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Cite as: [2004] UKSC SPC00437, [2004] UKSC SPC437

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O'Sullivan v HM Inspector of Taxes [2004] UKSC SPC00437 (25 October 2004)

SPC00437

Capital gains tax – exemptions and reliefs – appropriate level of taper relief on sale of asset – Taxation of Chargeable Gains Act 1992 s 2A

Income tax – self-assessment – whether agreement to amendment of self-assessment

THE SPECIAL COMMISSIONERS

EILEEN M O'SULLIVAN Appellant

- and -

D PHILIP

(HM INSPECTOR OF TAXES) Respondent

Special Commissioner: Dr David Williams

Sitting in London on 27 September 2004 in public

Mr Hennessy Thompson, H A S Thompson & Co Accountants, for the Appellant

Ms J Kennerly, HM Inspector of Taxes, Northern England Regional Appeals Unit, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

This is an appeal against an amendment made by the respondent inspector (the inspector) to an amendment made by the appellant taxpayer (the taxpayer) to the taxpayer's self-assessment tax return for the year ended 5 April 2000. The further amendment was made by the inspector following closure of an enquiry into the taxpayer's amendment. The decision letter was sent to the taxpayer on 8 September 2003. The effect of the amendment by the inspector was to cancel out the effect of the amendment by the taxpayer. The issue underlying both amendments was the proper rate of tax to be applied to a capital gain realised by the taxpayer in that year.

The appeal raises both an issue of substance and an issue of procedure. It was argued for the taxpayer that it was not open to the inspector to conduct the enquiry in the particular circumstances of the case as the amendment made by the taxpayer was confirmation of an agreement by both parties and not a unilateral action. The Revenue did not accept this. It was further argued that the original amendment was correct in law as a proper self-assessment of the tax due by reason of the gain, and that the amendment made by the respondent inspector was not justified in law. This also was contested.

The facts

In her return for the year 1999-2000 the taxpayer declared total chargeable gains exceeding £7,100. This was caused by the sale on 21 May 1999 of her single share in a close company generating net proceeds of sale of £1,229,790. The share had originally been purchased for £1. The net gain on sale was £1,229,788.58 after relief. To this a taper rate of 85% (that is, a reduction of 15%) was applied, showing a taxable gain of £1,045,320.29. This figure was entered into the appropriate boxes in the self-assessment return, and the appropriate amount of tax shown due. That return was recorded as received on 31 January 2001.

On 9 October 2001, after exchanges which I must consider further, the taxpayer submitted an amendment reducing the tax due. The basis for the reduction was the assertion that the rate of relief for the capital gain should have been stated as 75% not 15%, and that accordingly the amount of tax due was significantly overstated.

The Revenue gave effect to the amendment. The alleged sum overpaid in tax was not repaid at that time as the appellant did not amend the statement in her return that she was not claiming a repayment. On 11 June 2002 the inspector gave the taxpayer written notice that there was to be an enquiry into the amendment. No full reply was received from the taxpayer or those advising her save for an objection that the enquiry was out of time. On 8 October 2002 the inspector gave the taxpayer formal notice under section 19A of the Taxes Management Act 1970. This led eventually to the letter of closure and amendment now under appeal.

One stage of the correspondence can be dealt with briefly. On 20 July 2001, ahead of the amendment made by the taxpayer, her accountants purported to lodge an appeal on her behalf against her self-assessment return and to ask for a postponement of tax. This received a reply from a Revenue Officer dated 20 August 2001 indicating that the officer was "not sure exactly what you require". That is not surprising. There can be no appeal by a taxpayer against the self-assessment he or she has made. The only available course of action is an amendment, as the officer pointed out. There cannot be an appeal at that stage, nor therefore any request for repayment.

The accountants by reply indicated they wished to make an amendment for their client. But the letter (of 21 August 2001) indicating that "we wish to amend the 1999/2000 and reduce the payment on account" did not detail the amendment. The amendment was made some weeks later, but the course of action between that letter and the amendment gave rise to one of the grounds of appeal.

Grounds of appeal

On behalf of the taxpayer, Mr Thompson put forward three separate arguments against the action of the inspector:

(a) the amendment made by the inspector was wrong in fact and law;

(b) the enquiry was time barred;

(c) there exists an agreement between the parties to amend and the amendment was a joint amendment by both parties.

A separate point was also raised about abuse of process, but - whether or not there is substance in the point - that issue in my view does not form any part of this appeal.

Was the enquiry time-barred?

It was not. The return was made on 31 January 2001. The taxpayer's amendment was made on 9 October 2001, the day the accountants asked for it. That amendment was made in accordance with section 9ZA of the Taxes Management Act 1970.

Under section 9A of that Act, an officer of the Board may enquire into a return within the time allowed by section 9A(2): Section 9A(2)(c) provides that the time allowed is:

If the return is amended under section 9ZA of the Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made.

As the notice of enquiry was given within a year of the date of amendment, it was clearly in time. The enquiry was specifically into the amendment, and did not stray beyond it, so the time limit applying to the original return is irrelevant.

Was the Revenue's amendment wrong in fact or law?

The dispute was about the application of section 2A of the Taxation of Chargeable Gains Act 1992 (taper relief) to an asset held for some time before the section came into effect (5 April 1998). Sections 1 and 2 of that Act impose a charge to capital gains tax in a year on the net gain from disposals of assets after deducting losses. Section 2A applies to reduce that charge to tax on business assets as follows:

2A Taper relief

(1) This section applies where, for any year of assessment-

(a) there is, in any person's case, an excess of the total amount referred to in subsection (2) of section 2 over the amounts falling to be deducted from that amount in accordance with that subsection; and

(b) the excess is or includes an amount representing the whole or a part of any chargeable gain that is eligible for taper relief.

(2) The amount on which capital gains tax is taken to be charged by virtue of section 2(2) shall be reduced to the amount computed by-

(a) applying taper relief to so much of every chargeable gain eligible for that relief as is represented in the excess;

(b) aggregating the results; and

(c) adding to the aggregate of the results so much of every chargeable gain not eligible for taper relief as is represented in the excess.

(3) Subject to the following provisions of this Act, a chargeable gain is eligible for taper relief if-

(a) it is a gain on the disposal of a business asset with a qualifying holding period of at least one year; or

(b) …

(4) Where taper relief falls to be applied to the whole or any part of a gain on the disposal of a business … asset, that relief shall be applied by multiplying the amount of that gain or part of a gain by the percentage given by the table in subsection (5) below for the number of whole years in the qualifying holding period of that asset.

(5) That table is as follows-

Gains on disposals of business assets

Number of whole years Percentage of gain chargeable in qualifying holding period

1 92.5

2 85

10 or more 25

(6) The extent to which the whole or any part of a gain on the disposal of a business … asset is to be treated as represented in the excess mentioned in subsection (1) above shall be determined by treating deductions made in accordance with section 2(2)(a) and (b) as set against chargeable gains in such order as results in the largest reduction under this section of the amount charged to capital gains tax under section 2.

(7) Schedule A1 shall have effect for the purposes of this section.

(8) Subject to paragraph 2(4) of that Schedule … references in this section to the qualifying holding period of an asset are references –

(a) except in the case of an asset falling within subsection (9) below, to the period after 5^th April 1998 for which that asset had been held at the time of its disposal; and

(b) in the case of an asset falling within that subsection, to the period mentioned in paragraph (a) above plus one year.

(9) An asset falls within this subsection if-

(a) the time which, for the purposes of paragraph 2 of Schedule A1, the time when the asset is taken to have been acquired by the person making the disposal is a time before 17^th March 1998, and

(b) there is no period which in the case of that asset is a period by virtue of paragraph 11 or 12 of that Schedule does not count for the purposes of taper relief.

I do not need to refer specifically to any of the provisions in Schedule A1 because it is not in dispute that the asset in question was acquired a considerable time before 9 April 1998 or that any of the holding period did not count for this purpose. The asset therefore is one falling within subsection (9).

Accordingly subsection (8)(b) applies, and a year is to be added to the holding period.

The holding period is, under the clear terms of subsection (8) "the period after 5^th April 1998 for which the asset had been held at the time of its disposal plus one year. The disposal took place on 21 May 1999. Only whole years count (subsection (5), so the holding period under subsection (8)(b) is two years, as the inspector contends.

The taxpayer strongly disputes this, but I can see no arguable ground in law for doing so. The dispute appears to arise because the previous relief for a long holding by way of indexed relief. But on the particular facts of this case that was of almost no value. That is because the share was originally acquired for £1. As a consequence, the full relief by way of indexing between purchase and 4 April 1998 was 43p only (although it sounds somewhat larger if stated more formally as 43% of the original purchase price). That adjustment had been made by the inspector in the official amendment but, when the sums concerned are rounded, it disappears from view. The case illustrates the sharp distinction in result that can occur between the provision of relief by tapering the gain from a disposal as against provision by indexing the original acquisition cost, but it does not justify the taxpayer's argument that I should read section 2A in some way to give it retrospective effect so that the tapering applies before 17 March 1988 and therefore at the same time as the indexing.

There is therefore no basis for applying section 2A to reduce the amount of gain chargeable to 25% , as in the taxpayer's amendment to the return, rather than 85% , as in the inspector's amendment to the amended return. The notice of closure of the enquiry was given on 8 September 2003. The power to close the enquiry and amend the return in the light of that enquiry is in section 28A of the Taxes Management Act 1970. The effect of the amendment was to restore the calculation of the capital gain to that originally returned before the taxpayer's amendment, that is, with the 85% taper rate. That is correct in law.

Was the taxpayer's amendment an agreed amendment?

The taxpayer, however, argues that the inspector cannot make that second amendment because an inquiry had already taken place and the original amendment had been agreed.

In order to put this argument in its legislative context, it is necessary to note the framework in the Taxes Management Act 1970 under which individual self-assessment returns are made and amended. Section 8 of the Act imposes a duty on individual income tax payers to make returns. The framework of the Act and that section were both amended when self-assessment came into effect. A new form of section 9 was introduced into the Act to adjust the duty to make a return under section 8 to include a self-assessment by the taxpayer as defined in that section.

A self-assessment return is to be accompanied by payment of the relevant tax. If nothing else happens, the return and accompanying payment satisfy the taxpayer's obligations for the year. But both the taxpayer and the Inland Revenue may amend the return, and the Inland Revenue may also enquire into the return or any taxpayer's amendment of it.

The power under which the taxpayer may amend is section 9ZA. It is unconditional:

(1) A person may amend his return under section 8 … by notice to an officer of the Board.

That power may be used at any time within twelve months of the filing date for the return (sections 8(1A) and 9ZA(2)(3)). The taxpayer's amendment in this case was in time. As I find on the facts happened in this case, if the taxpayer properly notifies an amendment, then it must be made. If, as a consequence, tax is overpaid then the Inland Revenue must adjust that also.

The Inland Revenue may amend under two separate powers. Section 9ZB allows an officer of the Board to amend a return "so as to correct obvious errors or omissions in the return (whether errors of principle, arithmetical errors or otherwise). If, for example the figures in the return did not add up correctly, then the officer could correct them under this power. The other power of an officer is to enquire into the return or any taxpayer's amendment. That power is given by section 9A.

Section 9A, in the form that followed amendment by the Finance Act 2001 and that applied at the date of the enquiry notice in this case, provides:

9A Notice of enquiry

(1) An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention to do so ("notice of enquiry") –

(a) to the person whose return it is ("the taxpayer"),

(b) within the time allowed.

(2) The time allowed is-

(a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the filing date;

(b) if the return was delivered after the filing date, up to and including the quarter day next following the first anniversary of the day on which the return was delivered;

(c) if the return is amended under section 9ZA of this Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made.

For this purpose the quarter days are 31st January, 30th April, 31st July and 31st October.

(3) A return which has been the subject of one notice of enquiry may not be the subject of another, except one given in consequence of an amendment (or another amendment) of the return under section 9ZA of this Act.

(4) An enquiry extends to anything contained in the return, or required to be contained in the return, including any claim or election included in the return, subject to the following limitation.

(5) If the notice of enquiry is given as a result of an amendment of the return under section 9ZA of this Act-

(a) at a time when it is no longer possible to give notice of enquiry under subsection (2)(a) or (b) above, or

(b) after an enquiry into the return has been completed, the enquiry into the return is limited to matters to which the amendment relates or which are affected by the amendment.

(6) In this section "the filing date" means the day mentioned in section 8(1A) or, as the case may be, section 8A(1A) of this Act.

Notice of enquiry was given on 11 June 2002 by the inspector. This told the taxpayer that "I am writing to tell you that I am enquiring into [the] amendment." It gave the taxpayer 42 days to provide specified information. The letter was copied to the accountant.

I find that the notice was specific to the amendment. The time allowed for the enquiry under section 9A is therefore as specified by section 9A(2)(c). As I find that the notice was given less than twelve months after the day on which the amendment was made, the notice was clearly in time. I reject the contention that this was notice about the original return and therefore out of time. That cannot be maintained given the terms of the notice itself.

It was contended for the taxpayer that this was a second enquiry, and therefore one that could not be conducted by reason of section 9A(3). I also find that there is no substance to this point either. A full set of documentation has been presented to me by both parties, including the full correspondence between the parties, and internal notes and telephone records generated by each of the parties for internal use. I see nothing in any of these records that either constitutes a separate notice of enquiry under section 9A before the notice of 11 June 2002, or anything suggesting that there was such a notice issued or to be issued.

It was also contended for the taxpayer that, whether or not there had been an enquiry, the amendment made for the taxpayer was in fact an agreed amendment and therefore one into which the Inland Revenue had no cause to enquire. To substantiate this contention, the accountant took me through both the correspondence and also his own internal records leading up to the amendment being made in October 2001. He submitted that the only reasonable view that could be taken of that correspondence was that the Inland Revenue had agreed with him that the amendment was rightly made, and that accordingly it could not now contend otherwise.

The Revenue strongly rejected that interpretation of events. In the Revenue's view, all that had happened at the time was that correspondence and telephone calls took place between the accountants and the revenue officers responsible for collecting the tax and giving effect to the amendment. In support of that argument the Inland Revenue called as a witness Mrs Karen Simpson, a revenue officer based at the Inland Revenue office in Darlington that was responsible for processing tax returns and amendments to them. She gave evidence under oath, and which I fully accept, that she was the officer who had handled the amendment to the taxpayer's return and about her involvement in making the amendment for the taxpayer that led to the enquiry and this appeal.

I see no useful purpose in going in full detail in this decision, as was done at the hearing, through the precise letters sent, notes made on those letters, and telephone calls that took place. I am satisfied that I have seen all the relevant records and have heard from those actually involved on both sides. Having both heard and seen all the available evidence I find as follows. What took place was not a formal enquiry by the Inland Revenue. It was an enquiry in the widest and least formal sense of that word only in that the revenue officers handling the request for an amendment were, for whatever reason, not entirely clear what needed to be done. They sought clarification of the taxpayer's wishes. To the extent that there was an agreement, it was an agreement that they had understood the amendment and its immediate consequences in terms of tax due. The revenue officers did not use the formal terms of section 9A or any similar language in seeking that clarification. They did not consider that they were agreeing the amendment in the sense that they were settling a disagreement, and they did not have power to do that. Nor, in their view, was the amendment "agreed" in that narrow sense.

Mrs Simpson's evidence and the arguments for the Inland Revenue are also entirely consistent with the legislative framework within which the amendments and enquiry were conducted. I have noted the powers to amend above. There is no power jointly to amend. No doubt if a taxpayer made an amendment sought by the Revenue during an enquiry, that would close an enquiry in a way that would amount to an agreement. Alternatively, if there was an appeal and that was settled under the terms of section 54 of the Taxes Management Act 1970 again there would be an agreement. But either procedure requires formal steps that did not take place in this case.

My conclusion is that the amendment in October 2001 was a taxpayer's amendment made under section 9ZA of the Taxes Management Act 1970 and in no sense an amendment by the Inland Revenue or any of its officers or one to which any officer agreed in the formal sense of endorsement or settlement under the various powers in the Taxes Management Act 1970. The enquiry started in June 2002 was the only enquiry conducted under section 9A of that Act. It was conducted into the amendment, and the conclusion of the enquiry was correct in law on the facts as I find them.

I must therefore reject each of the taxpayer's arguments, and confirm the conclusion of the enquiry. In so finding, I repeat the proviso I indicated at the oral hearing. I make no finding, and intend no comment, in this decision about any issue that might be regarded as an issue of administration or maladministration. That is outside my jurisdiction.

DR DAVID WILLIAMS

SPECIAL COMMISSIONER

RELEASED: 25 October 2004

SC 3004/2004