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Special Comnmissioners - Allison Plager reports three recent Special Commissioners' cases.

01 November 2000 / Allison Plager
Issue: 3781 / Categories:
Special Commissioners' Decisions
Allison Plager reports three recent Special Commissioners' cases.
Nature of Lloyd's losses
Special Commissioners' Decisions
Allison Plager reports three recent Special Commissioners' cases.
Nature of Lloyd's losses
Jack Vernede died in March 1994. He was an underwriting member of Lloyd's, being a member of eleven syndicates. In July 1994, the executors (the appellants) of Mr Vernede's estate signed the Revenue account of inheritance tax which stated that the net value of Mr Vernede's interest in the business was £265,507. There were also underwriting losses of £301,311 for years prior to his death. Business property relief was claimed on the value of the business, and the losses were claimed as a deduction against the remainder of the estate.
It was agreed that the underwriting was a business within section 105(1)(a), Inheritance Tax Act 1984 and that business property relief was available. The matter under appeal related to the net value of the deceased's business. The appellants said that the money owing on the open account was not a liability incurred for the purposes of the business within the meaning of section 110(b), and so should not be deducted from the value of the assets used in the business, but from the value of the deceased's other estate. For the Revenue, Mr Peter Twiddy argued otherwise.
The Special Commissioner said that according to section 4, Inheritance Tax Act 1984 a valuation has to be made of the whole estate as if a transfer had taken place immediately before the death. Section 5 said that an estate is the aggregate of all the property to which the deceased was beneficially entitled, less his liabilities 'at that time'. Property was not restricted to capital, and included income accruing to the date of death. Liabilities included all debts, both capital and income accruing at the date of death. Thus, for an underwriter, it was necessary to prepare a notional account as at the time immediately before death, bringing into account assets and liabilities of the business, and any trading profits or losses.
However, for business property relief only the assets used in the business and liabilities incurred could be brought into account. The amount in dispute was £251,900 which was the excess on the deceased's estate protection plan policy. The wording of the policy led the commissioner to conclude that the sum was 'losses arising on accounts', and these were effectively trading losses.
The commissioner considered whether the amount could represent the value of trading contracts which were assets used in the business, albeit of a negative value, as claimed by the Revenue. She said the question arose as to whether individual trading contracts were assets used in business, and said that there was a difference between expenditure bringing into existence an asset for the enduring benefit of the trade and ordinary commercial contracts. In Van Den Berghs Ltd v Clark 19 TC 390 the judge distinguished some trading contracts as 'assets used in the business', but ordinary commercial contracts made in the course of carrying on business as not. In the instant appeal, the insurance contracts in respect of which no result had been notified to Mr Vernede at the date of death were ordinary commercial contracts made in the course of carrying on his business. Thus, for business property relief purposes, if they gave rise to a profit they should not be regarded as assets used in his business, and if they gave rise to a loss, they did not constitute liabilities incurred for the purposes of the business. The Special Commissioner said that ordinary liabilities incurred in the day-to-day running of a business were not liabilities to be deducted in calculating the amount on which business property relief was due; such liabilities would include unpaid rent and money owing to suppliers.
The money owning on open accounts was not therefore a liability for the purposes of the business within the meaning of section 110(b), and so the appeal was allowed.
(Michael William Hardcastle and Ruth Margaret Hardcastle (Executors of Jack Ronald Vernede deceased) (SpC 259).)
Reasonable requirements
An Inspector of Taxes' powers to call for private papers under section 19A, Taxes Management Act 1970 were in dispute in an appeal before the Special Commissioners.
The appeal concerned an accountant who was in practice on his own account. The Inspector opened an enquiry into the accountant's 1996-97 tax return and asked for a number of documents. The information was not supplied, so the Inspector wrote again, and gave notice under section 19A that the appellant had to produce certain information within 30 days. Again, the appellant did not reply, so the Inspector wrote again. The items listed by the Inspector included all the business records for the period 1 September 1994 to 31 August 1996; a profit and loss account and balance sheet for the same period; bank and building society statements for all interest-bearing accounts for the year ended 5 April 1997; dividend counterfoils for the year ended 5 April 1997; bank statements, paying-in books and cheque book counterfoils, etc. used by the appellant personally and for business for the period 1 September 1994 to 31 August 1996.
The appellant sent a certificate of deduction of income tax in respect of a business account, but the accountant appealed against the section 19 notice on the grounds that some of the items mentioned were outside the ambit of section 19A.
Firstly, the appellant said that section 19A did not apply to documents which did not exist, and which would have to be created specifically to comply with the notice. The Revenue argued that under section 19A(2)(b), it could ask for accounts to be prepared, as the subsection required the taxpayer 'to furnish the officer with such accounts or particulars as he may reasonably require' for the purposes of the enquiry into the return.
The Special Commissioner said that section 19A(2)(b) used the word 'furnish', rather than 'produce' as used in section 19A(2)(a), indicating that there was a different activity involved. She concluded that while the subsection (2)(a) was limited to existing documents, subsection (2)(b) could be used to call for a taxpayer to prepare accounts or balance sheets and furnish documents not necessarily contained in existing documents. This interpretation was also aided by the fact that the subsection was limited to 'accounts and particulars'.
The appellant argued that section 19A did not extend the requirements in section 12B relating to the records to be kept for the purposes of returns. The commissioner said, however, that there was nothing in either section which indicated that the requirements of section 19A were limited to the records mentioned in section 12B.
The commissioner then considered if it had been reasonable for the Inspector to require bank documents. After considering the decisions in R v O'Kane and Clarke, ex parte Northern Bank Ltd [1996] STC 1249 and Mother [1999] STC (SCD) 278, she concluded that although the appellant's client account was not interest bearing, it was one used by the appellant, and therefore reasonable that the Inspector required documents relating to it. Equally, it was reasonable to require the production of documents relating to his personal bank accounts.
Finally, she considered the requirement to prepare a balance sheet. She said that although a balance sheet may not have been required in respect of the return, section 19A went wider than that. The balance sheet would help the Revenue decide if the return was complete and correct, because it would indicate movements of capital assets.
The appeal was dismissed.
(Accountant (SpC 258).)
Sporting decision
The nature of payments made to sportsmen for 'image rights' was the subject of an appeal heard in April 2000 with the decision given in June. In brief, two players, Evelyn and Jocelyn, entered into service agreements with Sports Club plc. The salaries paid under the players' agreements were emoluments of employments. Both players also entered into promotional agreements with companies under which they agreed to provide promotional services to the companies. Sports Club plc entered into agreements with both companies under which the companies agreed to supply to Sports Club certain promotional services of the players in return for fees paid by Sports Club to the companies. Sports Club entered into another agreement with the company which provided the promotional services of Evelyn for the supply of consultancy services to Sports Club, for which it paid a separate fee to the company.
The issues for determination in respect of Evelyn were:
? whether the payments made by Sports Club under the promotional agreement and consultancy agreement were emoluments from Evelyn's employment and therefore chargeable under section 19;
? if not, whether the payments were benefits in kind within the meaning of section 154, and so treated as emoluments of employment;
? if the promotional agreement payments were not chargeable under either section 19 or 154, whether they were paid by Sports Club pursuant to a retirement benefits scheme.
The issues in respect of Jocelyn were similar to those in the first two points above. With regard to Sports Club the issue was if the payments were emoluments from the employments within the meaning of section 19, should Sports Club have deducted income tax from them under section 203.
The Special Commissioners considered first the section 19 aspect of the payments. They had to decide if the promotional agreements had an independent value. In practice, the commissioners said that the promotional agreements were a series of contractual obligations for the personal endorsement of products. They were genuine commercial agreements which could be enforced. Both players were established stars and could earn substantial sums from such contracts. This led the commissioners to decide that the agreements did have an independent value.
The commissioners decided that the consultancy agreement also had independent value.
The Revenue suggested that the promotional agreements were just smokescreens, allowing additional remuneration to be paid to the players, with little promotional work done for the money. The commissioners found this difficult to accept. They said that although the rights may not have been adequately exploited, the agreements were legally enforceable, and Sports Club expected to make money out of the agreement. The agreements were not therefore smokescreens.
The commissioners then considered whether the payments made under the promotional agreements were emoluments from the players' employments. They said that the promotional and consultancy agreements were contracts for full consideration and so were excluded from section 19. However, in addition, the payments were made in return for promotional rights and consultancy services, and were not in reference to the playing of games. Thus the payments were not emoluments from the players' employment. They found the decision in Pritchard v Arundale 47 TC 680 helpful in reaching their conclusion.
As the payments did not fall within section 19, then Sports did not have to deduct tax from them under section 203.
The next issue for the commissioners' consideration was whether the payments constituted benefits in kind. They said that the payments were not made by Sports Club by reason of the players' employment, but were made by reason of separate commercial contracts to provide promotional services. They did not consider any benefit was provided to either player since, in the commissioners' view, 'benefit' in section 154(2) had to exclude anything provided in return for good consideration under a separate commercial contract.
The last issue concerned Evelyn, and whether the payments were pension benefits. (Evelyn had unhelpfully described his own company formed to collect funds from promotional work as his pension fund.) The commissioners said that the payments were made not pursuant to a retirement benefits scheme as stated in section 595, but pursuant to the promotional agreement. They were not paid with a view to the provision of any relevant benefits, but to the provision of rights under the agreement.
Thus the appeals for Evelyn, Jocelyn and Sports Club all succeeded.
(Sports Club (1), Evelyn (2), Jocelyn (3) (SpC 253).)

Issue: 3781 / Categories:
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