BRING BACK THE GENERAL COMMISSIONERS

 

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BRING BACK THE GENERAL COMMISSIONERS

 

 

When I started in tax (1965) most tax appeals were heard by the General Commissioners.  These were unpaid local volunteers, like magistrates.  Their role was abolished in 2009.  They generally sat as a panel of three.  They were rarely lawyers but had a legally qualified clerk to advise them on what they could and could not legally do.  They were abolished as a result of Sir Andrew Leggatt’s 2001 Review of Tribunals, which said that justice needed to be open and legally driven.  Accordingly, tax appeals now go to the First-tier Tribunal (Tax Chamber) which sits as either a single legally qualified judge or a judge with a non-legal supporting member (with the judge having a casting vote).

 

At the time of the change, I represented the accountancy profession on a Consultative Committee to input views into the creation of the new system.  Most of the 20 or so others around the table were lawyers.  At one stage I lamented the fact that the General Commissioners applied common sense and was rounded on by the rest of the room for suggesting that the First-tier Tribunals might not apply that attribute in arriving at a fair decision.

 

I think that the Tribunal decision in Michelle McEnroe and Miranda Newman shows that my worst fears have been realised.

 

These two ladies set up a company to operate a nursing home.  It seems to have been a successful business and they sold it for either £8 million or £6.9 million.  Which, is the crux of the case.  I’ll start with the common sense approach.  They company owed Allied Irish Bank a little over £1.1 million.  The buyers wanted a company free of debt.  What normally happens in such circumstances is that the shares are sold for £6.9 million and the purchaser agrees to procure that the company will repay the debt.

 

Unfortunately, that is not what happened here.  The sale agreement simply said that the shares would be bought for £8 million.  The purchaser paid £8 million to the ladies’ solicitor, who paid £1.1 million to Allied Irish Bank and the other £6.9 million to the two ladies.  They duly each declared a capital gain on their sale for £3.45 million.  “No, no”, said HMRC, “you sold for £4 million and must pay tax on £4 million; the fact that you chose to gift £550,000 to the company is nothing to do with us”.

 

“I agree”, said the FTT.  “That is what the contract says, so that is what you are taxable on”.

 

To paraphrase Ian Hislop, if that’s applying common sense, I’m a banana”.  Indeed, if that’s applying the law, I’m a banana.  The deal was never that the ladies would sell the company as it stood at the time of completion for £8 million.  It was clearly that for £8 million they would deliver a company that was free of debt.  That would require them to settle the debt.  To put it another way, if they had not settled the debt, the purchasers would have sued them.  They would then have had to refund £1.1 million of the purchase price as damages for their breach of the agreement to sell the company free of debt.

 

That £1.1 million is what is called a contingent liability.  Paying up under a contingent liability reduces the sale proceeds for capital gains to the £6.9 million.  So is the law really that if you comply with the agreement, you pay more CGT than if you breach it and then make good the effect of your breach?  Apparently, in the view of Judge Allatt.

 

So let’s bring back common sense into the appeals process.

 

ROBERT MAAS