Estate 4 Ltd v Revenue & Customs [2011] UKFTT 269 (TC) (26 April 2011)

[2011] UKFTT 269 (TC)

TC01131

Appeal number: TC/2010/08116

Corporation Tax – enquiry into return – application by company for direction that closure notice be issued – whether evidence justifying continuation of enquiry – no – application granted

FIRST-TIER TRIBUNAL

TAX

ESTATE 4 LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE)

ANTHONY HUGHES

Sitting in public at 68 Lombard Street, London EC3V 9LJ on 12 January 2011

Steve Wood, Tax Partner, Barnes Roffe LLP, for the Appellant

Brian Lamb, Local Compliance Appeals and Reviews, HM Revenue and Customs, for the Respondents

DECISION

1. This Decision has been prepared and issued some time after the hearing. The reasons are as follows. The hearing concerned an application to close an enquiry into the Appellant company (“Estate 4”). The Tribunal considered the arguments put by Mr Wood for Estate 4 and the contrary arguments put by Mr Lamb on behalf of the Respondents (“HMRC”), and announced at the hearing that it would direct that HMRC should give a closure notice within 30 days of the date of such Direction. The Tribunal asked at the hearing whether the parties wished to have a reasoned decision setting out the reasons for making the Direction. The parties indicated that a reasoned decision was not required.

2. The Direction was issued on 24 January 2011. On 25 January, Mr Lamb sent an email to the Tribunal’s Birmingham office requesting a full reasoned decision. For some unexplained reason, that office overlooked Mr Lamb’s message. This did not come to light until much later, in March 2011, when HMRC confirmed to the Tribunal office that the closure notice had been issued and asked when the decision would be available.

3. The Tribunal now sets out its reasons for making the Direction.

The facts

4. The evidence consisted of two bundles of documents, one prepared on behalf of Estate 4 and the other by HMRC. A witness statement was given by Paul Henry, an officer of HMRC based in HMRC’s Bristol Local Compliance Office. This witness statement had arrived two days earlier at the Tribunal’s Birmingham office, which meant that there had not been time for copies of it to reach the members of the Tribunal in time for the hearing. The Tribunal therefore had to be provided with a further copy to be read through and considered at the hearing. Mr Henry also gave oral evidence, as did Pete Thackeray, another officer of HMRC.

5. From the evidence, we find the following facts.

6. On 14 December 2009 Mr Henry issued a notice under paragraph 24(1) of Schedule 18 to the Finance Act 1998 (“Schedule 18”) in respect of Estate 4’s return covering the year ended 31 December 2007. The accounts for that year showed a turnover of £197,000 and an adjusted net loss of £68,083 after directors’ salaries of £116,500.

7. The history of Estate 4 was that it had been incorporated on 27 March 2006. Initially the sole director had been Riccardo Crivelli, who had resigned on 1 February 2007. The two directors who replaced him were Alessandro Crivelli and Massimiliano Senise. (Although Mr Henry alleged in his evidence that the controlling party had remained as Alessandro Crevelli since the incorporation, no specific evidence was provided to establish this and we therefore make no finding in respect of the ultimate control of Estate 4.)

8. HMRC became aware that a former Post Office sorting station in Howick Place, London, had been purchased by an offshore company for £19.5 million on 7 February 2006. HMRC found information from the internet suggesting that Mr Alessandro Crivelli and his company Estate 4 held an interest in the site and were heavily involved in its development.

9. As Estate 4’s return did not appear to him to reflect a project on this scale, Mr Henry issued a notice requesting a meeting, and sent an outline agenda setting out the areas which he wished to cover in his discussions. The meeting took place at the premises of Estate 4’s accountants, AccounTrust, and was attended by the directors Massimiliano Senise and Alessandro Crivelli.

10. Alessandro Crivelli indicated that he had moved to London in February 2006 because of the Howick Place project, although he had already purchased a London flat in 2003. Before his arrival he had previously been involved in a number of development projects outside the UK, in particular one in Milan.

11. It was explained that Riccardo Crivelli had never resided in the UK, and his involvement with Estate 4 had been in the early stages, on the financial side. When the development had started, he had resigned and Mr Senise had come to the UK in January 2007 to assist Alessandro Crivelli with the project.

12. It had been in 2005 that Alessandro Crivelli had identified Howick Place as a suitable site to develop for living and working space for creative individuals. He had returned to Italy to seek financial backing. Howick Place had been purchased by Fabbriche Ceramiche Investments SARL (“FCI”), a Luxembourg company registered on 12 August 2005. FCI was owned by Fabbriche Ceramiche 27 SARL, an Italian company incorporated on 15 October 2002; it had also financed the project. This Italian company had a number of shareholders, including Alessandro Crivelli. Mr Henry stated in evidence that Alessandro Crivelli held a one-third share of its share capital; as no specific evidence was provided to support this allegation, we make no finding in respect of it.

13. Alessandro Crivelli explained at the meeting that Estate 4 had not carried out any of the project work, but, as he put it, “acted more like a conductor” overseeing the project.

14. An “Advisory Agreement” had been drawn up between Estate 4 and FCI. It was dated 3 July 2006. Under this agreement Estate 4 was to assist FCI during the commercial activity relating to Howick Place, promoting and co-ordinating the selling and letting of the units into which that property had been divided, and was to have sole selling and letting rights. In return Estate 4 would receive a monthly fee of £10,000 plus a commission for each unit sold or rented. Alessandro Crivelli considered this to be sufficient to meet Estate 4’s expenses, with the profits of the development being collected by FCI and ultimately passed to the shareholders of the parent company by way of a return on their investment.

15. Howick Card SARL, a Luxembourg company wholly owned by Alessandro Crivelli, had purchased a flat in Howick place from FCI. The contract date was 15 November 2007. He explained at the meeting that he liked to keep a property at each of the developments in which he had been involved, and that as a consequence he had properties all over the world.

16. Estate 4 had originally operated from a flat in London owned by Alessandro Crivelli, but subsequently rented an office at Howick Place from FCI. Estate 4 had looked at other projects in London but had been unsuccessful in pursuing these.

17. Other matters concerning the private financial affairs of Alessandro Crivelli were discussed at the meeting. Mr Thackeray requested Italian tax references of the companies and individuals concerned; this was to confirm how the arrangements had been dealt with by the Italian authorities, as the structures involved both Swiss and Luxembourg entities.

18. In his evidence, Mr Henry stated that the only source of income shown by the directors in their personal tax returns was their salary from Estate 4. We accept that evidence, which was not contested by Mr Wood. Mr Henry considered that this was not sufficient to meet Alessandro Crivelli’s known expenditure; he had purchased another property in March 2007 for £5.25 million, and whilst having renovation work done on that property he had taken a lease of a further property at an annual rent of £200,000. Alessandro Crivelli’s explanation at the meeting was that he had placed 11 million Euros in a Zurich bank account, and had been able to draw on this capital as opposed to remitting income back to the UK, which would have had to be included as income in his UK tax return.

19. After examining the records of Estate 4, Mr Henry had written to AccounTrust on 24 May 2010 explaining that he needed to establish the precise role undertaken by Estate 4 and its directors. He considered that the Advisory Agreement did not seem to reflect the full extent of Alessandro Crivelli’s involvement, and Mr Henry therefore needed to consider in greater detail the connection between the parties. He needed further information to determine whether Alessandro Crivelli or Estate 4 was acting as the UK permanent establishment through which FCI carried on its property trade in the UK. In addition, he requested various items of information in connection with the offshore companies, as well as the directors’ bank statements covering the year ended 31 December 2007.

20. Barnes Roffe LLP had been appointed as tax advisers to Estate 4, and with the latter’s written authority, they had responded on 23 June 2010. They stated that Mr Henry’s enquiry was into Estate 4’s corporation tax return for the year to 31 December 2007; they considered that Mr Henry’s apparent curiosity about the structure of FCI had absolutely no bearing on that return. They provided some specific information relating to the records of Estate 4, and requested a formal closure notice.

21. Mr Henry responded on 2 August 2010, reiterating that he was only attempting to establish the precise structures put in place, to help his understanding of the role played by Estate 4 and its directors. He also pointed out that a check into Estate 4’s return would not be complete without looking at the personal finances of the directors, and where there appeared to be a deficiency, it was not unreasonable to test the explanations provided.

22. Barnes Roffe LLP replied on 27 August 2010. They reiterated that the scope of Mr Henry’s enquiry was limited, by paragraph 25 of Schedule 18, to anything contained in the return, and stated that this did not allow him to ask general questions about the possible tax liabilities of other persons. They explained that Estate 4’s main role in the project, based on Alessandro Crivelli’s expertise in the world of art and fashion, was to source suitable high-end creative tenants for the property. They asked again for a closure notice.

23. On 21 September 2010 Mr Henry responded. He repeated that Alessandro Crivelli had had a pivotal role in the project as a whole, having identified the site, sought the necessary investment, invested a considerable sum from his own resources, moved to the UK and set up a UK company (ie Estate 4) at the start of the development to oversee the project and market the property for both rent and sale. Mr Henry explained that he needed to establish whether Alessandro Crivelli, through Estate 4, exercised management and control of the project. Mr Henry considered that in order to establish this, his request for information in respect of the offshore companies was not unreasonable.

24. Barnes Roffe LLP replied on 12 October 2010 stating that Mr Henry’s lines of enquiry were irrelevant and outside the scope of paragraph 25 of Schedule 18, and stated that they had written to the Tribunal seeking a closure notice.

25. Mr Thackeray explained in his evidence that HMRC were taking a holistic approach to a complicated set of circumstances. HMRC were looking into Estate 4; they might also be looking into the question of any tax liability of Alessandro Crivelli. The chance to enquire into his return had long gone. The enquiries being made by HMRC’s Charities Assets and Residence unit (“CAR”) related to rentals, this being the unit dealing with offshore landlords. Before considering the issue of a closure notice, HMRC had to look at all the questions, and also consider the position as it would be once a closure notice had been issued.

26. There were various questions considered to be outstanding. Estate 4 was an adviser; was it possible that its level of remuneration was not correct? Could it be an adviser to the Italian company? A transaction involving development and sale could involve trading profits. These would be separate from the profits declared by Estate 4. HMRC were still at a fact-finding stage. In his view, there was not yet sufficient information. Another question was whether Estate 4 was doing more than merely acting as an adviser, and not necessarily being remunerated for that additional work. A further question was whether the amount being charged for remuneration was appropriate. There were many “unknowns”.

27. His view was that there was not sufficient information to put forward a judgment. He explained that if there had been no application for a closure notice, the normal course would have been for further enquiries to have followed. In any event, HMRC would probably be asking for information in accordance with Schedule 36 [ie, to the Finance Act 2008]. Awaiting the result of the application for a closure notice had caused a hiatus in the enquiry. There was still the possibility of outstanding adjustments. Alessandro Crivelli needed to justify his income position; this was a cause for concern. HMRC needed to see the movement of monies. A chain of evidence was needed. If a closure notice was issued, HMRC would seek notices either under paragraph 1 of that Schedule or from third parties.

28. He felt that it was premature to issue a closure notice. The information currently available did not give cause to say that there were no further problems with Estate 4. This was one line of enquiry in a whole series of enquiries. It followed that HMRC were not able to authorise the issue of a closure notice. In cross-examination he indicated HMRC’s view that Estate 4 could not be excluded from having an increased liability. He expressed the view that HMRC did not have enough information to arrive at any such conclusion; it could not be categorically stated that no further liability arose in relation to Estate 4.

Arguments for Estate 4

29. Mr Wood referred to paragraph 1 of Schedule 18. This made clear that references in Schedule 18 to “tax” were to corporation tax. Paragraph 25 of Schedule 18 indicated that an enquiry into a company tax return extended to “anything contained in the return, or required to be contained in the return”. This provided checks and balances for a company where its return was subject to enquiry. Paragraph 33 of Schedule 18 was available to a company where HMRC had not closed an enquiry in accordance with paragraph 32; under paragraph 33, the company could apply to the tribunal for a direction that HMRC should give a closure notice within a specified period. He emphasised paragraph 33(3), which required the tribunal to give a direction unless it was satisfied that HMRC had reasonable grounds for not giving a closure notice within a specified period. This made it clear that it was for HMRC to prove their case if they resisted the application for a closure notice.

30. The Directors’ Report of Estate 4 for the year ended 31 December 2007 showed that its principal activity during the year was the provision of consultancy services. The notes to the accounts for the period showed the amount of the directors’ fees, which had contributed to a loss for corporation tax purposes.

31. FCI made its own UK tax returns, as shown by HMRC’s letter dated 16 July 2010 indicating that the whole of its return was to be checked. FCI was co-operating fully, as shown by Barnes Roffe LLP’s letter dated 16 September 2010 providing a response to HMRC’s queries. To the extent of HMRC’s interest in FCI, this was being satisfied by correspondence with the appropriate officer of HMRC.

32. If there was any liability to tax falling on FCI and that tax related to income derived through Estate 4, such tax would not be corporation tax to which Estate 4 would be liable in its own right. Under s 6 of the Corporation Tax Act 2009, a company was not chargeable to corporation tax on profits which accrued to it in a fiduciary or representative capacity, except in respect of any beneficial interest it had in the profits.

33. Mr Henry had asked questions about other entities; Mr Wood made clear that he and his clients were not happy about answering such questions. After reviewing the correspondence in detail, he contended that the outstanding questions raised in the correspondence did not concern Estate 4’s corporation tax liability, in respect of which all the relevant information requested had been provided.

34. HMRC had referred to the Special Commissioners case of Mr GR Gould and Mrs HA Gould t/a Garry’s Private Hire v Revenue and Customs Commissioners [2007] STC (SCD) 502 (SpC 0604). There was a world of difference between that case and that of Estate 4. Mr Wood contended that the decision in Gould was entirely irrelevant to Estate 4’s position.

35. He asked that Estate 4’s application should be granted. The enquiry had run its course. A large amount of information had been provided. A line had to be drawn. The position of Estate 4 was simple. HMRC were seeking to use the enquiry into its return as a “bridge” into other issues. There was no need to continue the enquiry. He requested that a direction should be made requiring the issue of a closure notice within 30 days of the date of the direction.

Arguments for HMRC

36. Mr Lamb outlined the reasons why the information had been requested. The question was whether HMRC were justified in continuing to press for further information. HMRC contended that the officer, Mr Henry, had not been provided with sufficient documentary evidence or information to close the enquiry. In their view it was necessary to determine whether Estate 4, through its director Alessandro Crivelli, made day to day decisions on behalf of FCI and thereby acted as the permanent establishment through which FCI traded in the UK. HMRC also considered that the relationship between Alessandro Crivelli and FCI needed to be explored further. Mr Lamb referred to Gould, in which the Special Commissioner had decided not to issue a closure notice rather than directing a closure after six months. HMRC maintained that given the outstanding information and documents in the present enquiry, they could not be satisfied that the correct amount of income had been included in Estate 4’s return.

37. The information was complex. It had been suggested that there was nothing wrong with Estate 4’s accounts. This might well be the case, but there were other issues to follow up. The HMRC officer had to be satisfied as to questions such as that of Alessandro Crivelli’s wealth. HMRC were not suggesting that anything in particular was wrong, merely looking at the possibilities. A large amount of information was still relevant before making the decision. Nothing Mr Wood had said in argument had changed the position; a reasonable position had been taken by HMRC. Mr Lamb asked that the appeal should be dismissed.

Discussion and conclusions

38. Under paragraph 33 of Schedule 18, where a company has applied to the tribunal for a direction that HMRC give a closure notice within a specified period, the tribunal shall give a direction—

“unless satisfied that [HMRC] have reasonable grounds for not giving a closure notice within a specified period.”

The effect of paragraph 33(3) of Schedule 18 is therefore to place on HMRC the burden of satisfying the tribunal that a direction should not be given. However desirable it may appear to an officer of HMRC that an enquiry should be continued, the test to be applied by the tribunal is whether on an objective view it is appropriate for a closure notice to be issued. This involves close scrutiny of the questions put to the taxpayer and its advisers, the information provided in response and its adequacy, and the extent to which it appears to the tribunal that further enquiry would produce information enabling the company’s corporation tax liability to be adjusted to a level differing from that shown in the return. Whereas an officer of HMRC may feel able to follow a suspicion (or a number of suspicions) in pursuing an enquiry, the tribunal can only consider objective justification. If on balance the tribunal is not satisfied that such justification has been provided, it must direct the issue of a closure notice.

39. The closure notice is sought in respect of HMRC’s enquiry into Estate 4’s corporation tax return for the accounting period ended 31 December 2007. Under paragraph 24 of Schedule 18, an officer of HMRC “may enquire into a company tax return”, subject to complying with notice requirements. Paragraph 25(1) provides:

“(1) An enquiry into a company tax return extends to anything contained in the return, or required to be contained in the return, including—

(a) any claim or election included in the return,

(b) any amount that affects or may affect–

(i) the tax payable by that company for another accounting period, or

(ii) the tax liability of another company for any accounting period,

. . .”

40. The enquiries made by HMRC have been wide-ranging. Various matters discussed at the meeting between HMRC and the directors and accountants for Estate 4, and dealt with subsequently in correspondence, related to possible taxation liabilities of persons other than Estate 4 itself. Under paragraph 1 of Schedule 18, “tax” means corporation tax. Matters concerning the individual tax position of the directors in respect of their remuneration are therefore not directly relevant, and we understand why the letter dated 27 August 2010 from Barnes Roffe LLP stated, “. . . this does not enable you to ask general questions about the liabilities of other persons”. However, we also understand why HMRC asked questions relating to the directors’ remuneration, as the information in respect of this might have been shown to indicate that in some way the level of profits stated in Estate 4’s accounts for the year to 31 December 2007 did not truly reflect the actual profits.

41. Having reviewed the information provided to HMRC, together with the evidence given by Mr Henry and Mr Thackeray, we find that it does not disclose any specific reason to suggest that this might be the case, and does not therefore form a sufficiently clear basis for continuing to make further enquiries into the level of the remuneration so far as the return of Estate 4 for the period is concerned. In order for us to have been satisfied to the contrary, we would have needed to have been persuaded that Alessandro Crevelli’s explanation as to his financial resources was not adequate. None of the evidence presented to us was sufficient to draw us to such a conclusion.

42. In relation to Estate 4’s corporation tax liability, our finding is that, for similar reasons, we are not satisfied that any of the information provided in evidence by HMRC is enough to suggest that the profits as stated in its return for the period are not correctly stated. Again, the generalised enquiries have not raised any specific issues which HMRC are in a position to demonstrate that they wish to follow up. HMRC have not given us any clear indication, with supporting evidence, of anything in Estate 4’s return which needs to be subjected to further enquiry, nor have they established supporting evidence pointing to any respect in which the return may possibly be considered to be deficient.

43. Questions in relation to the potential UK tax liabilities of the Luxembourg and Italian companies in respect of profits which might be treated as derived from some form of trading operation in the UK are in our view peripheral to the enquiry into Estate 4’s return. We accept that paragraph 25(1)(b)(ii) refers to “any amount that affects or may affect . . . the tax liability of another company for any accounting period”, but in order to satisfy us on this basis that a closure notice should not be issued, it would have been necessary for HMRC to point to some specific amount in Estate 4’s accounts for the period, and demonstrate why it was appropriate to continue enquiries into that amount.

44. In relation to the wider question of possible trading in the UK through a permanent establishment, we accept Mr Wood’s argument that under s 6 of the Corporation Tax Act 2009, a company is not chargeable to corporation tax on profits which accrue to it in a fiduciary or representative capacity (except as respects any beneficial interest which it may have in those profits). The basis for imposing a charge to UK tax on profits derived by a non-UK resident company trading in the UK through a permanent establishment which happens to be constituted by a UK company is entirely separate from the liability and collection arrangements which apply to the latter’s own profits. Any profits of the Luxembourg or Italian companies could not be treated as being within the scope of Estate 4’s corporation tax return; this could only concern profits properly attributable to Estate 4’s own activities and consequently potentially chargeable to corporation tax in Estate 4’s hands.

45. On the above basis, our decision given at the hearing was to direct, in accordance with paragraph 33 of Schedule 18, that HMRC should within 30 days of the date of our Direction give a closure notice in respect of their enquiry into Estate 4’s corporation tax return for the year to 31 December 2007. When we announced our decision we stated that this decision merely related to that return, and that it remained open to HMRC to continue to make or pursue whatever other enquiries or investigations they were empowered to make. It is not for us to comment on such matters, which are outside the scope of this decision.

Right to apply for permission to appeal

46. 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.

First-tier Tribunal (Tax)