Judgment summary
This appeal concerned an income tax discovery assessment issued under section 29 of the Taxes Management Act 1970 for the tax year 2018/19 and a penalty imposed under Schedule 24 to the Finance Act 2007, relating to an overdrawn Director's Loan Account (DLA) with Equus Human Capital Limited, of which the Appellant was sole director and shareholder (1-3).
HMRC contended the amount written off was chargeable to income tax under section 415 ITTOIA 2005, interacting with section 455 CTA 2010, and was not declared in the Appellant's 2018/19 Self-Assessment Tax Return (3-4). The Appellant argued the DLA liability was dealt with by a Settlement Agreement with the Company's liquidators dated 14 May 2018, that HMRC relied on an incorrect DLA figure, and that she had reasonably relied on professional advice (5-7).
The Tribunal found that section 415 was engaged on either party's figures, rejected the Appellant's contention that the DLA balance was £296,509.66, and accepted HMRC's figure of £838,609 as supported by company accounts, P11d returns and liquidator confirmation (69-73). The Tribunal held the Settlement Agreement settled only the civil liability to the liquidators and did not determine or extinguish the Appellant's personal income tax liability (74-76).
The Tribunal concluded a valid discovery had been made, that the insufficiency was brought about by the Appellant's carelessness under section 29(4) TMA 1970, and that the discovery assessment was validly made and in time (77-88). The penalty under Schedule 24 FA 2007 was upheld as correctly calculated, with the maximum reduction already given, and the decision not to suspend the penalty, following the Appellant's rejection of a suspension offer, was upheld (89-94). The appeal was dismissed (95-96).
Background
The Appellant was the sole director and shareholder of Equus Human Capital Limited, a management consultant business incorporated on 15 September 2008 (9). The Company entered a Creditors' Voluntary Liquidation on 20 March 2015, having initially commenced a Members' Voluntary Liquidation, and was dissolved on 23 January 2019 (9).
Prior to liquidation, the Appellant had an overdrawn DLA with the Company, recorded as £296,509.66 in the declaration of solvency dated 20 March 2015 (10). Correspondence from the liquidators to HMRC dated 4 February 2015 referred to the Company's estimated final balance sheet showing assets of £866,764 and an overdrawn DLA totalling £838,609 (11).
The liquidators pursued recovery of the DLA, which was settled under a Settlement Agreement dated 14 May 2018, by which £96,650.64 was paid to the Company in full and final settlement of claims connected with repayment of the DLA (12). The liquidators' final account dated 8 October 2018 recorded a DLA of £838,609 and receipts of £96,650.64 (13). On 1 March 2023 the liquidators confirmed the figure of £296,509.66 originated from the declaration of solvency, representing the amount needed to discharge liabilities and costs, rather than the DLA balance (14).
The Appellant's 2018/19 SATR declared dividend income of £150,000 from a different company and did not include any amount for release or write-off of the DLA (15). HMRC calculated additional dividend income using the DLA figure of £838,609, less the settlement payment of £96,650.64, producing a written-off amount of £741,958.36, giving total dividend income of £891,958.36 and additional income tax assessed of £282,685.99 (16-17).
Core dispute
The issues for determination were whether HMRC made a valid discovery of an insufficiency of tax under section 29 TMA 1970 by reference to whether the released or written-off DLA amount was chargeable under section 415 ITTOIA 2005, and if so whether it was correctly calculated (18(i)).
Further issues were whether any such insufficiency was assessed competently and in time, whether HMRC established carelessness on the Appellant's part under section 29(4) TMA 1970, and whether the penalty under paragraph 9 of Schedule 24 FA 2007 was validly issued, including whether the return contained a careless inaccuracy causing a loss of tax and whether HMRC correctly declined special reduction or suspension (18(ii)-(iv)).
The Appellant argued the Settlement Agreement dealt with the entirety of her liabilities connected to the DLA, that the correct DLA figure was £296,509.66 rather than £838,609, that the assessment was made outside the statutory time limit, and that she had not acted carelessly, having relied on professional advisers (5-7).
Court findings
The Tribunal found that section 415 ITTOIA 2005 was engaged on either party's figures for the DLA, since an amount of the debt was released or written off in either scenario (69). The Tribunal rejected the Appellant's assertion that the DLA was £296,509.66, finding the documentary evidence, including draft accounts and a P11d return prepared by the Appellant's own accountants, showed a DLA balance increasing beyond that figure, reaching £838,609 by 31 January 2015 (71-73).
The Tribunal held that the Settlement Agreement, made without admission of liability, settled only the civil liability between the liquidators, the Company and the Appellant, and did not reflect the true accounting balance of the DLA nor settle the Appellant's personal statutory income tax liability (74-76).
The Tribunal accepted that Ms Rea made a discovery of the under-assessment upon comparing the 2018/19 return with information from the liquidator, and that this was a view a reasonable officer could form (77-78). The assessment was found to have been made on 31 March 2023, within the statutory time limit, with the Notice of Assessment dated 5 April 2023 to allow for administrative and postal delays (78).
On carelessness, the Tribunal found the Appellant's evidence of reliance on professional advice vague and unpersuasive, with no contemporaneous written advice produced despite requests, and concluded a reasonable taxpayer would have obtained documented advice or disclosed the DLA write-off in the return (82-84). The Tribunal agreed with HMRC's quantification of £741,958.36 as the amount released or written off, producing total dividend income of £891,958.36 and additional tax of £282,685.99 (85).
The Tribunal concluded section 29(4) TMA 1970 was satisfied and the discovery assessment was validly made and in time (86-88). On the penalty, the Tribunal found the inaccuracy was brought about by a failure to take reasonable care for the same reasons as under section 29(4), and that HMRC had given the maximum reduction it felt able to give, with no other circumstances justifying further reduction (89-91). The Tribunal found no grounds to interfere with HMRC's decision not to suspend the penalty, noting the Appellant had rejected a suspension offer on 20 January 2025 (92-94).
Outcome
The Tribunal found that HMRC validly made a discovery assessment under section 29 TMA 1970 and that the Appellant's return contained a careless inaccuracy giving rise to the penalty charged under Schedule 24 FA 2007 (95). The appeal was dismissed (96).
Major issues / areas of contention
- Whether HMRC made a valid discovery of an insufficiency of tax under section 29 TMA 1970 by reference to whether the released or written-off DLA amount was chargeable to income tax under section 415 ITTOIA 2005
- Whether the amount of the overdrawn DLA was correctly calculated, with the Appellant contending £296,509.66 and HMRC contending £838,609
- Whether any insufficiency was assessed competently and within the statutory time limit
- Whether the Settlement Agreement dated 14 May 2018 with the Company's liquidators settled the Appellant's personal income tax liability arising from the DLA
- Whether HMRC established that the loss of tax was brought about by the Appellant's carelessness for the purposes of section 29(4) TMA 1970
- Whether the penalty under Schedule 24 FA 2007 was validly issued, correctly calculated, and whether HMRC correctly declined special reduction or suspension