[2013] UKFTT 200 (TC)
TC02615
Appeal number:
TC/2012/8146
CORPORATION TAX –
adjustments to Appellant’s returns to take account of incorrect treatment of
writing off of goodwill – whether such treatment discovered during
investigation into Appellant’s tax affairs – yes –appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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PENNINE DRILLING
& GROUTING SERVICES LTD
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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 DAVID DEMACK
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SUSAN STOTT FCA CTA
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Sitting in public at Manchester on 15 March 2013
Mr Dermot Garvey for the
Appellant
Mrs C Douglas of HM Revenue
and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
This is an appeal by Pennine Drilling & Grouting Services Ltd
(“Pennine”) against a decision on review by the Commissioners of 1 August 2012
which confirmed a decision of 23 May 2012 wherein, following an enquiry into
Pennine’s return for the accounting period ended on 31 July 2010, they amended
its returns for each of the accounting periods ended on 31 July 2008, 31 July
2009 and 31 July 2010. In the earliest of those years they did so by reducing
its declared loss by £24,000 and, in the two later years, by increasing its
profit by £24,000.
2.
The amendments were made to take account of the fact that Pennine had
claimed that it was entitled to tax relief on the purchase of the goodwill of a
business for £240,000 from its director, which it had amortised over a period
of ten years.
3.
It was common ground that Pennine had incorrectly claimed the relief in
question, so that the only question before us was whether the Commissioners had
discovered the error, and were thus entitled to make the adjustments in
question.
4.
Before us Pennine was represented by Mr Dermot Garvey, the company
secretary, and the Commissioners by Mrs C Douglas, one of their officers. Mrs
Douglas presented us with two bundles of documents, the one containing the
relevant documentation, including correspondence, and the other consisting of
the legislation and authorities on which the Commissioners relied.
5.
Pennine’s case can be stated very simply. It claimed that the
Commissioners had been informed at the outset, i.e. in its accounts for the
period ended on 31 July 2003, of the purchase of a business known as PDG
Services from its director, Mr M Tomlinson, and that a note was included in its
accounts for each subsequent year indicating that “ Acquired goodwill is
written off in equal annual instalments over its estimated useful economic life
of 20 years”. Consequently, it claimed that the Commissioners had discovered
nothing in their enquiry into the 2009/10 return.
6.
The relevant part of the note relating to “Related Party Transactions”
in the accounts to 31 July 2003 reads as follows: “On 31 January 2003 the
company acquired the assets and trade of PDG Services, a business owned by Mr M
A Tomlinson for a consideration of £240,000”. We observe that that note
contains no mention of “Goodwill”, so that it is difficult to see how the
Commissioners could have been expected to be aware that references to goodwill
in subsequent years’ accounts related to the acquisition of PDG Services.
7.
The Commissioners took the view that the explanations contained in the
various notes to Pennine’s accounts were insufficient
8.
Following the opening of the Commissioners’ enquiry on 17 January 2012,
they raised a number of queries with Pennine, one of which was its treatment of
goodwill. It replied on 15 February 2012 saying, “The goodwill was purchased
from M Tomlinson on 31 January 2003. M Tomlinson is a shareholder in
[Pennine]”.
9.
Having been pointed to s.118 of Schedule 29 to the Finance Act 2002,
Pennine agreed that the tax treatment adopted by its tax advisors had been
incorrect. At that point the Commissioners accepted that error had been “a
mistake”, and determined to take steps to correct the return for the enquiry
period and raise discovery assessments for the three accounting periods ended
in 2008, 2009 and 2010. They also invited Pennine to amend its return for the
period to 31 July 2011.
10.
The enquiry amendment, the discovery assessments and determinations
having been processed on 1 May 2012, Pennine appealed on 17 May 2012 claiming
that all relevant information had been disclosed to the Commissioners, and that
for the accounts period ended 31 July 2011, the goodwill had been treated
similarly to that in previous years. Pennine was offered a review of the
Commissioners’ decisions.
11.
In the letter offering the review, dated 23 May 2012, the Commissioners
explained that, whilst the discovery legislation put restrictions on their
right to raise assessments, that did not apply to the enquiry year, and said
that the notice giving effect to the conclusion of their enquiry was raised
under para 34 of Schedule 18 to the Finance Act 1998. The letter also dealt
with the Commissioners’ discovery powers, explaining that they could not be
used if information was included in the “relevant return”, which meant that it
had to have been included in the accounts for each of the two preceding
accounting periods (see s.118 Schedule 29 to the Finance Act 2002). Further,
the letter set out the relevant notes in Pennine’s accounts post-2003, and
continued, “I trust you can see that this is not a full disclosure enabling
HMRC to see from the relevant returns and accompanying documents that they
contained incorrect claims to goodwill amortisation. As you are aware I had to
ask you for the information in my enquiry for the year ended 31 July 2010 before
I could establish whether or not the claim was correct.”
12.
Summarising the Commissioners’ position, Mrs Douglas submitted that,
whilst the Commissioners accepted that the necessary information was provided
in Pennine’s 2003 accounts, it was not shown in the accounts or documents for
the accounting periods ended in in 2006,2007, 2008 or 2009, they were not
precluded from making a discovery assessment. Nor, she maintained, were they
prevented from amending a return to give effect to the conclusion of an enquiry.
13.
For completeness, we should mention that Mrs Douglas contended that the
Commissioners correctly notified Pennine that they were enquiring into its
accounts for the period ended in 2010, and were empowered to give effect to the
conclusions of the enquiry; they were not relying on the discovery powers in
that year. Her contentions were not challenged by Mr Garvey, and we accept them
as being correct.
14.
Although Mrs Douglas made reference to a number of cases in her
presentation to us, we find it necessary to refer to only one of them, that of Langham
v Veltema [2004] STC 544 where at [33] Auld LJ said, “…, it is plain from
the wording of the statutory test in s.29(3) [of the Taxes Management Act 1970]
that it is concerned, not with what an Inspector could reasonably have been
expected to do, but with what he could have been reasonably expected to be
aware of. It speaks of an Inspector’s objective awareness, from the information
made available to him by the taxpayer, of “the situation” mentioned in s.29(1),
namely an actual insufficiency in the assessment, not an objective awareness
that he should do something to check whether there is such an insufficiency, as
suggested by Park J. If he is uneasy about the sufficiency of the assessment,
he can exercise his power of enquiry under s.9A and is given plenty of time in
which to complete it before the discovery provisions of s.29 take effect”. And
at [36] Auld LJ added, “It seems to me that the key to the [self-assessment]
scheme is that the Inspector is to be shut out from making a discovery
assessment under the section only when the taxpayer or his representatives, in
making an honest and accurate return or in responding to a s.9A enquiry, have
clearly alerted him to the insufficiency”.
15.
In his submissions, Mr Garvey dealt with the whole of the case law
produced by Mrs Douglas, emphasising the differences between the various cases
and the present one, and effectively inviting us to distinguish them. For
present purposes, we are content to do so. It was plain that Mr Garvey had
prepared the case for Pennine with some care, and we should record our thanks
to him for his work. However, at the end of the day his submissions simply
amounted to a claim that Pennine had made full disclosure to the Commissioners,
so that its appeal should be allowed.
16.
We are quite satisfied that the contents of the various notes in
Pennine’s accounts did not amount to disclosure sufficient to enable the
Commissioners to be aware of its practice of dealing with goodwill in its
accounts. It follows that we dismiss the appeal.
17.
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.
DAVID
DEMACK
TRIBUNAL JUDGE
RELEASE DATE: 27 March 2013
