FIGHTING FOR JUSTICE

 

BLOG 209

 

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