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Cite as: [2004] UKSC SPC452, [2004] UKSC SPC00452

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Guest House Propietor v HM Inspector of Taxes [2004] UKSC SPC00452 (15 December 2004)

SPC00452

PROCEDURE — postponement of hearing — taxpayer failing to comply with directions and not preparing itself for hearing — postponement refused

CORPORATION TAX — relief for compensation payment and pension contribution — no evidence of payment within relevant year of account — compensation payment gratuitous — relief correctly refused — appeal dismissed

THE SPECIAL COMMISSIONERS

RELKOBROOK LIMITED Appellant

- and -

LAURA MAPSTONE (HM Inspector of Taxes) Respondent

Special Commissioner: Colin Bishopp

Sitting in public in Manchester on 3 December 2004

Nathan Banks, counsel, instructed by Ford & Warren Solicitors for the Appellant

John Cormack of the Northern England Regional Appeals Unit for the Respondent

DECISION

Relkobrook Limited challenges the refusal of the inspector to allow, in Relkobrook's corporation tax assessment for the year of account ended 31 May 1995, two payments which, the taxpayer company contends, it incurred in that year. One, it says, was of £30,000 paid to a director as compensation for loss of office; and the other, a payment of £160,000, was made for the benefit of the same director's pension fund. A further issue was whether, as the taxpayer requested, I should postpone the hearing.

The taxpayer was represented before me by Nathan Banks of counsel, instructed by Ford & Warren, solicitors in Leeds. So far as I am aware, that firm has hitherto played no part in the appeal which had been conducted on the taxpayer's behalf by Webster & Co, a firm of accountants, whose principal is Mr Phillip Webster. The inspector was represented by John Cormack of the Revenue's Northern Regional Appeals Unit, who provided me with a bundle of documents and authorities, included within which was a draft agreed statement of facts.

Mr Banks was instructed to deal only with the postponement application; once I had determined that issue against the taxpayer, he took no further active part in the proceedings although he did remain in order to make a note.

The postponement application

Webster & Co submitted the taxpayer's accounts for the year ended 31 May 1995 to its local Inland Revenue office on 26 August 1996. The accounts showed a loss for corporation tax purposes of £262,519. After somewhat protracted correspondence, the inspector issued an estimated corporation tax assessment for the year based on profits of £326,790. The difference between the claimed loss and the assessed profit is accounted for in part by the two payments to which I have referred and in part by the taxpayer's claim that it is entitled to rollover relief in respect of a large capital gain which it had made during the year. The claim for rollover relief is the subject of a separate dispute, which is not now before me. Shortly put, the inspector's case is that neither the compensation payment of £30,000 nor the pension contribution of £160,000 was paid in the relevant year (although a pension contribution was eventually paid, the amount was only £100,000 and the payment was made in the taxpayer's year of account to 31 May 1997); and, even if it was paid in the relevant year, the compensation payment does not attract relief.

As I shall later develop, the issues are essentially simple. Although Webster & Co appealed, on the taxpayer's behalf, in August 1998, against the inspector's determination earlier that month, that the trade losses for the year to 31 May 1995 were nil, and again in November 1999 against the assessment, it was not until 2003 that the appeal was referred to the Special Commissioners. I do not know the cause of that lengthy interval and in particular do not know whether either party, or both, is to blame for it. I treat that period of delay as neutral, though I do bear in mind that Webster & Co did not submit some of the evidence on which they claim to rely until after the appeal had been brought.

The appeal proceeded to a directions hearing on 17 March 2004, when both Mr Webster and Mr Cormack appeared. These directions, made in accordance with the current practice, provided for the agreement of a statement of facts, the preparation of bundles of documents and authorities, the exchange of proofs of evidence and the exchange of skeleton arguments. The inspector has complied with those directions even if, in some respects, a little late. Mr Cormack explained that lateness, in my view with ample justification, by the fact that Webster & Co, on behalf of the taxpayer, have not complied with the directions in any particular. It was apparent to me, not merely from what Mr Cormack told me, but also from the correspondence and other documentation before me, that Webster & Co had made no effort to respond to Mr Cormack's request that they agree a statement of facts, had similarly failed to contribute to the compilation of a joint bundle of documents, had submitted no authorities or skeleton argument and had put forward no proofs of evidence even though, as Webster & Co's recent correspondence indicates, it was the taxpayer's intention to call as many as six witnesses.

Promptly after the directions were made in March 2004, Webster & Co wrote to the Clerk to the Special Commissioners indicating that they would not be ready for a hearing before September 2004. That indication was heeded and Webster & Co were asked for dates inconvenient to them in September and October 2004. Despite two reminders, the second indicating that a hearing was by then likely to be fixed in November, and that in the absence of a reply, a date would be fixed without further reference to them, Webster & Co have at no time indicated any dates on which a hearing would be inconvenient. On 27 October 2004, the Clerk notified a hearing date of 3 December 2004. That notification did provoke a response from Mr Webster in the shape of a letter of 1 November 2004 the text of which, so far as material, reads as follows:

"We can inform you that we have had meetings with Legal Representatives on behalf of Relkobrook Limited and ourselves but we do not yet have the outcome nor the advice nor have we instructed finally anyone to represent the company at the appeal. Therefore it is highly unlikely that we will be ready to proceed on the 3^rd December 2004 to a full hearing.

Please therefore confirm that this matter has been removed from the list of the 3^rd December.

It would also be appreciated if you could advise as to whom will be the chairman of the Special Commissioners on the day of the hearing with Relkobrook Limited in Manchester. It may be that we elect another venue dependant on whom the chairman will be on the day."

That letter reveals ignorance of the procedure before the courts and tribunals of this country. Directions, designed to lead to timely hearing of the appeal, had been made in March 2004. The letter demonstrates a failure to comply, or even to begin to comply, with the directions. I refused a postponement on the strength of that letter since, as it seemed to me, any lack of readiness on the taxpayer's part was attributable to Webster & Co's failure to comply with the directions and, even then, it would not have been impossible to prepare a case for presentation on 3 December 2004. My refusal of a postponement led to further correspondence and telephone conversations between Mr Webster and the Clerk and then to a further letter of 26 November 2004, repeating the request for a postponement on the following grounds:

"1. It is our considered opinion that we have complied with the Directions of the Special Commissioners and have prepared for the hearing with all due diligence.

2. The listing officers have been kept fully informed of dates when it would not be convenient for a hearing.

3. Mr Scott's wife has been seriously ill over the past year after contracting multiple sclerosis. Due to domestic commitments he has been unable to attend to his affairs in an expeditious manner. [Mr Scott is the director to whom and for whose benefit the disputed payments were allegedly made.]

4. Notice of the proposed meeting was only received by us on 29 October 2004 which was insufficient.

5. It is anticipated that there will be six witnesses in support of the appellant and it has not been possible for them all to be given sufficient notice.

6. It would not prejudice either party for this matter to be re-listed for either January of February of next year after agreeing dates to avoid after all parties have been consulted."

That application was not immediately referred to me, but to one of my colleagues, who refused it. However, had it been referred to me, I too would have refused it. As I have already indicated, the assertions made at paragraphs (1) and (2) are manifestly incorrect; and there is within the bundle available to me another letter from Webster & Co of 31 October 2001 in which they refer to Mrs Scott's serious illness, using it then as an excuse for delay. In my opinion, about five weeks' notice is quite adequate. If it was intended to call six witnesses, their proofs of evidence should have been submitted long ago but none had been submitted. The assertion that there was insufficient notice to make the witnesses available (when the opportunity to provide inconvenient dates had been ignored) was unconvincing; and there were no good grounds for removing this case from the list, when it was too late to list any other case in its place. I remain of the view that any want of readiness was due to the taxpayer's or Mr Webster's inactivity.

There then followed a further application for postponement on the grounds that the Inland Revenue had only just provided the bundle of documents (which, as I observe, is almost entirely composed of correspondence between the parties and other documents which are, or have been, in Webster & Co's possession), coupled with the indication that solicitors had been instructed to seek an injunction. The injunction did not materialise and the hearing began on 3 December 2004.

Mr Banks repeated the application for a postponement, but candidly said he could add nothing to what Webster & Co had already said. He apologised for the tone of Mr Webster's letters, as well he might since they are arrogant, minatory and offensive. Nothing Mr Banks was able to say suggested to me that there were grounds for revising the view to which I had previously come, that the taxpayer was unprepared for the hearing for no other reason than that it had failed to comply with the directions which had been made, and to prepare its case in the manner in which any litigant, genuinely seeking to resolve a dispute, would have adopted. I entirely accept, as Mr Webster has stated in one of his letters, that a litigant is entitled to be legally represented, but the right is to be exercised with reasonable expedition, and no-one is entitled, as Mr Webster's letter of 1 November suggests, to a hearing at a time and before a tribunal of his own choosing, without regard to the convenience of others.

The application for a postponement was entirely without merit and I refused it.

The pension contribution

The only evidence that the pension contribution of £160,000 was paid in the year to 31 May 1995 is to be found in the taxpayer's trading and profit and loss account for that year. The correspondence showed that the inspector, entirely reasonably in my view, asked for some independent evidence that the payment had been made. Some evidence was produced of payments, amounting in the aggregate to £349,885 and made in May 1995. The evidence showed, however, that these payments were not made into a pension fund but into short term accounts, to remain there while the taxpayer looked for an investment which would attract rollover relief. The only third party evidence of a payment into a pension fund which the taxpayer has produced consists of a letter from Scottish Amicable of 25 February 2000 indicating that a single premium of £100,000 was paid into the taxpayer's retirement benefit scheme in October 1996. Section 592 of the Income and Corporation Taxes Act 1998, as amended, provides for relief in respect of payments made by employers to exempt approved schemes (which, as I understand the matter, the fund maintained by the taxpayer with Scottish Amicable is) but sub-s (4) imposes a restriction in the following terms:

"(4) Any sum paid by an employer by way of contribution under the scheme shall, for the purposes of Case I or II of Schedule D and of sections 75 and 76, be allowed to be deducted as an expense, or expense of management, incurred in the chargeable period in which the sum is paid but no other sum shall for those purposes be allowed to be deducted as an expense, or expense of management, in respect of the making, or any provision for the making, of any contributions under the scheme."

It follows that the payment can rank for relief only in the year of accounting in which it is actually paid; it is not sufficient, as the taxpayer appears to have done, to make a reserve for a future anticipated payment. Since the taxpayer appears to be unable to produce any evidence that it actually made a payment of £160,000 (or indeed any sum) in the year to 31 May 1995, it seems to me an inescapable conclusion that no such payment was made and that the inspector was right to refuse the claimed relief.

The compensation payment

As I have indicated, the inspector's first point is that there is, again, no evidence that the payment was actually made. She asked for production of the taxpayer's and the director's bank statements, confirming respectively payment and receipt, but the correspondence again suggests that the request has been ignored. For reasons similar to those that I have already given in respect of the pension contribution, I am satisfied that the conclusion that the payment was not made is a reasonable one.

The inspector's subsidiary reason for refusing the relief is that the payment, even if made, did not qualify for relief. It is apparent from what has been said by Mr Webster on behalf of the company, in the correspondence, that during the course of the year, it disposed of part of its business to another company; it was that disposal which gave rise to the capital gain which I have mentioned. The business was that of the distribution of a free newspaper. The director concerned, Mr Scott, did not lose his office of director but ceased to be, as Mr Webster styled him, the "managing director" of the newspaper. Mr Cormack argued that to qualify for relief in the hands of the taxpayer the payment must, like any other, have been made for the purposes of carrying on the taxpayer's trade and not, as was the case here, as a consequence of its ceasing to carry on that trade: see Commissioners of Inland Revenue v The Anglo Brewing Co Limited (1925) 12 TC 803 and Godden (Inspector of Taxes) v A Wilson's Stores (Holdings) Limited (1961) 40 TC 161. In each of those cases, a compensation payment was made to an employee upon the disposal by the employer of its business and in each case relief was refused on the ground that payment was not made for the purpose of carrying on the business. That refusal was upheld by the High Court and the Court of Appeal respectively. Those cases are not, however, the last word on the subject which is to be found, I think, in the decision of the Privy Council in Commissioners of Inland Revenue v Cosmotron Manufacturing Co Ltd [1997] STC 1134 where the distinction was drawn between a payment made pursuant to a contractual obligation which gave rise to a contingent obligation, and a gratuitous payment. In Cosmotron, the taxpayer was required to make redundancy payments to its former employees when it closed its business. The Privy Council accepted that the contingent liability had arisen as a component cost of the employment of its staff, while the business was actively pursued, and the cost was thus incurred in the course of earning profits. Godden's case was considered to have gone too far; but it is clear from the judgment in Cosmotron that a gratuitous payment made on the cessation of business would not qualify for relief. The evidence available to me shows clearly the payment in this case was gratuitous. I am accordingly satisfied that the inspector was right to disallow the claim for relief on this ground as well.

This appeal is, therefore, dismissed.

COLIN BISHOPP

SPECIAL COMMISSIONER
Release Date: 15 December 2004

SC/3029/2003