Judgment summary
Mr Michael Cohen appealed against a closure notice dated 8 August 2023, issued under s 28A(1B) and (2) TMA 1970, which increased his self-assessed income tax for 2020/21 by £138,047.73 (the Amendment) (1). The Amendment related to a balance of £362,830 (the DLA Balance) on Mr Cohen's director's loan account with Bellagio Europe Limited (BEL), written off by the liquidator in November 2020 (2), (9).
Mr Cohen also appealed against a penalty of £53,148.37 imposed under sch 24 Finance Act 2007 for failing to include the DLA Balance on his self-assessment tax return (SATR) for 2020/21 (3).
The Tribunal heard evidence from Mr Cohen and from HMRC Compliance Officer Alan Spraggs (5). The hearing was held remotely and in public (4), (6).
Background
BEL was incorporated in 2004 and Mr Cohen was appointed director on 1 November 2005 (7). BEL entered creditors' voluntary liquidation on 11 July 2019, with Gareth Howarth of Path Business Recovery Limited appointed as Liquidator (8).
By letter dated 9 November 2020, the Liquidator wrote off Mr Cohen's overdrawn DLA balance of £362,830, pursuant to a Settlement Agreement dated 16 December 2019 under which Mr Cohen paid an amount later varied to £36,170 (9), (17). BEL was dissolved on 23 June 2021 (11).
HMRC notified Mr Cohen by letter dated 16 November 2020 that the written-off DLA would be chargeable to income tax and should be included in his 2020/21 SATR (10). Mr Cohen's SATR, submitted on 18 March 2022, did not include the DLA Balance (12). HMRC opened an enquiry on 31 May 2022 (13).
Extensive correspondence followed in which Mr Cohen maintained he had not received the funds represented by the DLA, believed the Settlement Agreement payment to the Liquidator was in full and final settlement including any sums owed to HMRC, and attributed errors to his former accountants (16), (18), (22). HMRC issued an invalid notice of assessment on 18 April 2023, later corrected by the Closure Notice issued on 8 August 2023 (23), (27), (28). A penalty notice was issued on 28 December 2023 (31). Mr Cohen notified his appeal to the Tribunal on 5 February 2024 (33).
Core dispute
The issues for the Tribunal were whether the DLA Balance was chargeable to income tax for 2020/21 under sections 415-416 ITTOIA 2005, whether the Closure Notice was correctly issued, whether Mr Cohen had been overcharged by the Amendment, whether the conditions for the Penalty under sch 24 FA 2007 were met, and if so, whether the Penalty had been correctly categorised and calculated (36).
Mr Cohen's grounds of appeal included that he had never benefited from the funds, that the DLA figures were recorded incorrectly by his accountants, that he had never been advised to include the DLA on his SATR, that he believed the written-off DLA had already been settled including sums owed to HMRC, that he had not acted in bad faith, and that his dyslexia limited his understanding of company accounts (40).
Court findings
The Tribunal found that the Closure Notice had been validly issued within the required timeframe, notwithstanding earlier confusion caused by HMRC's erroneous issue of an invalid assessment (48).
Based on the Liquidator's Letter, the Liquidator's statement of affairs (signed by Mr Cohen), and the Settlement Agreement, the Tribunal found that Mr Cohen did have a DLA with BEL and that the DLA Balance was written off during the 2020/21 tax year (53). It followed, by operation of s 415(1) and s 416(1) ITTOIA 2005, that the DLA Balance was chargeable to income tax and should have been included in his SATR (54).
On the Penalty, the Tribunal found on the balance of probabilities that HMRC's Notification Letter was sent and received by Mr Cohen, but accepted that his dyslexia and confusion about the nature of the DLA Balance and Settlement Agreement may have prevented his understanding that the DLA Balance should be included on his SATR (67). The Tribunal accepted Mr Cohen was not an accounting expert and had sought informal advice after losing trust in his former accountants, leading him to believe only amounts actually received needed to be included (68).
However, the Tribunal found it would have been prudent for Mr Cohen to instruct accountants specifically on the tax treatment of the written-off DLA Balance, and that his failure to do so went beyond a simple error of omission or oversight, amounting to a failure to take reasonable care rather than deliberate behaviour (69), (70).
Outcome
The Tribunal decided that the appeals should be allowed in part (72).
The appeal against the amendment to Mr Cohen's SATR for 2020/21 in the amount of £138,047.73 was dismissed (73).
The appeal against the penalty of £53,148.37 was allowed in part, with the penalty to be re-categorised and recalculated as a careless penalty, with mitigation for helping, telling and giving applied (74), (71).
Major issues / areas of contention
- Whether the DLA Balance of £362,830 was chargeable to income tax during the 2020/21 tax year under sections 415-416 ITTOIA 2005 (36(1)).
- Whether the Closure Notice dated 8 August 2023 was correctly issued under s 28A(1B) and (2) TMA 1970 (36(2)).
- Whether Mr Cohen was overcharged by the Amendment of £138,047.73 (36(3)).
- Whether the conditions for imposing the Penalty under sch 24 FA 2007 were met (36(4)).
- Whether, if the conditions for the Penalty were met, it had been correctly categorised as deliberate but not concealed and correctly calculated (36(5)).