[2010] UKFTT 419 (TC)

TC00689

Appeals numbers SC/3096/2008 & SC/3097/2008

Payment of licence fees by company – whether income of inventor or a third party – whether trading income of inventor (yes) – whether employment income of inventor (no) – whether annual payments (no) – whether assessments defective or invalid (no)

FIRST-TIER TRIBUNAL
TAX 

UKCO
First Appellant
Mr XX
Second Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: 	Tribunal Judges Peter Kempster & David Demack

Sitting IN PRIVATE in Birmingham on 13-16 July 2009

The Taxpayers’ Representative for both Appellants

Mr Adam Tolley of Counsel (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The hearing of these appeals was held in private and this Decision Notice has been anonymised for publication.  
Introduction

2.	This case concerns appeals against a number of assessments, determinations and decisions in respect of income tax and national insurance contributions (“NIC”) for a number of tax years issued to the two taxpayers: UKCO  and Mr XX (together, “the Taxpayers”).  The appeals were heard together and in private pursuant to earlier case management directions.
3.	UKCO produces and sells a speciality product.  It has a single customer: the US Government Department of Defence.  In its corporation tax returns for the four accounting years ended 31 October 1999, 2000, 2001, and 2002 UKCO claimed a deduction for payments of licence fees (“the Licence Fees”).  The Respondents (“HMRC”) contend that the corresponding receipt of the Licence Fees gives rise to UK tax liabilities and have issued assessments, determinations and decisions to the Taxpayers on a number of alternative bases of charge. 

The assessments

4.	The assessments, determinations and HMRC decisions under appeal are as follows.
5.	Assessments raised on UKCO under paragraph 4(2) of Schedule 16 to the Income and Corporation Taxes Act 1988 (“ICTA”) covering the period from 1 November 1999 to 31 October 2002 (“the Para 4 Assessments”).  In outline, a UK resident company is required to deduct at source basic rate income tax from certain “annual payments” and HMRC contend that the Licence Fees were such annual payments.
6.	Assessments raised on Mr XX under section 29 of the Taxes Management Act 1970 (“TMA”) for the tax years 1999-2000 and 2000-01 (“the Schedule D Assessments”).  In outline, HMRC contend that the Licence Fees were the trading income of Mr XX.
7.	Determinations made in respect of UKCO under regulation 80 of the Income Tax (Pay as you Earn) Regulations 2003 for the tax years 1999-2000 and 2000-01 (“the PAYE Assessments”).    In outline, HMRC contend that the Licence Fees were employment income of Mr XX so that UKCO had a liability to deduct PAYE at source.
8.	Decisions in respect of primary and secondary Class 1 NICs due from UKCO for the tax years 1999-2000 and 2000-01 pursuant to paragraph 10 of schedule 4 to the Social Security (Contributions) Regulations 2001 (“the NIC Assessments”).   In outline, these supplement the PAYE Assessments and assess the NICs that HMRC contend are due from UKCO if the Licence Fees were employment income of Mr XX.

The appeals

9.	HMRC accepted that valid appeals had been made by the Taxpayers against all the assessments, determinations and decisions (which for brevity we shall call “assessments”) described above.
10.	The Taxpayers’ grounds of appeal included a number of challenges to the validity of the assessments, as well as arguments on the bases of assessment.
The hearing
11.	The Tribunal took evidence as follows.  For the Taxpayers: Mr XX adopted two witness statements dated 28 September 2008 and 16 December 2008, and gave sworn oral evidence; and Mrs XX adopted three witness statements dated 24 September 2008 and 16 December 2008 (two), and gave sworn oral evidence.  For HMRC: Mr Neil Meylan (an HMRC officer in the Special Civil Investigations Office) adopted a witness statement dated 30 October 2008 and gave sworn oral evidence.  
The facts

12.	The parties did not present an agreed statement of facts.  Where there was a contested issue we make a finding of fact as recorded below.
December 1997 – The Licence Agreement
13.	In the mid-1990’s Mr XX invented an ingenious product called the {Invention}.   
14.	Mr XX and Mrs XX were the directors (and Mr XX was the managing director) of a company which on 2 December 1997 changed its name to UKCO.  Mrs XX was the sole shareholder of UKCO.  Mr XX was managing director of UKCO until July 2001.  Mrs XX explained her understanding that she owned UKCO entirely and Mr XX owned the Invention product entirely.  
15.	On 12 December 1997 Mr XX and UKCO entered into a written agreement (“the Licence Agreement”), drafted by Mr XX without any legal advice.  Mr XX executed the Licence Agreement personally under hand and the company seal of UKCO was affixed with Mrs XX signing as director and company secretary of UKCO, and there was a witness signature.  The Licence Agreement included the following provisions (there was no clause numbering):
It is hereby accepted by [UKCO] that [Mr XX] is the inventor of all products hereinafter known as {Invention} and is the beneficial owner of all intellectual property rights, future rights, trade marks, design copyrights and other valuable assets of the said products and that [Mr XX] has complete autonomy and authority to use those intellectual property rights in any manner whatsoever.
It is now therefore agreed that [Mr XX] do hereby join with [UKCO] in a mutually binding licence agreement for the transfer of all such intellectual property rights in the products known as {Invention}  from [Mr XX] to [UKCO] for a pre-determined fixed period, under licence, so that [UKCO] can commence the establishment of a manufacturing, sales and marketing business for the sale of {Invention}, material handling equipment and other related items within that industry.
The territory to this agreement shall encompass all world market areas where the above products can be sold and shall not be solely restricted to the United Kingdom.  However, any further assignments of interests in the {Invention} to any third party company will only take place by express agreement and by the assignment rights being conferred by [Mr XX] to that third party.
It is further agreed that [UKCO] will be responsible for the manufacture, development and distribution of such {Invention}, material handling equipment and other related items under the {Invention} name and that [UKCO] will also be responsible for the application of Patent protection, trademark protection and design copyright protection of all items, seeking UK, USA and other world-wide protection, that may be deemed necessary so that the long term interests of [Mr XX’s] inventions are adequately protected.
It is further recognised, that in the negotiations forthcoming with the US Government for the contractual sale of {Invention} products to US Government establishments, a corporate entity will be necessary in order to be able to negotiate and obtain such contracts, and that for obvious commercial reasons patent, trademark and design protection will be needed to protect the interests of [UKCO] and by implication [Mr XX] from any infringement of their rights.  It is expressly agreed by [UKCO] that [Mr XX] is to be recognised as the inventor of such products and will be so named as such in any {Invention} patent applications, trademark protection and design copyright actions so that his long term rights as the inventor may not be prejudiced, whatsoever.
It is also agreed by [UKCO] that should it become necessary for a US company to be incorporated in order to comply with US Government requirements for contractual supply of {Invention} products to US Government establishments in the US, then this incorporation will be a decision at the sole discretion and agreement of [Mr XX].  Furthermore should this new company be charged with the sales and marketing of {Invention} products world-wide then the further transfer or assignments of any such aforementioned rights to the {Invention} programme is at the authority of [Mr XX] and is not that of [UKCO].  [UKCO] will only operate under the strictest compliance to the terms of this licence agreement and by agreement with [Mr XX].
The consideration was £1 paid and acknowledged on signature, plus:
On all sales generated by [UKCO] of {Invention} products ad other material handling related items [Mr XX] will receive licence fees from[UKCO] as remuneration for the use of his intellectual property rights over the licence period.  The fees will be calculated as the sum total of 20% (twenty per cent) on the FOB values of each and every invoice raised and paid to [Mr XX] upon monies being received from the buyers.  Such payments to be made to [Mr XX] in the currency of invoice used by [UKCO] and these payments are to be made directly to [Mr XX], or to his assigns, or as he so wishes and/or directs [UKCO] to so do.
It is agreed that payments to [Mr XX] under this licence agreement will commence 18 calendar months from the date of this agreement (ie June 1999).  This grace period of non-payment is to allow [UKCO] the opportunity to develop the {Invention} product range, and to recover partial development costs prior to the licence fees commencing.  Such information, relating to aforementioned sales to be maintained on file, and to be made fully available to [Mr XX] at all times and offered to him periodically by way of copy invoices.
This licence agreement granted to [UKCO] by [Mr XX] shall remain in force and be effective for a period of 60 (sixty) calendar months and will expire on the 11th day of December 2002.  At that time all rights, whatsoever, to the sales, marketing, production or other uses, all patent rights, trade marks and design copyrights of the {Invention} will revert back totally to [Mr XX].
In compliance with the above, [UKCO] agree that upon the formal signatures being affixed to this agreement [UKCO] will execute a separate assignment document, which will transfer back to [Mr XX] all rights so transferred under this agreement to [UKCO] by [Mr XX].  Such a transfer will occur at midnight December 11th 2002 and in accordance with the termination of this licence agreement.
[UKCO] will have no automatic right to a licence renewal agreement and this contract is executed by [Mr XX] on that clear understanding.
It is further agreed, that upon the formal signatures being affixed to this agreement, [Mr XX] will also execute a separate assignment document relating to the transfer of rights as detailed in the agreement and for the period so specified.  Such assignment to be used for any future application of approvals so being sought.

December 1997 to December 1998 – Registration of the IP rights
16.	On 24 December 1997 an application for the trade marks {Invention names} was filed with The Patent Office by a firm of patent attorneys naming the applicant as UKCO.    On 31 December 1998 the same firm of patent attorneys filed with The Patent Office a “Statement of inventorship and of right to grant of a patent” which (a) named the inventor as Mr XX; (b) named the applicant as UKCO; and (c) in the space marked “State how the applicant derived the right from the inventor to be granted a patent” stated “By virtue of employment of the inventor by the applicant company”.
17.	Mr Tolley for HMRC submitted that the applications were wrong and misleading, given the provisions in the Licence Agreement confirming that all intellectual property (“IP”) rights remained with Mr XX.
18.	In his testimony Mr XX stated that the basic intention was to generate credibility for UKCO by showing the invention as registered in its name.  Suppliers were being expected to enter into substantial contracts with a company with few assets and being able to show the IP rights registered in the name of UKCO would give them confidence.  Worldwide patent protection would be prohibitively expensive, so the {Invention} name was protected by trademark – that was considered sufficiently secure given that main customer was US Government.  He was the managing director of the company and the reference to an employee was semantics.  
March 1999 – Award of the GSA Contract
19.	On 11 March 1999 UKCO won a contract to supply {Invention} products to the US Government (“the GSA Contract”).  It was a condition of the award of the GSA Contract that there should be a local (ie US) agent with a US bank account.   That role was performed by a new Delaware company, formed in April 1999, “USCO”.  Mr XX in his testimony explained that as well as the GSA Contract requirement for a US agent, it was convenient to use USCO because having a US company would enable funds to be paid and cleared faster. He was conscious of the “Buy American” legislation in the US – using a US company for production and sales was desirable.  USCO was wholly owned by Mr YX (the son of Mr XX and Mrs XX); this was helpful in assisting him to obtain a US residency visa; the expectation was that USCO would be the main business vehicle in future.  Both UKCO and USCO were family businesses with no outside investors; they were run informally with oral agreements.  Mr XX was CEO of USCO.
20.	UKCO raised invoices and delivered these to the US Government.  Payment was made by the US Government to USCO.  USCO made three deductions from the monies it received from the US Government.  First, USCO deducted and kept a marketing fee (of approximately 15% of sales).  Secondly, USCO deducted the Licence Fees.  Thirdly, USCO deducted the US Government levy and remitted this to the US authorities.  After making those three deductions USCO remitted the balance to UKCO.  
August 2000 – HMRC enquiry into 1999 accounts
21.	On 10 August 2000 HMRC opened an enquiry (under paragraph 24 of schedule 18 Finance Act 1998) into the tax return of UKCO for the year ended 31 October 1999.  
22.	During the course of correspondence UKCO’s then adviser gave the following explanation of the licence fee deduction of £67,434.79 and the marketing fee deduction of £44,623.61 in a letter to HMRC dated 4 October 2000:
“A licence fee of 20% and a marketing fee of 15% of each sales invoice for “goods only” (that is not installation and freight) is payable to [USCO].
It is a requirement of [the GSA Contract] to maintain the services of an American corporation, located in the US, throughout the term of the contract “to assist and insure the Government of prompt and efficient contract administration” and “to assist in the resolution of any delivery, performance or quality complaints from customer agencies or to accept service of process in the event of any default by [UKCO] on behalf of the US Government.”
[USCO] complies with the above terms.  It collects US government cheques and EFT payments on behalf of [UKCO] and deducts the invoiced amount of licence fees and marketing fees before remitting the balance due to [UKCO].  Its main function is to co-ordinate the marketing of the {Invention} programme for a US base dealing mainly with {XYZ International Inc}, an American marketing company employing 34 full time representatives who specialise in the US government sector.  The marketing commission payable to {XYZ International Inc} on any business generated by them is 12% which leaves the balance of the 15% marketing fee to the US office [ie USCO] to cover running costs.  This arrangement saves [UKCO] the cost of employing UK [which may be a mistype for “US”] representatives to market their products into a foreign marketplace.
No assets are required (or acquired) with respect to the marketing fee.
In December 1997 [UKCO] acquired a licence from the inventor [Mr XX] to produce patent pending {Invention} products until termination of the agreement in December 2002 in consideration of payment of a licence fee of 20% of the FOB sales value goods in the {Invention} programme.
Actual payment of the licence fee was agreed to commence from June 1999, after a start up period of grace.  This licence fee amounting to £67,434.79 to 31/10/99 was assigned by [Mr XX] and collected by [USCO]. (Resources may be required in the US for future production and development of the American market in the event [the GSA Contract] is not renewed or if [UKCO] are unable to meet increasing demand to produce competitively in the UK.)  As and when [Mr XX] receives income derived from assigned licence fees he will declare the same to the Inland Revenue.”
23.	Having received that explanation HMRC closed their enquiry into the 1999 tax return of UKCO on 19 October 2000, stating “No amendment is necessary to the company’s self-assessment.”
May 2001 – HMRC enquiry into 2000 accounts
24.	On 23 May 2001 HMRC opened an enquiry into the tax return of UKCO for the year ended 31 October 2000.  The licence fee deduction for this year was £368,536 and the marketing fee was £464,844.  On 19 June 2001 HMRC wrote to UKCO’s advisers:
“… I should like to see the agreements under which the fees, marketing fees and supplementary commissions are payable.  I should also like to see please a copy of recent accounts for [USCO].”
25.	On 2 October 2001 there was a meeting between Mrs XX, UKCO’s adviser and an HMRC officer.  The notes of that meeting – which were provided to and not challenged by Mrs XX or the adviser – state:
“It was eventually left that [adviser] would attempt to obtain the latest accounts from [USCO] and would also gather together the contracts between [UKCO] and [USCO].  Once he had these he would send them to [HMRC].”
26.	On 18 February 2002 HMRC issued to UKCO a formal notice requiring production of stated documents, including “copies of contracts under which all licence fees are paid by this company during the year ended 31 October 2000.”  No documents were provided but on 19 April 2002 the adviser wrote to HMRC:
“The contract under which all licence fees were paid by [UKCO] during the year ended 31 October 2000 was a verbal contract.”
The copy of that letter provided to the Tribunal had been annotated by the HMRC officer:
“Telephoned [adviser] 22/5/2.  He did not know that there were no written contracts until just before the date of this letter.”
27.	On 23 May 2002 HMRC wrote to the adviser:
“As there are no written contracts it seems to me that the only way forward will be for me to see copies of [USCO’s] accounts.  As both [USCO] and [UKCO] are under the control of the same persons I would have thought the quickest way would be for [UKCO] to obtain copy of [USCO’s] accounts and send these on to me.  However as your client refused to do this I am attempting to obtain copies of the relevant accounts through departmental procedures.”
28.	Those procedures involved the agreement for mutual exchange of information between HMRC and the US Internal Revenue Service.  In January 2003 HMRC received from their US counterparts a copy of USCO’s US tax return for the year ended 6 April 2000; HMRC concluded that the turnover of USCO disclosed in its US tax return was significantly less than the deductions claimed by UKCO.
February 2003 – HMRC enquiry into 2001 accounts
29.	On 7 February 2003 HMRC opened an enquiry into the tax return of UKCO for the year ended 31 October 2001.  In October 2003 the Walsall Division of the General Commissioners rejected an application by UKCO for the two open enquiries (years ended 31 October 2000 and 2001) to be closed.  In that same month the former adviser was disinstructed and Mrs XX represented UKCO thereafter.  In November 2003 UKCO provided a large quantity of documents to HMRC, estimated by Mrs XX to be some 9 lever-arch files.
April 2003 – HMRC enquiry into Mr XX’s 2000-20001 tax return
30.	On 11 April 2003 HMRC opened an enquiry under s 9A TMA into Mr XX’s tax return for the tax year 2000-2001.  HMRC accept that the notice opening that enquiry was not received by Mr XX until 5 June 2003, which was after the statutory time limit for opening the enquiry (being 30 April 2003).  Following representations on behalf of Mr XX, HMRC purported to close that enquiry under s 28A TMA on 10 December 2003.
October 2003 – IP rights transferred back to Mr XX
31.	On 29 October 2003 UKCO and Mr XX executed formal assignments assigning to Mr XX (in consideration of a nominal sum paid and acknowledged) UK patent number {number}; UK design registration {number}; and other worldwide IP rights.  Although the documents presented to the Tribunal were not comprehensive, it appears that also in October 2003 UKCO assigned to Mr XX certain US IP rights (a trade mark and a patent) previously registered in the name of UKCO.
32.	In his witness statement Mr XX stated:
“… I had decided to temporarily register [the IP rights] in the name of [UKCO] since it was a new company with the {Invention} programme needing supplier credit and goodwill which holding these trade mark, patent and design registrations would bring to [UKCO].  Once [UKCO] had become established with its suppliers the aforementioned registrations reverted back to myself and they were re-registered in my personal name.  No charges were levied to me by [UKCO] and the process had achieved the results I had planned.  [UKCO] enjoys excellent relationships with its suppliers.”
The enquiries continue
33.	On 1 December 2003 HMRC wrote to UKCO:
“Licence fees – A deduction of £368,536 has been claimed in the accounts [for year ended 31/10/2000].
1.  Please clarify who was entitled to receive these payments.
2.  Please clarify whether these were made under the verbal agreement mentioned in [adviser’s] letter of 19 April 2002.
3.  If not, please forward a copy of the agreement under which they were paid.”
34.	On 16 January 2004 UKCO replied to HMRC:
“Licence fees –
1.  [USCO] was entitled to receive the licence fees.
2.  The licence fees were paid under the verbal agreement mentioned in [adviser’s] letter of 19 April 2002.
3.  Not applicable (see 2 above).”
35.	On 17 March 2004 Mr Meylan, who gave evidence at the hearing, wrote to UKCO stating that he had taken over the investigation for HMRC.  He stated that he had a copy of the Licence Agreement.  One of the documents provided to HMRC by the US IRS was a copy of the Licence Agreement.  The IRS obtained it during the course of a tax audit of USCO in 2001.  The document provided to the Tribunal bore a stamp, “This information is furnished under the terms of an income tax treaty with a foreign government.  Its use and disclosure must be governed by the applicable provisions.”  It was not clear when that document had been first received by HMRC; it may have been at the same time as USCO’s US tax return, in January 2003, or it may have been later.  It was clearly before Mr Meylan’s letter dated 17 March 2004.
36.	On 3 April 2004 UKCO replied to Mr Meylan stating they did not have a copy of the Licence Agreement, and saying:
“… you refer to licence fee payments having been made to [Mr XX] and upon which you have determined tax is due.  I would ask you to detail these “payments” as none has been made to him, nor recorded in our audited accounts.  Our records show that we have paid US Dollar invoices raised to us by [USCO] for licence fees, by way of deduction from USD payments collected by them on our behalf.”
37.	On 19 May 2004 UKCO wrote to HMRC enclosing a fourteen page “response to enquiries” in relation to the Licence Fees.  It included the following passages:
A3(d) “The written contract dated 12 December 1997 [ie the Licence Agreement] was waived, varied, or terminated by mutual repudiation in favour of a simple verbal agreement which was easy to operate and has never been in dispute between the parties.  Both parties agree and have stated officially that the operative licence agreement is verbal.”
B1(a)&(b) “The operative agreement … was not written but formed by verbal agreement to overcome the defects of the written licence agreement dated 12 December 1997.  It is evidenced by the conduct and course of trading between the parties.  As matters have arisen it has been updated to accommodate requirements.”
B2(a)  “There has never been any dispute that [Mr XX] is the person entitled to the entire intellectual property rights to the {Invention} programme.”
B2(b)  “The licence fee relates to the licence agreement for the use of the trade mark “{Invention name}” by which the goods in the {Invention} programme are described.  The sum of 20% of the FOB sales value of these trade marked goods is charged to [UKCO] and payable as directed by the originator of the trade mark, [Mr XX], to [USCO], the assignee.”
B3(a)&(b)  “Payment of licence fees is achieved by deduction from monies collected in US Dollars on behalf of [UKCO] and paid into the bank account of [USCO] at [a US bank].  This instruction appears on each invoice to the US Government and is registered in the GSA- Central Contractor Register for [UKCO].  [USCO] is the collections and payment agent for [UKCO]. It is also the GSA Contract registered agent for [UKCO].”
38.	In his evidence Mr Meylan stated that he believed this letter (dated 19 May 2004) was the first time HMRC had been aware of the purported replacement of the Licence Agreement by the oral agreement.
October 2004 – HMRC enquiry into 2002 accounts
39.	On 5 October 2004 HMRC opened an enquiry into the tax return of UKCO for the year ended 31 October 2002.
40.	On 2 November 2004 UKCO wrote to HMRC stating:
“Design, engineering and technical services in order to provide the {Invention} were the responsibility of [Mr XX] and his team of consultants and engineers; and these services were incorporated into the licence fee payable to [USCO].”
In his evidence Mr Meylan stated that he believed this letter was the first time UKCO had suggested that Mr XX might be carrying on a continuing business of developing the {Invention} products.  
41.	On 11 March 2005 UKCO wrote to HMRC stating:
“From looking at [USCO’s] accounts this licence fee, as you say, does not appear as income.  The company is stated to be engaged upon a business activity being “marketing and payments office” and the product or service is “marketing services”.  With reference to our situation I would interpret this to mean that the company acts as principal as regards the marketing services and as agent as regards the function of payments office (collections office).  This would mean that the licence fee payment is, by contract, collected by the US company on behalf of the person or company entitled to the income or payment accordingly.”
42.	Mr Meylan replied on 19 April 2005 stating:
“Following your letter of 11 March therefore I am now more firmly convinced that for tax purposes I should be treating [Mr XX] as being the recipient of the licence fee payments and not [USCO].
…
I note you do not consider I am able to enquire here into [Mr XX’s] employment status as [Mr XX] has received a closure notice against an enquiry into his 2001 Return.  … your assertion here is not accepted.  The Revenue can make additional assessments where under section 29 [TMA] it is discovered that any income that ought to have been assessed to income tax has not been assessed.  This can be done even after an enquiry had [sic] been closed.  … I consider this to be the case here.  The facts that now suggest that the income from the licence fee is for tax purposes treated as being [Mr XX’s] income by way of an employment (whether under PAYE or self-employed) have only recently emerged during my enquiry into the licence fee payments.”
That was the last letter from HMRC before the issue of the assessments under appeal in this case.
43.	UKCO made formal complaints to HMRC about the conduct of Mr Meylan and his predecessors on the enquiries.
May & October 2005 – the assessments are issued and appealed
44.	On 27 May 2005 HMRC issued the Para 4 Assessments; these were appealed on 23 June 2005.  On 16 September 2005 HMRC issued the Schedule D Assessments; these were appealed on 9 October 2005.  On 30 September 2005 HMRC issued the PAYE Assessments and the NIC Assessments; these were appealed on 3 October 2005.  

Findings on the facts
Ownership of the IP rights
45.	The first point we address is the registration in December 1998 of the IP rights in the name of UKCO and their subsequent assignment back to Mr XX in October 2003.
46.	We find that what occurred was best expressed by Mr XX when he said in his testimony that the purpose of the IP arrangements was to be a “a loan of the rights for a fixed period” to UKCO.  He stated that he could take back the rights at any time.  In his witness statement he stated, “I had decided to temporarily register [the patents etc] in the name of [UKCO]”. This was done in order to demonstrate commercial credibility for that company to third parties - with the intention from the outset that those rights would revert to Mr XX in due course.  That explains why there was no sale consideration received by Mr XX for any transfer of the IP rights – there was no transfer, only the licence fee arrangement.   It also explains why the rights were registered in the name of UKCO – Mr Tolley suggested that was an attempt to mislead third parties but our interpretation is that UKCO was registered as nominee for Mr XX, leaving beneficial ownership with Mr XX but showing UKCO as the registered owner to any person investigating the relevant register.  It further explains why there was no sale consideration paid by Mr XX when the IP rights were assigned back to him in October 2003– that was only a transfer by a nominee back to its principal.    
47.	The result of the above finding is that the beneficial ownership of all the IP rights remained throughout with Mr XX as inventor.  He licensed the use of those rights to UKCO for a period in return for a licence fee.  He did not assign or otherwise permanently dispose of beneficial ownership of those rights to UKCO, and the registration of those rights in December 1998 in the name of UKCO was no more than a nominee arrangement.  That nominee arrangement closed when the rights were transferred back to Mr XX in October 2003 (using his terminology, the loan of the IP rights was discharged).  
The purported variation of the Licence Agreement and assignment of Licence Fees
48.	Moving on to the position of USCO, there was a clear and commercially important reason for bringing USCO into the arrangements.  The terms of the US Government contract required the appointment of a US agent, who – among other tasks – would receive payments due from the US Government under the contract.  USCO made the three types of deduction detailed at paragraph 20 above.  It paid the levy to the US authorities.  It kept the marketing fee as its remuneration for its commercial role – that is recorded as income of USCO in its US tax return.  It did not record the licence fee as income in its US tax return.  We find as a fact that the reason USCO did not enter the Licence Fees in its profit and loss account is that USCO did not consider the Licence Fees to be its income.    In deducting the Licence Fees from the US Government receipt USCO was not taking monies due to it; instead, USCO was a paying agent acting in accordance with the unwritten arrangements put in place between USCO, UKCO and Mr XX.  Those arrangements did not consist of any legal assignment or other disposition of the right to the Licence Fees; rather, USCO put aside the Licence Fees into a separate deposit account always intended to be for the benefit of Mr XX.  That also explains why there was no payment by USCO to Mr XX for what would have been an assignment of a valuable asset.  
49.	In his witness statement Mr XX stated, 
“The terms of the [Licence Agreement] were not consistent with the circumstances prevailing when the [GSA Contract] was awarded but I dealt with this in an informal way. … By the revised agreement [USCO] raised invoices for the licence fees and marketing fees and deducted these fees as well as the [levy] from monies collected on payments of sales invoices into their US bank account.  From [UKCO’s] point of view the provision of the {Invention} programme was being handled by [USCO] and the specifics of [USCO’s] arrangement with me were none of its concern.”
50.	In his witness statement Mr XX described the IRS audit of USCO in 2001 and stated, 
“I showed [the IRS inspector] [the Licence Agreement] which outlined the background and anticipated functions of [USCO]. … There was no new written licence agreement for me to give him because the agreements between all the parties were verbal and he accepted this.  …  No adjustments were required with respect to the licence fees.  … If the IRS has seen the same licence agreement as the Inland Revenue (as background information), and the company’s books for the same year under scrutiny by the Inland Revenue, and its trading is acceptable to them on the revised verbal licence agreement, I do not see what business it is of the UK tax authorities to continue to seek additional taxation from [UKCO] or from me under the circumstances.”
However, what was, apparently, acceptable to the IRS was the fact that USCO was not booking any income in respect of the Licence Fees.  We conclude that the IRS – on the basis of the explanations provided to them at that time by Mr XX - accepted that the Licence Fees were still being dealt with in accordance with the Licence Agreement, which they (unlike HMRC) had been shown, so that USCO had not acquired any right to the Licence Fees and those still belonged to Mr XX.  
51.	In his witness statement Mr XX stated, 
“I have told the Inland Revenue that I did not take income from the licence fees until after I became non-resident [he moved to Andorra in 2001 for health reasons] and this is true.  I did not require immediate reward for my work because I have always taken a long-range view of business and I thought the best use of the licence fees would be to fund the Andorran Office base of engineering operations ...
…
I had not received income derived from licence fees until after I had become non-resident and therefore I had not declared this income for the tax returns under enquiry/assessment.”
52.	In response to a question in re-examination from the Taxpayers’ Representative, Mr XX answered that he had no accountancy training and he had no training concerning words such as “assign”.
53.	We find that the effect of the unwritten arrangements between UKCO, Mr XX and USCO was no more than a permission and a direction for USCO to deduct certain sums (the Licence Fees) out of monies owed by USCO to UKCO (the US Government payments net of the marketing fee and the levy) and hold those sums to the order of Mr XX, in satisfaction of UKCO’s obligations to Mr XX under the Licence Agreement.  Accordingly, the Licence Fees continued to belong to Mr XX throughout – and that is entirely consistent with our findings on the facts of ownership of the IP rights set out at paragraph 48 above.  
54.	We now examine the relevant tax law provisions that may be applicable to the facts as we have found them.

The relevant law
55.	HMRC have issued assessments on the Taxpayers on a number of alternative bases of charge. 
56.	The first basis of charge is that the Licence Fees were annual payments from which UKCO as payer should have deducted at source basic rate income tax; this results in the Para 4 Assessments.  
57.	Section 349 ICTA so far as relevant reads:
(1) Where (a) any annuity or other annual payment to which this paragraph applies; or (b) any royalty or other sum paid in respect of the user of a patent
is not payable or not wholly payable out of profits or gains brought into charge to income tax, the person by or through whom any payment thereof is made shall, on making the payment, deduct out of it a sum representing the amount of income tax thereon.
(1A) Paragraph (a) of subsection (1) applies to any annuity or other annual payment, not being interest  - 
(a) which is charged with tax under Case III of Schedule D, …
UKCO is a UK incorporated company subject to corporation tax, and so its profits are not brought into charge to income tax.
58.	Section 18(3) ICTA gives the charge to tax under Case III of Schedule D:
Case III: tax in respect of (a) any … annual payment, whether such payment is payable within or out of the United Kingdom, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation out of it, or as a personal debt or obligation by virtue of any contract, or whether the same is received and payable half-yearly or at any shorter or more distant periods, but not including any payment chargeable under Schedule A …
59.	In Commissioners of Inland Revenue v Whitworth Park Coal Co, Ltd (in liquidation) (1959) 38 TC 531 Lord Radcliffe stated (at 575):
“Neither the Acts nor the Courts have supplied any definition of these words, "other annual payment". There is authority for saying that the "category is quite a limited one ": In re Hanbury, 20 A.T.C. 333, at page 335. There is ample authority for saying that not all payments that are made annually are annual payments under Case III: Earl Howe v Commissioners of Inland Revenue, 7 TC 289; Hill v Gregory, 6 TC 39. The reason for limitation lies in the fact that for the Courts Case III annual payments have been inseparably associated with payments from which tax is deductible in accordance with General Rules 19 or 21, and it has been thought to be inconsistent with the idea of tax being deducted at the source at the standard rate to allow within the Case payments that are likely to be gross receipts of the payee and not "pure income profit". Although this distinction may be a good general guide in determining the scope of Case III, it does not in all circumstances throw a very certain light upon the duty of the payer, who is not necessarily in a position to know whether or not the sum he pays will be treated as "pure income" or a gross receipt in the computation of the payee's tax. That in itself perhaps argues for a restricted interpretation of the words "annual payment".
The word "annual" has not been found to admit of any significant interpretation. To the Courts it means no more than "recurrent": see, for example, Moss' Empires, Ltd. v Commissioners of Inland Revenue, 21 TC 264 - or even "capable of recurrence". That may be so, but I think that it would be both bad logic and bad law to deduce that merely because a payment is in fact recurrent or capable of recurrence it is therefore to be treated as an annual payment.
In the end the question of what is or is not such a payment is a question of judgment formed in the light of the considerations that I have alluded to.” 

60.	The second basis of charge is that the Licence Fees were the trading income of Mr XX; this results in the Schedule D Assessments. 
61.	 Section 18(3) ICTA gives the charge to tax under Case I of Schedule D:
Case I: tax in respect of any trade carried on in the United Kingdom or elsewhere but not contained in Schedule A …
62.	Section 832(1) ICTA provides that:
“trade” includes every trade, manufacture, adventure or concern in the nature of trade
63.	 Where a person carries on a trade as an inventor then royalties, licence fees and similar income receipts for IP rights form part of the trading receipts of that person.  If authority is required for that proposition then it can be found in Jeffrey v Rolls-Royce Ltd 40 TC 443 (not cited to the Tribunal).

64.	The third basis of charge is that the Licence Fees were employment income of Mr XX from an employment or office with UKCO; this results in the PAYE Assessments and the NIC Assessments.   
65.	Referring to the legislation in force during the relevant tax years, s 19(1) ICTA provided:
Tax under [Schedule E] shall be charged in respect of any office or employment on emoluments therefrom which fall under one or more than one of the following Cases—Case I: any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom …
66.	Section 131 ICTA provides:
(1) Tax under Case I, II or III of Schedule E shall, except as provided to the contrary by any provision of the Tax Acts, be chargeable on the full amount of the emoluments falling under that Case, subject to such deductions only as may be authorised by the Tax Acts, and the expression “emoluments” shall include all salaries, fees, wages, perquisites and profits whatsoever.
67.	Section 203 ICTA imposes a PAYE deduction obligation in respect of Schedule E emoluments:
(1)  On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment, notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for some year of assessment other than the year during which the payment is made.
68.	Section 6 Social Security Contributions and Benefits Act 1992 imposes the liability for Class 1 NICs.

Conclusions on chargeability
69.	We now turn to the UK tax consequences of our finding that the Licence Fees continued to belong to Mr XX throughout the relevant period.  
The Licence Fees were taxable on Mr XX as they arose
70.	The Taxpayers believed that by directing USCO to retain the Licence Fees and not remit them to Mr XX until he had ceased to be UK resident for UK tax purposes, that would prevent the income being taxable on both USCO and Mr XX as it arose and taxable on Mr XX only when he received the monies from USCO (by which time he would be outside the charge to UK tax) – see paragraph 51 above.
71.	Mr Tolley cited the case of Perkins’ Executor c CIR 13 TC 851 where Rowlatt J stated (at 858):
Now, this is one of those cases in which it has to be considered whether income is diminished for Super-tax purposes by reason - to use an expression - of something having to be done with that income to the exclusion of the taxpayer. It seems to me that the question - I think the Solicitor-General agreed with me - as a question can be stated very clearly. If a person has alienated his income so that it is no longer his income he is not super-taxed upon it, but if he merely applies the income so that it passes through him and goes on to an ulterior purpose, even although he may be obliged to do so, still that remains his income. I do not think there is any difficulty about stating that that is the question. It is the particular case that causes the trouble every time, and I am bound to say it does occur to me that there may be cases where the line is very hard to draw between what is an alienation and what is a binding application. From that point of view I suppose it is very important to look and see what the purpose of the application is, whether it is to pay a man's own debt or for some other purpose, but I suppose logically the purpose of an alienation, if it is an alienation, does not matter, and the purpose of an application, if it really is an application, does not matter either. However, that is how it stands.
72.	From the facts that we have found and stated at paragraphs 48 to 53 above, we find there was no alienation of the Licence Fees by Mr XX.  Accordingly, subject to any special rules of tax law, that income falls to be taxed on Mr XX as it arose to him.
73.	We record that the representatives made the following contentions, which, given our finding above, we do not need to consider further here:
(1)	Mr Tolley contended that a purported oral variation of the Licence Agreement would be ineffective to constitute a legal assignment of the IP rights, pursuant to s 136 Law of Property Act 1925.
(2)	The Taxpayers’ Representative contended that as all of UKCO’s sales were made to the US Government under the GSA Contract, which was governed by US law, both the relevant IP rights and the relevant licence to use such IP rights were located where the trade mark was registered, which he contended was the USA.  Thus the Licence Fees had a US source.  Any enforcement of the IP rights would be in the US courts. He also cited the case of Alloway v Phillips [1980] STC 490 in support.  He referred us to a passage from a textbook which stated that under US law an oral licence agreement is “valid in various contexts … For example, … to provide a binding obligation on the licensee to pay royalties”.

The Licence Fees were the trading receipts of Mr XX as the inventor of the Invention 
74.	It is clear from the evidence that Mr XX was the inventor of the Invention.  In his testimony Mr XX referred to the considerable work he had undertaken to develop the Invention, of which he was rightly proud, and how refinements had been made to the invention over a number of years.  As stated by UKCO to HMRC, he retained responsibility for design, engineering and technical services (paragraph 40 above).  He retained beneficial ownership of the IP rights throughout, notwithstanding his decision to register them for a period of time in the name of UKCO in order to give apparent commercial substance to that company in the eyes of third parties.  He licensed those IP rights to UKCO by virtue of the Licence Agreement.
75.	We find that Mr XX was engaged in the trade of an inventor.  There was only one invention but that is sufficient for there to be an identifiable trade.  Accordingly, the Licence Fees were trading receipts of Mr XX and are properly taxable under Case I of Schedule D.   
The Licence Fees were not emoluments from Mr XX’s office of director of UKCO
76.	In his testimony Mr XX described how, having invented the Invention, he decided to exploit it through a corporate vehicle and used the dormant company subsequently renamed as UKCO.  The trade of invention was already underway before UKCO became an operational company.  When Mr XX entered into the Licence Agreement he did so as the inventor of the Invention and as a person independent of UKCO.  Although the scope of s 131 ICTA is wide, it is still necessary to examine the capacity in which an individual derives the right to certain income.  For example, a director of a company who also happens to be its landlord would normally derive the rental income as landlord not as director.  We do not place any particular weight on the statement on the patent application form that UKCO derived the right from the inventor to be granted a patent by virtue of employment of the inventor by the company; Mr XX stated that the use of those words was semantics, and this was in any event a registration in the name of a nominee.
77.	We find that the Licence Fees were not received by Mr XX by way of emoluments of his office of director of UKCO.  Accordingly they are not Schedule E emoluments and no liability to PAYE or Class 1 NICs arises.

The Licence Fees were not “annual payments” within the meaning of s 349 ICTA
78.	From our findings above, the Licence Fees were received by Mr XX as Schedule D Case I trading receipts.  Thus they were not in his hands Schedule D Case III income within s 18(3) ICTA.  Further they were not annual payments within the meaning of s 349 ICTA.  Accordingly the obligation to deduct income tax under s 349 did not arise for the payer of the Licence Fees, UKCO.

Arguments and conclusions on validity of assessments
79.	  The Taxpayers made a number of challenges to the validity of the various assessments, as detailed below.  We address them all here, although our findings on the substantive issues may make some of these otiose.

Challenges to the validity of the Para 4 Assessments

First challenge
80.	UKCO contended that HMRC had no right to raise the Para 4 Assessments.
81.	As already stated, HMRC raised assessments on a number of alternative bases.  Paragraph 4(2) schedule 16 ICTA states:
If it appears to an officer of the Board that there is a relevant payment which ought to have been and has not been included in a return, or if an officer of the Board is of the opinion that a return is incorrect, any such officer may make an assessment on the company to the best of his judgment; …
82.	The Taxpayers’ Representative for UKCO contended, to quote from his skeleton argument:
“40.  It is submitted that it would be difficult to determine what liability HMRC were intending to pursue, let alone determine their primary or secondary objectives, given the tenor and content of their pre-assessment letter dated 19 April 2005.  In this letter Mr Meylan set out and then discredited a number of tax treatments.  The gist of the letter was that [the Para 4 Assessments] were to be issued for completeness or back-up in the event that [UKCO] did not agree to any of the other tax treatments.  Under the circumstances it could not be said that annual payments were the primary objective of HMRC at that time. …
49.	In summary, [UKCO] contends … that neither ... Mr Meylan, nor his Group Director, could be said to have held an honest belief that [UKCO] “ought” to have included the licence fees in a return, and therefore the inspector should not have issued any assessments under this provision.”
83.	  HMRC were investigating the Licence Fees paid by UKCO and those investigations lasted, intermittently, from August 2000 (the opening of the 1999 accounts enquiry) to May 2005 (the issue of the Para 4 Assessments).  From the bundle of correspondence presented to the Tribunal we note that at least as early as a letter from Mr Meylan to UKCO dated 12 July 2004 there is reference to the possibility of annual payments and the applicability of s 349 ICTA.  In the “pre-assessment letter” dated 19 April 2005 Mr Meylan stated:
“If licence fee is for tax purposes that of [USCO] – The situation remains that in my view the payments should be treated as annual payments in their hands and a tax deduction under section 349 ICTA 88 would be required.  For the reasons outlined above I do not consider this is the case here as the licence fee should be treated for tax purposes as being received by [Mr XX].  You however have stated that you consider [UKCO] to have been trading with [USCO].  If the [Tribunal] accept that for tax purposes this income is validly [USCO’s] then I would need to present to them why in my view this would then amount to annual payments caught by section 349 ICTA 88 … The assessments will be under Paragraph 4(2) schedule 16 ICTA 1988 and for each year of enquiry will be for periods outlined in [earlier correspondence].”
That clearly sets out Mr Meylan’s rationale as to why UKCO’s tax returns were incorrect.  Accordingly, the Tribunal rejects UKCO’s contention that HMRC had no right to raise the Para 4 Assessments.  
Second challenge
84.	UKCO contended that the form of the Para 4 Assessments was invalid.  
85.	The Para 4 Assessments gave the “assessment particulars” as “Relevant payment(s) made (Schedule 16 ICTA 1988 paragraph 4(2))”.  They informed the recipient of its right to apply for postponement of payment of the tax and said “(see notes 1 and 2 on the enclosed form 310 (Notes)). Any numbers to the left of the computation refer to appropriate paragraphs in the Notes which accompany the assessment.”   Unfortunately, the notes enclosed with the assessment were not the intended “310 Notes” but a set of “CT10 Notes”.  Further, the paragraph reference given on the assessment (paragraph 5) did occur in the CT10 Notes and related to a statutory provision that had been cited in other correspondence from HMRC (section 419 ICTA).  It was only during the course of a hearing before the Special Commissioners in November 2008 of UKCO’s application for closure notices that UKCO became aware of the nature of the Para 4 Assessments.  
86.	The Taxpayers’ Representative for UKCO contended that this considerable confusion caused such uncertainty as to the true basis of charge of the Para 4 Assessments that it was not until UKCO was provided with the correct set of notes (in February 2009) that the company could properly be said to have been in possession of a complete and valid assessment. 
87.	Section 114 TMA states:
(1) An assessment or determination, warrant or other proceeding which purports to be made in pursuance of any provision of the Taxes Acts shall not be quashed, or deemed to be void or voidable, for want of form, or be affected by reason of a mistake, defect or omission therein, if the same is in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts, and if the person or property charged or intended to be charged or affected thereby is designated therein according to common intent and understanding.
(2) An assessment or determination shall not be impeached or affected—   
(a)     by reason of a mistake therein as to—   
(i)     the name or surname of a person liable, or   
(ii)     the description of any profits or property, or   
(iii)     the amount of the tax charged, or   
(b)     by reason of any variance between the notice and the assessment or determination.
88.	While the Tribunal has sympathy with UKCO for the inconvenience to which the company was put by the HMRC error in relation to the notes included with the Para 4 Assessments, the Tribunal finds that the form of the Para 4 Assessments was valid.   Further, given that the confusion was resolved at or soon after the closure notice hearing in November 2008, UKCO has not been prejudiced by that error in relation to its preparation of its appeals against the Para 4 Assessments heard by this Tribunal.  
Challenge to the validity of the enquiry into the 2002 accounts 

89.	As stated at paragraph 30 above, HMRC purported to open an enquiry into UKCO’s return for the year ended 31 October 2002 in a letter dated 5 October 2004.  The Taxpayers’ Representative for UKCO contended that this notice was ineffective for two reasons.  First, it was the final paragraph in a four page letter headed “Enquiries into Returns for 31st October 2000 and 31st October 2001”, although he accepted that the paragraph in question was headed “Company Accounts to 31st October 2002”.  Secondly, the paragraph stated, “… I hereby give you notice under Finance Act 1988 Schedule 18 paragraph 24 of an enquiry into these accounts.”  The correct statutory provision is paragraph 24 schedule 18 Finance Act 1998.  
90.	On the first point, we do not consider this has any bearing on the validity of the opening of the enquiry.
91.	On the second point, the Taxpayers’ Representative contended that HMRC could not rely on s 114 TMA (cited above), because an error on a notice of enquiry is not of a type provided by s 114.  The Tribunal notes that the relevant wording in paragraph 24(1) is:
The Inland Revenue may enquire into a company tax return if they give notice to the company of their intention to do so (“notice of enquiry”) within the time allowed.
There is no statutory requirement to cite the enabling statutory provision.    Also, the words “or other proceeding” in s 114 are sufficiently wide to include a paragraph 24 notice of enquiry.  The statement by HMRC in their letter dated 5 October 2004 is sufficient to constitute a valid notice of enquiry.
92.	Further, as we believe the Taxpayers’ Representative accepted, UKCO has not been prejudiced by the typographical error in HMRC’s letter in relation to its preparation of its appeals heard by this Tribunal.  
Challenges to the validity of the NIC Assessments

First challenge
93.	UKCO contends that the NIC Assessments are “void for want of form”.  To quote from the Taxpayers’ Representative’s skeleton, HMRC’s decision, 
“was issued on 30 September 2005 without any reference on the Notice itself nor in the covering letter referenced therein to the legislation under which the assessments to NIC were issued.  … The first notification of any legislation with respect to NIC was in HMRC’s acknowledgement of [UKCO’s} appeal in a letter dated 12 October 2005 … [That] occurred after [UKCO] had appealed on 3 October 2005 … Therefore, [UKCO] had in truth appealed against a non-statutory concept called “NIC” and no taxpayer would have found any appeal route under so vague a reference …”
94.	The Taxpayers’ Representative for UKCO contends that s 114 TMA does not assist HMRC on this, because the NIC notice “does not purport to be made in pursuance of any provision of the Taxes Acts”.  He also referred the Tribunal to the decision of the Special Commissioners in Vodafone 2 [2005] STC (SCD) 549.
95.	Before dealing with those arguments, it is important to note what was stated on the notice issued on 30 September 2005.  It is headed “Notice of Decision” and states:
“National Insurance contributions … My decision is as follows:
1. That [UKCO] is liable to pay primary and secondary Class 1 contributions for the period ended 6 April 1999 to 5 April 2001 in respect of the earnings of [Mr XX].
2. The amount that [UKCO] is liable to pay in respect of those earnings is £74,126.39.
3. The amount that [UKCO] has paid in respect of those earnings is nil.
… If you accept this decision please pay … If you do not accept this decision please appeal … Interest may be charged on National Insurance contributions paid late.”
96.	This Tribunal concludes that no reasonable person reading that notice could have been in any doubt as to its nature and intent.  It does not require any remedy under s 114.  Further, Vodafone 2 (which is not binding on this Tribunal) is easily distinguishable: there HMRC sent a letter to the company requesting certain information; a director replied stating he was not sure if the letter was a formal notice (under paragraph 27 schedule 18 FA 1998) but in case it was, he was making a formal appeal; HMRC then replied confirming the letter was not intended to be a formal paragraph 27 notice.  The Special Commissioners held that the letter could not be such a notice because, “a notice under para 27 must clearly indicate that it is such, so that the recipient is in no doubt as to the legal obligations (including a liability to penalties for non-compliance) which it imposes.”  The notice of decision sent to UKCO is clearly a decision in respect of NICs.
97.	For the reasons stated above, we reject UKCO’s contention that the NIC Assessments are “void for want of form”.
Second challenge
98.	To quote from the Taxpayers’ Representative’s skeleton:  “[UKCO] contends that the NIC assessments for years 1999/2000 relate in part to [UKCO’s] return for year ending 31 October 1999.  That return was the subject of an enquiry into the Licence Fees and the enquiry was closed without any amendments being required.  [UKCO] understands that it would be necessary for HMRC to raise assessments for this period under discovery legislation and it is doubtful that they have done so.”
99.	The Taxpayers’ Representative’s skeleton refers to Section 29 TMA in relation to the NIC Assessments.  We consider that that provision has no application to the NIC Assessments; there is nothing in the relevant NIC primary or secondary legislation to import s 29 TMA, and the relevant time limitation regime is that in the Limitation Act 1980.  HMRC issued protective proceedings in the Newcastle County Court in November 2005 which were stayed pending the outcome of the appeals before this Tribunal.
Challenges to the validity of the PAYE Assessments

100.	UKCO challenged the PAYE Assessments on broadly the same grounds as the NIC Assessments, although it accepted that the PAYE assessments did make reference to the relevant statutory provisions.
101.	In relation to the discovery point, s 29 TMA is relevant here.  Reg 80(5) Income Tax (Pay As You Earn) Regulations 2003 applies the TMA provisions relating to assessments (including s 29) as if the Reg 80 determination were an assessment, and the amounts of tax determined were income tax charged on UKCO.
102.	Section 29 TMA, so far as relevant states:
Assessment where loss of tax discovered
(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or   
(b)     that an assessment to tax is or has become insufficient, or   
(c)     that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
…
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—   
(a)     in respect of the year of assessment mentioned in that subsection; and   
(b)     in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—   
(a)     ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or   
(b)     informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if—   
(a)     it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;   
(b)     it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;   
(c)     it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or   
(d)     it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—
   (i)     could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii)     are notified in writing by the taxpayer to an officer of the Board.
(7) In subsection (6) above—   
(a)     any reference to the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—   
(i)     a reference to any return of his under that section for either of the two immediately preceding chargeable periods; and   
(ii)     where the return is under section 8 and the taxpayer carries on a trade, profession or business in partnership, a reference to any partnership return with respect to the partnership for the relevant year of assessment or either of those periods; and   
(b)     any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.
(8) An objection to the making of an assessment under this section on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the assessment.
(9) Any reference in this section to the relevant year of assessment is a reference to—   
(a)     in the case of the situation mentioned in paragraph (a) or (b) of subsection (1) above, the year of assessment mentioned in that subsection; and   
(b)     in the case of the situation mentioned in paragraph (c) of that subsection, the year of assessment in respect of which the claim was made.
103.	HMRC’s enquiry into UKCO’s 1999 accounts was closed on 19 October 2000.  UKCO contends that no discovery assessment under s 29 is possible because of the operation of s 29(5)(b): when HMRC  informed UKCO that they had completed their enquiries into that return, HMRC could have been reasonably expected, on the basis of the information made available to them before that time, to be aware of the situation mentioned in s 29(1) (ie that assessable income had not been assessed). 
104.	Mr Tolley for HMRC contends that two crucial pieces of evidence acquired by HMRC were not provided by or on behalf of the Taxpayers: the Licence Agreement and the tax return information of USCO.  He contended that it was only after Mr Meylan took over responsibility for the enquiry (in March 2004) that HMRC formed a view with regard to liability to tax on the basis of annual payments and, subsequently, with regard to emoluments or trading income; there was no earlier time at which, on the basis of the information provided by or on behalf of the Taxpayers, HMRC could reasonably have been expected to reach either of those views.
105.	In June 2001 HMRC first asked to see the agreements under which the Licence Fees were payable and the accounts of USCO.  In her testimony Mrs XX said that certain information was made ready and available for the meeting in October 2001 but HMRC did not specifically ask to see it so it was not handed over.  HMRC’s note of that meeting indicates that the request for the agreements and accounts was reiterated at the meeting.  When HMRC did eventually get hold of the information it came not from the Taxpayers but from the US tax authorities.  As stated at paragraph 35 above, it is not certain when the Licence Agreement was obtained by HMRC; it may have been in January 2003 (when the USCO US tax return was obtained) but was certainly no later than March 2004.  Even if it was January 2003 – the date most favourable to the Taxpayers in this context – it cannot be said that HMRC were at that point in a position to form a view as to what arrangements in relation to the Licence Fees had been made between UKCO, Mr XX and USCO.  The information that had been provided to HMRC up until then by the Taxpayers had been piecemeal and not transparent.  It was not until March 2004, when Mr Meylan dropped the bombshell that he now had a copy of the Licence Agreement, that the Taxpayers made any real attempt to address the concerns raised by HMRC in earlier correspondence.  That elicited the fourteen page “response to enquiries” in May 2004 from UKCO.  
106.	We find as a fact that May 2004 was the earliest time at which HMRC could have been reasonably expected, on the basis of the information made available to them by that time, to be aware that income which ought to have been assessed to income tax had not been assessed.  Accordingly, s 29(5)(b) is not in point and the conditions of s 29 are satisfied in relation to the PAYE Assessments.

Challenges to the validity of the Schedule D Assessments

107.	The discovery provisions in s 29 TMA are also relevant in relation to the Schedule D assessments but with an extra twist.  As stated at paragraph 30 above, HMRC accept that the notice opening an enquiry under s 9A TMA into Mr XX’s tax return for the tax year 2000-2001 was not received by Mr XX until 5 June 2003, which was after the statutory time limit for opening the enquiry of 30 April 2003.  Following representations on behalf of Mr XX, HMRC purported to close that enquiry under s 28A TMA on 10 December 2003.
108.	The Taxpayers’ Representative for Mr XX contends that an enquiry was opened and then closed, as stated in the correspondence from HMRC to Mr XX.  Mr Tolley for HMRC contends instead that, since the statutory time limits were missed, there can never have been an enquiry opened in the first place and so HMRC’s description of a closure was a misnomer – there just never was a valid enquiry. 
109.	The significance of this is that on Mr Tolley’s interpretation the relevant date for the purposes of s 29(5) was 30 April 2003 (when the normal enquiry period expired); but on the Taxpayers’ Representative’s interpretation the relevant date was 10 December 2003 (when the purported enquiry was purportedly closed).  
110.	From our finding of fact in paragraph 106 above – that May 2004 was the earliest time at which HMRC could have been reasonably expected, on the basis of the information made available to them by that time, to be aware that income which ought to have been assessed to income tax had not been assessed – it follows that both dates described in paragraph 109 above had passed by that time.  Accordingly, on either interpretation of the relevant date, HMRC did not have sufficient information until May 2004 and thus the conditions of s 29 are satisfied in relation to the Schedule D Assessments.
111.	Both representatives made reference to the decision in Langham v Veltema [2004] STC 544 but, in view of our finding as to the relevant date of knowledge, we do no more than record that the case was cited.
Summary of conclusions on challenges to the validity of the various assessments

112.	To summarise, we find that:
(1)	HMRC had the right to raise the Para 4 Assessments (paragraph 83 above).  
(2)	The form of the Para 4 Assessments was valid (paragraph 88 above).  
(3)	The statement by HMRC in their letter dated 5 October 2004 is sufficient to constitute a valid notice of enquiry into the 2002 accounts      (paragraph 91 above).  
(4)	The NIC Assessments are not “void for want of form” (paragraph 97 above).  
(5)	Section 29 TMA has no application to the NIC Assessments (paragraph 99 above).  
(6)	The conditions of s 29 are satisfied in relation to the PAYE Assessments (paragraph 106 above). 
(7)	 The conditions of s 29 are satisfied in relation to the Schedule D Assessments (paragraph 110 above). 

Decision

113.	For the reasons stated at paragraphs 72 and 75 above, we dismiss Mr XX’s appeal against the Schedule D Assessments.  
114.	For the reasons stated at paragraphs 72, 77 and 78 above, we allow UKCO’s appeals against the Para 4 Assessments, the PAYE Assessments, and the NIC Assessments.  
Right of appeal to Upper Tribunal

115.	Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal, which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identify the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision, and state the result the party making the application is seeking.
116.	This document contains the full written reasons for the Decision.

TRIBUNAL JUDGE

RELEASE DATE: 29 April 2010