FIGHTING FOR JUSTICE
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FIGHTING FOR JUSTICE
When I started in tax, there were two
Appeals Tribunals, the General Commissioners and the Special
Commissioners. There was then a right of
appeal (on a question of law only, as now) to the High Court. The General Commissioners, who heard the vast
majority of appeals, were laymen.
Complex appeals went to the Special Commissioners, who were
lawyers. Most accountants thought the
system worked well, but lawyers did not.
The problem was that the General Commissioners often determined an
appeal on the basis of commonsense and their own sense of fairness, which was
not always in accordance with the law.
The current system merged the General
and Special Commissioners into the First-tier Tribunal (FTT) and gave a right
of appeal on a question of law to a new Tribunal, the Upper Tribunal, which has
a similar legal standing to the High Court.
A big difference though is that every hearing of the FTT is chaired by a
lawyer – and the lawyer often sits alone, although he can be accompanied by one
or two other members some of whom are lawyers and some of whom are laymen. It was anticipated that this would create
consistency.
In general, there is no cost regime in
the FTT but the Upper Tribunal, like the High Court, can require an
unsuccessful party to pay the winning party’s costs of the appeal (albeit only
of the appeal to the Upper Tribunal).
This is the case even if the taxpayer wins before the FTT and it is HMRC
that appeals. A taxpayer in such
circumstances either has to accept the risk of a heavy, unquantifiable amount
of costs against him if the Upper Tribunal reverses the decision of the FTT, or
has to discard his FTT victory and agree to pay tax that the FTT has held he
does not owe.
It is therefore unsurprising that
individuals do not appeal many cases to the Upper Tribunal, particularly where
there is not a large amount of tax at stake, as there is a fear that HMRC’s
costs of losing may well significantly outweigh the tax saving in winning. This is a shame, because reading many FTT
decisions I get the impression that the pendulum has swung far too far in
favour of HMRC, insofar as whilst a legally biased Tribunal will give proper
weight to the law, it can also give too much weight to the law and too little
consideration to the facts. The law does
not function in isolation. The role of
the Tribunal is to discern the facts and then consider how the law applies to
those facts. Many lawyers claim little
skill in maths, so this can be a particular problem where the facts have a
mathematical slant.
Those musings were prompted by the
decision of the Upper Tribunal in Heather Jones. Ms Jones is one of that, sadly rare, category
of an unrepresented taxpayer who felt that she had been so unfairly treated by
the FTT that she should argue her case (again in person) before the Upper
Tribunal.
Ms Jones was made redundant from her job
with Doubletake Studios Ltd on 31 October 2010.
Yes 2010, in tax matters the wheels of justice can grind very
slowly. It was agreed that the company
would pay her a redundancy payment totalling £36,700 in four equal
instalments. She received three
instalments of £9,175 and a fourth payment of £6,515.04. There was a small problem with the £9,175s
insofar as one of the three payments identified by the Tribunal was not a
receipt at all; it was a transfer out of Ms Jones’ bank account, and the
Tribunal did not pick up the actual payment at all, which does suggest a
somewhat inadequate grasp of the principles of arithmetic. But that is a by-the-way. The problem is why the fourth payment was
£6,515.04, not £9,175. Doubletake
Studios had not volunteered an explanation to Ms Jones and had subsequently
gone into liquidation, so it was too late for an explanation. Ms Jones said that the company must have
deducted tax.
The first £30,000 of compensation is
tax-free and the excess is taxable. In
Ms Jones’ case the excess over £30,000 was £6,700. Tax at 40% on £6,700 is £2,680. The reduction in the payment was £2,660.96
which near enough made sense – after all the burden on Ms Jones is not to prove
her case beyond all reasonable doubt; it is to show that it is more likely than
not (i.e. greater than a 50% probability) that the £2,660.96 was tax.
Unfortunately, the FTT did not ask
themselves whether there was another reasonable explanation for the £19.04 difference
between the two figures (such as that PAYE code numbers rarely result in a
precisely accurate deduction or there could have been some other adjustment
due). They worked out that £2,660.96 was
39.7% of £6,700 and concluded that as it was not 40%, Ms Jones had not shown
that it was more likely that it was tax than that it was anything else.
To be fair, HMRC said (correctly) that
Doubletake Studios should not have deducted tax at 40%, but only at the 20%
basic rate as the payment was made after the employment ceased. They analysed the £2,660.96 as: basic rate
tax due, £1,340 plus an under-deduction made earlier in the tax year of £310.40
= £1,650.40 and plus employee’s National Insurance, which should also have been
deducted from the compensation, but could not get back to the £2,660.96. Actually, there is no employee’s National
Insurance on compensation as HMRC’s own manual (NIM 13132) makes clear, so
their suggestion makes no sense at all.
But perhaps it is unreasonable to expect the Tribunal (which might be
expected to try to help a litigant in person) to know that.
The FTT said that the taxpayer had not
proved her case, but gave her 56 days to look for further evidence. In that period, Ms Jones discovered an e-mail
chain. She had indeed asked the company
why it had deducted the £2,660.96 and the company’s solicitor had responded
that it was tax. She triumphantly sent
the e-mail chain to the FTT, which promptly dismissed this. By then it had found the further £9,175 that
it had missed first time round and concluded that the £6,515.04 was probably
nothing to do with the compensation.
The Upper Tribunal thought that treating
a £9,175 payment as a receipt was a serious error of law, as also was
dismissing the e-mail chain so cursorily.
It at least showed that the £6,515.04 was part of the compensation, so
how could the FTT simply dismiss it. The
Upper Tribunal accordingly set aside the FTT decision and remade it by deciding
that Ms Jones had indeed shown that it was more likely than not that the entire
£2,660.96 was tax.
The Upper Tribunal also pointed out that
the assessment on Ms Jones was a discovery assessment and, as such, it was for
HMRC to prove that the assessment had been validly raised. Although the FTT had correctly said that this
burden was on HMRC, it had not gone on to consider what proof HMRC had put
forward (which was none, as they had not addressed the issue), so there was no
evidence on which they could in law have decided that the assessment had been
validly raised.
This looks to me a prime example of the FTT
having been so pre-occupied with the law that they gave little consideration to
the weight of the facts in determining whether the taxpayer had shown that it
was more likely than not that the deduction was tax.
I applaud Ms Jones for persevering in her
belief that she did not owe tax even to the extent of taking the risk of costs
in the Upper Tribunal. I am delighted
that her persistence won through.
ROBERT
MAAS
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