Judgment summary
Simon Hackett and Edward Hackett appealed to the Upper Tribunal against a First Tier Tribunal (FTT) decision released on 15 August 2024 which dismissed their appeals against Closure Notices dated 5 January 2017 issued by HMRC under section 28A of the Taxes Management Act 1970 (para 1).
The appeal concerned basic redress payments received from HSBC following the mis-selling of interest rate hedging products (IRHPs), part of a scheme agreed between the Financial Conduct Authority (FCA) and nine banks (para 8). The Appellants argued the FTT's decision was logically invalid because its findings and conclusions could not both be true, and that the compensation represented a non-taxable lost opportunity cost rather than a taxable income receipt (paras 19-21).
The Upper Tribunal, comprising Judge Phyllis Ramshaw and Judge Guy Brannan, refused a late application to introduce a new ground of appeal concerning ESC D33 (paras 13-17). It held that the Appellants' grounds amounted in substance to an Edwards v Bairstow challenge, and that the FTT's conclusions were ones properly open to it on the evidence (paras 24, 30, 92). The Tribunal dismissed the appeal on all grounds (para 114).
Background
On 27 January 2006 and 15 May 2006 the Appellants jointly purchased two IRHPs from HSBC (products 1 and 2), and in August 2006 a further IRHP from RBS (para 3). Products 1 and 2 were described as Libor caps with Knock-in floor, used to manage interest rate fluctuations on bank loans (para 5). Until late 2008 the base rate exceeded the ceiling and HSBC made payments to the Appellants; the base rate then fell below the floor and the Appellants made substantial payments to HSBC, which they deducted as expenses of their property business profits (paras 7-8).
From 2010 it became apparent that IRHPs of this kind had been mis-sold, leading the FCA to agree a redress scheme with nine banks, including HSBC and RBS (para 8). The scheme comprised basic redress, interest, and consequential loss (para 8). The Appellants were automatically entered into the redress phase and HSBC determined that they would, but for the mis-selling, have entered into alternative products, with redress calculated as the difference between actual payments and the payments that would have been made under those alternatives (paras 59-64).
The RBS basic redress payment was treated as taxable and was not part of the appeal; interest payments from both banks were also not pursued on appeal (para 3). Only the HSBC basic redress payments remained in dispute (para 8).
Core dispute
The central issue was whether the basic redress (compensation) payments received from HSBC were chargeable to income tax, or whether they represented a non-taxable lost opportunity cost (paras 9, 42).
The Appellants argued that the FTT's decision was not based on valid rules of logical inference, and that if its findings were assumed true, its conclusions must be false, rendering the decision invalid in form rather than wrong in substance (paras 19-21, 33-41). They contended the compensation was in reality for the lost opportunity to have entered into an alternative, more favourable, hedging product (paras 34-42).
HMRC argued that the FTT reached the correct conclusion for the correct reasons, and that the Appellants had not identified any recognisable error of law, their arguments instead relying on economic and logical theory rather than legislation or case law (paras 44-46).
A further ground (Ground 4) argued that the FTT had failed to answer the question actually raised by the Appellants, namely whether HMRC's tax assessment was logically valid, and that section 28A(1) TMA required HMRC's stated conclusions in the closure notices to be formally valid (paras 98-100).
Court findings
The Tribunal refused the Appellants' late application, made at the start of their reply on the second day of the hearing, to introduce a new ground based on ESC D33, finding it would prejudice HMRC and was not a pure point of law (paras 11-17).
On Grounds 1-3, the Tribunal held that the Appellants' 'validity' argument was, in substance, no different from an Edwards v Bairstow challenge or an insufficiency of reasons challenge (paras 24, 30). It found the FTT's conclusions were ones properly open to it on the evidence and fully endorsed them following its own analysis (para 31). The Tribunal held that the FTT was correct that the basic redress compensated for the Appellants' liability to make payments under the mis-sold IRHPs, and not for any lost opportunity to have purchased an alternative product; the alternative product was relevant only to the calculation of quantum, not to identifying what the compensation was paid for (paras 79-84, 90-94).
Applying London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772 and Deeny and others v Gooda Walker Ltd [1996] 1 STC 299, the Tribunal held that, having identified what the compensation was paid for, it would have been an income receipt of the Appellants' property rental trade had it been received, and was therefore chargeable to income tax (paras 73-76, 87, 91).
On Ground 4, the Tribunal held that the FTT had correctly identified the issues it had to determine under sections 31 and 50 TMA 1970, namely whether the Appellants had been overcharged by the closure notices, and that it had properly dealt with the arguments raised (paras 102-109).
The Tribunal also noted, without making findings of misconduct, HMRC's concern about language used by the Appellants describing HMRC's conduct, and found nothing to suggest HMRC had acted other than professionally (paras 110-113).
Outcome
The Upper Tribunal found no error of law in the FTT decision and dismissed the appeal (para 114). Any application for costs was required to be made in writing within one month of release of the decision, in accordance with rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (para 115).
Major issues / areas of contention
- Whether the FTT's decision was logically invalid because its findings and conclusions could not both be true
- Whether the basic redress payments received from HSBC for mis-sold interest rate hedging products were chargeable to income tax
- Whether the compensation instead represented a non-taxable lost opportunity cost for entering into the mis-sold products rather than an alternative product
- Whether the Appellants should be permitted to raise a late new ground of appeal concerning ESC D33
- Whether the FTT had failed to answer the question actually raised, namely the logical validity of HMRC's tax assessment under section 28A TMA 1970
- Whether the FTT's decision amounted to an Edwards v Bairstow challenge or disclosed any other recognisable error of law