Bringing it all back home – Tribunal rejects HMRC’s arguments on remittances
In Pflum v HMRC [2012] UKFTT 365 (TC), the First-tier Tribunal (‘FTT’) has found in favour of the taxpayer in a recent appeal concerning taxation of remittances from overseas under section 26 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’).
Background
Mr Pflum was resident, but not ordinarily resident, and not domiciled, within the UK. He was employed in London by Nomura International PLC.
All of Mr Pflum’s salary was paid directly into an account with Barclays Bank in Guernsey (the ‘Guernsey Account’). This account was held solely in his name.
Some of the money in the Guernsey account was used in the UK and some was transferred to an account with Barclays in the Isle of Man (the ‘Isle of Man Account’). The Isle of Man account was held in the joint names of Mr Pflum and Ms Olga Luzhanskaya (the two later married, and Ms Luzhanskaya is referred to in the decision and this blog as Mrs Pflum).
The money used directly from the Guernsey Account to meet UK expenditure and UK credit card bills were remittances to the UK by Mr Pflum and were taxable pursuant to section 26 of ITEPA.
Some money was used from the Isle of Man Account to pay standing orders and direct debits in respect of UK rental and utility bills for which Mr Pflum was liable. It was agreed these were also remittances to the UK of Mr Pflum and were taxable pursuant to section 26 of ITEPA.
HMRC also sought to tax Mr Pflum in respect of cash withdrawals from UK cash machines and purchases of goods in the UK by way of a debit card, paid for from the Isle of Man Account.
Mr Pflum explained that he gave his wife an allowance to spend as she saw fit and this was deposited in the Isle of Man account on a regular basis. He said that all cash withdrawals and card purchases were made by Mrs Pflum and were for her own use. She did not ask his permission because it was always understood that he had given her all the monies within the Isle of Man Account for her own use. Mr Pflum used the Guernsey Account for his personal outgoings. There was never any intention that any of the monies in the Isle of Man Account would revert to him, except in relation to a limited number of direct debits and standing orders.
The issues
HMRC argued that all the sums in the Isle of Man Account should be regarded as beneficially owned solely by Mr Pflum as they were represented solely by deposits of his earnings. Consequently, all monies withdrawn in cash from the Isle of Man Account through the use of a debit card, or used to pay for purchases in the UK, or otherwise transferred to the UK, should be regarded as having been remitted by Mr Pflum to the UK, and were therefore taxable under section 26 ITEPA.
Mr Pflum argued that the sums were beneficially owned solely by Mrs Pflum (with the exception of those monies designated by Mr Pflum to meet certain liabilities of his in the UK) and should therefore not be treated as income of his remitted to the UK. When opened, the Isle of Man account was held by Mr and Mrs Pflum as joint tenants in law and equity, but the joint tenancy had been severed through a course of conduct that indicated the monies were to be solely at Mrs Pflum’s disposal, so that the legal position was that the account was owned as tenants in common with Mrs Pflum’s share being 100% (less the monies designated for Mr Pflum’s benefit).
HMRC argued that the money in the Isle of Man Account had never lost its character as Mr Pflum’s property as it was derived solely from his earnings, and therefore all sums withdrawn in the UK should be regarded as remittances by Mr Pflum to the UK.
The FTT’s decision
The FTT found in favour of Mr Pflum but on a slightly different basis than that argued.
The FTT placed particular reliance on the case of Re Bishop [1965] Ch 450, and held that the monies held in the Isle of Man account were at the joint disposal of Mr and Mrs Pflum, but the result of this was that when either party withdrew money, that money then belonged to the party withdrawing the money (which was usually Mrs Pflum). The same conclusion applies in relation to purchases made through use of the debit card in the UK. It followed therefore that the sums withdrawn or transferred did not amount to remittances by Mr Pflum.
Whilst the FTT therefore did not need to determine whether the joint tenancy had been severed, they nonetheless held that this was the case.
Comment
This decision provides useful guidance on the circumstances when payments from a joint account can be excluded from the liability to UK tax for non-domiciled individuals. Although section 25 of ITEPA has been repealed and section 26 of ITEPA was significantly amended by Finance Act 2008, HMRC are likely to be uncomfortable with the notion that even where a joint tenancy in a joint account has not been severed, withdrawals do not amount to remittances by the taxpayer if they are used for the benefit of the other party to the account. An appeal by HMRC to the Upper Tribunal would not be surprising.