus
business is a very wide term, embracing almost every commercial activity, and
is much wider than trade or profession alone. It includes a business of making
investments.
102. Section 2(1) of
the Partnership Act 1890, however, appears to put a brake on what can be
regarded as a partnership by stating that jointly owned property or the fact that
the joint owners receive a share in the rents from the property does not of itself
create a partnership.
103. The question
posed by section 2(1) is the effect that it has on restricting the scope of
ventures that can constitute a partnership. The implication of Mr Webster’s submission
was that ventures with an income source of rental receipts could not in law
amount to a partnership because such income was not derived from a trade. In
this respect the decision of Mr Justice Vinelot in Griffiths v Jackson [1983] STC 184 is of assistance.
104. In the Griffiths case the issue before Mr Justice Vinelot was whether income
derived from the exploitation of proprietary interests in land constituted income
from a trade as defined by the Taxes Act. Although the decision was not
concerned with the interpretation of the Partnership Act, Mr Justice Vinelot
made some telling observations on the meaning of business:
“I may perhaps be permitted to add that I am not
without sympathy for the taxpayers. It is a peculiar feature of United Kingdom tax law that the activity of letting furnished flats or rooms, while it may
be a business and, in this case, a demanding and time-consuming business, is
not a trade. Formerly the principle operated in favour of the taxpayer whose
liability to tax on the proceeds of exploitation of his proprietary rights was
exhausted by the Sch A assessment. Now the proceeds of letting are taxable
under Sch A and the rule operates to the disadvantage of the taxpayer; his
income is not earned income and he is not entitled to capital allowances and to
the rollover relief for capital gains tax purposes afforded to a person
carrying on a trade. The business may, as in this case, occupy much of the
taxpayer's free time or even be one which requires his whole time and
attention. The taxpayer may put as much or more work into his business as, for
instance, someone whose business consists in arranging licences to fix vending
machines on the property of others and who daily or at less frequent intervals
collects the proceeds and replenishes the machines. It is not too easy to see
why in the modern world a business consisting of the exploitation of the right
of property in land should be treated differently from a business consisting of
the exploitation of other assets. However, the principle is now too deeply
embedded in the law to be altered except by legislation”.
105. Mr Justice
Vinelot also referred to two decisions of the Court of Appeal in support of his
proposition that the letting of property was a business:
“In Fry (Inspector of Taxes) v Salisbury House
Estate Ltd the taxpayers' activities could be described as the carrying on of a
business. All the members of the court of appeal recognised that a landlord who
lets out a number of properties or parts of a property can be fairly described
as carrying on a business.
Slesser LJ pointed out ([1930] 1 KB 304 at 332, 15
TC 226 at 301):
'As it seems to me,
every landlord who lets out habitually more than one house, or part of a house,
may be said to be carrying on a business, and I would rely upon what Lord
Loreburn said in Smith v Lion Brewery Co ([1911] AC 150 at 155, 5 TC 568 at
590) ... "You cannot, by saying that a man carries on the business of
owning house property, shift the method of assessing that property for Income
Tax from Sched. A to Sched. D".'
More recently, in American Leaf Blending Co Sdn Bhd
v Director-General of Inland Revenue [1978] STC 561 at 565, [1979] AC 676 at
684 Lord Diplock said:
'On the other hand their
Lordships do not think that the dicta to be found in some of the speeches in
the Salisbury House case ([1930] AC 432 at 451, 470, 15 TC 266 at 316, 331) and
in particular those of Lord Warrington of Clyffe and Lord Macmillan on which
the Federal Court relied and which suggest that the letting of land does not
constitute a "trade", have any relevance to the question whether the
letting of land by the company in the instant case amounted to the carrying on
of a "business" within the meaning of the [Malaysian Income Tax Act
1967]. "Business" is a wider concept than "trade"; and in
the Hanover Agencies case ([1967] 1 AC 681) the Board uttered a warning against
seeking to apply these dicta outside the narrow context of British income tax
law and in particular that of Schedule D.”
106. The Tribunal draws
the following propositions from the decision in Griffiths v Jackson: confirmation that business is a wider term than trade, and that the
application of the meaning of trade within the Taxes Acts should be restricted
to those Acts. The Tribunal concludes that the definition of business in the
Partnership Act 1890 is not the same as that of trade within the Taxes Act. The
question posed by the Partnership Act is whether the activities of the Bhatti
brothers constituted a business or whether they were mere co-owners of
properties in receipt of rents. In the Tribunal’s view the key to the correct
interpretation of the restriction in section 2(1) of the 1890 Act is the use of
the phrase “of itself” which suggests that it is directed at property
holdings which are not run on commercial lines.
107. The issue of
whether the Appellant, A H Bhatti and M H Bhatti under the name of Central
Properties carried on a partnership is essentially one of fact. The Tribunal
concludes that there was a clear intention on the part of the three brothers to
operate together as a partnership under the trading name of Central Properties
with a view to gain, and that they had been so operating for a significant
number of years. There were clear agreements in place between the brothers regarding
the sharing of profits and losses. The Tribunal’s conclusion was based on the
following findings:
(1)
The income and expenditure accounts for the years ended 30 April 1992
and 30 April 1994 prepared by Mr Sidat demonstrated that the Bhatti brothers
had been trading as a partnership under the name of Melbourne Guest House &
Central Properties. The accounts also showed that the brothers had agreed to
share profits from the joint enterprise which was allocated 40 per cent each to
the Appellant and Mr A H Bhatti with 20 per cent to Mr M H Bhatti.
(2)
The three brothers, Mr I Bhatti (the Appellant), Mr M H Bhatti and Mr A
H Bhatti, had been registered with HMRC for self assessment as a partnership
under the trading name Central Properties from 24 April 1989 to 23 November
2003. The partnership returns for ending 30 April 2000 to 2002 inclusive declared
turnovers of £195,000, £149,453, and £165,032 respectively for the business.
The turnover for 30 April 2004 was £47,419. In each of the returns except the
year ended 30 April 2000 the profit/losses were shared equally between the
brothers. The profit declared for the year ended 30 April 2000 was shared
equally between the Appellant and A H Bhatti.
(3)
The brothers have consistently held themselves out to be a partnership
trading as a business under the name of Central Properties to banks and
building societies (Barclays (1993), Nationwide (1996, albeit a partnership of
A H Bhatti and M H Bhatti), Halifax (2001) and Abbey National (2002)).
(4)
The three brothers declared in a Trust Deed dated 31 May 2001 that they
were trading together as Central Properties. The brothers also stated that they
would hold the net proceeds of sale and net rents and profits until sale upon
trust for themselves as tenants in common in equal shares upon the trusts
applicable thereto as part of their subsisting partnership assets of Central
Properties.
(5)
The accounts for Central Properties from 18 December 2001 to 15 April
2004 demonstrated that the Appellant and his two brothers were in receipt of
monthly drawings of £1,666
from the business.
(6)
Mr Hughes had acted for the brothers trading as Central Properties as
their accountant since 1997. The brothers advised Mr Hughes that they operated
as a partnership, and instructed him to file partnership tax returns. Mr
Webster sought to discredit his evidence by reference to the Appellant’s claim
against Mr Hughes for professional negligence. The Tribunal considers the
alleged circumstances of the claim did not undermine Mr Hughes testimony about
what he was told by and the instructions given by the brothers.
(7)
The individual statements of Mr M L Bhatti and Mr A H Bhatti about the
existence of a partnership made respectively at the meeting on 14 March 2007
with Miss Neczypor of HMRC and in the e-mail to Mr Hughes on 8 March 2012.
108. Mr Webster’s
submission that the brothers had operated as individual landlords collecting
the rents from each of their separately owned properties was without factual
foundation. The Appellant chose not to give evidence. The documents relating
to the Nationwide mortgage upon which Mr Webster placed weight showed that A H
Bhatti and M H Bhatti were holding themselves out to be partners trading as
Central Properties albeit without the Appellant, not as individual landlords.
109. Equally the
Tribunal was unconvinced by Mr Webster’s contention that the Appellant ceased
to be a partner when the property portfolio was re-mortgaged with the
Nationwide in 1997. There was no evidence that the partnership had been
dissolved in 1997. The only reference to dissolution was a fax dated 6 January
2003 in the bundle from A H Bhatti giving notice to the Appellant and M H
Bhatti to dissolve the partnership but it appeared that the notice had not been
followed through.
110. The evidence
relied on by Mr Webster for his contention was a representation in a letter
dated 17 June 1998 from Central properties to Nationwide about the Appellant
being an employee, and correspondence with Hacker Young. The representation of
the 17 June 1998 was undermined by the wealth of evidence pointing to the
contrary. This evidence included the Central Properties correspondence since
July 1999, the self assessment and partnership tax returns, and the Trust Deed
dated 31 May 2001 in which the Appellant held himself out to be a partner in
Central Properties. The Appellant’s purported employee status was also
contradicted by his action in taking regular drawings from Central Properties
as revealed in the accounts from 18 December 2001 to 15 April 2004. The
Tribunal did not consider the Hacker Young correspondence helpful in
determining whether the Appellant was a partner. Hacker Young in its capacity
of Law of Property receivers was not interested in the affairs of partnership.
111. The Tribunal
considers the above findings met the essential requirements of a partnership
contract between the brothers as being an agreement to share profits and losses
from a joint venture. The question that remains is whether the brothers’ joint
venture was a business within the meaning of Partnership Act 1890 or simply a
situation of the brothers sharing the profits from the properties that they co-owned.
112. The history of
the brothers’ joint venture indicated that they originally built up a portfolio
of guest houses, and property and market stall lettings. The comparison of the
schedule of properties for the properties for the year ended 30 April 1992
with the schedule of those properties given as security for the Nationwide
mortgage
showed that the brothers had sold existing properties, and purchased new ones with
the effect of increasing the number of properties in the portfolio. The
activity of buying and selling properties continued after the Nationwide
mortgage with the acquisition of land and buildings at Livingstone Mills and at
Riverside Mills, and the disposal of Bankfield flats, Melbourne House,
Woodthorpe, Pendle Lodge, Oakdene and Prairy Guest House, and only came to a
halt with the appointment of the Law of Property Receivers.
113. The brothers’
rationale for their buying and selling activities was to maximise the profits
from the property portfolio and to realise new opportunities. The Appellant in
his letter about future strategy dated 19 September 2001 to his brother, A H
Bhatti, suggested selling loss making properties whilst maintaining a secure
rental income on all sites and examining opportunities for expansion possibly
in the Midlands. The strategy for Pettys
referred to the sale of James Nelsons to a house builder with different sale
values dependent upon the grant of planning permission. The plan drawn up for
HSBC
proposed the preparation of development plans for each property.
114. The activities
of Central Properties were described in the strap line to the documented faxes
as Land, Residential, Industrial, Development and Investment, which
mirrored Mr Hughes’ depiction of the brothers’ joint venture as property development
The correspondence under the heading of Central Properties from 17 June 1998 to
4 June 2001 showed that the property portfolio was being actively managed by
the brothers, which included alterations to commercial premises to meet the
requirements of prospective business tenants.
115. The Appellant
did not give evidence on the activities of Central Properties. Mr Webster
asserted that a venture which derived its income from rental receipts could not
in law amount to a partnership. Mr Webster also criticised Mr Hughes for his
inability to give a specific example of property development undertaken by the
brothers.
116. The Tribunal
finds on the above facts that the brothers were jointly engaged in the buying
and selling of properties and the management of the property portfolio with a
view to exploit rental and developmental opportunities. The brothers were not
simply holding properties and receiving the rents therefrom. The Tribunal is
satisfied that the brothers’ joint venture constituted a business within the
meaning of section 45 of the Partnership Act 1890.
117. In view of its
findings in paragraphs 111 and 116 the Tribunal is satisfied that the brothers
(the Appellant, A H Bhatti, M H Bhatti) trading as Central Properties were carrying
on a business in common with a view of profit. They constituted a partnership
within the meaning of the Partnership Act 1890.
Partnership Property?
118. Section 20(1)
defines partnership property as
“All property and rights and interests in property
originally brought into the partnership stock or acquired, whether by purchase
or otherwise, on account of the firm, or for the purposes and in the course of
the partnership business, must be held and applied by the partners exclusively
for the purposes of the partnership and in accordance with the partnership
agreement”.
119. Section 20(1)
specifies three separate criteria for determining the existence of partnership
property:
(1)
Was the property originally bought into the partnership stock?
(2)
Was it acquired by purchase or otherwise on account of the firm? The
fact that a purchase was made with partnership monies raised a rebuttal presumption
that it was made on account of the partnership.
(3)
Was it acquired for the purposes and in the course of the partnership
business? If so, it was partnership property even though the purchase money
might have been provided by one of the partners out of his own pocket.
120. The Court of
Appeal in Don King Productions inc v Warren and others [1999] 2 All ER
218 emphasised what is partnership property depends upon the intention of the
partners and their agreement:
“For the purposes of s 20 of the 1890 Act, property
which was not assignable might, nevertheless, be partnership property, and
similarly whether an asset was 'brought into the partnership stock or acquired
... on account of the firm ... or for the purposes and in the course of the
partnership business' did not depend on whether it was assignable at law. Thus,
partnership property within the meaning of the section included that to which a
partner was entitled and which all the partners expressly or by implication
agreed should, as between themselves, be treated as partnership property, and
it was immaterial, as between the partners, whether it could be assigned by the
partner in whose name it stood to the partners”.
121. The importance
of identifying the partners’ intention for determining whether property was
partnership property was also highlighted in the High Court decision of Barton
v Morris [1985] 2 All ER 1032:
“Although a joint tenancy could be severed by a
course of dealing sufficient to intimate that the interests of the joint
tenants were mutually treated as constituting a tenancy in common, the
deceased’s inclusion of the property in the accounts as a partnership asset did
not show an intention on the part of the deceased or the defendant that the
property was thenceforth to be held as tenants in common proportionate to their
cash contributions to the purchase of the property, since that would have
represented a fundamental change in the parties’ intention at the time of the
purchase, which was that there should be a joint tenancy, and there was no
evidence that either party had since changed that intention. In the
circumstances, the accounting records kept for the partnership business was
merely formalities for tax purposes and in reality did not represent the
parties’ true relationship”.
122. Mr Webster argued
that as the legal titles to the disputed properties were in the names of A H
Bhatti and M H Bhatti, and that they purchased properties with a mortgage in
their own names from the Nationwide conclusively demonstrated that the
properties were not partnership property. The Appellant had no legal or
beneficial ownership in the said properties which was confirmed by Hacker Young,
the Law of Property Receivers for the Nationwide. The Appellant also told Ms
Neczypor at a meeting on 10 September 2009 that his name was not on the deeds
for the Equinox buildings. Given those circumstances Mr Webster stated that
the Appellant was not liable to capital gains tax on the insurance pay out for
the Equinox building and the sale proceeds of the James Nelson buildings
because he was not the owner or part owner of the assets in question.
123. The picture
painted by Mr Webster, however, was a partial one and did not reveal the true
extent of the brothers’ intentions and agreement about the ownership of the
disputed properties.
124. The Tribunal
places weight on the contents of the Deed of Declaration of Trust made on the
31 May 2001 between the three brothers. In the Deed the brothers declared that
they had traded as partners and had acquired the properties which included the
Equinox building and the James Nelson buildings
as part of their partnership assets. The brothers further declared that they
would hold the respective properties as Trustees upon trust to sell the same
and that they would hold the net proceeds of sale, net rents and profits until
sale upon trust for themselves as tenants in common in equal shares upon the
trusts applicable thereto as part of their subsisting partnership assets of
Central Properties.
125. The Tribunal
considers that the terms of the Deed were unequivocal and represented an
express agreement between the brothers as to what constituted partnership property
and their respective share in the named properties, which was one third. The terms
of the Deed demonstrated that the Appellant held equitable interests in the
Equinox building and the James Nelson buildings.
126. The terms of the
Deed showed that the properties were acquired for the purposes and in the course
of the partnership business which fulfilled the requirements of section 20(1)
of the 1890 Act. In those circumstances it mattered not whether the properties
were funded by one or two of the partners. Although Messrs A H and M H Bhatti
were personally liable to pay the Nationwide mortgage on the Equinox building
and the James Nelson buildings they were entitled under the terms of Deed to
treat that expense as a partnership liability with each partner including the
Appellant paying an equal share of that debt.
127. The Appellant
did not give evidence challenging the authenticity of the Deed or the truth of
its contents. The Tribunal is satisfied that the Appellant was aware of the
Deed and understood its contents. The Deed was drafted by solicitors, Steele
& Sons, at the instructions of the brothers. The Appellant held the
original document, and signed it in the presence of witness, L A Chadwick, a
legal clerk with Steele & Son.
128. Although the
Appellant did not challenge the accuracy of the Deed, Mr Webster argued that
the Deed was of no legal effect. Mr Webster referred to the provisions of the
Law of Property Act 1925 arguing that a legal interest in land can only be
transferred by means of a conveyance or transfer. According to Mr Webster,
there was no evidence that A H Bhatti and M H Bhatti had transferred their
legal title in the properties to the partnership or that Central Properties had
acquired title to the properties by means of a transfer or conveyance.
129. The Tribunal
considers Mr Webster has misunderstood the purposes of the Law of Property Act
and the effect of section 20(1) of the 1890 Act. Essentially the 1925 Act drew
a distinction between legal estates and equitable interests in land, and
established a legal process whereby the legal estate in a property could be
transferred to a third party overreaching the equitable interests in the land.
This is best illustrated by the provisions of the Land Registration Act under
which the register records the ownership of the legal estate, not the
beneficial interests, and the Registrar is not affected with notice of a trust
unless a restriction is placed on the register. Thus there is no requirement
for an equitable interest in land to be created or transferred by means of a
transfer or conveyance. The equitable interest in partnership property arises
from the intention of the parties and may be evidenced by an express agreement
which in the case of an interest in land must be in writing if it is to be
enforceable (section 53(1) of the Law of Property Act 1925).
130. In this case the
agreement was in writing in the form of a Declaration of Trust dated 31 May
2001 and represented a binding statement by the partners who were the legal
owners of the properties that they held the legal title for the benefit of the
partners as tenants in common. Thus in relation to the disputed properties, A H
Bhatti and M H Bhatti retained the legal title but they did so for the benefit
of all three partners with the Appellant entitled to a one third share of the
proceeds of sale and the profits from the properties.
131. Mr Webster
pointed out that there was no restriction on the Register of Title for the said
properties about the Trust Deed. The fact of no restriction did not affect the
validity of the Trust. The partners were not legally required to give notice of
the Trust to the Registrar. The legal effect of no restriction is that a third
party can acquire the legal title to the properties without being affected by
the terms of the Trust Deed.
132. The fact that
the partners gave no notice of the Trust to the Registrar did not affect the
existence of the Trust. It is not for the Tribunal to speculate about the
reasons why the partners did not give notice. The reasons must be based on the
evidence. The Appellant chose not to give evidence. The same considerations
applied to Mr Webster’s question about why the existence of the Trust was not
brought to the attention of the Nationwide, the mortgagee for the properties.
As an aside, the Tribunal notes that the partners have not always observed the
niceties of mortgage requirements (see the comments of Mr Sagar, Inspector of
Taxes, on purchasing properties for business with a loan in the MIRAS scheme).
Equally the Tribunal attaches no weight to the comments of Hacker Young which
as Law of Property Receivers were only concerned with the legal title to the
properties.
133. Mr Webster’s
final argument on the Trust Deed was that the brothers had not implemented
Clause 6 of the Deed which required them to execute when called upon so to do,
any deed, charge, transfer or other document necessary to give effect to the Deed
at their own joint expense. According to Mr Webster, there was no evidence that
the partners had taken any action to transfer the equitable interest in the
properties which meant that the Deed was void because the legal title to the
properties had not been transferred to the partnership. Mr Webster has
misconstrued Clause 6. There was no requirement for the partners to transfer
the legal title to the properties in order to create the equitable interests in
the properties. The Deed declared those equitable interests. The purpose of
Clause 6 was to give effect to the Trust, for example, if the properties were
sold the relevant partners would execute the necessary transfer to realise the
proceeds which would then be shared equally between the three partners.
134. The Trust Deed,
however, was not the only evidence of the brothers’ intention to hold the
properties on trust for themselves as tenants in common in equal shares.
135. The Appellant’s
declaration dated 31 January 2005 in his 2003/04 tax return that he was
entitled to one third share of the gain from the insurance pay out on the
Equinox building corroborated the existence of an agreement between the
brothers about having shared equitable interests in the Equinox building. This
was also confirmed by the evidence that Salisbury Hamer paid the insurance
proceeds to the account of Bhatti TA Central Properties,
and that the Appellant drew from those proceeds
which contradicted his statement to Ms Neczypor that he received no monies in
relation to the Equinox building.
136. Mr Webster’s
response was that the Appellant did not have any technical knowledge and relied
on Mr Hughes’ expertise to complete the 2003/04 return. It was for the
Appellant to give this evidence not Mr Webster. The response, however, did not
explain the receipt of the proceeds by the partnership and the Appellant’s
action in drawing from those proceeds. Further, the facts of the Appellant’s
status as a partner and receiving monies from the insurance proceeds were not,
in the Tribunal’s view, difficult technical matters upon which the Appellant
was incapable of forming a view without advice. It is also significant that the
Appellant was fully aware at the time he approved the tax return that he did
not have legal title to the properties mentioned in the capital gains pages
having received legal advice
but he nevertheless signed the return which suggested that the Appellant
considered the return to be accurate.
137. There were two other
instances of where the Appellant received a share of the proceeds from the
disposal of properties to which he had no legal title. Robson Rhodes, the Law
of Property Receivers for HSBC, distributed the surplus funds from the sales of
Livingstone Mills and Riverside Mills equally between the three partners. The
Appellant gave approval to the distribution.
Although Livingstone Mills was in the joint names of the three brothers,
Riverside Mills was not, the legal title being vested in M H Bhatti alone who
was also personally liable to pay the mortgage on the property. Similarly the
Appellant received an equal share of the proceeds from the sale of the Grand
Cinema Site, the legal title of which was held by A H Bhatti and M H Bhatti,
with the Appellant receiving his share of £33,274.46 direct by cheque drawn on
the account of Inghams solicitors.
138. The copies of
the partnership accounts included in the bundle showed that the various
properties were included in the accounts. The notes to the balance sheet for
the year ended 30 April 1994 referred to Central Properties (the Equinox
building) and Markets. The balance sheet for Central Properties as at 30 April
2000 referred to Central Properties market, James Nelson and Lonsdale Street, amongst others. The notes to the accounts for the year ended 5 April 2004
referred to the disposals of 2 Lonsdale Street, 65 Scotland Road, and 2-4, 22-30 Market Street. The other accounts in the bundle related to the receiverships which
were not concerned with the partnership.
139. There was no
indication in the bundle that the accounts had been signed off by the partners,
which affected the weight to be attached to them. Nevertheless the fact that
the various properties had been included in the partnership accounts added to
the picture built by the other evidence that the said properties were part of
the partnership assets.
140. The Tribunal,
therefore, finds that
(1)
The Appellant and his brothers had expressly agreed that they would
hold the Equinox building, the James Nelson Buildings, 2,4, and 22-30 Market
Street, 65 Scotland Road and Unit 2 Lonsdale Street as Trustees upon trust to
sell the said properties upon trust for themselves as tenants in common in
equal shares.
(2)
The terms of the Trust Deed dated 31 May 2001, the Appellant’s receipt
of monies from the disposals of properties to which he had no legal title, his
declaration in 2003/04 tax return regarding the Equinox building, and various
copies of the partnership accounts confirmed the existence of the agreement.
(3)
The Equinox building, the James Nelson Buildings, 2,4, and 22-30 Market
Street, 65 Scotland Road and Unit 2 Lonsdale Street formed part of the assets
of the partnership trading as Central Properties with the partners being the
Appellant, A H Bhatti and M H Bhatti.
(4)
The Appellant held equitable interests in The Equinox building, the
James Nelson Buildings, 2,4, and 22-30 Market Street, 65 Scotland Road and Unit
2 Lonsdale Street which equated to one third share in the beneficial ownership
of the said properties.
The 2006/07 Discovery Assessment
141. HMRC has the
burden of proving that the conditions for the issue of a discovery assessment
have been met. If HMRC discharges that burden, the onus to prove on the balance
of probabilities that the assessment was excessive passes to the Appellant.
HMRC had no such obligation in respect of the 2003/04 assessment which was an
amendment to the Appellant’s self assessment return following the issue of a closure
notice. In respect of the 2003/04 assessment, the Appellant had the
responsibility of demonstrating that the assessment was excessive.
142. Under section of
29 of the Taxes Management Act 1970 which authorises the issue of a discovery
assessment, HMRC is required to establish the fact of the discovery of the
insufficiency of tax, and that one of two conditions have been met. The first
condition is that the insufficiency of tax was brought about carelessly or
deliberately by the Appellant or a person acting on his behalf (section 29(4).
The second condition is that where the period to enquire into the Appellant’s
tax return has expired, an HMRC officer could not have been reasonably expected
on the basis of the information made available to him before the expiry of the
enquiry period to be aware of the insufficiency of tax (section 29(5)).
143. The facts were
that the Appellant made no declaration of capital gains in his 2006/07 return.
HMRC made no enquiries into the return. On 13 February 2008 HMRC sent the
Appellant a nil assessment for the tax year ending 5 April 2007. In 2010 Ms
Neczypor of HMRC entered into discussions with Pierce CA Limited, Chartered
Accountants, for the Appellant’s brother, MH Bhatti, regarding the property
disposals made by Central Properties. On 13 September 2010 the Appellant phoned
Ms Neczypor to say that he had gone to Pierce CA Limited for advice, the same
as his brother. At sometime in 2010 Pierce C A Limited disclosed to HMRC the
capital gain on the disposal of the James Nelson Buildings in 2006/07 which
revealed that the Appellant’s share of the capital gain was £39,385 giving an
amount of undeclared tax of £8,879. On 18 November 2010 Ms Neczypor informed
the Appellant of the discovery and issued an assessment in the sum of £8,879.
144. Mr Webster’s
challenge to the discovery assessment was confined to representations that HMRC
has the burden of proving the assessment and that Pierce & Co had no
authority to release the details of the capital gain to HMRC. The Appellant has
not challenged the facts as set out paragraph 143 above.
145. The Tribunal
would have preferred to have had sight of the nil 2006/07 return but as the facts
as outlined by HMRC at the hearing regarding the non-declaration of the gain in
the return were not challenged by the Appellant, the Tribunal finds that there
has been a discovery of an insufficiency in tax. The Appellant did not declare
the gain in his 2006/07 tax return, and the first time that HMRC knew about the
gain was when it was revealed by Pierce & Co in 2010. This discovery was
after the expiry of the period of enquiry into the 2006/07 return, which meant
that the condition in section 29(5) had been met. The Appellant’s failure to
include the gain in his return was prima facie evidence of carelessness. The
Tribunal, however, only has to be satisfied that one of the two conditions had
been met. In those circumstances it is unnecessary for the Tribunal to
determine whether the condition in section 29(4) has also been established.
146. Mr Webster did
not advance a case on the relevance of the “unauthorised disclosure” by Pierce
and Co to the prior conditions for the issue of a discovery assessment. In any
event the Tribunal is not satisfied that the disclosure was unauthorised.
According to Ms Neczypor in her letter of 18 November 2010, the Appellant was
prepared to accept the decision she agreed with the Appellant’s brother and his
agent. That being case it was for the Appellant to give evidence to resolve
the conflict. The Appellant chose not to do so.
147. The Tribunal,
therefore, finds that the discovery assessment dated 18 November 2010 in the
sum of £8,879 satisfied the legal requirements of section 29 TMA 1970.
Decision
148. The issues in
this Appeal were whether the Appellant was liable to tax on the gains from the
partial disposal of the Equinox Building in 2003/04 and the disposal of the
James Nelson buildings in 2006/07. Once HMRC had discharged its burden of
demonstrating that the legal requirements for a discovery assessment had been
met, the Appellant had the responsibility of proving on the balance of
probabilities that he was not liable to capital gains tax. The Appellant was
ably represented by Mr Webster who presented the Tribunal with detailed and
well thought out legal representations. The Tribunal, however, found that Mr
Webster’s submissions were not supported by the evidence.
149. The Tribunal
decides that:
(1)
The discovery assessment dated 18 November 2010 in the sum of £8,879
satisfied the legal requirements of section 29 TMA 1970.
(2)
The brothers (the Appellant, A H Bhatti, M H Bhatti) trading as Central
Properties were carrying on a business in common with a view of profit. They
constituted a partnership within the meaning of the Partnership Act 1890.
(3)
The Appellant and his brothers had expressly agreed that they would
hold the Equinox building, the James Nelson Buildings, 2,4, and 22-30 Market
Street, 65 Scotland Road and Unit 2 Lonsdale Street as Trustees upon trust to
sell the said properties upon trust for themselves as tenants in common in
equal shares.
(4)
The terms of the Trust Deed dated 31 May 2001, the Appellant’s receipt
of monies from the disposals of properties to which he had no legal title, his
declaration in 2003/04 tax return regarding the Equinox building, and various
copies of the partnership accounts confirmed the existence of the agreement
that the partners were holding the properties upon the trust for themselves as
tenants in common in equal shares.
(5)
The Equinox building, the James Nelson Buildings, 2,4, and 22-30 Market
Street, 65 Scotland Road and Unit 2 Lonsdale Street formed part of the assets
of the partnership trading as Central Properties with the partners being the
Appellant, A H Bhatti and M H Bhatti.
(6)
The Appellant held equitable interests in The Equinox building, the
James Nelson Buildings, 2,4, and 22-30 Market Street, 65 Scotland Road and Unit
2 Lonsdale Street which equated to one third share in the beneficial ownership
of the said properties.
150. There was no
dispute that there had been disposals of the Equinox building, 2,4, and 22-30 Market Street, 65 Scotland Road and Unit 2 Lonsdale Street in 2003/04. The disposal
in respect of the Equinox building was a partial one and took the form of a
capital payment (insurance for destruction of the asset by fire) in accordance
with section 22 of the 1992 Act. Equally the disposal of the James Nelson
buildings in 2006/07 was not contested.
151. In view of the
Tribunal’s finding that the said properties were assets of the partnership,
trading as Central Properties, with the partners being the Appellant, A H
Bhatti and M H Bhatti, the Appellant was liable to the capital gains or entitled
to the capital losses on the disposal of the properties in accordance with his
fractional share of the assets, which was one third. The Tribunal,
therefore, dismisses the Appeal.
152. The parties
requested the Tribunal to restrict its decision to one of principle, namely,
liability. The Tribunal directs the parties to reach an agreement on the basis
of this decision in respect of the quantum of the assessments. In the absence
of an agreement, leave is given to either party to reinstate the Appeal before
the Tribunal to determine the quantum.
153. The Appellant
applied for a costs order against HMRC. The Tribunal operates effectively a no
costs regime, and can only order costs in standard cases where one party has
acted unreasonably in the conduct of the Appeal (rule 10(1)(b) of the Tribunal
Procedure Rules 2009). It is a power that should only be made exceptionally.
The Appellant’s principal justification for the costs order was that HMRC had
been negligent in making the assessments. In view of the Tribunal’s
determination, there are no grounds for making a costs order.
154. 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.
MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 19 June 2013
