Tribunal confirms it has jurisdiction to consider an argument of abuse of process based on excessive delay on the part of HMRC

In Clive Kingdon & Ors v HMRC [2022] UKFTT 407 (TC), the First-tier Tribunal (FTT) allowed the taxpayers' appeals against discovery determinations and penalties on the basis that a company acquired a partnership business earlier than HMRC considered to be the case.

Background

This case concerned income tax. In 1993, Clive Kingdon, Terry Stead and Anne Kingdom (the Appellants) established a partnership named Rota Rod (the Partnership). The following year, the Partnership engaged the services of Christopher Lunn & Co (CLC) to act as its accountants. 

In 2003, the Appellants incorporated Rota Environmental Services Ltd (the Company). On the advice of CLC, the Appellants transferred the Partnership business to the Company. 

The Partnership's return for 2005/2006 was amended by HMRC to reflect additional income which HMRC believed was earned by the Partnership in that tax year. In 2005, the Appellants were also shareholders of the Company. Sometime in 2005, the business of the Partnership was transferred to the Company. It was the Appellants’ position that the transfer took place on either 31 March 2005 or 1 April 2005. There was, accordingly, no partnership income for the 2005/06 tax year. HMRC’s position was that the transfer took place on 2 August 2005 and therefore the profits of the Partnership which were generated between 6 April 2005 and 1 August 2005 should have been returned on the Partnership’s return for that year. HMRC also issued penalties to the Appellants. 

There were some unusual circumstances that led to significant delays in this case. Christopher Lunn, the director of CLC, was found guilty of the offence of cheating the public revenue contrary to common law. As part of its criminal investigation, HMRC seized a vast number of documents from Mr Lunn and CLC, some of which were relevant to the Partnership's affairs. 

The Appellants appealed to the FTT. The appeal before the FTT came down to a simple factual question: whether the Appellants had transferred the Partnership's business to the Company (which they controlled) on 2 August 2005 or before 6 April 2005. 

FTT decision 

The appeals were allowed. 

The Appellants submitted that the transfer of the Partnership's business took place on either 31 March 2005 or 1 April 2005. In their view, as a result of the transfer taking place prior to the start of the following tax year, there was no partnership income for the 2005/06 tax year. 

HMRC submitted that the transfer took place on 2 August 2005 and accordingly, the Partnership's profits up until that point should be subject to income tax in the 2005/06 tax year. 

The FTT noted that there had been "inordinate delay" on the part of HMRC in this case. For example, Pearlman Rose (PR), the Company's subsequent accountants, wrote to HMRC in 2011, and did not receive a substantive response until almost 7 years later, in February 2018. As a result of the significant delay the Appellants’ oral evidence was of little value to the FTT, and the documentary evidence was virtually non-existent. As the FTT commented it had to "make bricks of fact without much, if any, straw of evidence". 

The burden of proof was on HMRC (the onus being on HMRC to prove, on a balance of probability, that it had made a valid in time discovery amendment and that the penalty determinations were valid in time determinations). A letter sent by HMRC in July 2007 to Mr Kingdon stated that Mr Kingdon had informed HMRC that the business of the Partnership had moved to the Company in March 2005. 

The FTT noted that because of the delay caused by HMRC, the Appellants were not able to recall the exact details of the transfer and were therefore denied a fair trial. The documents relied on by the Appellants to demonstrate the earlier date of transfer were more contemporaneous than those relied on by HMRC. That evidence was therefore preferred to the evidence relied upon by HMRC. Accordingly, the FTT concluded that it was more likely than not that the transfer occurred in March/April 2005.

Comment 

Issues around delay and abuse of process have resurfaced in the FTT in recent months. In this case, the FTT confirmed (at para. 53) that (as evidenced in Nuttall v HMRC [2022] UKFTT 192 (TC)) it had jurisdiction to consider the Appellants’ argument of abuse of process on the basis that the delay caused by HMRC’s investigation into the affairs of Mr Lunn had prevented the Appellants having a fair hearing and that if it found that to be the case, its case management powers would allow it to bar HMRC from defending the appeal. Ultimately, on the facts of the case, this submission was not accepted by the FTT.  

Given that the FTT has made it clear that it considers it has jurisdiction to consider an argument of abuse of process on the basis of delay on the part of HMRC, it is likely that other taxpayers, in appropriate cases, will rely upon such an argument.

The decision can be viewed here.