Selection of recent Tax Tribunal Cases

Late filing tax-geared penalty due for late filing of tax return

Case details: Neal Futcher V HMRC [2022] TC08629

Mr Futcher appealed against a tax-geared penalty of £51,324.23 raised by HMRC in respect of the late filing of his 2015-16 self-assessment return. The penalty is charged where the return remains outstanding after 12 months. The return, which should have been filed by 31 January 2017, was not filed until 16 August 2019, more than two and a half years late.

HMRC considered that the behaviour of Mr Futcher that led to this failure was deliberate but not concealed. Mr Futcher argued that the late filing was not deliberate behaviour and that there were mitigating circumstances.

It was acknowledged by Mr Futcher that he did initially choose to delay the submission of his 2015-16 tax return for financial reasons, as the return showed a large tax liability which he could not afford to pay. It had been his intentions to delay submitting the return for a few months only.

However, the business began experiencing problems which took up all of his time and his health began to suffer because of this. It was contended that HMRC had not considered that mental health can amount to a reasonable excuse in appropriate circumstances.

Considering all the circumstances of the case, the Tribunal found that Mr Futcher did not have a reasonable excuse for failing to file his tax return on time since his business difficulties and mental health issues did not present themselves until after the return filing date. Accordingly, these issues did not prevent him from meeting the filing obligations.

Furthermore, whilst the Tribunal found that the HMRC decision to consider special circumstances was flawed, the Tribunal found that there were no special circumstances relevant to this appeal. The appeal was dismissed.

When did business transfer from the partnership to the limited company?

Case details: Clive Kingdon, Terry Stead & Anne Kingdon V HMRC [2022] TC08633

The business commenced trading as a Partnership in 1993 and, following advice from the then accountants Christopher Lunn & Co, a Limited Company was also set up. At some time during 2005 the business of the Partnership was transferred to the Limited Company.

This case concerns the date from which the business of the Partnership transferred to that of the Limited Company. The appellants believe the date to be either 31 March 2005 or 1 April 2005, whereas HMRC contend that the transfer took place on 2 August 2005 and that additional income tax is due from the Partnership for the 2005-06 tax year, with additional income tax and penalties being due from the appellants.

The Tribunal noted that there was little evidence available regarding the point in question, which was not aided by the fact that information held by the business’ accountant at the time had been seized by HMRC due to an investigation into the affairs of Mr Lunn of Christopher Lunn & Co in June 2010. Further, HMRC’s subsequent inordinate delay in responding to the letter sent by the then business’ new accountants, Pearlman Rose, on 2 November 2011 (which HMRC did not respond to until 1 February 2018 following a holding letter issued in 2015) only served to exacerbate the issue.

Considering all the circumstances of the case and the information and evidence, which focused primarily on details contained in the letter dated 13 July 2007 from HMRC, and letters from the appellants’ former accountant Pearlman Rose dated 30 October 2009 and 25 February 2011, the Tribunal found that HMRC had failed to discharge the burden of proof that the transfer did take place as of 2 August 2005 and concluded that the transfer took place at the end of March 2005 or 1 April 2005. The appeals were therefore allowed.

Compensation payment was taxable

Case details: Mrs A V HMRC [2022] TC08640

Mrs A appealed against a closure notice for 2018-19 tax year issued by HMRC which reduced her claim for a refund of overpaid tax from £467,683.82 to £6,136.02 with the amount under appeal being the difference between the two sums.

Under a Settlement Agreement between Mrs A, her employer and its owner, the appellant received a settlement sum in return for withdrawing her Employment Tribunal claim against the employer and its owner regarding several grievances, including sexual harassment, and also agreed to be bound by certain confidentiality and non-disclosure obligations.

The settlement sum comprised the following:

• £45,000 – the Tribunal Claim Compensation Sum as compensation for injury to feelings and aggravated damages;
• £1,055,000 – the Compensation Sum as compensation for the termination of her employment; and
• £14,083 – the Monthly Compensation Sum, a further monthly compensation sum payable for a defined period.

The employer paid the Tribunal Claim Compensation Sum free of tax, whilst the Compensation Sum was taxed as a termination payment under section 401 ITEPA 2003, and the Monthly Compensation Sum was subject to PAYE.

The sum in dispute was the treatment of the Compensation Sum, which Mrs A contended had no connection to her termination of employment but was wholly in respect of her entering into the confidentiality and non-disclosure obligations under the settlement agreement and which therefore did not fall to be taxed within section 401 or any other provision.

HMRC’s view was that the Compensation Sum was taxable under section 401, or if it was found that the payment was made in relation to the confidentiality and non-disclosure obligations rather than the termination then the payment was still taxable under section 225 ITEPA 2003 – restrictive covenants.

Whilst the arguments put forward primarily centred on whether the Compensation Sum fell within section 401, the Tribunal noted that the starting point was to consider the restrictive covenant position first, as section 225 takes priority over section 401. On considering both submissions and the contents of the Settlement Agreement, the Tribunal found that there was no doubt that an agreement not to pursue claims or proceedings was a restrictive undertaking within section 225 and that the Compensation Sum was chargeable to employment tax under section 225(3).

The Tribunal also considered the position under section 401, in case their conclusion under section 225 was incorrect, and found that, after considering all the evidence, there was a connection between the payment of the Compensation Sum and the termination of Mrs A’s employment, so the payment would also fall within the scope of section 401 and would fall to be taxed under section 403(1). The appeal was dismissed.

Permission to make a late appeal against IR35 tax determinations and NIC decisions refused

Case details: MPTL Limited V HMRC [2022] TC08669

MPTL Limited sought permission to make a late appeal against Regulation 80 determinations and National Insurance Contributions (NIC) decisions totalling approximately £230,000 issued by HMRC regarding their view that the IR35 legislation applied.

MPTL Limited is the personal service company of former professional rugby player Michael Lynagh, who has been in dispute with HMRC regarding whether the IR35 rules applied in respect of work Mr Lynagh undertook as a sports commentator (predominantly for Sky) through MPTL Limited.

Following the issue of the formal determinations and decisions, HMRC undertook an internal review and issued its conclusion letter dated 20 December 2021, upholding HMRC’s position that IR35 applied. The conclusion letter also set out what might happen next, including reference to the Alternative Dispute Resolution process and appeal to the tribunal process, stating that the time limit for filing the Notice of Appeal with the First Tier Tribunal (FTT) was 19 January 2022.

Whilst MPTL’s accountants wrote to HMRC on 21 January 2022, advising that both they and their client were still in disagreement with HMRC’s review and conclusion (and requesting details to be heard before the FTT), no Notice of Appeal was filed with the FTT. A Notice of Appeal was filed on 18 March 2022, along with a request for permission for the appeal to be filed late.

The FTT stated that in order to consider granting permission for a late appeal, the three-fold test set out by William Martland v HMRC had to be applied: the tests being the length of delay, the reasons for the delay and all circumstances of the case.

Taking all details into account, the FTT found that the delay of 59 days in filing the appeal was not a short period and that there were no good reasons for the delay, nor could MPTL Limited distance itself from its then accountant’s failure to file the appeal on time. Regarding the final test (all other circumstances), the judge found that there were no circumstances of the case to persuade him to grant permission.

The appeal was refused, meaning that MPTL Limited are liable to pay the tax determinations and NIC decisions raised by HMRC in respect of the IR35 legislation considered applicable.

Temporary workers were attending permanent workplaces and, therefore, subsistence payments were not deductible

Case details: Mainpay Limited V HMRC [2022] TC08678

Mainpay Limited is an employment business or umbrella company which engages temporary workers who supply their services to clients or end users. The company appealed against Regulation 80 determinations and National Insurance Contribution (NIC) decisions issued by HMRC for the 2009-10 to 2013-14 tax years and 2010-11 tax year, respectively relating to PAYE tax and NIC considered due regarding subsistence payments paid to workers.

Mainpay Limited’s view is that its workers were engaged on an ongoing contract, with each assignment carried out at a temporary workplace (or at least not a permanent one) and, therefore, reimbursed subsistence payments were deductible for PAYE tax and NIC purposes. HMRC disagreed with this view and considered that each assignment undertaken by a worker was a separate employment, meaning the worker was attending a permanent workplace and that subsistence payments were not deductible.

Whilst the main issue in this case was whether the subsistence payments were deductible for PAYE tax and NIC purposes, the Tribunal had to consider several issues in order to reach its conclusions. These issues being:

• Was the 2010 Contract a contract of employment and did all the assignments carried out under the contract form part of a single employment or was each assignment a separate employment?
• If the 2010 Contract was not a contract of employment, was it an agency contract giving rise to a deemed employment? If so, did all assignments carried out under the contract form part of a single deemed employment or does the relevant legislation deem each assignment to be a separate employment?
• Was the 2013 contract an overarching contract of employment which continued during the gaps between assignments? If not an overarching contract, did all assignments form part of a single employment, despite the breaks between assignments?
• Even if each assignment was a separate employment, Mainpay Limited argued that the places of work were not permanent workplaces.
• Can round sum or benchmark scale rates be paid tax- and NIC-free without any evidence of actual expenses incurred where such dispensation has not been applied for or granted by HMRC?
• If subsistence payments were not deductible regarding the tax years 2010-11 and 2011-12 was any loss of tax brought about carelessly by Mainpay Limited?

After considering all the details, the Tribunal found that the workplaces attended by each worker were permanent workplaces in respect of each individual assignment and that any subsistence payments were therefore not deductible for PAYE tax and NIC purposes. The Tribunal stated that there is no automatic entitlement to deduct amounts from earnings reimbursed to employees where no dispensation is in place. Furthermore, it did not consider that the arrangements in place by Mainpay Limited during the period under review were a genuine attempt to reimburse actual subsistence payments incurred.

The 2010-11 and 2011-12 tax determinations and 2010-11 NIC decisions were issued in time as the loss of tax was brought about by Mainpay Limited’s carelessness. Therefore, the appeals were dismissed in full.