Does a recent FTT decision offer a route to challenge penalties on s 455 liabilities?
The case of P Gopaul v HMRC [2023] UKFTT 728 (TC) was in many ways a routine one. HMRC alleged that a company operating a fast-food business had deliberately understated its takings and the First-tier Tribunal (FTT) broadly agreed, upholding additional assessments for VAT and corporation tax and associated penalties. Nothing particularly out of the ordinary there.
The thought-provoking point is in relation to the assessment under the ‘loans to participators’ legislation, and in particular to HMRC’s claim for penalties.
If receipts have not gone through the books of a business, the question arises what happened to them (or, in double-entry bookkeeping terms, where should the debit go which matches the missing credit to sales?). In the case of a closely-controlled trading company, HMRC will routinely infer that the missing money has been appropriated by the proprietor(s) and should be debited to their account with the company. Any resulting overdrawn balance will normally trigger a charge under CTA 2010 s 455 of the ‘loan to participators’ provisions. Occasionally, it may be possible to resist the inference in whole or in part if it is possible to show that the alleged appropriations are of a size that is manifestly inconsistent with any possible expenditure or investment by the proprietor(s), but this will be very rare.
In Gopaul, the FTT accepted that sales had been deliberately understated, that the money had been misappropriated, and that the charge under s 455 was correct. Yet they rejected HMRC’s claim to penalties on the s 455 charge. How so? The FTT’s thinking was this:
‘HMRC needed to prove that Mr Gopaul knew that the Company had a s 455 liability and intentionally omitted it from the Company’s corporation tax return. However, there is no evidence that Mr Gopaul even knew at the time the returns were made, that the extraction of money from his own company could trigger a corporation tax charge: nothing in the correspondence discusses his knowledge or understanding, and he was not cross-examined on this point. We agree ... that HMRC have failed to meet their burden of showing that the Company acted deliberately in omitting the s 455 liabilities from its corporation tax returns, and we allow this ground of appeal.’
This is interesting. By law, the trigger for a penalty is a careless or deliberate inaccuracy in a document submitted to HMRC (which includes accounts) which inaccuracy amounts to or leads to an understatement of tax. The law’s focus is thus on the deliberateness (or carelessness) of the inaccuracy: knowledge of the tax consequences of the inaccuracy does not appear to be relevant. It therefore seems that the FTT’s focus on the deliberateness (or not) of the understatement of tax liability rather than that of the inaccuracy in the accounts may be a misstep giving HMRC grounds for appeal to the Upper Tribunal.
Meanwhile, although the decision, like all FTT decisions, sets no binding precedent, it may in some cases afford a route to challenge penalties on s 455 liabilities in cases where it can be shown that a taxpayer did not know that that ‘the extraction of money from his own company could trigger a corporation tax charge.’
Does a recent FTT decision offer a route to challenge penalties on s 455 liabilities?
The case of P Gopaul v HMRC [2023] UKFTT 728 (TC) was in many ways a routine one. HMRC alleged that a company operating a fast-food business had deliberately understated its takings and the First-tier Tribunal (FTT) broadly agreed, upholding additional assessments for VAT and corporation tax and associated penalties. Nothing particularly out of the ordinary there.
The thought-provoking point is in relation to the assessment under the ‘loans to participators’ legislation, and in particular to HMRC’s claim for penalties.
If receipts have not gone through the books of a business, the question arises what happened to them (or, in double-entry bookkeeping terms, where should the debit go which matches the missing credit to sales?). In the case of a closely-controlled trading company, HMRC will routinely infer that the missing money has been appropriated by the proprietor(s) and should be debited to their account with the company. Any resulting overdrawn balance will normally trigger a charge under CTA 2010 s 455 of the ‘loan to participators’ provisions. Occasionally, it may be possible to resist the inference in whole or in part if it is possible to show that the alleged appropriations are of a size that is manifestly inconsistent with any possible expenditure or investment by the proprietor(s), but this will be very rare.
In Gopaul, the FTT accepted that sales had been deliberately understated, that the money had been misappropriated, and that the charge under s 455 was correct. Yet they rejected HMRC’s claim to penalties on the s 455 charge. How so? The FTT’s thinking was this:
‘HMRC needed to prove that Mr Gopaul knew that the Company had a s 455 liability and intentionally omitted it from the Company’s corporation tax return. However, there is no evidence that Mr Gopaul even knew at the time the returns were made, that the extraction of money from his own company could trigger a corporation tax charge: nothing in the correspondence discusses his knowledge or understanding, and he was not cross-examined on this point. We agree ... that HMRC have failed to meet their burden of showing that the Company acted deliberately in omitting the s 455 liabilities from its corporation tax returns, and we allow this ground of appeal.’
This is interesting. By law, the trigger for a penalty is a careless or deliberate inaccuracy in a document submitted to HMRC (which includes accounts) which inaccuracy amounts to or leads to an understatement of tax. The law’s focus is thus on the deliberateness (or carelessness) of the inaccuracy: knowledge of the tax consequences of the inaccuracy does not appear to be relevant. It therefore seems that the FTT’s focus on the deliberateness (or not) of the understatement of tax liability rather than that of the inaccuracy in the accounts may be a misstep giving HMRC grounds for appeal to the Upper Tribunal.
Meanwhile, although the decision, like all FTT decisions, sets no binding precedent, it may in some cases afford a route to challenge penalties on s 455 liabilities in cases where it can be shown that a taxpayer did not know that that ‘the extraction of money from his own company could trigger a corporation tax charge.’
