Sarah Thomas v The Commissioners for HMRC

The Appellant’s Calculation includes claims for £5,000 of employment income in 2006/07 and £35,000 in 2008-09 for Mr Thomas.

We accept these amounts were not paid to Mr Thomas but do not accept that the debt was assigned.

The Appellant’s Calculation includes two amounts for consultancy services being £66,800 in 2008-09 and £53,385 in 2009-10. The consultancy services were for services invoiced by Mr Thomas to TML on 31 October 2008 and 31 October 2009 respectively. The Appellant produced invoices to support the claim.

HMRC suggested that these amounts were reflected in note 6 in the 2008 accounts where there was an accrual in October 2007 of £120,185. The accruals figure in the 2008 accounts reduced by £66,800 to £53,385 and so HMRC concluded it was reasonable to assume that Mr Thomas had been paid £66,800. In the absence of later accounts it was also reasonable to conclude that the balance of £53,385 was also paid to Mr Thomas.

We find that the £66,800 invoice was on balance paid by TML but not the second invoice of £53,385. However, again, we do not accept this debt was assigned by Mr Thomas to the Appellant.

On 8 February 2011 HMRC issued a determination under Regulation 80 of the PAYE Regulation assessing to employment income £119,385 of income payable to Mr Thomas. The Appellant produced the determinations to support the claim. The regulation 80 determination was appealed by TML and payment of the tax postponed but the company went into liquidation before that appeal could be determined.

The underlying income referenced in the Regulation 80 assessment was listed as an expense in the Appellant’s Calculation. In cross examination Mr Thomas accepted that this employment income was the same as the consultancy services income amounts of £66,800 and £53,385 invoiced in October 2008 and 2009 as discussed above. Mr Thomas was indignant that HMRC had assessed the consultancy services to PAYE. He had paid tax through his personal tax return on these amounts and, it appeared to him, that he would in effect be subject to double taxation on the consultancy services as HMRC had refused to credit the personal tax he had paid against TML's PAYE bill. That being the case Mr Thomas felt entitled to show in the Appellant’s Calculation not only the original consultancy services but also the employment income HMRC said arose.

It was accepted by Mr Thomas in cross examination and by Mr Welsh in closing submissions that the employment income of £124,385 in the Appellant’s Calculation in effect duplicated the consultancy services and there had never been employment income of that amount independent of the consultancy services recharacterized by HMRC.

We find that Mr Thomas knowingly made a fictitious claim repeated under oath which was intended to reduce the Appellant’s tax liability. As already noted, Mr Thomas is extremely familiar with the tax appeals and cannot have made an innocent mistake. That aside, the claim for employment income of £124,385 in the Appellant’s Calculation cannot stand.

The Appellant claimed interest accruals of £6,101 in 2006/07 and £150,000 in 2007-08. As we have found, we consider the total interest accrual over the period of the TML Loan is £430,684.93, significantly higher than that claimed by the Appellant.

The Appellant claimed a “mortgage” of £1m in 2006/07. This is a misdescription of the principal advanced under the TML Loan but it is common ground that the TML Loan is a constituent element of the Appellant’s Loan Account.

The Appellant claimed for office and other costs as to £39,754 in 2006/07, £32,866 in 2007-08 and £4,108 in 2009-10. Mr Thomas argued that these amounts represented costs of fitting out TML’s offices including the value of items already owned by Mr Thomas and given (or introduced) to TML. The costs also included music equipment for TML’s subsidiary, Artemis Records.

The Appellant argued that these costs were borne by Mr Thomas and so amounted to a debt owed by TML to Mr Thomas which he assigned to the Appellant. Mr Thomas accepted that he did not have any invoices or other evidence of the expenditure.

In the absence of any evidence to support this expenditure and Mr Thomas’ lack of credibility as a witness, we have difficulty believing TML needed £76,728 spent on office furniture for a company that appears by the accounts to have had a maximum of four employees who were paid token salaries. We also note that the Thomas family ran other companies and it is not obvious to us why the office costs needed to be allocated to TML. No specifics were given by Mr Thomas as to the nature of the music equipment.

Further, as we have found that Mr Thomas has not shown he assigned any debt to TML these amounts cannot be treated as increasing the Appellant’s Loan Account.

This expenditure relates to the purchase by TML for £25,000 of a property in Skye owned by Mr Thomas’ mother. It was Mr Thomas’ evidence that having purchased the property his mother did not want the sale proceeds so assigned the right to receive them to Mr Thomas. Mr Thomas then assigned the right to receive the proceeds to the Appellant. Accordingly, TML owed the Appellant £25,000 which had never been paid. The Appellant produced an email from a solicitor at Skene Edwards LLP to Mr Thomas in respect of land in Skye being purchased by TML from Mr Thomas’s mother for the price of £25,000.

HMRC doubted this account, including what happened to the land, whether ultimately ended up in the hands of Mr Thomas on the Appellant.

We do not find Mr Thomas is account of the dealings in this property to be credible and in short in the absence of any evidence do not accept any debt was assigned to the Appellant.

The Appellant claimed that £115,000 was introduced by Mr Thomas into TML in 2007-08 using proceeds distributed by the MacLellan Trust. Mr Thomas evidenced the payments with bank statements from his account at Handelsbanken showing a deposit of £130,000 from the MacLellan Trust on 3 January 2008 and two payments to TML, one of £100,000 on 3 January 2008 and one of £15,000 on 31 July 2008.

HMRC argued that there was no evidence these payments had not been repaid and rejected the argument that they added to the Appellant’s Loan Account.

We accept that these payments were made but as they were made by Mr Thomas we do not accept the debt was transferred to the Appellant.

The Appellant claimed that Mr Thomas lent TML’s subsidiary £243,715.

HMRC argue that there is no evidence for this loan, save that the 2008 accounts show that TML invested £243,715 in its subsidiary Artemis Records. The company never filed accounts and was wound up in July 2008. There was never any evidence that the debt was assigned from Artemis to TML when it was clear that Artemis records was in financial difficulties. Had this happened it is likely the ultimate creditors would have challenged any preferential arrangements in favour of the Appellant.

We accept based on the evidence in the accounts that there was a loan but we do not accept the debt was transferred to the Appellant.

As we have found that the shareholders’ loan account in the 2008 accounts does not indicate the shareholder to whom it is owed and predates the NRL loan assignment by 16 months, there is therefore a legitimate task in identifying debts owed to the Appellant by TML as at 1 February 2010.

The Appellant’s Calculation is an attempt to do so. However, having reviewed the items of claimed expenditure, we do not accept the Appellant’s arguments that the expenditure shown in the Appellant’s Calculation support the amount claimed for the Appellant’s Loan Account save for;

The Appellant argued and it was Mr Thomas’ evidence, that the costs shown in the Appellant’s Calculation were examples and illustrative of the financial support provided by Mr Thomas, the debts from which were assigned to the Appellant. Aside from the general finding that there was no assignment, we do not draw any such wider conclusions. It is for the Appellant on the balance of probabilities to show that the Appellant’s Loan Account was equal or in excess of the value of the NRL loan and, save for the specific items identified, has not done so.

During the course of the investigation Mr Charles reviewed and considered the evidence provided by Mr Thomas in support of the Appellant’s primary and alternative positions. Mr Charles did not accept the shareholder loan account numbers in the 2007 and 2008 accounts, the Appellant’s primary or alternative position or the supporting evidence produced by the Appellant. Instead, Mr Charles sought to construct a version of the Appellant’s Loan Account and produced the HMRC Calculation which shows the Appellant’s Loan Account to be worth £1,049,794.08.

There are three elements to the HMRC Calculation:

We have found that TML did not pay any interest to the Appellant. However, we have found that a total of £430,684.93 of interest accrued on the TML Loan from 19 March 2007 to 1 February 2010 and not just £300,000 in 2007-08 and 2008-09.

As described above, we do not accept that the Appellant has shown that Mr Thomas assigned to the Appellant his right to repayment of debts owed by TML. We have also found that the shareholder loan account in the 2008 accounts does not assist us in determining the Appellant’s Loan Account.

The only evidence we can rely on is the amount of the TML Loan, our findings as the terms of the interest and that no interest or employment income was paid to the Appellant. Accordingly, we find that as at 1 February 2010 the Appellant’s Loan Account was £1,480,684.93 being the TML Loan of £1m plus (subject to the caveat as to illustrative numbers) £430,684.93 of interest and £50,000 of the Appellant’s employment income.

The central issue in this appeal is whether the assignment of the NRL Loan by TML to the Appellant is taxable as the Appellant’s income.

An individual taxpayer in receipt of distributions as a shareholder is liable to income tax under s. 383 Income Tax (Trading and Other Income) Act 2005:

Section 209(2) ICTA provides:

It is common ground that the Appellant is liable to income tax as a distribution to the extent that the value of the NRL Loan assigned by TML to the Appellant exceeded the Appellant’s Loan Account.

Mr Welsh for the Appellant has made a point in submissions that the effect of s. 209(4) is that an assessment should be made on the value of the benefit received. Thus, there is a tax charge to the extent:

It is agreed that the face value of the NRL Loan was £2,135,713. However, according to Mr Welsh, the value of the NRL Loan was impacted by the fact that NRL was, as agreed by Mr Charles in his evidence, in financial difficulties. Mr Welsh argued that no attempt has been made to determine the market value (as opposed to the face value) of the NRL Loan and so the assessment does not comply with section 209(4).

The point was made in submissions handed up during the hearing but was not in Mr Welsh’s skeleton argument, aired in the hearing or otherwise so far as we can determine foreshadowed at any earlier stage in this dispute. Indeed, Mr Welsh’s skeleton argument provides at 2.12:

Further, section 209(4) was not in the authorities bundle.

Mr Birbeck has unsurprisingly not made any submissions on the point.

HMRC should have included this argument in their ground of appeal or sought permission to raise it (Rule 20, ABP Technology at [2] and Asiana Limited at [15] as discussed further below). However, on the facts of this appeal it is in our view a short point and we will address it.

HMRC have assessed using the amount of £2,135,713, being the amount the parties have agreed as having accrued on the NRL Loan. We also note that the NRL deed of assignment in February 2010 provided:

It may well be appropriate to discount this face value due to NRL’s difficulties, but the burden of proof is on the Appellant on this issue and the Appellant has not produced any evidence as to what that alternative value would be. Indeed, we would expect it would need to be a matter of expert evidence.

The Appellant therefore has not persuaded us that we should apply an alternative value to the assignment of the NRL Loan. We therefore reject the argument.

We have found that the value of the Appellant’s Loan Account on 1 February 2010 was £1,480,684.93 and that the value of the NRL Loan was £2,135,713. Accordingly, we find that , subject to the arguments discussed below, the Appellant is liable to income tax on a distribution of £655,028.07, being £2,135,713 less £1,480,684.93.

We note that it follows from our findings of fact that the Appellant did not declare all the interest that accrued on the TML Loan in her tax returns.

As set out above, the Appellant declared interest in her tax returns in 2007-08 and 2008-09, initially of £120,000 in each year, but increased to £150,000 by the Appellant amending her 2008-09 tax return in October 2010 to show a gross receipt of £150,000 and, in respect of 2007-08, the decision of Thomas2014.

However, it appears to us that the Appellant did not declare the £6,986.30 of interest that accrued in 2006/07 and the £123,698.63 interest that accrued in 2009-10. That interest serves to increase the Appellant’s Loan Account and so reduces the Appellant’s liability to distribution income but is in principle itself taxable.

There is no appealed assessment before us in respect of the 2007-08 tax year so that is not an issue we can consider in this appeal. Further, HMRC did not in the Income Tax Assessment argue in the alternative or otherwise that tax was due on the interest accruing in 2009-10. The evidential and legal issues arising, including us to our powers to uphold the Income Tax assessment on that basis, were not considered by the parties in this appeal. Accordingly, we have decided it would be inappropriate now to make findings on this point.

The Appellant argues that in substituting the Dividend Calculation for the Other Income Calculation, HMRC had entered into an agreement under s. 54 discharging or cancelling the Income Tax Assessment and has not issued a fresh assessment. Accordingly, as no fresh assessment was issued to accompany the Dividend Income Calculation, there was no live assessment taxing the Appellant. For brevity we refer to this argument as the s.54 argument.

Towards the end of the hearing Mr Welsh for the Appellant objected to Mr Birbeck raising counter arguments on this point on the basis that his argument had not previously been raised or pleaded by HMRC. Again, for brevity we refer to this issue as the s.54 procedural argument.

It became clear that it was necessary for the parties to make written submissions on the issue and I directed accordingly. Those submissions have been made by the parties and have been considered in this decision.

Section 54 TMA provides insofar as relevant:

The Appellant argued in the appeal and in written submissions that HMRC was not entitled to raise arguments on the s.54 argument because they had not pleaded them, given the Appellant notice, included the argument in their skeleton argument or sought permission from the Tribunal to make the argument.

HMRC had had due notice of the Appellant’s argument on s.54. The argument had been raised in Mr Barnard’s letter to HMRC on 10 January 2024 requesting a review. In their review conclusion letter of 22 March 2024 HMRC noted the argument and rejected it arguing that there had simply been an “administrative error” in the computations which was corrected in the review of the matter letter.

The point was further raised in the Appellant’s application to the Tribunal of 18 December 2024 objecting to HMRC’s application for an extension of time to serve their statement of case:

Following HMRC's successful application for an extension of time to serve their statement of case, and the Tribunal’s specific direction that HMRC answer the issues raised by Mr Bernard in a letter of 28 May 2025, HMRC failed to include any argument on the point, even though HMRC was aware of it.

The Appellant relied on the Court of Appeal in ABP Technology Ltd v Voyetra Turtle Beach Inc [2022] ETMR 33 at §2:

Failing to alert the Appellant as to these arguments until making closing submissions amounted to litigation by ambush. Accordingly, the Appellant was not able to present their case properly including cross examine witnesses.

Rule 25 requires HMRC’s statement to case to set out HMRC’s position. Rule 20 did not do so the same for an Appellant’s grounds of appeal.

Mr Welsh accepted that the Appellant’s grounds of appeal did not expressly refer to s. 54 but the grounds did provide (emphasis added):

That argument was the basis of the s.54 point which was made clear in correspondence and so fair notice had been given by the Appellant to HMRC of the argument. The position, including documents and authorities relied on, was also fully set out in the Appellant’s skeleton argument.

However, it was clear that HMRC for its part did not give the Appellant fair notice of its argument. HMRC instructed counsel for the first time shortly before the hearing and no doubt realised the case needed to be argued on a different basis. However, rather than seeking permission to change their pleaded case, HMRC made the arguments in closing relying on authorities not produced and hoped no one would notice (Jacobs v Chalcot Crescent (Management) Co Ltd [2024] EWHC 259 (Ch) at [57], [60], [63] and [65])).

The Appellant’s position therefore was that in consequence not only should HMRC's arguments not be considered by the Tribunal but also an award of costs in favour of the appellant under Rule 10(1)(b) of the Tribunal Rules (Witton v HMRC [2024] UKFTT 489 (TC) at [37-41])

HMRC argued that the s.54 argument had not been pleaded as part of the Appellant’s case. The Appellant had made the argument in their request for an internal review of 10 January 2024 but, following HMRC's rejection of that argument in the review conclusion letter of 22 March 2024, the Appellant did not raise the point again. It was not in her grounds of appeal and the Appellant did not at any time seek to amend her grounds of appeal. The argument was only raised at the last possible stage in the skeleton argument filed on 29 January 2026, after HMRC had filed their skeleton on 19th January 2026.

An Appellant must state what its grounds of appeal are, otherwise it cannot rely on them (Asiana Limited v HMRC [2019] UKFTT 267 (TC) at [15],

It was not for HMRC to make submissions on the argument if the Appellant did not do so, just in case the Appellant sought to resurrect the point in their skeleton argument. The implication of the Appellant’s argument was that if HMRC failed to anticipate an Appellant’s argument not only should the Appellant be entitled to rely on it without pleading it but any defence to the point should have automatically be struck out and the appeal decided as if the Appellant’s argument were correct.

Mr Birbeck for HMRC suggested that the Tribunal should either (1) refuse to allow the Appellant to rely on the s.54 argument or (2) exercise its case management powers on the basis that the Appellant has impliedly made an application to amend their grounds of appeal so as to include it. HMRC would not oppose any application by the Appellant (implied or otherwise) to admit the s.54 argument as there is little prejudice, see Denley v HMRC [2017] UKUT 340 (TCC) at [34]:

In this appeal all the relevant evidence and law was before the Tribunal, and the argument could be and was addressed at the hearing. In particular, had the s. 54 argument been properly pleaded, no further witness evidence or cross-examination would have been required.

Accordingly, the only prejudice suffered was to HMRC who was denied the opportunity of making written submissions on the point and that prejudice has been remedied by the post hearing written submissions.

The Appellant argues that, just as HMRC has accepted in its statement of case that the letter of 26 October 2023 constituted a settlement of the CGT position for the purposes of s.54, HMRC’s letter of 19 December 2023 withdrawing the Other Income Calculation constitutes a settlement of the Income Tax Assessment. Thus, the Appellant and HMRC both agreed that the assessment should be cancelled and therefore on the wording of s. 54:

That being the case, the effect of that agreement is that:

Further, the Dividend Income Calculation is not in itself an assessment for tax purposes but it is a necessary element of a tax assessment which must identify the proper source of the income and therefore the manner and rate at which it is taxable (Ashraf v HMRC [2018] UK FTT 97).

As a result, once the Income Tax Assessment was withdrawn there is no live assessment to be appealed and no tax payable by the Appellant.

Mr Welsh accepted in the hearing that there would appear to be nothing to prevent HMRC issuing a fresh assessment but he argued that that did not alter the effectiveness of the argument in this appeal.

HMRC accept that the letter of 26 October 2023 constituted a settlement of the CGT Assessment under s. 54 but deny that their letter of 19 December 2023 constitutes a settlement of the Income Tax Assessment. As stated in the review letter, it was an administrative error which did not invalidate the Income Tax Assessment. Mr Charles in his evidence confirmed that that was his view. The decision to assess the Appellant as receiving distribution income was made and communicated to the Appellant on 26 October 2023 but the calculation “was put in the wrong box”.

The normal rules or offer and acceptance apply to agreements under s. 54 (Schuldenfrei v Hilton (Inspector of Taxes) [1999] STC 821). HMRC did not in the letter of 19 December 2023 make an offer to discharge or cancel the Income Tax Assessment. Further, there has never been a meeting of minds as to the amount of tax due so it cannot therefore be said that the parties agreed that it should be varied.

In the hearing Mr Birbeck sought to make an argument as to the effect of s. 49F and that the decision being appealed was the review conclusion letter. However, he did not pursue the point in submissions and we take him to have withdrawn it.

We agree with HMRC that the Appellant did not include the s.54 argument in its grounds of appeal as required by Rule 20(1)(f) and s. 31A(5) TMA. In our view the argument in paragraph 1 of the grounds of appeal that HMRC have not “raised a valid discovery assessment” and that the raising of the Income Tax Assessments “involved an error” do not amount to a clear indication that s. 54 is engaged.

There was a reference to the point in the Appellant’s objection to HMRC’s application for an extension of time to serve their statement of case. However, the issue is not in Mr Barnard’s email of 28 May 2025 to which the Tribunal on 12 December 2025 directed HMRC respond in their statement of case.

The fact that the Appellant had raised the point in previous correspondence including the application for a review does not amount to a pleaded ground of appeal or argument that HMRC is required to address in its statement of case or skeleton argument. It is not unusual for parties to raise wider arguments in correspondence which they ultimately do not pursue in the appeal.

Further, the Appellant did not at any stage seek to amend its grounds, even at the hearing (Rule 20, ABP Technology at [2] and Asiana Limited at [15]). The first time the argument appears is in HMRC’s skeleton served on 29 January 2026, after HMRC had filed their skeleton. That being the case, we do not find it surprising HMRC did not include any arguments on the point in their statement of case or skeleton.

Indeed, applying the standard the Appellant seeks to apply to HMRC, we consider the procedural issue might be better couched as to whether the Appellant should be entitled to run her s.54 argument at all. In raising a new argument, the Appellant must be treated as seeking permission to add a new ground of appeal. However, in our view for the reasons set out below, we consider that the s.54 argument is a short legal point and, applying the principles in Denley [2017] UKUT340 and having had the benefit of written submissions, there is no prejudice to either party in deciding it.

For completeness we dismiss the Appellant’s application for costs.

The short point is whether the Appellant’s argument at the time and Mr Charles’ letter of 10 December 2023 amounted an agreement for s.54 purposes.

We do not accept that in substituting the Dividend Calculation for the Other Income Calculation in the 10 December 2023 letter Mr Charles was agreeing “…that the assessment …should be treated …as discharged or cancelled”. In his letter of 26 October 2023 Mr Charles had expressed his view that the Appellant was liable to tax on a distribution but, as he explained in his evidence, in issuing the Income Tax Assessment calculation there was an error resulting in HMRC producing an “other income” calculation not a distribution calculation. In admitting the error in the 10 December 2023 letter, Mr Charles still believed that the Appellant had failed to declare £1,078,418 of distribution income in 2009-10 but was simply correcting the calculation of the tax liability that arose in consequence.

Mr Charles necessarily agreed that the Income Tax Assessment should be reduced to £263,081.25, the amount shown in the Dividend Calculation, but the Appellant did not accept that any was payable.

For s.54(1) to apply there must be

Mr Charles did not believe the Income Tax Assessment should be “discharged or cancelled” and the Appellant did not agree that it should upheld “as varied”. Accordingly, the terms of s.54(1) were not met.

We therefore find that the Appellant and HMRC did not reach an agreement within s.54 when HMRC substituted the Dividend Calculation with the Other Income Calculation.

The Appellant argued that there is no valid assessment because HMRC did not make a discovery within s. 29(1) which entitled HMRC to raise the Income Tax Assessment.

The burden of proof is on HMRC to show there was a discovery.

Section 29 provides as follows:

The Appellant argued that HMRC are not entitled to issue the Income Tax Assessment because, in accordance with s.29, once a discovery has been made, HMRC is only entitled to make “an” assessment not multiple assessments. HMRC purported to issue two assessments in respect of the substantive tax, the CGT Assessment on 10 May 2023 and the Income Tax Assessment on 26 October 2023. HMRC could have issued an assessment in the alternative but chose not to.

The Appellant’s challenge is not as to whether there was a discovery which led to the CGT assessment on 10 May 2023 but that there was no new discovery that entitled HMRC to issue the Income Tax Assessment. In effect having acted on the discoveries made prior to 10 May 2023, they could not be used again and no new discovery was made prior to issuing the Income Tax Assessment on 26 October 2023. The reason why Mr Charles issued the Income Tax Assessment was because it was pointed out to him in the 31 May 2023 letter that the CGT analysis was wrong. There was at that time no discovery of new facts or a different understanding of the circumstances.

The Supreme Court in Tooth [2019] EWCA Civ 826 was dealing with a discovery by an officer of something previously known by a different officer. In the current appeal the position is different as it is the correction of an error by the same officer and that is not a discovery.

HMRC argued that on receiving the Appellant’s appeal of 31 May 2023 setting out why the NRL Loan was not a capital asset, Mr Charles concluded that there was insufficient information to determine whether the debt was a debt on security or a simple debt. Accordingly, he changed his view and concluded instead that the assignment of the NRL Loan was taxable as a distribution within s. 209 ICTA. The CGT Assessment was therefore settled under s. 54 and Mr Charles issued the Income Tax Assessment.

HMRC rely on the Upper Tribunal’s decision in Charlton [2012] UKFTT 770 (TCC) at [37]:

HMRC further rely on the principles summarised by the Upper Tribunal in Jerome Anderson [2018] UKUT 0159 at [24], [29] and [30], approved by the Supreme Court in Tooth at [72], that for there to be a discovery by an officer a subjective and objective test must be satisfied:

Mr Charles’ belief was based upon evidence obtained by HMRC during the enquiry and resulting from the s.36 notice. The analysis that the assignment was not an assignment of a debt on security was new information. In any event there is no requirement for Mr Charles to have obtained new information for him to make a further discovery. Mr Charles reviewed the information available to him during the appeal and changed his view of the tax treatment which was in itself, in accordance with Charlton, a new discovery. He believed that there was an insufficiency of income tax and that belief was one a reasonable officer could form.

The case law in this area was extensively reviewed in Tooth and we take the interpretation of s.29 from that judgment, the tests set out in Anderson at [24] and the first part of Charlton at [37] both of which was endorsed by the Supreme Court, save for the later observations in Charlton on staleness (Tooth at [76]).

In our view the information obtained during the inquiry amounted to a discovery by Mr Charles for the purposes of s.29(1). We do not accept the Appellant’s argument that, having issued the CGT Assessment, those discoveries were spent and could not justify the later issue of the Income Tax Assessment. However, in our view nothing turns on that point because the decision to issue the Income Tax Assessment was based on two things, the information provided by the Appellant’s appeal of 31 May 2023 and Mr Charles’ change of mind in October 2023. Both of these things were new discoveries which justified a fresh assessment. He had been working on the basis that the NRL Loan was an asset for CGT purposes. He was provided with further information which alerted him to this not being the case and so he changed his mind. Even aside from the Appellant’s appeal of 31 May 2023 pointing out that a CGT treatment was inappropriate amounting to new information, Mr Charles’ change of mind was “a change of view, change of opinion, or correction of an oversight…” as described in Charlton at [37] and so amounted to a “discovery”. Having made a new discovery Mr Charles was entitled to issue the Income Tax Assessment.

The question as to whether the Appellant deliberately failed to pay tax arises in three contexts:

The penalty question is addressed separately below.

The first context, as to whether HMRC can issue an assessment, arises in s. 29(3) and (4) TMA which provide:

The second condition referred to in s. 29(3) is not relevant to this appeal and so the effect of s. 29(1),(3) and (4) is that in order for HMRC to raise an assessment the failure to pay tax must have been brought about carelessly or deliberately.

The second context, whether HMRC are time barred, arises is in s.34 and 36 TMA which provides insofar as relevant:

The effect of s.34 and 36 is that in order for HMRC to raise an assessment more than 6 years after the end of the year of assessment the failure to pay tax must have been brought about deliberately. Here HMRC issued the Income Tax Assessment on 31 October 2023, over 13 years after the end of the 2009-10 tax year and so these provisions are engaged.

Section 118(7) TMA provides guidance on the meaning of “deliberately”:

Whilst the requirements in s.29(3) and (4) TMA could be satisfied by the Appellant being careless, HMRC must in any event show the Appellant acted “deliberately” so as not to be time barred under s.36(1A) and so it is insufficient for HMRC to show the Appellant acted carelessly.

The Supreme Court in Tooth v HMRC [2021] 1 WLR 2811 summarised the test of deliberate inaccuracy:

The burden of proof on this issue is on HMRC.

HMRC argue that the failure to account for the dividend income arising from the assignment of the NRL loan was brought about deliberately, whether by the Appellant or by Mr Thomas acting on her behalf.

The Appellant knew she had made a £1m loan to TML funded by a mortgage on her family home. On 1 February 2010 she received the benefit of the NRL Loan which has a value of £2,135,713. The assignment documentation signed by her on that day expressly referred to that value. She was therefore aware that she had received something of a value exceeding the amount owed to her and that the transaction has a tax consequence. However, her tax return did not declare any liability for such a substantial transaction. This was deliberate behaviour.

HMRC further argue that even if the Appellant did not fully understand the tax consequences, the evidence demonstrates she at least suspected a tax liability arose. A reasonable taxpayer receiving value would recognise the likelihood of tax arising. HMRC do not need to show the Appellant understood the precise tax head under which the liability arose. The test is whether she knew—or deliberately avoided knowing—that a tax liability existed and failed to declare it. HMRC argue that the facts clearly meet that threshold, and the inaccuracy is deliberate.

In the alternative, HMRC argue that the insufficiency was brought about deliberately by Mr Thomas acting on behalf of the Appellant. It is accepted by the Appellant that Mr Thomas managed the Appellant’s tax affairs, and she relied on him for help with all financial affairs. He communicated with HMRC on her behalf, controlled the provision of documents and information, acted as director of TML and SCL, and prepared or facilitated the preparation of the Appellant’s returns and explanations (Hicks v HMRC [2020] UKUT 12 (TCC) at [122]).

The Appellant first argues that HMRC has failed to explain and the Appellant has had no notice of HMRC's arguments as to how the Appellant deliberately failed to account for tax. In Mr Charles’ witness statement he characterised the deliberate behaviour as “the omission of the acquisition of a company asset from Mrs Thomas’ 2010 SAR” but there is no such requirement to include it.

The Appellant would have known the £1,759,480 value of the shareholders’ loan account and the accrued interest of £150,000 as recorded in the 2008 accounts. Further, in the 16 months since October 2008 further interest would have accrued, increasing the shareholders’ loan account. Finally, as illustrated in the Appellant’s Calculation, the Appellant would have been aware that Mr Thomas was incurring expenditure on behalf of TML and assigning the benefit of that debt to her. For all of those reasons the Appellant had no reason to believe that there was any profit or income arising on the assignment of the NRL debt.

The purpose of time limits are to protect taxpayers against stale or tardy assessments (HMRC v BUPA Purchasing [2008] STC 101 at [59], Pegasus Birds Ltd v Customs and Exercise Commissioners [2000] STC 91 at [15]). In this matter HMRC, in exercising their information powers, have required the Appellant to reconstruct many years after the event figures that were shown in professionally prepared accounts and then simply refused to accept the taxpayer's explanation.

On the procedural point, we do not accept the Appellant’s argument that she has had no notice of HMRC's position on this issue. In our view it was clear from HMRC's Statement of Case, specifically at [66]:

On the substantive point, as with this appeal as a whole, it is common ground that Mr Thomas took all the relevant decisions for his wife, the Appellant. In this context that position is reinforced by s.36(1B) and 118(7) TMA. We attribute Mr Thomas’ actions and knowledge to the Appellant. Mr Thomas is a sophisticated businessman who for years filed tax returns on behalf of himself, the Appellant and others (in evidence he stated he had filed “over 250 tax returns”) and has been engaged directly or indirectly in tax disputes with HMRC. We therefore take him to understand a taxpayer’s self-assessment obligations.

For the reasons set out above we have found that the Appellant’s Loan Account as at 1 February 2010 was significantly below the value of the NRL Loan and that difference was taxable as a distribution.

Mr Thomas, representing the Appellant and the architect of the Appellant’s tax and financial affairs, would have known all the circumstances as to the accrual of the Appellant’s Loan Account including that there had been no assignment by him of debts owed by TML. He would also have known the value of the NRL Loan as at 1 February 2010: it is recorded in the assignment documentation. We therefore find that Mr Thomas knew that the assignment of the NRL loan by TML to the Appellant was in excess of the value of the Appellant’s Loan Account. Further, we find that whilst he may not have been aware of the precise tax treatment of the assignment, he would have known that the profit or benefit to the Appellant was likely to be taxable. Mr Thomas knowingly failed to include the assignment in the Appellant's tax return.

We find that Mr Thomas (and so the Appellant) in failing to declare the tax held an intention to mislead HMRC as to the Appellant’s taxable income and so the accuracy of the 2009-10 return.

On 14 November 2023 HMRC issued the Penalty Assessment for deliberate inaccuracies in the amount of £286,180.56 which the Appellant has appealed. Mr Charles accepted in his view of the matter letter of 19 December 2023 that the amount of the penalty should be reduced to £177,579.84 following the reduction in the Income Tax Assessment.

The Penalty Assessment is necessarily contingent on the Income Tax Assessment being upheld and the amount of any penalty dependent on the amount of tax payable, if any.

However, the Appellant challenges the Penalty Assessment on three grounds:

The penalty regime is set out in schedule 24 Finance Act 2007, principally for this purpose by paragraphs 1 and 3:

HMRC assessed the Appellant on the basis that the inaccuracy was deliberate and prompted.

The Appellant accepts that Condition 1 is satisfied but argues that Condition 2 is not because she had not acted deliberately in failing to declare the income arising from the assignment of the NRL Loan in her 2009-10 tax return.

We have found in the context of s.29(3) and 36(1A) that the Appellant, acting through Mr Thomas, acted deliberately in failing to declare the income. No argument was put by either party as to any distinction in the meaning of “deliberate” in these different contexts. We note the comments of the Upper Tribunal in CF Booth Limited v HMRC [2022] UKUT 00217 (TCC):

We find that the inaccuracy in the Appellant’s 2009-10 tax return was brought about deliberately and so Condition 2 is satisfied.

The Appellant criticised HMRC's approach to raising penalties in that HMRC did not issue warnings to the Appellant until the Penalty Assessment was issued. Certain penalties are “criminal” in nature and so protected by Article 6 of the European Convention on Human Rights, the right to a fair trial (Engel v Netherlands (1976) 1 EHRR 647). HMRC recognise that inaccuracy penalties under paragraph one of schedule 24 are “criminal” for this purpose (HMRC manuals at CH300200):

The specific criticism of HMRC's behaviour by the Appellant is that the first time that HMRC raised the possibility of penalties was when they issued the Penalty Assessment on 12 May 2023. However, beyond a reference to CF Booth Limited v HMRC, Mr Welsh says no more on this point, the approach to be taken by the Tribunal and the remedy sought.

Mr Birbeck for HMRC simply suggested that there had been no breach of Article 6. Mr Charles had been investigating the Appellant and when he decided it was appropriate to consider penalties he issued the usual notifications.

This argument is not in the Appellant's grounds of appeal and was, so far as we can detect, first included in the Appellant's skeleton argument and the Appellant has not sought to amend her grounds of appeal (Rule 20, ABP Technology at [2] and Asiana Limited at [15])

However, we do not find that HMRC have breached Article 6. Mr Charles first warned the Appellant that there may be penalties in his letter of 23 September 2022 to the Appellant’s agent Mr Barnard. On 12 May 2023 Mr Charles then wrote to the Appellant to notify her of the penalty assessment and enclosed the relevant factsheets explaining in greater detail how the penalty was calculated and regarding deliberate behaviour.

Article 6 ECHR provides:

 We have considered the conduct of this matter and each aspect of Article 6 and particularly the minimum rights set out in Article 6(3) and in brief cannot see that there has been any prejudice to the Appellant’s ability to have a fair trail.

The Appellant’s main argument on the Penalty Assessment was that insufficient credit was given and so the penalty was excessive.

As a prompted inaccuracy, the maximum penalty is 70% of the potential lost revenue which can be reduced to a minimum of 35%. In their letter of 12 May 2023 HMRC gave the following percentage reductions:

Out of a potential reduction of 30% HMRC gave no reduction for “telling” on the basis that there was no disclosure of the NRL assignment in the Appellant's tax return and it only came to light several years later. The Appellant did not admit any inaccuracy but instead offered vague and inconsistent explanations.

The Appellant argued that she believed she was correct in her argument that no tax was payable and did her best to explain where the numbers came from. Her advisers also offered to meet HMRC but the offer was declined. A taxpayer is entitled to a full reduction for telling even if she disputes there is a tax liability (CH82444). Further, a taxpayer should not be penalised for taking advantage of their right to appeal a schedule 36 notice. The reduction should therefore have been at least 10%.

Out of a potential reduction of 40% HMRC gave a 5% reduction for “helping” on the basis that, as reflected in Thomas 2021:

Further, the schedule produced by the Appellant to support the value of the Appellant’s Shareholder Account was unreliable, inaccurate and implausible.

The Appellant argued that this reduction should be seen against the context of HMRC only having sought information more than a decade after the relevant events. The Appellant as requested provided the Appellant’s Calculation and associated documents in support of her arguments. The reduction should have been 10-12%.

Out of a potential reduction of 30% HMRC gave a 5% reduction for “giving access” on the basis that when the investigation was opened the Appellant’s response was that the matter had been comprehensively dealt with and there was nothing further to add. It was therefore necessary to issue a schedule 36 notice and nothing of substance was provided until the Tribunal had endorsed the notice.

The Appellant argued that her initial reaction was to say that information had been provided previously and a note of exasperation was to be expected as the request came a long time after the events in question. Again, the Appellant’s advisers offered to meet HMRC and making use of the right to appeal should not be taken against the Appellant. The Appellant and her advisors provided explanations and documents and responded to the queries that were put to them. The reduction should have been at least 10%.

We agree that the credit given by HMRC is very low at 10% of the difference between 35% and 70%. The Appellant asks for the reduction to be increased to at least 30%.

We are also conscious of the Appellant’s point that it is very difficult to provide information relating to a period after a long time has lapsed. HMRC made much during the correspondence and in submissions over Mr Thomas’ comment that “we have nothing further to add”. We understand that part of Mr Thomas’ frustration with HMRC’s enquiries into the Appellant’s position was borne out of having (in his mind) having already explained the position in respect of the NRL Loan and SCL.

However we do find that the Appellant's approach, as reflected in the evidence shown to us and as summarised in Thomas 2021, has been obstructive and difficult. It is right not to prejudice a taxpayer for exercising their right to appeal a schedule 36 notice and we do not do so. However, in the wider context it is clear to us that the Appellant acting through Mr Thomas dragged her feet and provided vague contradictory and sometimes untrue information to HMRC.

That being the case, we do not find it necessary to interfere with HMRC's decisions as to reductions given in the level of penalty.

We find as set out below.

We find that the Appellant’s Loan Account consisted of the £1m principal under the TML Loan, interest on the TML Loan which accrued to 1 February 2010 and £50,000 of employment income owed to the Appellant. Our illustrative calculation of the accrued interest on the TML Loan is £430,684.93.

We therefore find (and using our figures as illustrative), that the Appellant is liable to tax on a distribution of £655,028.07, being the difference between £2,135,713 and the Appellant’s Loan Account of £1,480,684.93.

Further, we find that the Appellant failed to declare £6,986.30 of interest in her 2006-07 tax return and £123,698.63 of interest in her 2009-10 tax return. However, HMRC has not assessed such income and for reasons set out in this decision do not make any findings on it.

We find that the loss of tax was brought about deliberately by the Appellant within s.29 and s.34, that HMRC made a discovery within s.29 entitling HMRC to raise the income tax assessment. We also find that the Appellant and HMRC did not enter into a section 54 agreement when HMRC substituted the Dividend Calculation for the Other Income Calculation.

We therefore find that the Income Tax Assessment was validly issued by HMRC and the Appellant is liable for income tax as a distribution in the amounts as varied.

We find that the Appellant acted deliberately in failing to declare the income arising from the assignment of the NRL loan. We find that the Appellant did not plead the Article 6 argument as a ground of her appeal but in any event we do not find that Article 6 has been breached. Finally, we find no reason to interfere with HMRC's decision as to reductions in the level of penalties.

The amount of penalty payable will necessarily reduce in accordance with our findings in respect of the Appellant’s liability to income tax but we otherwise uphold the Penalty Assessment.

For the above reasons we allow the Appellant’s appeal in part.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

The Appellant’s Calculation