Taxpayer successfully relies on human rights argument to defeat HMRC following the taxation of the same profits twice

The appellant, in Ignatius v HMRC[1], has successfully fought off an attempt by HMRC to strike out his appeal, by relying on the European Convention on Human Rights ("ECHR").

Background

The appellant, a barrister, was in the "transitional regime" applicable to barristers moving from the "cash" to the "true and fair" basis of recognising profits for tax purposes, under section 42, Finance Act 1998. The appellant's tax returns for the years 2005-06, 2006-07 and 2007-08, contained a number of errors.

The correct application of the true and fair basis resulted in profits from the 2006-07 tax year being moved back a year so that they fell into charge in the 2005-06 tax year. As a consequence, the appellant had made an underpayment of tax in 2005-06 and 2007-08 (the "Underpayment Years"), but a corresponding overpayment in the 2006-07 tax year (the "Overpayment Year").

This state of affairs came to light during an HMRC enquiry into the appellant's 2008-09 return. On 14 April 2011, HMRC provided the appellant with its analysis of how the true and fair basis should have been applied.

On 14 December 2011, HMRC notified the appellant that a claim for overpayment relief in respect of 2006-07 should have been made by no later than 5 April 2011[2].

On 25 January 2012, the appellant agreed to HMRC's revised computations for each of the affected years but this was subject to a claim that the underpayments due to HMRC for the Underpayment Years should be offset against the overpayment due from HMRC in respect of the Overpayment Year.

On 27 March 2012, HMRC issued discovery assessments to the appellant pursuant to section 29, Taxes Management Act 1970 ("TMA 1970") in respect of the Underpayment Years[3]. The discovery assessments made no allowance for the overpayment which had been made in respect of 2006-07.

The effect of the discovery assessments combined with the time-barred overpayment claim was that profits subject to tax in 2006-07 (pursuant to the original self-assessment return) were also made subject to tax in 2005-06 (pursuant to the discovery assessment issued by HMRC in respect of that year).

The appellant appealed the discovery assessments to the First-tier Tribunal (Tax Chamber) ("FTT"). HMRC applied to the FTT for the appeals to be struck out under Rule 8 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.

Whilst various arguments were raised by the appellant to resist the strike out application, for present purposes, we need only focus on the human rights arguments and in particular the appellant's right to the peaceful enjoyment of his possessions, pursuant to Article 1 of the First Protocol to the ECHR.

The FTT considered whether the appellant could rely on the ECHR:

• to extend the four year time limit for re-claiming tax due for the 2006-07 year; and/or
• to object to the way in which HMRC assessed him to tax for the 2005-06 and 2007-08 years.

The FTT considered that the two arguments were discrete, and that even if the ECHR could not be relied on in relation to one line of argument, it might nevertheless be available in the other.

The FTT's decision

The FTT framed the first question in terms of whether the claim to repayment for the 2006-07 year outside the statutory time limit for making a claim amounted to property or a possession for the purposes of the ECHR. The FTT referred to the Prince Hans[4] decision, in which claims with a legitimate expectation of obtaining effective enjoyment of a property right were contrasted with "the hope of recognition of survival of an old property right which it has long been impossible to exercise effectively". The latter was held not to be a possession.

The FTT also referred to the Carvill[5] case, in which it was confirmed that "a refusal to repay in the exercise of a discretion was not a deprivation of a possession within the meaning of the Convention".

The FTT concluded that the appellant's claim to be allowed to make a repayment claim under Paragraph 3(1), Schedule 1AB TMA 1970 outside the statutory time limit to be "an expectation of the exercise of an administrative discretion" and so not a property right.

Because the right to re-claim tax was not a possession, Article 1 of Protocol 1 ECHR was not engaged, and this part of the appellant's claim was struck out.

The FTT went on to consider whether there was any other basis on which the appellant might make a claim under the ECHR, notwithstanding its findings in respect of the Overpayment Year.

The FTT considered that this argument was distinct from that advanced in relation to the Overpayment Year because the appellant still held the funds representing the amount of tax owed. The claims made by HMRC for tax for the Underpayment Years would result in denying him that property. The FTT therefore held it to be clear, in respect of the Underpayment Years, that the appellant had a possession or property to which the ECHR applied.

In the view of the FTT, legislation must pursue a legitimate aim in a proportionate manner, if it is not to offend against the principles of the ECHR and interfere with an individual's property rights.

HMRC argued that it had not acted in an arbitrary or disproportionate manner in issuing the discovery assessments, since it was merely applying the relevant taxing statute. The FTT did not agree. In its view, it was at least arguably disproportionate for HMRC to collect tax for the 2005-06 period when it had already collected tax on the same profits for 2007-08. This was particularly so given that HMRC knew when issuing the discovery assessments that the 2007-08 year was closed which would result in the same profits being taxed twice.

The FTT noted that as a consequence of HMRC's actions, the equivalent of a penalty of 100% of the tax due for 2006-07 was levied. This put the appellant in a worse position than if he had failed to make a return at all, as he could then have then benefited from the extended time limits for making a claim in the face of a determination contained in paragraph 3A, Schedule 1AB, TMA 1970.

In the view of the FTT, there is at least an argument that it is not proportionate for legislation to be applied in a way which has such a result. HMRC issued discovery assessments in circumstances where it was fully aware that the assessments would result in the double taxation of profits.

Accordingly, HMRC's strike out application was dismissed.

Comment

The ECHR affords a "wide margin of appreciation" to Member States in taxation matters, and it is therefore relatively rare for a taxpayer to succeed when relying on a human rights argument.

The FTT commented that HMRC's actions could be held to be "without reasonable foundation" and observed that: "there is an imbalance between general interests, that each taxpayer should pay their fair share of tax and [the appellant's] fundamental rights, not to be knowingly taxed twice on the same profits and therefore wrongly deprived of his property or possessions."

Most observers will be of the view that in the circumstances of this case, and irrespective of the ECHR, the appellant should not be taxed twice on the same profits. It remains to be seen whether HMRC will pursue its discovery assessments further, or settle the matter without the need to trouble the FTT further.

The blog was written by Nigel Brook.

[1] [2015] UKFTT 80 (TC).

[2] Paragraph 3(1), Schedule 1AB, TMA 1970, provides that a claim for overpayment may not be made more than 4 years after the end of the relevant tax year.

[3] HMRC claimed that the appellant had been careless which enabled them to extend the usual time limit for making an assessment from 4 years to 6 years.

[4] Prince Hans-Adam II of Liechtenstein v Germany Application no 52527/98.

[5] R (Carvill) v IRC (No2) [2003] STC 1539.