[2010] UKFTT 469 (TC)

TC00731

Appeal number: TC/2010/2543

CORPORATION TAX – application for postponement of tax under s55(6) – proceeds of tipping on land received by Applicant – evidence that beneficial owner of land was not the Applicant- whether reasonable grounds to believe the Appellant is overcharged to tax by the assessments on the tipping receipts - yes
COSTS – whether unreasonable for HMRC to defend the postponement application – no - costs under Rule 10(1)(b) refused

FIRST-TIER TRIBUNAL

TAX 

	BLUNTS FARM ESTATE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	Barbara Mosedale (TRIBUNAL JUDGE)							Leslie Howard (TRIBUNAL MEMBER)		

Sitting in public at Holborn Bars, London on 14 September 2010

Mr O Conolly, Counsel, instructed by Haslers, for the Appellant

Mr Elson,  Officer of HMRC, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The Applicant Company applies for postponement of payment of corporation tax arising from 3 assessments pending the hearing of its substantive appeal. The postponement application is made under s55(3) Taxes Management Act 1970 (“TMA”).
2.	HMRC opened an enquiry into the Company’s accounting period ending 31 August 2004 on 20 February 2006.  The assessments were issued on 3 December 2009 and are for (including interest) £34,893.54 for the accounting period ending 31 August 2004, for £826,794.63 for the accounting period ending 31 August 2005, and for £106,673.67 for the accounting period 31 August 2006.  The total at stake is £968,361.84.  
3.	The assessment for the period ending 31 August 2004 was made under paragraph 30 of Schedule 18 of the Finance Act 1998 and was an amendment of a self-assessment made during the course of an enquiry.  The latter two assessments were discovery assessments made under paragraph 41 of the same Schedule.
4.	An appeal was lodged with HMRC on 16 December 2009 together with an application for the tax assessed to be postponed.  HMRC refused the postponement application on 12 February 2010.   The application for postponement was made to the Tribunal on 11 March 2010.
Reasonable grounds test
5.	Section 55(2) TMA provides that except as otherwise provided by S55 the tax charged by an assessment shall be due and payable as if there had been no appeal.  S55(3)(a) allows the taxpayer to apply to the Tribunal if HMRC refuses the postponement.  Section 55(6) provides:
“The amount of tax the payment of which shall be postponed pending the determination of the appeal shall be the amount (if any) in which it appears that there are reasonable grounds for believing that the appellant is overcharged to tax….”
6.	It follows from the requirement for this Tribunal to determine whether there are reasonable grounds for believing the appellant is overcharged to tax, that this Tribunal must consider the merits of the case which the Applicant intends to put to the Tribunal:  but we do not determine the appeal.  As Park J said in Pumahaven Ltd v Williams (HMIT) [2002] BTC 477 at paragraph 10:
“…the phrase ‘reasonable grounds for believing that the appellant is overcharged to tax’ taken as a whole does not require the commissioners to conduct a mini trial of what will be the main appeal.”
7.	Even though we do not conduct a mini-trial, nevertheless we must consider both the legal arguments put and the evidence adduced by Appellant in order to determine whether together they amount to “reasonable grounds”.  As the Special Commissioner said in the case of Swallow Ltd v Inspector of Taxes [2001] STC (SCD) 206, in a paragraph specifically approved by the Court of Appeal in the appeal in that case in Pumahaven Ltd v Williams [2003] EWCA Civ 700:
“..the appellant at this stage does not have to prove all the facts or succeed in all the legal arguments which will have to be proved or established at the hearing of the substantive appeal.  Thus my limited task is to determine whether the appellant has demonstrated reasonable grounds for believing that it is overcharged to tax.  However, s55(6) does require me to have some firm basis for believing that the appellant has been overcharged by the assessment and here I must have regard to the evidence adduced.”
8.	Having considered the legal and evidential basis for the Appellant’s case, how high is the threshold it must cross to establish “reasonable” grounds?  Counsel referred me to the Special Commissioner’s decision in the above case of Swallow.  In that case the Special Commissioner adopted the meaning of “reasonable grounds” from a number of Australian cases, in particular that:
 “to be ‘reasonable’, it is requisite only that they be not fanciful, imaginary or contrived, but rather that they be reasonable; that is to say based on reason, namely agreeable to reason, not irrational, absurd or ridiculous”.  
And that for grounds to be reasonable it
 “requires the existence of facts which are sufficient to induce that state of mind in a reasonable person”.
9.	Mr Conolly suggested this meant that the threshold was a low one and all the Applicant had to do was show that its grounds of appeal were not absurd.  In our view this is going too far.  The quotations given above themselves require the grounds to be reasonable as well as not absurd, irrational or ridiculous.  It may be that grounds which are not absurd might not nevertheless be reasonable grounds for believing the assessments to be wrong.  Indeed we are bound by Park J’s view in Pumahaven in the High Court at paragraph 39 that:
“There is scope for an argument not to be palpable nonsense but still to stop short of affording reasonable grounds for believing that the taxpayer may have been overcharged.”
10.	It seems to the Tribunal that the purpose of s55 is to prevent delays in the collection of tax by frivolous appeals but at the same time not to put financial obstacles in the way of a taxpayer with reasonable grounds who wants an opportunity to present his case.  To demonstrate that it has reasonable grounds to bring its appeal, the Applicant does not have to show to us that it is more likely than not that it would win the appeal:  on the other hand the Applicant has to do more than show us it is not virtually inevitable that it would lose the appeal.  The taxpayer must show us that it has reasonable grounds to believe that the assessments are excessive.  
The case
11.	The Tribunal heard evidence from Mr Smith, a trustee in the H & M L Smith 1991 Settlement (“the Trust”) and from Mr Anderson, partner in Haslers, the accountancy firm which gave the advice referred to below.  There was also some documentary evidence to which we refer below.
12.	The Applicant’s case, including its evidential case,  is as follows.  Mr Smith and Mr Newman had made joint investments in land over many years.  Mr Newman participated personally:  Mr Smith participated (with his sister Mrs Sharon Gay) as trustees of the H & M L Smith 1991 Settlement (“the Trust”).  Mr Smith and Mr Newman decided to purchase land known as Blunts Farm with the intention of developing it as a golf course.  Their normal practice when buying land together was to set up a new company for each piece of land bought.  In accordance with their normal practice a company known as Parsonage Golf Limited (and now re-named Blunts Farm Estate Limited, the Applicant in this case) was incorporated and Mr Newman and the Trust were its shareholders.  It purchased Blunts Farm on 12 April 2002 from the unconnected vendor, a Mr Axon, at market value.  
13.	In order to create the landscape necessary for an interesting golf course, it was decided to allow the tipping of inert waste onto the Blunts Farm land before the golf course was developed.
14.	After the acquisition, Mr Smith took advice from their accountants Haslers, and in particular from Mr Anderson. The advice was that because their development plans were somewhat different to their normal plans and in particular involved creating a golf course, it would be more tax efficient for the land to be held personally rather than through a company.  The advantage would be that taper relief would be available because (in the opinion of Haslers) the tipping receipts would be capital.
15.	It was therefore decided for tax reasons to create a partnership between Mr Newman and the Trust and to transfer the land from the Company to the partnership. 
16.	No written partnership agreement was entered into.  Mr Smith stated he saw no need for one as his business relationship with Mr Newman extended back over 20 years and was based on trust.  The income split would be 50/50 between Mr Newman and the Trust.  They instructed the same accountancy firm (Haslers).
17.	 Stamp duty had been paid on the purchase of the land from Mr Axon and they wished to avoid paying it again.  It was therefore decided that a sale contract would be entered into and the contract price would be paid but that the conveyance of the land from the company to the partnership would never take place.  In fact, the sale agreement was dated 27 November 2003, just a few days before the introduction of SDLT on 1 December 2003.  The evidence given was that this agreement was signed before tipping activities commenced.  
18.	The effect intended was that although the company would remain the legal owner of the land it would be a mere bare trustee for the partnership which would have full beneficial title to the land.
19.	The income from the tipping was declared by the Mr Newman on his personal tax return and by the trustees on the trust return on or around the due date of 31 January 2006.  The returns were completed by Haslers. No partnership return was submitted and HMRC were not notified of the existence of the partnership on the grounds that (in the view of Mr Anderson) the tipping receipts were capital and that a partnership did not legally exist until it realised trading income such as was intended to be generated by the operation of the golf course.  
20.	The Company filed returns showing it to be dormant.
21.	However, to the complete contrary of the arrangements advised by the accountants and adopted by Mr Newman and the trustees, the Company made an application to be VAT registered on 19 April 2002 and this was signed by Mr Newman.  It described its business activity as “development of golf course”.  Thereafter until the end of 2005 it filed VAT returns and paid VAT on the tipping receipts at Blunts Farm.
22.	During this time any customer tipping on the land would be issued with Site Receipts in the name originally of Parsonage Golf Ltd and then of Blunts Farm Estate Ltd.  In around March or April 2004 the Company ordered more Blunts Farm Estate Ltd stationery.
23.	Further, the Company entered into a factoring agreement with a bank under which all tipping receipts were factored.  The proceeds from this agreement were paid into the Company bank account.
24.	The day to day administration of the tipping activities were carried out by persons employed by Mr Smith’s umbrella company Aitch Group Holdings and Aitch Construction.  Mr Bultitude was the bookkeeper and Mr Stedman was the Finance Director.  It was the applicant’s case that they operated in the mistaken belief that the tipping activity was carried out by the Company.  Where Mr Newman or Mr Smith signed anything they tended to sign what they were asked to sign and rely on the staff to get it right.  
25.	On 20 October 2005 Mr Bultitude on behalf of the Company wrote to HMRC and notified them that:
“currently this company is trading under the above name.  As from 1 November 2005 the ‘trading business’ of the company will transfer into a new partnership called H & M L Smith 1991 Settlement and Philip Newman t/a Parsonage Golf.  The nature and turnover of the new business will be similar to that of the old company.
We therefore request that the VAT registration number applied to Blunts Farm Estates Limited be transferred to the new entity”
26.	The partnership made an application for VAT registration with effect from 1 November 2005 stating they were taking over the business from Blunts Farm Estate Ltd and that they wished to keep the Company’s VAT number.  This application was also signed by Mr Newman.  Similarly the VAT 68 “Request for Transfer of a Registration Number” dated 18 October 2005 was signed by Mr Newman on behalf of both the company and partnership.
27.	In summary the Applicant’s case is that it was intended that the tipping activities be carried on by the partnership and that the partnership was the beneficial owner of the land and was intended to be beneficially entitled to the proceeds of the tipping.  Nevertheless, due to a mistake made by the partners and/or their staff, the Company actually represented itself to third parties as carrying on the tipping activities and actually received the proceeds, although it held them on behalf of partnership.
HMRC’s position
28.	HMRC do not accept that a partnership existed from 2003 and does not consider that any evidence that one did exist has been put forward.  Mr Elson referred to the Court of Session case of Commissioners of Inland Revenue v Williamson (1928-29) 14 TC 335 where  Lord Clyde said:
“..you do not constitute or create or prove a partnership by saying that there is one.  The only proof that a partnership exists is proof of the relations of agency and of community in losses and profits and of the sharing in one form or another of the capital of the concern; the only proof of a partnership consists in proof of these things.”
29.	While this is clearly right it does not apply in this case.  Firstly, there is oral evidence that Mr Newman and the Trust intended to exploit the land together for mutual profit so it is not a question of mere assertion that a partnership existed.  We do not prejudge whether the Tribunal will accept the evidence:  but the evidence does exist.  Secondly, the question of the existence of a partnership is a red herring.  The assessments at issue are on the Company:  it does not need to show that a partnership existed, merely that it the company did not receive the tipping receipts in its own right.
30.	HMRC also doubt that the land was transferred to the partners saying that the sale agreement was unsigned by the vendor (the Company) and was in favour of Mr Newman and Mrs Gay and not clearly in favour of the Trust.  Evidence was produced during the hearing that the sale agreement was signed by Mr Newman on behalf of the company.  We were also given oral evidence that Mrs Gay was a party to the contract in her capacity as Trustee of the Trust.  Again we do not prejudge whether the Tribunal will accept the evidence but the evidence does exist.  We also note that the question of in what capacity Mrs Gay bought the land is a red herring:  the assessments are on the Company and the question is whether it had parted with beneficial ownership of the land.
31.	Mr Elson said that even if the Tribunal hearing the appeal accepted that the advice given was that the tipping should be carried on by a partnership, nevertheless the evidence is that it was in fact carried on by the Company.  He reiterated that Mr Stedman who was the Finance Director of Mr Smith’s holding company was clearly thought that the Company was the trader and was unaware that the partnership was meant to carry on the trading.  When registering the partnership for VAT in 2005 the application stated the company was currently trading.  Any person tipping at the site would believe that they were contracting with the Company:  and the factoring bank would also consider their client was the Company.
32.	HMRC go on to say that even if it is established that the partnership exists and owns the land beneficially, that still does not necessarily mean that the partners were entitled to the tipping receipts.  In HMRC’s view the evidence does not support the Applicant’s contention that it did not receive the tipping receipts in its own right.
Conclusions
33.	On the question of law we find that the Applicant’s case, if it could be proved on the evidence, that it is not liable to tax on the tipping receipts because it did not receive the tipping receipts in its own right but on behalf of another person or persons, is a reasonable case and indeed HMRC does not appear to dispute this.  
34.	This case turns largely on its facts and the substantive issue is whether as a matter of fact the Company received the tipping receipts in its own right.  It is not for this Tribunal determining the postponement application to make conclusive findings of fact yet nevertheless we have to conclude whether there are reasonable grounds for believing the assessments to be wrong.  We have to form some view of the evidence:  we must allow the postponement application if we find the evidence adduced to this Tribunal by the Applicant sufficiently credible to form reasonable grounds for believing the tax assessments wrong.  In other words, we do not express a concluded view on the evidence but we will conclude whether there is evidence on which a Tribunal could reasonably conclude that the Company did not receive the tipping receipts in its own right.    
35.	Mr Conolly pointed out that Mr Elson for HMRC had chosen not put it to the witnesses that their evidence was false and that the sale agreement was a sham and that it was therefore not open to this Tribunal to find to the contrary. However, it is not for this Tribunal to form a concluded view on the evidence and HMRC have the right to challenge the evidence in any substantive appeal.  We found the evidence seen and heard by this Tribunal was such that a reasonable Tribunal could conclude it was credible and that, further, a reasonable Tribunal, if it found the evidence credible,  could conclude that the tipping receipts did not belong beneficially to the Company.  
36.	We therefore conclude that there are reasonable grounds to believe the Company is overcharged to tax by the assessments against which it has lodged appeals. We express no view on whether the Applicant is overcharged which is an issue for sole determination by the Tribunal which hears the substantive appeal. We are merely deciding that pending that hearing the tax should be postponed. 
37.	We allow the postponement application.
Other considerations
38.	Counsel for HMRC asked the Tribunal to take further matters into account when considering whether to allow the company’s application for postponement.  These other matters were:
•	That in respect of the paragraph 30 amendment, the Applicant Company by law was unable to take any further steps in the appeal beyond lodging it with HMRC and in particular (as per paragraph 30(5) Schedule 18 Finance Act 1998) was unable to request a review or notify the appeal to the Tribunal until HMRC conclude their enquiry.  That this meant, in Mr Conolly’s view, the Tribunal should be slow to refuse the application as it was uncertain when HMRC would decide to close the enquiry and in the meantime the Company could not progress its appeal;
•	That the Company has no assets and the likely consequence of a failure of the postponement application would be that HMRC would take enforcement action which would result in the Company being wound up before its appeal could be heard and that this would not be consistent with justice and the overriding objectives of the Tribunal;
•	That as HMRC’s response to the above bulletpoint was that Mr Elson indicated that he did not think HMRC would take action to enforce the assessments pending the appeals as the effect of this would be to force the Company into insolvent liquidation with its appeal unheard,  HMRC’s opposition to the application for postponement seemed pointless as the result would be the same.
39.	Although irrelevant as we have allowed the application for the reasons given in paragraph 35 above, we note that we cannot take these matters into account.  S55 gives the Tribunal no discretion: it only allows the postponement where there are reasonable grounds.  And the High Court in Pumahaven (above)  has ruled we have no discretion:
 “The commissioners [referring to the Special or General Commissioners] have an exercise of judgment to carry out but not an exercise of discretion.  They have to exercise their judgement as to whether the taxpayer’s grounds or arguments are reasonable.  If they consider that they are, they must direct a postponement, and they do not have  a discretion to grant one or not.”
Costs application
40.	Although Mr Conolly stated it was legitimate for HMRC to raise questions on the mismatch between the declared direct and indirect tax position, nevertheless he considered it was unreasonable for them to oppose the postponement application.  He asked the Tribunal to award the Applicant costs in the event they were successful.
41.	This application was not categorised as a complex and therefore the only power the Tribunal has to award costs, as Mr Conolly recognised, was under Rule 10(a) or (b) of the Tribunal Procedure (First-tier Tribunal) Tax Chamber 2009 for wasted costs or unreasonable behaviour.
42.	His view was that HMRC’s conduct in defending the postponement application was unreasonable because s55 imposed a low test which in his view the applicant easily met.  He did not suggest a wasted costs order against a legal or other representative of HMRC.
43.	We consider that this Tribunal would be very slow to award costs on the basis it was unreasonable to bring or defend an appeal or application.  If the Tribunal were to do otherwise, it would be very close to bringing in a “costs follow the event” rule.  On the contrary, our Tribunal Procedure Rules 2009 make it clear that the normal rule is that no costs are awarded.  
44.	So it is far from being enough to show that HMRC failed in its defence.  We consider that for the Applicant to succeed in its costs application it has to show that it was so obviously and apparently in the right in its claim for postponement of the assessed tax that it was not reasonable for HMRC to defend the application.
45.	Should it have been clearly apparent to HMRC that the Applicant would win its postponement application?  On the contrary, taking into account the body of evidence, particularly the documentary evidence, known to HMRC before the hearing, its resistance to the application seems reasonable.  This evidence includes evidence that shows the Company entered into the contracts in its own name with the tippers and with the factoring bank, it registered for VAT and accounted for the VAT on the tipping receipts in its own name.  And the Company informed HMRC that it was selling its business as a going concern in 2005 after the receipts in question arose.  
46.	Further, the evidence produced to the Tribunal and which we have taken into account in reaching our decision on the postponement application, was largely oral.  This includes the fairly critical evidence relating to whether Mr Newman and the Trust had paid the Company for the land under a contract of sale in 2003.  HMRC did not possess and could not judge this oral evidence before the hearing.  
47.	Although we accept that “reasonable grounds” is a fairly low test which the Applicant has to meet in order to be entitled to postponement, in view of the evidence unfavourable to the Applicant’s case which HMRC did possess before the hearing, and that HMRC had not heard oral evidence which was favourable to the Appellant until the hearing was underway, we do not think it should have been obvious to HMRC that its resistance to the application would be unsuccessful.  In our view it was not unreasonable for HMRC to resist the application.
48.	We make no order for costs.
49.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Barbara Mosedale

TRIBUNAL JUDGE
RELEASE DATE: 5 October 2010