HOW FAIR IS THIS?

 

BLOG 229

 

HOW FAIR IS THIS?

 

Treasury Ministers (of all political persuasions) are constantly telling us that the UK has a fair tax system and it is unacceptable for taxpayers to seek unfairly generous treatment by seeking to rely on the letter of the law, when it is clear that the wording does not properly reflect the intention of Parliament (which of course nowadays means the parliamentary draftsman interpreting the wishes of Treasury and HMRC civil servants, as MPs rarely challenge the wording of Finance Bills).  I do not myself favour artificial tax avoidance (which in practice rarely works so is more accurately described as attempted avoidance), but I see it as a moral issue.  I support the rule of law and if others see no moral bar to relying on the wording of the law where it conflicts with the intention of the legislation, I do not question their right to do so.

 

But morality ought to work both ways!  If Ministers and HMRC exhort people to follow the spirit of the law rather than the letter of the law, it is surely incumbent on them to do the same.  It is hypocritical for HMRC to excoriate tax avoiders who rely on the letter of the law, while at the same time resorting to the letter of the law in order to collect tax that is clearly not due on the basis of the spirit of the law.

 

The recent First-tier Tribunal decision in Michelle McEnroe and Miranda Newman is a case in point.  These two ladies set up a company in which they each owned 50%.

 

Happily, their venture was successful and they were able to sell the company for £8 million on condition that at the time of sale it was free from debt.  Unfortunately, it was not free from debt.  It owed Allied Irish Bank £1.1 million (roughly).  The purchaser paid the ladies’ solicitors the £8 million, £1.1 million to be used to repay Allied Irish Bank, leaving £6.9 million for the shareholders, which they duly paid to them.  The two ladies duly paid capital gains tax on the £6.9 million.  I suspect that they were both entitled to Business Asset Disposal Relief which halves the tax on the first £9 million, so I imagine that they paid getting on for £1.2 million in tax.

 

“Not enough”, said HMRC!  The agreement says sale for £8 million.  If the two ladies voluntarily paid Allied Irish Bank (“voluntarily”, of course, in the context that they had warranted that the company was free from debt and would be sued by the purchaser if it was not), they are of course entitled to do so.  But there is nothing in the CGT legislation to allow them to deduct such a voluntary payment.  We want CGT on £8 million.  So please hand over another £440,000.

 

The First-tier Tribunal said that its role is limited to interpreting the sale agreement.  That says £8 million.  There is no ambiguity about it, so HMRC win.  I hope the ladies appeal, because there is a fallacy in that decision, namely that what the ladies agreed to sell for £8 million was a company free from debt and what they actually sold was a company with £1.1 million of debt.  If instead of paying off the £1.1 million, the solicitor had handed the full £8 million to the shareholders, and the purchaser then claimed £1.1 million back under the warranty that the company would be free of debt, the sale proceeds for CGT purposes would have been £6.9 million because a payment under the warranty would have been the settlement of a contingent liability for which the law does allow a deduction.

 

But I am not writing this to criticise the FTT.  I am not even criticising the solicitors (if there were solicitors involved), as such a contract would normally provide that the shares will be sold for £6.9 million, and the purchasers shall procure that the company repays its £1.1 million debt to Allied Irish Bank.  My concern is that HMRC wanted tax on £8 million in circumstances where the two ladies received only £6.9 million, and it was clear that they would never get the extra £1.1 million.  Not only did HMRC want an unjustified £440,000, but they wanted it so badly that they were prepared to defend the ladies’ appeal to the Tribunal to make sure that they got it.

 

In the old days, an Inspector of Taxes argued his own case before the Tribunal; there was (in theory at least) no intervention by anyone else within HMRC.  This is no longer the case.  When a taxpayer appeals an HMRC decision, the HMRC Officer hands over the conduct of the case to an appeals specialist.  Accordingly, when HMRC defend an appeal, it is not a rogue Officer on a frolic of his own; it is a considered opinion by someone else within HMRC (often by two other people as when you make an appeal, HMRC offers you a review by HMRC’s review department and I would have expected these two ladies to have accepted such an offer).

 

As a taxpayer, are you pleased that these two ladies have been told to pay £440,000 that in any remotely fair tax system they would not owe?  After all, the more that HMRC can obtain unfairly, the less the Chancellor has to increase tax on the rest of us.  If so, why not write to HMRC and congratulate them on screwing these two hard-working ladies?  I’m sure they will pass on the congratulations to the two or three (or possibly more) officers who partook in the decision to go to the Tribunal.

 

As a taxpayer, I’m not pleased myself!  I’m ashamed that we have a tax system that permits our tax authority to act so unfairly.

 

 

ROBERT MAAS