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Special Commissioners' Decisions - Allison Plager reports some recent Special Commissioners' cases.

20 December 2000 / Allison Plager
Issue: 3788 / Categories:
Special Commissioners' Decisions

Allison Plager reports some recent Special Commissioners' cases.

Who pays the tax?
Special Commissioners' Decisions

Allison Plager reports some recent Special Commissioners' cases.

Who pays the tax?
An employer, referred to in an anonymised decision as 'Group', was established by 'Mr Jones' in 1983. During the next few years he recruited the four appellants. He was responsible for all decisions regarding remuneration. In 1987 Group sold 50 per cent of its shares to ABC and in 1989 it became Plc, with Mr Jones described as chairman and chief executive. At the time of the sale of shares, he was in discussion with the four appellants about bonuses to be paid to them. Bonuses were eventually paid as units in approved unit trusts on the grounds that this would provide the business with a National Insurance saving. The units were transferred to the appellants in 1989 and 1990, with the appellants believing that the amounts were net of pay-as-you-earn, although in fact no tax was paid in their respect by the company, it reporting the bonuses as benefits and any tax due to be paid by the recipient.

The issue before the Special Commissioner was whether or not the company should have deducted income tax. The appellants, the recipients of the bonuses, were appealing against assessments made under Schedule E. The Revenue was taking the highly unusual stance (because it suited it better) that the bonuses were benefits in kind and no deduction of pay-as-you-earn was appropriate.

First, the Commissioner considered whether decisions made by Mr Jones were binding on Group and Plc. From the evidence, the board of Plc voted the bonuses, although it appeared that it was effectively Mr Jones' decision as to who was paid what amount. The Commissioner decided that the boards of Group and Plc allowed Mr Jones to undertake negotiations and correspondence on all matters relating to remuneration and recruitment, and this meant that he had authority to enter into agreements regarding remuneration. Furthermore, the appellants felt this to be the case. The Commissioner thought it significant that the board of Plc had to ratify any agreements, but decided that Mr Jones had ostensible authority to bind Group and Plc.

Then the Commissioner had to establish if the evidence showed that each appellant had a pre-existing entitlement to money or money's worth, before the Group became Plc. The Commissioner decided that on the specific facts of the case, each of the appellants did have a pre-existing entitlement to be paid a bonus. Some inferences had to be drawn from all the facts and the wording of certain memoranda, but the Commissioner accepted that each appellant considered that a prior commitment had been made to pay a bonus and it was only later that the company decided to pay it in unit trusts rather than cash.

These conclusions meant that Plc should have deducted tax under section 203, Taxes Act 1988 and the 1973 Regulations before providing the units to the appellants.

The appeal was allowed. The Commissioners noted that the appellants and the Revenue had requested a decision in principle only, and that the assessable amounts had still to be agreed.
(Michael Black (1) Stephen Brown (2) Gregory Green (3) Malcolm White (4) (SpC 260).)

Meaning of losses
The appellant was an investment company and a member of a group for corporation tax group relief purposes. In its accounting period ended 30 September 1994, the company made profits of £300,000 and had charges on income of £48,644,400. In the same period, it realised chargeable gains of £6,040,017. There were also allowable capital losses brought forward amounting to £60,583,017. The company considered that the amount available for surrender by way of group relief was £48,344,400 (i.e. charges on income less profits), and not £42,304,116 as contended by the Revenue (i.e. less the chargeable gains). The company wanted the gains to be offset by the allowable capital losses brought forward from previous accounting periods.

The relevant legislation was contained in section 403(7) and (8), Taxes Act 1988. The Commissioners began their decision by considering the meaning of the word 'profits' and whether or not it included chargeable gains without any deduction of allowable losses. The Commissioners agreed with the Revenue that profits meant income and chargeable gains as in sections 6(4)(a) and 9(3), Taxes Act 1988, but said that this did not explain how chargeable gains were to be calculated. Section 8(1), Taxation of Chargeable Gains Act 1992 states that the amount of chargeable gains to be included in a company's profits is the total amount after deducting allowable losses both from the relevant period and previous period. This led the Commissioners to conclude that the word 'profits' meant income and the net amount of chargeable gains after deduction of allowable losses, as contended by the company. Decisions in Owten Fens Properties Ltd v Redden 58 TC 218, Tod v South Essex Motors (Basildon) Ltd 60 TC 598 and Jones v Lincoln-Lewis & Others 64 TC 112 broadly supported
this conclusion.

The Commissioners then had to consider if the same argument applied to trading losses, capital allowances and management expenses. They concluded, after considering sections 393(1) and 75(3), Taxes Act 1988, that in computing profits, it is net trading income after deduction of carried forward trading losses which should be brought into account, but that excess management expenses have to be deducted from total profits. However, they noted that section 403(8) specified that there should be no deduction for 'losses or allowances' or brought forward management expenses of preceding periods.

It was therefore necessary to examine the meaning of the words 'losses or allowances' in the context of section 403 as a whole, and concluded that losses meant trading losses and allowances meant capital allowances. If Parliament had intended that the same words repeated throughout the section were to have different meanings, that would have been made clear.

Overall, the Commissioners concluded that the Taxes Act uses the word 'losses' to mean trading losses, and 'allowable losses' to mean capital losses which can be deducted from capital gains. If section 403(8) had referred to 'any losses', then the Commissioners could have been persuaded that this included allowable losses. However, the section referred to 'losses or allowances' within the context of a whole section where those words meant trading losses and capital allowances.

Words in the legislation should be given their normal and natural meaning within the context they appeared, with nothing read into them or implied.
The Commissioners allowed the appeal, ruling that in determining the company's profits for the purposes of section 403(7), the result of section 403(8) was that the amount to be included in profits in respect of chargeable gains was nil, i.e., the net amount of realised chargeable gain less the allowable losses brought forward.
(MEPC Holdings Ltd (SpC 256).)

Confused accounting
In a recent case heard by the Special Commissioners, the facts in relation to three separate assessments were effectively the same, and it was agreed to treat the facts in one as those in the others. The issue before the commissioners was whether the appellants had made good to the company of which they were directors, the tax due under pay-as-you-earn in respect of bonuses paid in the form of tradeable assets.

The facts in brief were that in order to avoid paying National Insurance contributions on bonus payments to the three appellants, the company resolved at a meeting of the directors to purchase 782.526 ounces of rhodium metal. Ownership of the metal was duly awarded in September 1995 to the three appellants as a bonus for the year ended 31 December 1994. The appellants immediately instructed the sale of the metal, and on 26 September 1995, the proceeds from the sale were paid to the appellants. The proceeds were then credited to the company's current account, and receipt of the sum entered in the company books by way of debit to the bank account and credit to the directors' loan accounts.

The appellants each intended that the company would pay the pay-as-you-earn tax due on the bonuses, and had been wrongly advised that the tax was due in April 1996. Ultimately, the due tax was indeed paid in April 1996 by the appellants sending company cheques to the Revenue.

The appellant contended that when the proceeds of the metal sale became available, it was his understanding that the pay-as-you-earn would be paid when it became due, and the balance would be transferred to his account. The full amount was incorrectly paid to his account, but he made good the tax due within 30 days of the payment of the metal.

In the event, the company treated the payment incorrectly, but this did not mean that the appellant should not be treated as making good the tax.

The Revenue said that it was the appellant and not the company who was entitled to the proceeds of the sale, and that by crediting the proceeds of the sale to the appellant's loan account in September, the company did make payment of the full amount to the appellant. As no deduction was made from the appellant's loan account in respect of the tax due until six months later, the appellant did not make good the tax to the company within 30 days of the date of the payment. Thus tax was due under Schedule E for 1995-96 in terms of section 144A(1).

The commissioners said that the appellant's evidence was reliable and credible. The effect was that the proceeds had been incorrectly treated by the company. The matter was complicated and unclear, but the commissioners accepted that had the appellant known that the company should have paid tax in the October after the payment was made, this would have been done. It was, however, known that the money sitting in the directors' loan accounts was that of the company, pending payment of tax incorrectly thought to be due in April 1996. Thus the appellants did make good the tax due in terms of section 144A(1)(c), and the assessments should be reduced by the appropriate amounts.

The commissioners further commented that the entire event happened because of inaccurate accounting and inappropriate advice. Although the full facts had eventually surfaced, the Revenue was entitled to rely upon the audited accounts signed by the appellants, and so costs should be borne by each party.

(Kenneth S Ferguson, Thomas H Ferguson, David H Ferguson (SpC 266).)

Issue: 3788 / Categories:
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