Jones – Taxpayer's appeal allowed as FTT failed to consider vital evidence
In Heather Jones v HMRC [2020] UKUT 229 (TCC), the Upper Tribunal (UT) allowed an appeal against a decision of the First-tier Tribunal (FTT) upholding a discovery assessment issued in respect of income tax on a severance payment.
Background
Heather Jones (the appellant) received a severance payment of £36,700 from her former employer, Doubletake Studios Ltd (DSL). Under the Income Tax (Pay As you Earn) Regulations 2003/2682, DSL was liable to deduct tax at the basic rate of 20% from the amount of the severance payment which exceeded £30,000 (the Taxable Element), leaving any additional tax to be reported and accounted for under self-assessment.
The severance payment was made to the appellant in three instalments of £9,175 and a final instalment of £6,515.04. The appellant did not declare the Taxable Element in her tax return.
DSL subsequently went into liquidation. HMRC approached the liquidators of DSL but was unable to determine how the £6,515.04 was made up, or what deductions had been made.
HMRC raised a discovery assessment on the appellant pursuant to section 9, Taxes Management Act 1970, for the balance of the higher rate tax (40%) chargeable on the Taxable Element (the discovery assessment). The appellant appealed the discovery assessment to the FTT.
FTT decisions
The FTT concluded that HMRC had shown, prima facie, that there was a "discovery" leading to a loss of tax, and that the appellant had failed to discharge the burden of proof on her to reduce or set aside HMRC's figures. The FTT accordingly dismissed the appellant's appeal and confirmed the discovery assessment.
The appellant applied to set aside the FTT's decision, on the basis of correspondence which she discovered after the FTT had made its decision.
In the correspondence, DSL's lawyer set out the payment schedule for the severance payment, which was comprised of four instalments of £9,175. After receipt of the final payment, the appellant wrote to DSL to query why the final payment to her had been £6,515 rather than £9,175. The response referred to an internal email from DSL's Financial Controller which stated "[DSL's lawyer] stated £30,000 was tax free and £6,700 was taxable and to deduct the tax from the last payment, so the last payment of £9,175 was partially taxed reducing it to £6,515."
The FTT refused the appellant's application to set aside its earlier decision.
The appellant appealed the FTT's earlier decision to the UT.
UT decision
The appeal was allowed.
The appellant argued that the FTT had erred in law by:
a) failing to properly consider the correspondence evidence containing DSL's explanation for the deduction and provide reasons for its view that the evidence did not add anything; and
b) basing its original finding in part by making a speculative assumption, unsupported by the evidence, that an amount shown in her bank statements of £9,175 was a payment to her by DSL (the entry was in fact a transfer out of the account).
In the view of the UT, the FTT had erred in law by dismissing evidence which so clearly went to the essence of the issue the parties had raised before it.
The UT also concluded that the FTT erred in law by making a finding of fact that a payment had been made to the appellant, when such a finding was contrary to the bank statement evidence, and which then led it to positing a wrong assumption about the nature of the subsequent £6,515.04 payment in issue.
Comment
It is surprising that the FTT chose not to set aside its decision (pursuant to Rule 38 of the Tribunal Rules), following the receipt of clear evidence in support of the appellant's appeal. Although the position has now been rectified by the UT, it is unfortunate that Miss Jones, who represented herself both before the FTT and the UT, had to take her case all the way to the UT.
A copy of the decision can be viewed here.