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Special Commissioners' Decisions

08 January 2003 / Allison Plager
Issue: 3889 / Categories:

Special Commissioners' Decisions


ALLISON PLAGER reports four recent decisions: Beauty Consultants Ltd (SpC 321); Timothy John Bancroft and James William Bancroft (SpC 322); The Executors of Elsie Fanny Stedman (SpC 323); and Wildin & Co (a firm) (SpC 327).


Whose benefit?


Beauty Consultants Ltd appealed against a corporation tax assessment for the year ended 31 December 1997, claiming that certain insurance policy premiums were an allowance expense.

Special Commissioners' Decisions


ALLISON PLAGER reports four recent decisions: Beauty Consultants Ltd (SpC 321); Timothy John Bancroft and James William Bancroft (SpC 322); The Executors of Elsie Fanny Stedman (SpC 323); and Wildin & Co (a firm) (SpC 327).


Whose benefit?


Beauty Consultants Ltd appealed against a corporation tax assessment for the year ended 31 December 1997, claiming that certain insurance policy premiums were an allowance expense.


The directors of Beauty Consultants had taken out an insurance policy whereby if one them died, the survivor received the policy moneys and paid off the secured borrowings of the company. The excess of any of the money paid out would belong to the remaining director. The Special Commissioner said that he could not see any benefit to the company or its trade in paying the premiums on this policy, so they were not deductible as being wholly and exclusively for the purposes of the appellant's trade within section 74(1)(a), Taxes Act 1988. His conclusion might have been different had the policy been assigned to the company.


Two other policies were taken out by the directors in connection with the purchase of their main residence, as mortgage protection. The only connection with the company was that it had a second charge on the house, so there was again no benefit to the company or trade in paying the premiums, and the premiums could not be deductible expenses.


The final policy had been taken out by Holdings Ltd, a company owned by the directors of Beauty Consultants, but which had failed in 1994. The policy was assigned to Beauty Consultants in circumstances where the directors were to acquire shares. In the event of the death of one of the directors, the company would receive £200,000. This would benefit the company, but also the directors as it would improve the value of their shares. Thus, there was a dual purpose, and the premiums were not allowable.


The appeal was dismissed.


(Beauty Consultants Ltd (SpC 321).)




Stretching the point


The two appellants practised as solicitors in partnership and appealed against surcharges under section 59C, Taxes Management Act 1970 in respect of late paid income tax. They had posted a cheque in respect of tax due on 31 January 2000 to the Revenue on 28 February 2000. The Revenue received it the following day. It was accepted that the tax was unpaid on part of the day following the expiry of 28 days from the due date, and thus the appellants were each liable to a surcharge.


The appellants claimed reasonable excuse in that they could not make suitable arrangements with their bank. Furthermore, they believed that they had until the end of February to pay the tax, and as 2000 was a leap year, the final day for payment would be 29 February. The Revenue claimed that the appellants did not 'have a leg to stand on', as section 59C(9) states that such an excuse had to persist during the period of default, namely from 1 to 28 February, and an excuse had been put forward.


The Special Commissioner agreed with the Revenue. He said that the appellants had not read the rules properly. The Revenue's form SA324 clearly stated that payment had to reach the Revenue by 28 February, and if it did not, then a five per cent surcharge would be imposed automatically. He concluded that the appellants did not have reasonable excuse.


The appellants then argued that the Special Commissioner could interpret the legislation differently to give effect to the Human Rights Act. They said that where the legislation uses the word 'may', in that if the Commissioner finds that there is no reasonable excuse he 'may' confirm the surcharge, this meant that it was open to the Commissioner to do other things. The Commissioner disagreed saying that 'even the widest possible reading consistent with the Human Rights Act' could not result in his doing the opposite of what the legislation states.


Overall, with respect to whether the surcharge went against the human rights legislation, the Commissioner said that the penalty was not a criminal one, and did not relate to the appellants' civil rights. Article 6 of the Human Rights Convention could not therefore apply.


The appeals were dismissed and the surcharges confirmed.


(Timothy John Bancroft and James William Bancroft (SpC 322).)




Caravan appeal


The issue of business relief from inheritance tax for caravan sites has been the subject of previous appeals, for instance Weston v Commissioners of Inland Revenue [2000] STC 1064. However, a new point was raised by counsel in the instant case before the Commissioner.


The facts in brief were that the deceased had an 85 per cent holding of shares in Dunton Park Caravan Sites Ltd. The residential site consisted of 167 mobile homes, all of which were owned by the residents, rather than the company. The company arranged for the various services, e.g., sewerage, water, electricity and calor gas, to be supplied to the caravans, for which it made a charge. There were also parking spaces and garages for hire. The company took a commission of ten per cent on caravan sales, and also sold caravans.


In addition, the company ran the Dunton Park Country Club, which could be used by residents and non-residents who paid a membership fee. There was also caravan storage available for touring caravans when not in use.


A number of employees were necessary to run the company.


It was agreed that the company carried on a business, but the issue before the Commissioner was to decide if the business was one of holding or making investments. Looking first at the residential site, the Commissioner said that a considerable proportion of the site fees were used for running the site, and this pointed towards a non-investment type business.


The Revenue claimed that mobile homes parks were regarded as investments, but the Commissioner disagreed that this was so in the instant case, as the overhead expenses far exceeded the profit from the trading activities. He thought it likely that a valuer would have difficulty in valuing a company on the basis of the yield from site fees.


Taking into account all the evidence, the Commissioner said that the service element predominated, and so the company was providing services, rather than in the business of holding investments.


With regard to the provision of gas, electricity and water, the Commissioner agreed with counsel for the appellant that the business traded in these items for a profit. As to the trade in selling caravans, this was a business in itself, and the holding of land in this respect was incidental to the business.


The Commissioner concluded that while the storage business and rental income were investment activities, these were outweighed by the company's other trading activities which did constitute running a business. The appeal was allowed, and business property relief applied.


(The Executors of Elsie Fanny Stedman (SpC 323).)




Taxable release


The appellant, Wildin & Co, was a firm of chartered accountants with two partners. Readers will remember the firm from the case of Butler v Wildin [1989] STC 22. In 1984 it entered into a contract with Wildin & Co Ltd for the latter to deal with the day-to-day administration and running of the practice. The partners were also the directors and only shareholders of the company. In 1992, a winding-up order was made in respect of the company on a claim of unpaid VAT of £96,133. At this date, under the service agreement, the partnership owed the company £208,090 in respect of service charges. However, the agreement also provided that it could be unilaterally terminated by either party upon payment to the other of a sum equal to three years' service charges. Therefore the partnership claimed a set off of three years' worth of service charges amounting to £128,533. It also claimed a set off in respect of £66,000 under the director's service contract. Thus the net amount due to the company from the partnership was £13,557, which was paid to the liquidator.


However, the liquidator did not accept this payment, and after two sets of High Court proceedings, a single consent order was signed, whereby the partnership agreed to pay £120,000 to the liquidator.


The appellant's 1998-99 partnership tax return was submitted on 31 January 2000. It was subject to a Revenue enquiry. The Revenue accepted that the £120,000 was a payment on behalf of the partnership, but said that the remaining liability of the company, i.e., £208,090 - (£120,000 + £13,557) = £74,533, had been released and was taxable under section 94, Taxes Act 1988 (release of debt to be treated as trading receipt in stated circumstances).


The appellant argued that the £74,533 should be reduced by £43,574, as this had been paid to the liquidator. The Commissioner examined the evidence and agreed that the £74,533 be reduced by this amount, subject to the Inspector being able to verify the amount repaid.


(Wildin & Co (a firm) (SpC 327).)


Issue: 3889 / Categories:
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