[2011] UKFTT 394 (TC)

TC01249

Appeal number: TC/2010/02566

INCOME TAX – money owing to Appellant not paid to him but set-off against his debts – whether received by Appellant – yes – whether debts in respect of allowable expenses – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	DARREN DEMETRIOU	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL:  Mrs B Mosedale (TRIBUNAL JUDGE)
                                                Mrs E Bridge (TRIBUNAL MEMBER)

Sitting in public at 68 Lombard Street, London  on 18 January 2011

The Appellant in person.

Mr Kelly, officer of HMRC,  for the Respondents

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DECISION
Appeal out of time						
1.	The Appellant lodged his appeal on 7 February 2010 which was approximately one month late.  This was due in part to the review letter not being received until mid-December and Mr Demetrious misunderstanding that the 30 days in which to appeal included non-working days.  HMRC made no objection to the Appellant’s appeal being out of time and the Tribunal in the circumstances allowed the application for permission to appeal out of time and went on to consider the appeal.
Background
2.	The background to this appeal was not in dispute and the Tribunal finds that the Appellant was a partner in Hunt & Hunt (solicitors) from 2000 to 31 August 2005.  The Appellant accepted that he had caused money to be transferred to a client of the firm to which that client was not entitled.  The result was that Hunt & Hunt took legal action against the Appellant and the client to recover it. Another result of the Appellant’s action was that the Law Society instituted disciplinary proceedings against him with the result that he was struck off the roll of solicitors. The Appellant was asked to retire from the Hunt & Hunt which he did with effect from 31 August 2005.
3.	The Appellant did not defend the legal action:  he accepted that he was liable to refund the money (some £90,000).  However, the client did defend the action albeit unsuccessfully and this resulted in further liability on Mr Demetriou’s part (which he accepted) for Hunt & Hunt’s legal costs.
4.	At the time of Mr Demetriou’s resignation from the partnership, the partnership owed him his share of the profits for the years 2004/05 and 2005/04.  They also owed him a share of the tax reserves.
5.	On 13 March 2007 Hunt & Hunt wrote to Mr Demetriou in which they acknowledged that the firm owed Mr Demetriou various sums of money including the part of the profit share for 2004/5 and for 2005/6 to the date of his retirement, being a profit share of approximately £65,000 on which HMRC considered he owed £20,357.09 in tax.  The firm only paid £884.07 of the sums owing to Mr Demetriou:  the rest of the money owed to him they used to set-off against the monies due under the court order including their legal costs and drawings he had made from the firm when he was a partner.
6.	Mr Demetriou accepted that Hunt & Hunt were entitled to make this set-off as he  accepted he had owed the money to Hunt & Hunt.  However, it was his view that as he did not physically receive any part of the profit share (apart from the £884.07 mentioned above), he did not consider himself liable to pay tax on it.
7.	Mr Demetriou filed his self assessment tax return for 2005/6 on 10 August 2007.  His covering letter explained that he had declared his profit due from Hunt & Hunt to be nil on the basis it had been retained by the partnership and set-off against sums claimed by Hunt & Hunt to be owed to them by Mr Demetriou.  He asked HMRC to confirm that this was correct.
8.	HMRC acknowledged the return by letter dated 24 September 2007 and said that they had processed the return on the basis of the information declared but that they reserved the right to open an enquiry.
9.	The Appellant received a letter from HMRC on 25 September 2008 opening an enquiry into his self assessment tax return for 2005/6.   The closure notice was issued on 6 January 2009 increasing (from nil) Mr Demetriou’s liability to tax to £8,879.89.  Mr Demetriou notified HMRC that he wished to appeal on 15 January 2009.  He was offered a review by letter on 27 July 2009 which he accepted by letter of 20 August 2009.  The Review was concluded on 20 November 2009 and increased Mr Demetriou’s liability to £20,357.09
10.	The computation of the figures was not in dispute:  Mr Demetriou accepted, subject to the points at issue in the appeal, that the tax due would be £20,357.09 and had signed an agreed statement of facts to that effect. The figure was calculated on Mr Demetriou’s share in the profits of a partnership accountable in the tax year 2005/6 (but relating to two part-year accounting periods for the partnership for 2004/5 and 2005/6) but which were not paid to Mr Demetriou.
Liability to tax on income
11.	The Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) which came into force on 6 April 2005 and which therefore applied for tax year 2005/06 provides:
“Section 5 Charge to tax on trade profits
Income tax is charged on the profits or a trade, profession or vocation.
Section 7 Income charged
(1)  Tax is charged under this Chapter on the full amount of the profits of the tax year.
(2) ……
Section 8 Person liable
The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.”
12.	Mr Demetriou did not agree that any tax was due at all.  It was his view that he had not received the money.
13.	HMRC considered that Mr Demetriou was liable to pay the tax as the profit share was his even though he had never received it in cash.  Mr Kelly referred to the Court of Appeal case of Commissioners of Inland Revenue v Lebus’s Executors (1946) where Lord Greene MR said:
“It is said that where partners carry on business and make profits they are assessable to Income Tax in respect of those profits, whether they take them out of the business and divide them or whether they do not.”
14.	Mr Demetriou did not think the Lebus case applied:  he said in that case the partners voluntarily decided to leave their profits in the partnership.  On the contrary in his case, his profit share had been involuntarily set off against his debts.  Mr Demetriou’s case in a nutshell was that he was not liable to tax on the profits because they were never paid to him.
15.	We find that Mr Demetrious is liable to tax on his share of the partnership profits.  He received them as a matter of law because they were used to discharge his liability to Hunt & Hunt.  While it is true the money was not paid to him, he received the benefit of it.  If Hunt & Hunt had paid him the money rather than exercising their right of set-off, he would have remained liable to discharge his debt to them.  He received the money albeit it was not paid to him.  
16.	In any event we note that he would be chargeable to tax under ITTOIA merely because he was entitled to the money irrespective of whether he received it.  Mr Demetrious did not dispute that he was entitled to his part of the profit share.
Allowable deductions?
17.	He further suggested that some of the items against which Hunt & Hunt set-off the money monies they owed to him may have been for business expenses of the partnership, and as such deductible from the profits he received (by way of set-off from his debts).
18.	The sums owed to Hunt & Hunt by the Appellant under the court order excluding legal costs and interest we find were calculated on the basis of a number of matters which Hunt & Hunt maintained the Appellant was liable to reimburse them on.  These were itemised on a schedule produced to the Tribunal as follows:
	Correction of Accounting error	
	Capital gain re Cookson	 
	Int re tax on standfast
	Charge re public G’ship office
	Int re tax on Bardell
	M D Reynolds compensation
	A W Forder compensation
	Professional fees written off
	Professional fees written off
	
19.	Mr Demetriou did not offer an explanation to the Tribunal to what these matters related save that the first item was the £90,000 owing in respect of the misallocation of client monies mentioned in paragraph 2.  He said he did not know if they had already been deducted from the partnership’s profits before his profit share was allocated to him.
20.	The question of deductibility appears to break-down into two:  is the Appellant allowed a deduction for the damages he paid to Hunt & Hunt?  Secondly, if he is not, is Hunt & Hunt allowed a deduction for all or any of the items/expenses for which the Appellant admitted liability when calculating its profits?
21.	ITOIA provides at s 34:
“34(1)  In calculating the profits of a trade, no deduction is allowed for—
(a)  expenses not incurred wholly and exclusively for the purposes of the trade;….”

22.	On the first question, Mr Demetriou either could not or did not wish to explain to the Tribunal to what these amounts related apart from the misallocation of client funds.  We find he did not satisfy the Tribunal that the damages (including interest and legal costs) owing and paid by him to Hunt & Hunt by way of set-off were incurred wholly and exclusively (or indeed at all) for the purposes of the trade.  We had no information on any but the first item, and the payment away of funds from a client account to a person not entitled to them is not  an expense of trade.
23.	Further, in so far as any of these items would have been deductible against the profits of Hunt & Hunt, there was no evidence in front of this Tribunal that the appropriate deductions had not been made, and we note that it follows that since Hunt & Hunt were reimbursed for these items in any event no deductions were due in any event.
 Conclusion
24.	We find that Mr Demetriou was entitled to his profit shares from the partnership for 2004/5 and 2005/6 and that although he was not paid them he did receive his profit shares in that they were used as set-off against debts he owed to Hunt & Hunt.  Nor were we satisfied that any of the various items of debt due to Hunt & Hunt from Mr Demetriou amounted to allowable expenses of the business.
25.	Taxes Management Act 1970 s50 provides that:
“(7) If, on an appeal notified to the tribunal, the tribunal decides – 
(a)	that the appellant is undercharged to tax by a self-assessment…
(b)	….
(c)	That the appellant is undercharged by an assessment other than a self-assessment,
the assessment or amounts shall be increased accordingly.”
26.	The figures were not in dispute and therefore we further find that his self assessment undercharged him to tax as it showed the figure of nil tax due where it should have shown the figure of £20,357.09.  His self-assessment for 2005/6 is therefore increased accordingly.

27.	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.

TRIBUNAL JUDGE
RELEASE DATE: 15 JUNE 2011

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