[2013] UKFTT 126 (TC)
TC02555
Appeal number: TC/2012/03012
INCOME TAX — Appeal against amendment made by a closure
notice —Whether Tribunal has the power to allow an appeal on grounds that the
application of the law in the circumstances of the particular case would be
manifestly unreasonable and unjust and would not achieve the purposes of the
legislation — European Convention on Human Rights First Protocol Article 1 — Extra-statutory
Concession A19 — Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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ROSS JAMES ANDERSON
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Appellant
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- and -
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THE COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE & CUSTOMS
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TRIBUNAL:
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JUDGE CHRISTOPHER STAKER
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MR RICHARD THOMAS
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Sitting
in public in London on 10 December 2012
Mr
Facherty for the Appellant
Ms
Carwardine for the Respondents
© CROWN COPYRIGHT 2013
DECISION
Introduction
1. This is an appeal by Mr Ross James Anderson (the
“Appellant”) against closure notices issued
under s.28A(1) and (2) of the Taxes Management Act 1970 (the “TMA”) in respect
of the 2007-08 and 2008-09 tax years. The closure notices gave effect to a
conclusion by HMRC that in the two years in question he had chargeable event
gains from life insurance policies that had not been returned by him, resulting
in a total additional income tax liability of £33,134.80.
Background
2. During enquiries into the Appellant’s 2007-08 and 2008-09
tax returns, HMRC found that the Appellant had failed to declare chargeable
event gains that had arisen on offshore life insurance policies. There was
correspondence between the parties, and with the Appellant’s MP, in relation to
the matter. The Appellant made offers of settlement which were not accepted by
HMRC. HMRC issued closure notices in respect of the two tax years on 15 November
2011, against which the Appellant appealed on 21 November 2011. An HMRC review
was completed on 13 January 2012, in which HMRC concluded that the closure
notices should be upheld. The Appellant now appeals to the Tribunal.
3. The Appellant has not sought to dispute that the
additional tax liability is in accordance with the terms of the applicable legislation.
Rather, his appeal seeks to attack the legislative provisions themselves, at
least in their application to his particular circumstances. Alternatively, he
argues that the legislative provisions lead to a result that is so unfair in
his case that they should not be applied to him, and that the relevant tax
should be written off.
4. Because the Appellant has not sought to argue that the legislative
provisions have not been correctly applied, it is unnecessary to deal in detail
with the terms of the legislation. The relevant provisions are the Income Tax
(Trading and Other Income) Act 2005 (“ITTOIA”), sections 461-468, 475, 515,
516, 522-525 and 528.
5. Some explanation is necessary however to show why the
Appellant feels so strongly about this case, and why the Tribunal has a great
deal of sympathy with him. In the years concerned the Appellant was the holder
of some life insurance policies issued by an Irish insurance company. He took
out these policies at a time when he was not resident in the UK, but in the tax years concerned in this appeal he had become UK resident. Under the legislation mentioned
above (as it applies to a UK resident), the policyholder of such offshore policies
is liable to income tax on any “chargeable event gains” made. Where the event
involves the policyholder ceasing to possess any rights in the policy, whether
as a result of its maturity, total surrender or assignment, the calculation of
the gain is simple and intuitive – the gain is the difference between what the policyholder
gets from the insurance company as a result of the event and what was paid by
way of premium.
6. In the case of certain other events matters are far more
complex. One of those events is the surrender of part only of the rights in
the policy (“part surrender”), which is what the Appellant did. Where that
happens, the policyholder may (in simple terms) realise in a given tax year an amount equal to 5% of the
total premium invested without any chargeable event gain arising in that year
(s 507 ITTOIA especially subsection (5)). The amount withdrawn up to this
limit is however brought into account, along with amounts withdrawn up that
limit in other years, when the policy ends, by adding the various amounts paid
on earlier part surrenders to the amount received on the final event (ss 491
and 492(1)(b) ITTOIA).
7. However, if the amount obtained on a part surrender in
any year exceeds the 5% allowance for that year (plus any unused allowance from
previous years), then the whole of the excess is a chargeable event gain and is
taxed in the year that the part surrender is made. Where a substantial part
surrender is made in the early years of a policy, it is likely that the part
surrender will in economic terms represent in large part a realisation of
capital invested rather than of the income earned from the investment of the
premiums by the insurer, but nevertheless the whole of the amount realised in
excess of the 5% allowances available is taxed as income. In the case of a UK policy, the policyholder is liable to income tax only at the
excess of the higher rate over the basic rate (s 530(1) ITTOIA), but in the
case of an offshore policy, the policyholder is liable at the basic rate as
well (s 530(4)(b)). This reflects the fact that under the UK system of taxing life assurance, the insurer pays corporation tax at a rate equal to the
basic rate of income tax on the income accruing for the benefit of policyholders.
8. A further complicating aspect of the Appellant’s tax
situation is that the largest policy he held has been classified by the insurer
as a personal portfolio bond (“PPB”). It therefore falls within the regime
given by ss 515 to 526 ITTOIA. Under that regime, in addition to any actual chargeable
event gains that arise on the policy, the policyholder is charged to tax each
year as if there were an actual gain on an amount equal to 15% compounded of
the premiums paid (“PPB gain”) less the aggregate amount of any previous part
surrender gains, irrespective of whether the policy gives an actual return of
that amount, or indeed any return at all. These PPB gains are also deducted,
in addition to the part surrender amounts, in computing the final gain in the year
the policyholder ceases to have any rights in the policy (s. 491(2) (4) ITTOIA).
9. The effect of the rules for taxing part surrenders of
life insurance policies in excess of the 5% allowances may be mitigated or
completely nullified (except for a cash flow disadvantage) by certain reliefs
that are available in certain circumstances. One such relief, known as “corresponding
deficiency relief” (ss 539 to 541 ITTOIA), applies where the policy ends, the
final chargeable event calculation does not give rise to a gain, and there has
been at least one previous part surrender giving rise to a gain (s 540). The
amount of the “deficiency” will be equal to the amount of the previous gains, because
of the exclusion in the computation of earlier chargeable event gains on part
surrenders. However annual gains on PPBs are not included in the amount of
previous gains (s 541(4)(a)).
10. Where
there is a deficiency, the policyholder may be entitled to a reduction in liability
to tax on their other income in the year in which the policy comes to an end.
However, deficiency relief is only applied to income taxed at the higher rate
of income tax, and of course can only be given if the policyholder has income
from other sources taxed at that rate. Furthermore, deficiency relief is calculated
as a tax reduction based on the difference between the basic rate and higher
rate of tax, even if as in the Appellant’s case, the previous gains have been
taxed at the basic rate as well as the higher rates because they were from an offshore
policy. The Appellant says that the effect of this was that he was taxed at
the higher rate of 40% on the amount of some £97,000 that he withdrew from the
policies in the years in question, while he received deficiency relief of only 20%
on some £15,000, the amount of his expected income at the higher rate in the
year of full surrender.
11. The
Appellant says that he was the victim of bad advice from professional
advisers. He says that the policies produced little or no gain overall.
Therefore, if he had surrendered the whole of the policies in a single year, he
would have paid little or no tax as a result. However, because he made large part
surrenders, he paid 40% tax on the bulk of the amount withdrawn, and regained
only a small portion of this by way of deficiency relief, and that only at 20%.
The evidence and submissions
12. The
Appellant’s grounds of appeal, as set out in the notice of appeal, are in
summary that:
a)
He has been helpful to HMRC in
investigation and assessment.
b)
He initially relied on others to
provide the correct tax advice and information, but his advisers proved
unreliable and inaccurate.
c)
HMRC require insurance companies to
provide the chargeable event certificates, and his insurance company was late
in so doing. If his insurance company is regarded as an agent of HMRC in
providing the certificates, Extra-Statutory Concession A19 (“ESC A19”) should
apply and the tax should be written off.
d)
The legislation for interim taxation
relief of PPBs is “faulty”. The legislation is supposed to provide a
reasonable estimate of tax chargeable during the life of the policy when actual
figures are not available, and a correcting mechanism for overpayments. In
this case, the interim tax was excessively high, and the correcting mechanism
excessively low due to inequitable calculations and unfair restrictions.
e)
The legislation does not properly
address the overseas nature of the PPB. Tax liabilities are calculated at both
basic and higher rate, while deficiency relief is reduced.
f)
The legislation does not meet the
standards required by English law in regard to fairness, equitability and the
requirement to use the best evidence available. The legislation is unjust and
does not produce the results intended by Parliament.
g)
The legislation breaches the requirements
of the Unfair Contract Terms Act 1977.
h)
The legislation breaches the
Appellant’s human right to the peaceful enjoyment of his property as it amounts
to “judicial theft”.
i)
The tax calculation using the final
state of the bond shows no tax due, and this final calculation should be used
rather than the interim calculations.
j)
If the deficiency relief calculation
used the same rate to calculate relief as was used to calculate the tax and the
limit to higher rate tax removed, there would be no tax to pay.
k)
In all of the circumstances, it would
be fair and equitable for HMRC to write off the relevant tax liability.
13. The
HMRC case as set out in the HMRC statement of case is as follows:
a)
The chargeable event gains have been
correctly calculated in accordance with the legislation.
b)
No information has been received [within
the meaning of ESC A19, we assume] by HMRC, so ESC A19 cannot be considered.
c)
Deficiency relief is available in the
year the policy ends.
14. At
the hearing, the Appellant’s arguments in the grounds of appeal were presented
orally, and the following additional arguments were also advanced.
15. No
one with knowledge of the case could believe that HMRC would demand the full
amount of money in this case. Applying the rules without regard to the
particular circumstances of this case is wrong. The Appellant acted throughout
in good faith, acting on professional advice which turned out to be
incompetent.
16. Over
the life of the policy the Appellant made a loss, so there was no income from
the policy. The rules relating to taxation of part surrenders are effectively
based on estimated income over the life of the policy. The rules on deficiency
relief when the policy is finally surrendered are intended to achieve a
correction once the final net income from the policy is known, so that a fair
amount of tax is paid over the life of the policy. In this case, an excess
amount of interim tax was paid, and an insufficient correction was made at the
end.
17. HMRC
simply rely on the terms of the legislation and refuse to consider the
circumstances. The Appellant has made offers of settlement which HMRC have
refused. His MP has intervened, to no avail. The Appellant has been treated
inconsistently with large corporations where HMRC has been prepared to write
off large amounts of tax.
18. In
effect, the Appellant has been unfairly taxed twice, as he was taxed on the
capital when he earned it, and was then taxed on it again when he withdrew it
from the policy. What happened in this case amounts to expropriation.
19. At
the hearing, the following additional arguments were presented on behalf of
HMRC. It appears that the PPBs were a kind of investment not suitable to the
Appellant’s circumstances. However, tax consequences must follow what actually
happened, rather than what the Appellant wishes had happened. The legislation
has been applied correctly to the facts of the case. HMRC accept that the
Appellant cooperated in the course of the enquiry and acted in good faith.
However, the law is the law. If the Appellant received bad advice, he should
have recourse against his advisers.
20. In
reply, it was reiterated on behalf of the Appellant that the Appellant was
charged to income tax when he has received no income, that HMRC has a
discretion to not collect the tax, and that HMRC is intransigent and unfair in
failing to exercise that discretion when the legislation produces such a flawed
result. It is unfair to charge income tax when there has been no income, first
because there is no income to tax, and secondly, because there is no income with
which to pay the income tax.
Findings
21.
The Tribunal has a great deal of sympathy for
the plight in which the Appellant presently finds himself. He is certainly not
the first Appellant to come before this Tribunal or its predecessors to
complain of the workings of the chargeable event regime where large part
surrenders are made–see for example Shanthiratnam
v Revenue & Customs [2011] UKFTT 360 (TC), Rogers v Revenue
& Customs [2011] UKFTT 791 (TC) and Cleghorn v Revenue & Customs
[2011] UKFTT 488 (TC). He is almost
certainly the first person to come before the Tribunal as someone who has
fallen into the “large part surrender” trap, and been subject to the PPB regime
and found that the corresponding deficiency relief has not only not given him
relief on an amount of income equal to his deficiency but has only given him
relief at lower rates than those he has suffered on the part surrenders. His
advisers appear to have accepted that a PPB was not appropriate to his
circumstances once he had decided to become UK resident, and that he should
have surrendered the whole of a policy, rather than about 90%, in those
circumstances. Unfortunately for the Appellant, as was submitted by HMRC, the
fact that a person has been the victim of bad tax advice does not absolve them
of their tax liability that results from following that advice. The Appellant
may consider seeking some kind of redress against his adviser, but that is not
a matter for the Tribunal.
22. The
fact that a taxpayer has been helpful to HMRC in investigation and assessment
is not in principle relevant to the taxpayer’s tax liability. In some cases it
may be relevant to the level of penalty to be imposed for a failure to comply
with obligations under tax legislation. The Tribunal is not persuaded that it
could be relevant to the tax liability itself in the circumstances of the
present case.
23. The
Appellant argues that the applicable legislative provisions are contrary to his
human rights. Article 1 of the First Protocol to the European Convention on
Human Rights provides as follows:
Every natural or legal
person is entitled to the peaceful enjoyment of his possessions. No one shall
be deprived of his possessions except in the public interest and subject to the
conditions provided for by law and by the general principles of international
law.
The preceding provisions
shall not, however, in any way impair the right of a State to enforce such laws
as it deems necessary to control the use of property in accordance with the
general interest or to secure the payment of taxes or other contributions or
penalties.
24. Article
1 of the First Protocol is a Convention right for purposes of the Human Rights
Act 1998 (see s 1(1)(b) of that Act). However, as is clear from its terms,
that provision does not impair the right of the State “to enforce such laws as
it deems necessary ... to secure the payment of taxes”.
25. The
parties did not address detailed argument on the European Convention on Human
Rights, or cite relevant case law on the issue. The burden of persuasion is on
the Appellant to establish that there has been a breach of the Convention. The
Tribunal finds that the Appellant has not discharged that burden.
26. In
Burden and Burden v. United Kingdom (2007) 44 EHRR 51, [2007] STC 252,
the European Court of Human Rights said at [54] that:
It is for
the national authorities to make the initial assessment, in the field of
taxation, of the aims to be followed and the means to be used (Lindsay,
cited above). The State enjoys a wide margin of appreciation in this field, as
is usual when it comes to general measures of economic or social strategy (see,
for example, James and Others v. the United Kingdom, judgment of
21 February 1986, Series A no. 98, § 46; National and Provincial
Building Society and Others v. the United Kingdom, judgment of 23 October
1997, Reports 1997-VII, § 80). A government may often have to strike a
balance between the need to raise revenue and the need to reflect other social
objectives in its taxation policies. Because of their direct knowledge of their
society and its needs, the national authorities are in principle better placed
than the international judge to appreciate what is in the public interest on
social or economic grounds. The Court will generally respect the legislature’s
policy choice in this field unless it is “manifestly without reasonable
foundation” (ibid.; and see also Lindsay, cited above) and subject to
the proviso that, in creating and implementing a scheme of taxation, the State
must not discriminate between tax-payers in a manner which is inconsistent with
Article 14 of the Convention (see, mutatis mutandis, Stec and Others
v. the United Kingdom (dec.), [GC], nos. 65731/01 and 65900/01, §§
54-55, ECHR 2005-...).
The Appellant’s case is that
the relevant provisions of ITTOIA are “manifestly without reasonable
foundation”, and apparently also that they do “discriminate between tax-payers
in a manner which is inconsistent with Article 14 of the Convention”. However,
there is no suggestion that there was any obligation on the Appellant to invest
in offshore life insurance policies or PPBs. Nor is there any suggestion, let
alone evidence, that the tax regime for offshore life insurance policies or PPBs
did not make them a suitable and attractive investment for certain persons with
different personal circumstances to those of the Appellant, or that the tax
laws deprived the Appellant of any suitable investment possibilities. The tax
regime applicable to any kind of investment may make it suitable for one
category of persons but unsuitable for another category of persons. This does
not mean that the tax regime violates the rights under Article 1 of the First
Protocol of the second category of persons. Persons in that latter category
remain free to make alternative investments, more suited to their particular
circumstances.
27. The
Tribunal finds that in reality the Appellant’s complaint is not with the tax
regime as such. Rather, his case is that the normal tax law should not be
applied to him, on the ground that he has unintentionally put himself in a
situation which has disadvantageous tax consequences as a result of bad advice
and lack of knowledge of the applicable tax law. The Tribunal is not at all
persuaded that it would be contrary to the European Convention on Human Rights to
decline to exempt a person from the application of the normal tax laws in those
circumstances. The Appellant has not cited any authority in support of his
contention that it would be. It is also noted that in Ferrazzini v. Italy
(2002) 34 EHRR 45, [2001] STC 1314, the European Court of Human Rights said at
[29] that it “considers that tax disputes
fall outside the scope of civil rights and obligations [for purposes of Article
6 of the Convention], despite the pecuniary effects which they necessarily
produce for the taxpayer”.
28. The
Tribunal therefore does not consider that it is required, pursuant to s 3(1) of
the Human Rights Act, to seek to interpret the applicable legislation in a way
that would avoid the Appellant having any tax liability.
29. For
similar reasons, the Tribunal does not consider, for purposes of s 6 of the
Human Rights Act, that HMRC would act in a way which is incompatible with a
Convention right in refusing to write off the tax owed, or that the Tribunal
would act in a way which is incompatible with a Convention right in dismissing
this appeal.
30. The
grounds of appeal based on the European Convention on Human Rights therefore
fail.
31. The
grounds of appeal referred to at paragraph 12(d)-(g) above must fail, for the
simple reason that the applicable legislative provisions are contained in an
Act of Parliament. The Tribunal cannot review the provisions of primary
legislation in the manner suggested. An Act of Parliament is not a contract
for purposes of the Unfair Contract Terms Act 1977.
32. The
grounds of appeal referred to at paragraph 12(i)-(j) above must fail, because
the tax liability in the closure notices has been determined in accordance with
the applicable legislation.
33. As
to the argument referred to in paragraph 12(c) above, the Tribunal sees nothing
at all in the argument that the insurance company was acting as an agent for
HMRC in discharging its obligation to issue certificates, or in failing in that
obligation, even assuming that the Tribunal had the jurisdiction to consider
the possible application of ESC A19 (as to which, see for instance, Prince
& Ors v Revenue & Customs [2012] UKFTT 157 (TC) at [33]-[34]; Ireton
v Revenue & Customs [2011] UKFTT 639 (TC) at [53]; Hudson v Revenue
& Customs [2012] UKFTT 661 (TC)). As to the argument referred to in
paragraph 12(k) above, the Tribunal does not have a general power to order HMRC
not to collect tax on the grounds that it would be inequitable in all of the
circumstances.
34.
Unfortunately for the Appellant, it follows
that all of his grounds of appeal must be dismissed. The Tribunal would
however note that the system of taxation of part surrenders in excess of the 5%
allowance is one which penalises the unwary or ill-advised, often with quite
disproportionate consequences as in this case. HMRC, and for that matter the
insurance industry, have been aware of this major fault in the system for many
years but have done nothing to correct it. In
correspondence with the Appellant’s MP, the Director of HMRC CT & VAT, Jim
Harra, said “…the ‘5 per cent rule … continues to be popular with many insurers
and their investors. Proposals on a couple of occasions to abolish the 5 per
cent rule have not been pursued.” Quite apart from the odd notion that it is
the rule’s popularity with insurers that should allow the iniquitous effect of
a large part surrender to be visited on taxpayers, the reply completely misses
the point. The iniquitous effect of large part surrenders can clearly be
removed without affecting the operation of the 5% rule in those cases in which it
was intended to apply as a relief. What is more, the rules for corresponding deficiency relief are in most
cases a wholly inadequate remedy for the disproportionate consequences of a
large part surrender, even where they are not prima facie discriminatory
(as to which see the next paragraph).
35. There
is, however, a further issue that appears to the Tribunal to be raised by the
circumstances of this case, but on which no argument was advanced by the
Appellant or by HMRC. As noted in paragraph 7 above, in the case of a UK
policy, the policyholder is liable to income tax only at the excess of the
higher rate over the basic rate (s 530(1) ITTOIA), but in the case of an offshore
policy, the policyholder is liable at the basic rate as well (s 530(4)(b)). On
the face of it this treatment discriminates against persons who take out policies
with insurers in other Member States of the EU and against insurers in such
Member States, such that the free movement of capital and the freedom to
provide services might be in issue. The Tribunal assumes however that the
differences between the UK system for taxing life assurance (the I minus E
basis) and the systems in the rest of the European Union (where there is no
current taxation of the income accruing for the benefit of the policyholder)
explain why the only remedy for the apparent discrimination is s 532 ITTOIA.
But such differences cannot explain why the corresponding deficiency relief
rules similarly discriminate due to their failure to give relief at the basic
rate where a gain on the policy has been charged to tax at that rate.
36. The
Tribunal expresses no view on this last issue, as it falls outside the scope of
this appeal. The Appellant’s notice of appeal states that the decision he is
appealing against is the HMRC decision of 6 December 2011 (pages 242-243 of the
bundle). The notice of appeal further states that the HMRC notice of
conclusions of review of the decision appealed against was the decision dated
13 January 2012 (pages 244-245 of the bundle). The 13 January 2012 decision
was in fact a review of the earlier 15 November 2011 decision (pages 229-230 of
the bundle) explaining the additional assessments made in the closure notices
for 2007-08 and 2008-09. An intermediate decision of HMRC dated 29 November 2011
(pages 237-239 of the bundle) noted that the Appellant was still appealing
against the closure notices for 2007-08 and 2008-09, and advised him that he
could either ask for a review by HMRC or notify the appeal to the Tribunal. In
a letter dated 2 December 2011 (page 240 of the bundle) the Appellant requested
a review, leading to the HMRC letter of 6 December 2011 and review decision of
13 January 2012. The Tribunal finds that the present appeal is an appeal
against closure notices in respect of the 2007-08 and 2008-09 tax years, which
were the years in which the Appellant had the taxable chargeable event gains
(that is, the years in which he partially surrendered the policies). For the
reasons above, the Tribunal must dismiss the appeal against those closure
notices.
37. Any
argument as to the compatibility of the deficiency relief rules with EU law
would arise in connection with the year that deficiency relief was claimed or
claimable. It appears that this was in tax year 2010-11 (pages 216-218 of the
bundle). Any argument relating to the deficiency relief rules would therefore have
to be made by the Appellant in a claim to HMRC in respect of 2010-11. It does
not fall to the Tribunal to consider in the present appeal whether or how such
a claim could be made.
Conclusion
38. For the reasons above, the Appellant’s grounds of appeal
are dismissed.
39. 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.
DR CHRISTOPHER STAKER
TRIBUNAL JUDGE
RELEASE DATE: 18
February 2013
