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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Whines v Revenue And Customs (CAPITAL GAINS TAX - ENTREPENEURS RELIEF : INCOME TAX) [2025] UKFTT 597 (TC) (09 May 2025)
URL: http://www.bailii.org/uk/cases/UKFTT/TC/2025/TC09537.html
Cite as: [2025] UKFTT 597 (TC)

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Neutral Citation: [2025] UKFTT 597 (TC)

Case Number: TC09537

FIRST-TIER TRIBUNAL

TAX CHAMBER

Llandudno Magistrates' Court

The Court House

Conwy Road

Llandudno

 

Appeal reference: TC/2019/04485

 

CAPITAL GAINS TAX - ENTREPENEURS RELIEF - Appellant did not satisfy Condition A, because not a director for 12 months prior to disposal of a share - Appeal dismissed

 

INCOME TAX - Whether inaccuracy in a self-assessment return? - Yes; sum declared as income received subject to PAYE regime was not so received, but treated as deduction to Director's Loan Account - Whether deliberate or careless? - Deliberate  - Appeal dismissed

 

Heard on: 20 May 2025

Judgment date: 29 May 2025

 

Before

 

TRIBUNAL JUDGE CHRISTOPHER MCNALL

TRIBUNAL MEMBER KERRY PEPPERELL

 

 

Between

 

MICHAEL WHINES

Appellant

and

 

THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS

Respondents

 

Representation:

 

For the Appellant:         Mr Michael Whines appeared in person.

 

For the Respondents:    Mr Andrew Wilde, a litigator of HMRC Legal Group, Washington, Tyne and Wear

 


DECISION

Introduction and summary

1.             For the reasons which follow, we have made the following decisions:

(1)          The appeal against HMRC's decision and conclusions, made by way of a Closure Notice dated 31 July 2015, to deny Entrepreneurs' Relief against a claim made on the Appellant's Self-Assessment Tax Return for 2009/10 is dismissed (and the corresponding Revenue adjustment is upheld);

(2)          The appeal against HMRC's decision and conclusions, made by way of a Closure Notice, that an amount of £74,000 (declared on that return as having been received as employment income subject to PAYE) is dismissed (and the corresponding Revenue adjustment, treating this sum as a distribution, is upheld);

(3)          The penalty assessment, issued on 31 July 2015 under Schedule 24 of the Finance Act 2007, in relation to Item (2) is upheld, but in the amount of £5,067.70.  

2.             At the hearing, HMRC confirmed that it was no longer seeking to pursue a penalty assessment imposed in relation to the claim for Entrepreneurs' Relief, and that the same would be administratively withdrawn.

The background

3.             On 3 April 2014 Mr Whines filed a paper copy Self-Assessment tax return for the year ended 5 April 2010. He had completed that document by hand himself, and had signed to confirm that the information given on it and in supplementary pages was correct and complete to the best of his knowledge and belief.

4.             On that return, he declared a capital gain of £66,333, minus the annual exempt amount of £10,100, giving rise to a declared net capital gain of £56,233. As the computation working sheet set out, this arose from the sale, on 6 May 2009, of one share in a company called Origin System Solutions Ltd for £120,000, minus £600 costs of sale. The declared date of 6 May 2009 was a mistake for 9 May 2009.

5.             He also declared, on the "Employment" page, against "Pay from employment - the total from your P45 or P60 - the total before tax was taken off" from his employment with "Information Systems for Business Ltd" as £74,000, and declared that UK tax of £29,001 had been deducted.

6.             A 'Narrative' to that return explained that the disposal of the shareholding served to reduce the Directors Loan Account, which was said to have been zero at the point of Information System's administration, which was 13 July 2009.

7.             On 22 May 2014, HMRC's Officer Richardson, an Inspector of Taxes, opened an inquiry into the 2009/10 return.

8.             On 31 July 2015, Officer Richardson decided to refuse the claim for Entrepreneurs Relief on the basis that it was made out of time. He also decided to assess the sum of £74,000 as a distribution on the footing that Mr Whines had failed to provide any P45s or P60s, or any bank statements, showing receipt of the £74,000 (or the net figure of £44,999), leading him to form the view that this was a sum which had been written off Mr Whines' Directors' Loan Account (DLA) and not actually received as payment. He made a Revenue amendment of plus £27,779.16 to the tax return.

9.             In January 2016, he reconsidered his earlier decisions, but stood by them:

(1)          The claim to Entrepreneurs Relief was not valid not only because out of time but also because Mr Whines did not meet the statutory qualifying conditions set out in section 169 of the Taxation of Capital Gains Act 1992;

(2)          There was no evidence supportive of Mr Whines' position that the £74,000 gross (£44,999 net) had been received under the PAYE regime; and that accordingly it was to be taxed as a distribution, under section 415 of Income Tax (Trading and Other Income) Act 2005.

10.         On 10 September 2018, Mr Whines' representative wrote to HMRC making submissions  (i) that the claim to Entrepreneurs' Relief should be allowed, on the basis that Mr Whines had in his possession a bank statement for Origin showing that it made sales of £600, and therefore (on that footing) was trading; and (ii) that Mr Whines had taken the figure of £74,000 from his P60. But neither the bank statement nor the P60 referred to were attached. It was said that he had made the claim to the relief on his (then) accountant's advice, and that therefore this had not been done carelessly.

11.         On 27 June 2019, Mr Whines appealed HMRC's decisions by way of a Notice of Appeal. This was obviously very significantly late (3 years and 5 months late) and, ordinarily, applying the usual principles as set out by the Upper Tribunal in Martland, might have enjoyed very little prospect of being allowed to proceed. But HMRC, despite originally objecting to the late appeal, then decided to consent, on the basis that it wished to revise some of the sums calculated.

12.         Mr Whines subsequently had his appeal struck-out, for non-compliance with case management orders of Judge Sinfield, then the Tribunal's President; but his appeal was then reinstated (by Judge Sinfield).

Entrepreneurs' Relief

13.         It was not in dispute that the share sale was a qualifying business disposal.

14.         There are a number of statutory requirements which all need to be satisfied in order for this relief to be available. The requirements are cumulative: a failure to satisfy any one of the requirements means that the claim to the relief must fail.

15.         One such requirement is that the taxpayer must have been an officer or employee of the company for a full 12 month period prior to the disposal.

16.         The disposal took place on 9 May 2009 (and not 6 May 2009, as set out on the return: the difference in date is inconsequential to the analysis which follows). Therefore, the full 12 month period ran from 10 May 2008 to 9 May 2009.

17.         As the unchallenged Companies House return showed, Mr Whines did not become an officer of Origin Systems Solutions Ltd until he was appointed a director on 20 May 2008 - ie, 10 days after the beginning of the period, and hence 10 days short of the full 12 month period. He therefore failed to satisfy this requirement insofar as it related to his officership in the company.

18.         Nor, for the sake of completeness, was there any evidence that he had ever been an employee of Origin. Mr Whines' own self-assessment return for 2009/10 (a year beginning 6 April 2009) did not declare employment with Origin.

19.         This means that whether or not Origin was trading in the period is irrelevant.

20.         However, even if, contrary to the above, Mr Whines had satisfied the officer/employee requirement, he nonetheless had still failed to produce any evidence at all that Origin was trading in the period; and any such evidence would have been inconsistent with the dormant accounts filed with Companies House which declared that, as at 30 June 2008 (a date well within the 12 month period) the company was dormant. We reject Mr Whines' evidence to us that those accounts were produced by someone else. Those accounts were approved by the board and signed by Mr Whines on 4 February 2009, who, in doing so, acknowledged his responsibility to prepare accounts giving a true and fair view of the state of affairs of the company at the end of the relevant accounting period.

21.         That disposes of any argument that Mr Whines was entitled to Entrepreneurs Relief in relation to the share disposal. He was not.

Penalty assessment in that regard

22.         HMRC raised and pursued a penalty assessment in that regard. However, the officer who assumed conduct of the matter on behalf of HMRC in February 2023, Officer Sarah Wilson, on a reconsideration of the matter, as set out in her witness statement dated 10 October 2023, concluded that there was insufficient evidence to support a contention that Mr Whines had acted carelessly, and concluded that the incorrect claim for Entrepreneur's Relief was the result of a mistake despite taking reasonable care, and expressed the view that no penalty was due. 

23.         At the outset of the hearing, Mr Wilde helpfully confirmed that HMRC was accordingly no longer pursuing that penalty, that it was being withdrawn, and that it would be administratively vacated from HMRC's systems so that no further action would be taken in respect of it. Accordingly, we need have no further regard to it.

£74,000 p.a.y.e.-able gross salary

24.         In his oral evidence to us, Mr Whines explained that he had been in dispute with his then co-director of Integration Services, and, recognising that any cash payment to Mr Whines would have to be equalled by payment to his co-director, Mr Whines decided not to take cash but instead to reduce the balance of Mr Whines' director's loan account.

25.         But this was not the payment of a salary at all, let alone a salary from which PAYE was being deducted. In his answers to us, Mr Whines clearly showed that he knew the difference between being paid money (which receipt would have been reflected in an increased credit balance in his personal bank account; and which - as money - could have been spent on anything) and a deduction in owing money through a director's loan account.

26.         In reality, we are forced to conclude that the reason why Mr Whines never produced any evidence such as P45, P60 or bank statements showing payment to him (despite repeated assertions that the same existed and would support his position) was that there never was any such evidence. Of course, that is entirely consistent with Officer Richardson being unable to find evidence of any such payment on HMRC's systems.

Penalty assessment

27.         This gave rise to a penalty assessment which was re-calculated by HMRC, on the basis that there was an inaccuracy which was deliberate and prompted, with a Potential Lost Revenue of £8,628.07, to which a behavioural percentage (telling 0%; helping 20%; giving 10%) of 59.5% (reduced from 63%) was applied, and a reduction for default surcharge of £66.00 (reduced from £66.88) = £5,067.70.

28.         Insofar as called upon to do so, we do not adjust the percentages for telling, helping and giving. There is no arguable basis for doing so. Indeed, in the circumstances, they can be read as somewhat on the generous side to Mr Whines in circumstances where he had repeatedly asserted the existence of documents which did not exist; and had repeatedly asserted that the money had been received as PAYE-able salary, when it had not been; and he knew that it had not been.

29.         We must decide whether the inaccuracy was deliberate or careless. Schedule 24 defines a 'careless' inaccuracy as 'due to the failure by the taxpayer to take reasonable care': see Regulation 3(1)(a). 'Deliberate' is not defined, but, by necessary inference, is a level of culpability greater than that set out for 'careless'. In HMRC v Tooth [2021] UKSC 17, the Supreme Court held that, for there to be a deliberate inaccuracy in a document, there must be demonstrated an intention to mislead HMRC on the part of the taxpayer.

30.         We are satisfied that there was an intention to mislead HMRC as to Mr Whines' true financial circumstances for 2009/10. As such, we are satisfied that the inaccuracy was deliberate. As a cross-check, we are satisfied that the inaccuracy arose because of something attracting a greater degree of culpability than a failure to take reasonable care.

31.         Mr Whines was, from 6 April 2009 until its entry into administration on 13 July 2009, Information System's sole director, and therefore was in sole ultimate control of its payment and other activities. Payments being made by it were in his hands, and his hands alone.

32.         Whilst Information Systems' documents may have gone into the hands of its administrators, Mr Whines' personal documents such as his bank statements and any P45s and P60s would not have done. But nothing was ever disclosed by him.

33.         We still do not know where the figures of £74,000 or £29,001 on the 2009/10 tax return, populated by Mr Whines in April 2014, came from. Mr Whines told us that his (then) accountant had given them to him, but he could not recall when, or by what means; and there was a striking, and unexplained, absence of any corroborative or contemporary documentary evidence (eg any letters, emails, notes or accountants' working papers).

34.         Standing back, and looking at the matter in the round, we are entirely satisfied that Mr Whines knew all along that he had not received a PAYE-able salary from Information Systems, but that - as he told us - his director's loan account had been adjusted. That was not the same as gross payment, and we are satisfied that Mr Whines - as a commercially aware individual - knew this. We are satisfied that Mr Whines also knew that PAYE had not been paid; because there was no salary which would have brought the need to pay PAYE about.

The additional £9,471 Potential Lost Revenue

35.         HMRC advanced the case that the penalty should be increased from the £5,067.70 to take account of the fact that the Potential Lost Revenue was in fact £9,471 greater, because inclusion of the £74,000 and £29,001 on his tax return had led Mr Whines to also claim an overpayment of income tax of £9,471.

36.         We have declined to increase the penalty. This is for a number of reasons. This part of the appeal is a penalty appeal and HMRC therefore bear the burdens of showing that the penalty as sought is due. Here, relevantly:

(1)          The sum of £9,471 was not charged by the Closure Notice;

(2)          HMRC failed to set out this sum in the Penalty Table attached to the Penalty Explanation sent in July 2015. That table contained one line, and one sum for PLR, which was £8,720.10 (later adjusted to £8,628.07);

(3)          Moreover (and as Officer Wilson fairly and sensibly accepted) there is nothing in the penalty explanation which can be read, clearly and unequivocally, as making the same point that HMRC made before us, which is that the overall effect included an inaccurate claim by Mr Whines to the repayment of overpaid income tax;

(4)          Paragraph 109 of HMRC's Statement of Case was clear that the penalty being sought related to 'the amount of £74,000 being returned as employment income subject to deductions for PAYE'.

37.         We do not consider that the attempt in Paragraph 152 of the Statement of Case to "recalculate" the penalty by adding "correction of overpayment of income tax per return" (which would have increased the PLR from about £8,500 to about £18,000; and increased the penalty accordingly) was a permissible way of dealing with this; especially in the absence of any revised or amended Closure Notice or Penalty Assessment.

38.         Insofar as we were invited to use our powers in Schedule 24 Paragraph 17(2) (powers in relation to an appeal as to the amount of a penalty) to accomplish this outcome, we decline to do so. Without expressing any concluded view on whether our power under Paragraph 17(2)(b) to "substitute for HMRC's decision another decision that HMRC had power to make" actually extends to doing what HMRC was asking us to do, the Paragraph 17(2) power is in any event discretionary ("may") and this is not an appropriate case in which to exercise that discretion.

39.         HMRC might well be right that the claim to overpaid income tax of £9,471 was indeed a (further) inaccuracy in the 2009/10 return. But, put shortly, HMRC knew everything it needed to know about this aspect of the matter in July 2015. That was when the die was cast. In the context of an appeal, itself brought several years out of time, and which has then taken almost 6 years to come to a hearing, 2015 was the time to have dealt with the point; not almost 10 years later.

Interest

40.         We have no jurisdiction over interest. But we invite HMRC to consider the following matters when it comes to their calculation of interest. Significant amounts of time after the Notice of Appeal was filed were taken up with a succession of agreed stays occasioned by Mr Whines' health (first notified to the Tribunal on 12 November 2019, and lasting until 2023) and latterly the cancellation of a hearing which was due to have taken place in Mold on 7 August 2023. Those periods of delay relate to matters which were, on any view, outside the control of Mr Whines.

Right to apply for permission to appeal

41.         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.

 

Release date: 29th MAY 2025

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