[2011] UKFTT 63 (TC)

TC00941

Appeal number TC/2010/1103

INCOME TAX – claim for relief from income tax for an allowable CGT loss on a disposal of shares subscribed for in a qualified trading company – section 574 ICTA 1988 – held the shares in issue had not been subscribed for within the meaning of section 574 – see: s.574(3) – appeal dismissed – Tribunal criticised HMRC for making repayments of tax before enquiring into the Appellant’s tax returns

FIRST-TIER TRIBUNAL

TAX 

	FARZAD FARD	Appellant

-	and –
-	
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: JOHN WALTERS QC
						JOHN ROBINSON

Sitting in public at 45 Bedford Square, London WC1 on 11 January 2011

The Appellant in person

Ms. Nicola Parslow, Advocate, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	Mr. Fard (“the Appellant”) appeals against an amendment to his self-assessment for the year 2005-06.
2.	The amendment arose in the following circumstances.
3.	A company in which the Appellant had shares, FI Packaging Ltd. (“the Company”), ceased to trade on 14 October 2004 and went into administration thereafter, in the same year of assessment (2004/05).  H.M. Revenue and Customs (“HMRC”) accept that the Company was ‘a qualifying trading company’ within section 574(1) Income and Corporation Taxes Act 1988 (“ICTA”).
4.	Section 574 ICTA relevantly provides as follows:
“(1) Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (fort capital gains tax purposes) on the disposal of the shares in any year of assessment, he may, by notice given within twelve months from the 31st January next following that year, make a claim for relief from income tax on-
(a)	so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or
(b)	so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, for the whole of that income;
but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and paragraph (b) above.
Where such relief is given in respect of the loss or any part of it, no deduction shall be made in respect of the loss or (as the case may be) that part under [the Taxation of Chargeable Gains Act 1992].
(2)	...
(3)	For the purposes of this section-
(a)	An individual subscribes for shares if they are issued to him by the company in consideration of money or money’s worth; and
(b)	...”

5.	In late 2006, the Appellant sought advice from his local (Maidstone) tax office as to what tax relief might be available to him in these circumstances.  Over the telephone he was informed that relief would or might be available for the year 2004/05.  He was sent a (duplicate) tax return form for that year with supplementary pages for employment income and capital gains tax (“CGT”) together with a copy of the ‘Help Sheet’ IR286 (Income tax losses for shares).
6.	The Appellant assumed that if the tax he had paid in 2004/05 was insufficient to relieve the loss which he had suffered, then the balance of the loss could be carried forward to be similarly relieved against income in future years. The ‘Help Sheet’ makes it clear that this is not the case.
7.	The revised tax return for 2004/05 which the Appellant completed and signed on 6 December 2006 showed a claim for a capital loss to be ‘used against income’ of £76,698.
8.	Ms. Parslow told the Tribunal that HMRC operates a system of “process now check later” in relation to returns.  
9.	Accordingly the revised tax return for 2004/05 was processed (without being checked) and a tax calculation was issued for 2004/05 showing the loss claimed of £76,698 and income tax overpaid of £9705.60.  This figure (£9705.60) was the amount of income tax which had been deducted at source from the Appellant’s employment income in the year.
10.	A repayment of £9705.60 was made to the Appellant before HMRC had checked the validity of the claim.
11.	The Appellant had filed a tax return for 2005/06 on 13 October 2006 in which no claim was made for loss relief.
12.	He amended his tax return for 2005/06 on 29 March 2007 and in the amended return claimed relief for ‘unused losses brought forward from earlier years’ of £66,967.67. (The Tribunal is unsure how this precise figure was arrived at, but it is close to the difference between the loss originally claimed (£76,698) and the tax repayment received for 2004/05 (£9705.60)).
13.	In any event the claim was as a matter of law inadmissible, because section 574(1) of ICTA only permits allowable losses to be relieved against income tax for the year of assessment in which the relevant disposal is made (in this case 2004/05) and the last preceding year (in this case 2003/04).  No claim in respect of an allowable loss incurred on a disposal of shares in the Company in 2004/05 could be relieved under section 574(1) ICTA against income tax on income for the succeeding year of assessment (2005/06).
14.	Nevertheless, following HMRC’s system of “process now check later”, a further repayment in respect of the year of assessment 2005/06 in the amount of £8,876.10 was paid to the Appellant sometime after 3 April 2007.  The relevant tax calculation makes clear that this was the amount of income tax which had been deducted at source from the Appellant’s employment income in 2005/06.
15.	 Ms. Parslow acknowledged that this repayment was made against a claim that could not possibly have been correct.
16.	On 8 January 2008 enquiries were opened by HMRC into both the Appellant’s tax returns – that for 2004/05 and 2005/06.  The enquiries were both into the Appellant’s capital loss on disposal of his shares in the Company.  Various questions were asked of the Appellant and he replied by an undated letter apparently sent in February 2008 with the following information:
•	29 Ordinary Shares in the Company had been acquired by him on 13 December 1988 for £1 each, paid in cash.
•	10,000 Ordinary Shares in the Company were acquired by the Appellant on 20 January 1995 for £1 each.  These shares were acquired in exchange for money loaned to the business.
•	66,668 Ordinary Shares in the Company were acquired by him on 20 December 2002 on a transfer to him “from family”.
•	He was the owner of the shares at the date of his negligible value claim, made in his tax return for 2004/05 received by HMRC on 11 December 2006.
•	He made loans to the Company in the 1990s.
•	The Company ceased to trade on 14 October2004.
•	The Company was dissolved on 4 October 2005 – the administrators were Moore Stephens.
17.	On 10 March 2008 HMRC (Mr. R. P. Durtnall, Local Compliance South) replied to the Appellant stating that the entire claim was made out of time because it was made after 4 October 2005 when the Company was dissolved.  He added that even if the claim had been made in time £66,668 of it would not be allowable because the relevant 66,668 Ordinary Shares had been transferred to the Appellant from family.
18.	The Appellant responded that he had made his claim following advice from HMRC (Maidstone office).  Mr. Durtnall made amendments to the returns to recover the repayments made but stated in his letter of 6 May 2008 that he could ‘confirm that there will not be a penalty in your circumstances’.
19.	Mr. Durtnall wrote to the Appellant again on 24 November 2008 stating that he had previously decided that the Appellant’s entire claim had been made out of time on the basis that the Appellant’s information that the Company was dissolved on 4 October 2005 was correct.  He went on to state that he had discovered that the liquidation of the Company was still continuing and on that basis ‘your loss relief claim of 11 December 2006 was within the time limits’.
20.	Mr. Durtnall went on to consider the claim and to allow a loss of £10,030 (which should have been £10,029 – but no point was taken by Ms. Parslow on this) on the basis that the Appellant had subscribed for 10,030 (actually 10,029) Ordinary Shares for a consideration in money or money’s worth.  He however refused the claim in relation to the balance of £66,667 (actually £66,668) because they were not subscribed for by the Appellant but had been transferred to him by member(s) of his family.
21.	On 17 September 2009 Mr. Durtnall sent a closure notice in respect of the enquiry into the Appellant’s tax return for 2004/05.  It showed an amendment to his return to allow a loss of £10,030 against income tax for that year.  Having regard to the repayment of £9,705.60 already made, a charge of £5,905.50 was made to recover the amount of the repayment found not to have been due.
22.	On 25 April 2008 Mr. Durtnall sent a closure notice in respect of the enquiry into the Appellant’s tax return for 2005/06.  It showed no relief for any part of the loss and a recalculation of the Appellant’s tax liability for the year.  Regard was also had to the repayment of £8,876.10 already made in respect of the non-allowable loss claim and the net result was a charge of £7,775.20 to recover the amount of the repayment found not to have been due.
23.	The appeal before the Tribunal was against the amendment to the 2005/06 return.  No appeal had been entered against the amendment to the 2004/05 return.
24.	We told the parties at the hearing that we would dismiss the appeal.  The substantive point of tax law arising for our decision was whether the Appellant was entitled to loss relief under section 574 ICTA in respect of the 66,668 Ordinary Shares in the Company which were acquired by him on 20 December 2002 on a transfer to him “from family”.
25.	The Appellant explained to us the circumstances of this acquisition, namely that, when the Company had been established, his father took shares and provided funds for the Company to trade and expand.  He himself worked in the business for a minimal remuneration and his understanding with his father was that when the business was established his father would transfer shares to him in recognition of his contribution to building up the Company.  This happened in 2002.
26.	We considered whether these facts could show that the 66,668 Ordinary Shares in the Company had been ‘subscribed for’ by the Appellant, in the sense that they had been ‘issued to him’ by the Company in consideration of money or money’s worth within the meaning of section 574 ICTA.
27.	We decided that it was clear that the shares had been issued to the Appellant’s father and that the transaction whereby the Appellant acquired them was a transaction between the Appellant and his father which did not directly involve the Company.  We concluded therefore that the loss on the disposal of the 66,668 Ordinary Shares could not qualify for relief under section 574 ICTA.
28.	For these reasons we dismiss the appeal.
29.	However, as we indicated at the hearing, on the basis of what was told to us we are very critical of the implementation of HMRC’s policy of “process now check later” which led to excessive repayments being made to the Appellant on the basis of honestly made but incorrect claims.  The Appellant is not a tax expert and the only tax advice he says he took came from the Maidstone tax office.  We are aware of the constraints on tax offices giving advice to taxpayers and it appears that ‘Help Sheet’ IR 286 ought to have steered the Appellant in the right direction.
30.	Nevertheless the excessive repayments (and the way in which the correspondence proceeded after the enquiries were commenced) seriously inconvenienced the Appellant, leading to a justified sense of grievance on his part.  As a point of detail Ms. Parslow was unable to show us any basis for the point taken by Mr. Durtnall that a valid claim under section 574 ICTA had to be made while the Company was still in existence.
31.	The Appellant now has to make significant payments of tax to HMRC in circumstances where this is likely to cause him acute financial difficulty as his family’s financial circumstances have changed for the worse since the tax years in question.  We strongly recommend that HMRC negotiate with the Appellant so that he is given adequate time to make the necessary payments of tax.  We further recommend that interest on these payments of tax is, if possible, waived, on account of HMRC’s contribution to the responsibility for the Appellant finding himself in this situation.
32.	Finally, we regard HMRC’s policy of making repayments of tax against claims which have not been checked for their validity as extraordinary, and in need of immediate high-level review, in the light of the country’s current well-known financial difficulties.  This Appellant is an honest man.  A dishonest taxpayer in the same situation might have absconded with the excessive repayments.
33.	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.

JOHN WALTERS QC

TRIBUNAL JUDGE
RELEASE DATE: 18 January 2011