The First-tier Tribunal has dismissed an appeal that a redress payment (“the redress payment”) made by RBS in respect of a mis-sold interest rate hedging product (“the swap”) should be taxed on a successor company and not the partners of the partnership that was originally privy to the contract. The FTT also affirmed that HMRC were correct to assess the partners and not the partnership itself. “Careless” penalties were upheld against one of the former partners but HMRC failed to plead their case in respect of the basis of these penalties for the other two (O’Neil and Anor v HMRC [2023] UKFTT 290 (TC)).
The appellants, the former partners of Blackpool Promotions and Leisure Travel (“the partnership”) argued that the redress payment should be treated as received by and taxable on the company, Blackpool Promotions Limited (“the company”) to which the business of the partnership was transferred under a business purchase agreement (“the agreement”) dated 22 May 2012. The respondents (HMRC) argued that the redress payment should be treated as received by and taxable on the partnership as a “post-cessation trading receipt”. The main issue in dispute was whether on the proper interpretation of the agreement the person entitled to the redress payment was the partnership or the company.
The case was complicated as the partnership was a Scottish partnership and as such Scottish law applied.
The tribunal dismissed the appeal concluding:
- “The right to a payment from RBS did not depend on anyone making (or having) a claim, it depended only on the Partnership being a party to the Swap and falling into the category of “unsophisticated investor”. That right (the Claim Right) arose at the time when the FSA notified RBS that they were treating the Swap as having been mis-sold to them as an unsophisticated investor and that compensation was therefore due. That was after the date of the Agreement. Therefore, the legal right giving rise to the Redress Payment did not exist at the time of the Agreement.
- In addition, the legal conditions for transfer of the Swap and the Claim Right to the Company were not complied with for Scottish law purposes because there was no intimation of the transfer to RBS.
- Clause 8.2.2 of the Agreement cannot be relied on because the Scottish law which governs the Agreement does not recognise the concept of property held on trust.
- At best, the Company has a right under Scots law to make a claim against the Partnership for any payments it has made under the Swap and for the Redress Payment, but that does not mean that it is the Company rather than the Partnership which should be paying tax on the Redress Payment.”
In respect of the procedural matter as to whether HMRC were correct to assess the partners rather than the partnership, the tribunal judged that:
“It is difficult to see how, in circumstances in which the Partnership business had ceased and HMRC had no evidence that the Partnership continued to exist, it can be said that HMRC should have assessed the Partnership under s 30B TMA 1970. The only possibility was for HMRC to make an assessment in the name of the former partners as individuals. In accordance with s 245 ITTOIA 2005, it is the individual partners who, after the cessation of the Partnership, were entitled to the Redress Payment (if the Company was not so entitled). … We accept that the discovery assessments made by HMRC were validly made in the name of the individual partners in 2017.”
With regards to the “careless” penalties the tribunal judged in respect of Mr O’Neil that:
“We have concluded that Mr O’Neil did act carelessly in failing to properly consider the tax treatment of the Redress Payment. … It may be correct that there was confusion in the market at the time about how these payments should be taxed, but that does not absolve a taxpayer from making any enquiries at all about how a significant sum should be taxed, or at least notifying it to HMRC on the white space of their tax return.”
However, concerning the other two appellants, Mrs O’Neil and Mrs McCallum, the tribunal concluded that:
“HMRC simply made no submissions on this point but assumed that each of the partners should be dealt with in the same way. … Given that careless behaviour is specific to an individual, we can see no basis on which we can accept HMRC’s contentions in respect of Mrs O’Neil and Mrs McCallum in the face of a total lack of evidence about their decision-making processes and no suggestion that we should look to Mr O’Neil as the person they relied on.”
https://www.bailii.org/uk/cases/UKFTT/TC/2023/TC08761.html
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Discovery Assessments, by tax barrister Keith Gordon, is a detailed, clearly written guide to the law and practice in this area. Based on the author’s personal involvement in many leading cases, the book contains much practical advice explaining when and how such assessments may be challenged.
