TC09537 - [2025] UKFTT 00597 (TC)

It was not in dispute that the share sale was a qualifying business disposal.

There are a number of statutory requirements which all need to be satisfied in order for this relief to be available. The requirements are cumulative: a failure to satisfy any one of the requirements means that the claim to the relief must fail.

One such requirement is that the taxpayer must have been an officer or employee of the company for a full 12 month period prior to the disposal.

The disposal took place on 9 May 2009 (and not 6 May 2009, as set out on the return: the difference in date is inconsequential to the analysis which follows). Therefore, the full 12 month period ran from 10 May 2008 to 9 May 2009.

As the unchallenged Companies House return showed, Mr Whines did not become an officer of Origin Systems Solutions Ltd until he was appointed a director on 20 May 2008 - ie, 10 days after the beginning of the period, and hence 10 days short of the full 12 month period. He therefore failed to satisfy this requirement insofar as it related to his officership in the company.

Nor, for the sake of completeness, was there any evidence that he had ever been an employee of Origin. Mr Whines' own self-assessment return for 2009/10 (a year beginning 6 April 2009) did not declare employment with Origin.

This means that whether or not Origin was trading in the period is irrelevant.

However, even if, contrary to the above, Mr Whines had satisfied the officer/employee requirement, he nonetheless had still failed to produce any evidence at all that Origin was trading in the period; and any such evidence would have been inconsistent with the dormant accounts filed with Companies House which declared that, as at 30 June 2008 (a date well within the 12 month period) the company was dormant. We reject Mr Whines' evidence to us that those accounts were produced by someone else. Those accounts were approved by the board and signed by Mr Whines on 4 February 2009, who, in doing so, acknowledged his responsibility to prepare accounts giving a true and fair view of the state of affairs of the company at the end of the relevant accounting period.

That disposes of any argument that Mr Whines was entitled to Entrepreneurs Relief in relation to the share disposal. He was not.

HMRC raised and pursued a penalty assessment in that regard. However, the officer who assumed conduct of the matter on behalf of HMRC in February 2023, Officer Sarah Wilson, on a reconsideration of the matter, as set out in her witness statement dated 10 October 2023, concluded that there was insufficient evidence to support a contention that Mr Whines had acted carelessly, and concluded that the incorrect claim for Entrepreneur's Relief was the result of a mistake despite taking reasonable care, and expressed the view that no penalty was due.

At the outset of the hearing, Mr Wilde helpfully confirmed that HMRC was accordingly no longer pursuing that penalty, that it was being withdrawn, and that it would be administratively vacated from HMRC's systems so that no further action would be taken in respect of it. Accordingly, we need have no further regard to it.

In his oral evidence to us, Mr Whines explained that he had been in dispute with his then co-director of Integration Services, and, recognising that any cash payment to Mr Whines would have to be equalled by payment to his co-director, Mr Whines decided not to take cash but instead to reduce the balance of Mr Whines' director's loan account.

But this was not the payment of a salary at all, let alone a salary from which PAYE was being deducted. In his answers to us, Mr Whines clearly showed that he knew the difference between being paid money (which receipt would have been reflected in an increased credit balance in his personal bank account; and which - as money - could have been spent on anything) and a deduction in owing money through a director's loan account.

In reality, we are forced to conclude that the reason why Mr Whines never produced any evidence such as P45, P60 or bank statements showing payment to him (despite repeated assertions that the same existed and would support his position) was that there never was any such evidence. Of course, that is entirely consistent with Officer Richardson being unable to find evidence of any such payment on HMRC's systems.

This gave rise to a penalty assessment which was re-calculated by HMRC, on the basis that there was an inaccuracy which was deliberate and prompted, with a Potential Lost Revenue of £8,628.07, to which a behavioural percentage (telling 0%; helping 20%; giving 10%) of 59.5% (reduced from 63%) was applied, and a reduction for default surcharge of £66.00 (reduced from £66.88) = £5,067.70.

Insofar as called upon to do so, we do not adjust the percentages for telling, helping and giving. There is no arguable basis for doing so. Indeed, in the circumstances, they can be read as somewhat on the generous side to Mr Whines in circumstances where he had repeatedly asserted the existence of documents which did not exist; and had repeatedly asserted that the money had been received as PAYE-able salary, when it had not been; and he knew that it had not been.

We must decide whether the inaccuracy was deliberate or careless. Schedule 24 defines a 'careless' inaccuracy as 'due to the failure by the taxpayer to take reasonable care': see Regulation 3(1)(a). 'Deliberate' is not defined, but, by necessary inference, is a level of culpability greater than that set out for 'careless'. In HMRC v Tooth [2021] UKSC 17, the Supreme Court held that, for there to be a deliberate inaccuracy in a document, there must be demonstrated an intention to mislead HMRC on the part of the taxpayer.

We are satisfied that there was an intention to mislead HMRC as to Mr Whines' true financial circumstances for 2009/10. As such, we are satisfied that the inaccuracy was deliberate. As a cross-check, we are satisfied that the inaccuracy arose because of something attracting a greater degree of culpability than a failure to take reasonable care.

Mr Whines was, from 6 April 2009 until its entry into administration on 13 July 2009, Information System's sole director, and therefore was in sole ultimate control of its payment and other activities. Payments being made by it were in his hands, and his hands alone.

Whilst Information Systems' documents may have gone into the hands of its administrators, Mr Whines' personal documents such as his bank statements and any P45s and P60s would not have done. But nothing was ever disclosed by him.

We still do not know where the figures of £74,000 or £29,001 on the 2009/10 tax return, populated by Mr Whines in April 2014, came from. Mr Whines told us that his (then) accountant had given them to him, but he could not recall when, or by what means; and there was a striking, and unexplained, absence of any corroborative or contemporary documentary evidence (eg any letters, emails, notes or accountants' working papers).

Standing back, and looking at the matter in the round, we are entirely satisfied that Mr Whines knew all along that he had not received a PAYE-able salary from Information Systems, but that - as he told us - his director's loan account had been adjusted. That was not the same as gross payment, and we are satisfied that Mr Whines - as a commercially aware individual - knew this. We are satisfied that Mr Whines also knew that PAYE had not been paid; because there was no salary which would have brought the need to pay PAYE about.

HMRC advanced the case that the penalty should be increased from the £5,067.70 to take account of the fact that the Potential Lost Revenue was in fact £9,471 greater, because inclusion of the £74,000 and £29,001 on his tax return had led Mr Whines to also claim an overpayment of income tax of £9,471.

We have declined to increase the penalty. This is for a number of reasons. This part of the appeal is a penalty appeal and HMRC therefore bear the burdens of showing that the penalty as sought is due. Here, relevantly:

We do not consider that the attempt in Paragraph 152 of the Statement of Case to "recalculate" the penalty by adding "correction of overpayment of income tax per return" (which would have increased the PLR from about £8,500 to about £18,000; and increased the penalty accordingly) was a permissible way of dealing with this; especially in the absence of any revised or amended Closure Notice or Penalty Assessment.

Insofar as we were invited to use our powers in Schedule 24 Paragraph 17(2) (powers in relation to an appeal as to the amount of a penalty) to accomplish this outcome, we decline to do so. Without expressing any concluded view on whether our power under Paragraph 17(2)(b) to "substitute for HMRC's decision another decision that HMRC had power to make" actually extends to doing what HMRC was asking us to do, the Paragraph 17(2) power is in any event discretionary ("may") and this is not an appropriate case in which to exercise that discretion.

HMRC might well be right that the claim to overpaid income tax of £9,471 was indeed a (further) inaccuracy in the 2009/10 return. But, put shortly, HMRC knew everything it needed to know about this aspect of the matter in July 2015. That was when the die was cast. In the context of an appeal, itself brought several years out of time, and which has then taken almost 6 years to come to a hearing, 2015 was the time to have dealt with the point; not almost 10 years later.

We have no jurisdiction over interest. But we invite HMRC to consider the following matters when it comes to their calculation of interest. Significant amounts of time after the Notice of Appeal was filed were taken up with a succession of agreed stays occasioned by Mr Whines' health (first notified to the Tribunal on 12 November 2019, and lasting until 2023) and latterly the cancellation of a hearing which was due to have taken place in Mold on 7 August 2023. Those periods of delay relate to matters which were, on any view, outside the control of Mr Whines.

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.