Fiscal distortion
In recent years the amount of new fiscal legislation has increased dramatically. It is HMRC that makes proposals to ministers for such new legislation so it is unsurprising that fiscal legislation is designed to advance the Department’s interests; often at the expense of the taxpayer and the wider economy. The previous experience of Ministers before they enter parliament has narrowed significantly in recent years so that few are now experienced in commercial or professional life. The result is that Ministers are less able to provide, and less willing to risk providing, an effective review of HMRC’s proposals than were their predecessors in, for example, the 1980s. For this reason our new fiscal legislation is increasingly distorted in ways highly detrimental to the taxpayer.
James Anderson v. PricewaterhouseCoopers and HMRC
The case of James Anderson v. PricewaterhouseCoopers [‘PwC’] and HMRC is a perfect illustration of the process.
The facts
Mr Anderson:
‘… was a partner in PwC from 1 July 2016. In May 2018 he was told that the decision had been taken to serve notice requiring his compulsory retirement … he retired from PwC on 30 November 2018.’
Mr Anderson:
‘… claimed that in requiring him to retire, PwC had had [sic] unlawfully discriminated against him by reason of a pre-existing medical condition which had been aggravated by their actions. The claim was settled on the basis of a payment [the ‘Aggregate Payment’] by PwC to Mr Anderson comprising two distinct elements:
- a payment described as “the balance of profit share” for the period 1 July 2018 to 30 November 2018; and
- a payment described as “an additional payment of an amount equal to 12 months’ profit share” (the “Additional Payment”).
Both elements were included as profit share allocated to Mr Anderson in the partnership return for the accounting period from 1 July 2018 to 30 June 2019 which was filed by PwC on 26 October 2020 (the “Partnership Return”).’
Mr Anderson accepted that the Aggregate Payment, to the extent that it related to ‘the balance of profit share’, was a share of profit and that he was chargeable to Income Tax on it but contended that, to the extent that it related to the Additional Payment, it was in settlement of his claim for damages and, as such, was not a share of profit.
Had HMRC assessed Mr Anderson in respect of the Additional Payment for a year before 2018/19 he would have been able to appeal against the assessment to the Tribunal in the normal way.
The relevant law
The Finance Act 2018, however, introduced a new section into TMA 1970 being s.12ABZB. Section 12ABZB(1) provided that:
‘(1) A partnership return is conclusive for tax purposes as to—
(a) whether a person does or does not have a share in the profits or losses of the partnership for any period, and
(b) what the share of any person in those profits or losses is.’
The section includes a right of appeal:
‘(3) If there is a dispute between the person mentioned in subsection (1)(a)
or (b) and any one or more partners in the partnership about whether
what is given in a partnership return is correct as to the matters
mentioned in that subsection, a party to the dispute may refer it to the
tribunal for determination.’
The right of appeal under sub-section (3) is, however, subject to the following:
‘(4) That does not include a dispute to the extent that it is in substance about
the amount (before sharing) of the partnership’s profits or losses for a
period..’
Mr Anderson referred his dispute with PwC as to the figures shown in PWC’s partnership tax return to the Tribunal under TMA 1970 s.12ABZB(3).
The substantive issue
The substantive question at issue in the case was whether Mr Anderson’s dispute with PwC was, in essence about ‘the amount (before sharing) of the partnerships profits or losses for a period’. If that was the essence of his dispute, Mr Anderson would not have had a right of appeal under s.12ABZB(3).
The parties’ arguments
The Tribunal Judge gave this substantive question only a cursory examination in his written decision taking only three paragraphs to do so. He stated the issue in one paragraph and recorded the arguments of the parties in another:
’43. Mr Whiscombe [for the taxpayer] says that the dispute is essentially about the nature of the Additional Payment. However, he accepts that, as payment of compensation is an expense deductible in computing profit, it does have a “knock on” effect on the amount of partnership profits. Mr Afzal [for PWC], with whom Ms Henshaw [for HMRC] agrees, contends that because of that effect on the amount of partnership profits the dispute is, in substance, directly about the amount of partnership profits.’
The Tribunal Judge’s conclusion
The Tribunal Judge then took only one paragraph to give the grounds of his decision:
‘Although initially attracted by the argument advanced by Mr Whiscombe, on balance, given the potential effect of any determination by the Tribunal on the partnerships [sic] profit, I agree with Mr Afzal that the dispute is, in substance, about the amount of the partnership’s profits whether directly, as PwC and HMRC contend, or indirectly, as Mr Whiscombe accepts. [It would be very surprising if Mr Whiscombe had accepted this as, if he had, he would have conceded that Mr Anderson had no right of appeal, which was the very issue in dispute in the case.] This is apparent from the description of the dispute at paragraph 5 of the Referral itself (see paragraph 14, above) from which the issue to be determined by the Tribunal if the Referral were to be admitted is whether the Additional payment is as “a matter of fact a share of profit”.’
Reasons for doubting the correctness of the decision
The final sentence in that paragraph is simply a non-sequitur. To say that the dispute is as to ‘whether the Additional Payment is as a matter of fact a share of profit’ is not to say that the profit of which it is a share is incorrect or that the question at issue is ‘in substance about the amount … of the partnership’s profits …’. It may be that these assertions are implicit in this description of the dispute but to establish it is so implicit requires further steps of reasoning which the Tribunal Judge did not take the trouble to set out.
In referring to ‘the partnership’s profits and losses’, sub-section (4) must be referring to its taxable profits and not to its accounting profits. Deciding that part of the Aggregate Payment which related to the Additional Payment was not a payment of profit share would only have affected taxable profits if it were true that such a payment would necessarily be deductible in arriving at the partnership’s taxable profit. The parties in the case seem simply to have accepted that was the case but, whether or not that acceptance was correctly made, if it were decided that the payment was not a payment of profit share it would require a further logical step to decide that the payment was deductible in arriving at the taxable profits of the partnership.
That on its own is surely a strong argument for Mr Anderson’s contention that the dispute was not in substance about ‘the amount … of the partnership’s profits’.
In any event, it is the dispute between the taxpayer and the partnership which, under sub-section (4), must be ‘in substance about the amount of the partnership profits or losses for the period’. Mr Anderson had no dispute with PwC as to the total amount of its profits merely as to whether an amount of profit equal to the Additional Payment should properly be allocated to him. In respect of the Additional Payment, it was a matter of indifference to Mr Anderson whether PwC received a deduction for its payment.
Such a question can be contrasted to a dispute with a partner as to whether a partnership should, in arriving at its taxable profits, have treated a deduction properly deductible in arriving at its accounting profit, as allowable for tax purposes so as to reduce the partnership profits on a share of which the partner is assessable. Such a dispute would clearly fall within sub-section (4) as being a dispute which was, ‘in substance about the amount (before sharing) of the partnership’s profits and losses for the period’.
It is clear, therefore, that it is at least possible that the Tribunal might properly have concluded that sub-section (4) did not apply to Mr Anderson’s dispute as to the amount of profit properly allocated to him. In judging between opposing constructions each of which is not clearly wrong it is permissible to consider the scheme of the relevant legislation. The Tribunal Judge did not do so in Anderson.
The construction of sub-section (4) adopted by the Tribunal Judge, therefore, left Mr Anderson with no legislative remedy to correct PwC’s decision to treat the payment as a share of profit if that decision were incorrect. It is very uncertain whether that decision, or HMRC’s decision to assess tax on the basis of it, could even have been subject to judicial review. Even if they could, judicial review is a remedy which is extremely uncertain and expensive of both time and money. A construction which denies a taxpayer an effective remedy in the event that he is assessed to Income Tax on profits to which he is not entitled should only be adopted on the clearest of grounds.
Mr Anderson could have played no part in formulating PwC’s partnership return for the relevant fiscal year.
If the parties’ agreement that, if the element of the Aggregate Payment which related to the Additional Payment was not a share of profit it was an expense deductible in arriving at assessable trading profits, was correct, HMRC had an interest in establishing that the Alternative Payment was a share of profit because to do so would be to increase its tax receipts. PwC had no interest in resisting, or motive to resist, such a contention because the burden of the additional tax would fall on a partner who had already left the partnership by compulsion of PwC and who had been involved in a dispute with PwC which had resulted in its paying a substantial sum in settlement.
In effect Mr Anderson’s liability to Income Tax was determined by two third parties one of which had no interest in its amount and the other of which had an interest in its being the highest possible amount. If the treatment adopted, were wrong in law, Mr Anderson had no effective means of resisting what would be an unjust and unlawful expropriation.
There must be a strong presumption that such an unjust result could not have been the intention of the legislature in enacting s.12ABZB. That being the case only the clearest of legislative words could establish a construction which had such a result. In fact, as we have seen, there were more than adequate arguments supporting a construction which would not result in such injustice.
A substantial injustice
Whether or not Mr Anderson appeals to the Upper Tribunal against the FtT’s decision, the case of Anderson clearly illustrates the gross injustices which can result from the enactment of TMA 1970 s.12ABZB.
A failure of duty
The Finance Act 2018 s.18 and Sch. 6, which amongst many other changes relating to partnerships, inserted s.12ABZB into TMA 1970, was passed after only the most cursory debate in the Finance Bill Committee none of which related to s.12ABZB. It seems that the main professional bodies made no representations in respect of that insertion. Certainly we have been able to find no evidence that the professional body primarily concerned with taxation, the Chartered Institute of Taxation, did so.
Ministers, MPs and the professional bodies which comment on proposed legislation have a moral responsibility to review critically HMRC’s proposals to restrict the rights of taxpayers and to extend its own powers. They clearly failed in that duty in respect of the introduction of TMA 1970 s.12ABZB.
