[2010] UKFTT 140 (TC)

TC00446
Appeal number SC/2008/3032

Income tax – office holder - deductibility of expenses for travel and secretarial assistance – Appeals allowed in part

FIRST-TIER TRIBUNAL

TAX 

	MR JOHN EVANS	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

				TRIBUNAL: 	Tribunal Judge Peter Kempster
						Ms Sandi O’Neill

Sitting in public in London on 23 & 24 November 2009

Miss Rebecca Murray of counsel, instructed by Howell & Co, for the Appellant

Mr Barry Williams and Mrs Nicola Parslow (HMRC Appeals & Review Unit) for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This case concerned the deductibility for income tax purposes of certain expenses incurred by an office holder.
Background

2.	The Commissioners for the general purposes of the income tax (“the General Commissioners”) were originally established by William Pitt’s Income Tax Act of 1799.  They were appointed in “divisions” to cover separate geographical areas of the country and each division appointed a Clerk (see generally ss 2 & 3 Taxes Management Act 1970 (“TMA”)).  The pay and administration of the Clerks was (in England & Wales) the responsibility of the Lord Chancellor and during the years of assessment under appeal in this case the relevant government department was called the Department of Constitutional Affairs (“the DCA”).  The General Commissioners were terminated on 31 March 2009 as part of the establishment of the new tax appeal tribunal system.  
3.	On 18 March 1987 Mr Evans was appointed as Clerk to the Birmingham South and Birmingham Central Divisions of the General Commissioners.  For the thirty years prior to that he had been employed by the Inland Revenue (as then was), the last four years as a grade III Inspector of Taxes.  In 1997 he was also appointed to a third Division, Birmingham North.  All three appointments terminated on 31 March 2009.
4.	Mr Evans’ situation was unusual.  Most Clerks were solicitors in practice in or near the Division to which they were appointed, and thus had available the resources of their practice – eg secretarial assistance, photocopying facilities etc –in connection with the carrying out of their duties as Clerk.  Mr Evans took on his appointments as effectively a full-time occupation.  When he was appointed it was made clear to him that he would need to arrange his own administrative and secretarial support and assistance, and part of his fee was to be used to fund that.  His wife, Gillian, had been employed by the Inland Revenue as a tax officer for ten years and then by a local firm of accountants as a secretary and office administrator.  Mr and Mrs Evans agreed that Mrs Evans would undertake the secretarial and administrative duties associated with Mr Evans’ appointments as Clerk.  
The assessments and appeals

5.	Mr Evans submitted his income tax self-assessment return for the tax year 2003-04 on 14 April 2004.  On 19 August 2005 the Respondents (“HMRC”) gave notice of their intention to enquire into that return of income pursuant to s 9A TMA.  They raised specific questions on two items on the employment pages of that return, relating to his income as Clerk to the General Commissioners: deductions for expenses in respect of ‘travel and subsistence’ in the amount of £1,300, and deductions for ‘other expenses and capital allowances’ in the amount of £15,530.   In the course of the enquiry it was established that the latter amount included £14,940 in respect of secretarial assistance provided by Mrs Evans.  
6.	On 8 June 2006 HMRC closed their enquiry and issued a closure notice pursuant to s 28A TMA.  Their conclusion was that the expenses were overstated and the return was amended so as to disallow part of the deduction sought for travelling costs and secretarial assistance.
7.	On the same day HMRC made discovery assessments pursuant to s 29 TMA for the tax years 1996-97, 1997-98, 1998-99, 1999-2000, 2000-01, 2001-02, and 2002-03; all on a similar basis of a disallowance of part of the deduction sought for travelling costs and secretarial assistance.
8.	Mr Evans, through his solicitor, appealed timeously against each of the assessments and the closure notice.
9.	On 3 August 2006 HMRC issued a penalty determination under s 95 TMA on the basis that Mr Evans’ returns of income were incorrect due to his negligent conduct.  Mr Evans, though his solicitor, appealed timeously against that penalty determination.
10.	The Tribunal took evidence as follows.  For the Appellant: Mr Evans adopted two witness statements dated 6 and 23 November 2009 and gave sworn oral evidence;  and Mrs Evans adopted two witness statements dated 6 and 23 November 2009 and gave sworn oral evidence.  For HMRC: Mr Terry Williams, the Inspector of Taxes who conducted the enquiry, adopted a witness statement dated 23 November 2009 and gave sworn oral evidence; Mr William Johnson, an Inspector of Taxes formerly responsible for appeal hearings in Birmingham, adopted a witness statement dated 23 November 2009 and gave sworn oral evidence; Mr Peter Williams, an Inspector of Taxes formerly responsible for appeal hearings in Birmingham, adopted a witness statement dated 23 November 2009 and gave sworn oral evidence; and Mrs Janet Hobin, an HMRC presenting officer in Birmingham, adopted a witness statement dated 23 November 2009 and gave sworn oral evidence.  
Issues for determination by the Tribunal

11.	In order to determine the appeals the Tribunal must reach conclusions on four issues.
12.	First, in relation to the adjustments to disallow part of the travel expenses claimed, are the proposed adjustments reasonable and has Mr Evans discharged the burden of proof on him?  Mr Evans received from the DCA a mileage allowance for travel between his home/office and the locations of the hearings, and HMRC accept there is no income tax consequence of that.  The dispute relates to deductions claimed by Mr Evans for travel over and above attending the hearings.  Mr Evans did not keep a record of these business miles travelled.  HMRC contend that the amounts claimed are excessive.
13.	Secondly, in relation to the adjustments to disallow part of the secretarial assistance expenses claimed, are the proposed adjustments reasonable and has Mr Evans discharged the burden of proof on him?  The agreement reached between Mr and Mrs Evans on his appointment back in 1987 (but never put into writing) was that she would be paid one third of the fees he received as clerk.  HMRC contend that, at least in relation to the period in dispute (being approximately April 1996 to March 2004), the amounts claimed are excessive.  
14.	Thirdly, HMRC contend that in order to qualify for a deduction for the secretarial expenses, Mr Evans must demonstrate that he paid his wife.  The relevant legislation (explored later) requires the office holder to “defray” or “pay” the amounts.  HMRC say that the Clerk’s fees were received into a joint account in the names of husband and wife, and drawings by Mrs Evans on that account do not constitute payment by Mr Evans to her.  
15.	Fourthly, should a penalty be charged for negligent conduct and, if so, is the amount reasonable?
The enquiry and its outcome

16.	Having opened the enquiry on 19 August 2005, Mr Terry Williams met with Mr Evans on 25 October 2005.  Mr Evans was aware that the purpose of the meeting was to discuss his expenses deductions (and other matters) in connection with the enquiry, and he was accompanied by a colleague.  Mr Terry Williams’ evidence was, 
“Mr Evans said that he could not produce any records whatsoever in respect of the duties undertaken by himself as Clerk [to the three Birmingham Divisions] for the year ended 5 April 2004.  He could not, therefore, indicate how many meetings had been held in that year.  Nor could he state the number of cases that had been listed nor the number of cases in which a Stated Case had been requested.  Nor could he indicate the time spent by his wife providing secretarial and clerical help.  Also, he was unable to provide any record at all of the travelling costs incurred in carrying out his duties as Clerk, or a record of the mileage travelled.”  
17.	We note that the period in question had ended less than 19 months before the meeting, so it was reasonable for Mr Terry Williams to have expected that Mr Evans would be able to produce some information on these matters.  Mr Evans confirmed in his evidence to the Tribunal that he had not retained or could not produce documentary records in relation to the two key issues in dispute: the travel expenses and the expenses of secretarial assistance.  
18.	It is settled law that if HMRC can demonstrate to the satisfaction of the Tribunal that they have reason to believe there was an excessive deduction of expenses, then the burden of proof lies on Mr Evans to show that, on the balance of probabilities, his figures for the eligible deductions are correct.  As an experienced Clerk of many years’ standing that must have been obvious to him from the start of the enquiry.  From the evidence of Mr Evans and Mr Terry Williams we find that Mr Evans – surprisingly, given his background – did not co-operate fully with the enquiry.  In his evidence Mr Evans told the Tribunal that when he received the notes of the meeting of 25 October 2005 from Mr Terry Williams, he did not read beyond the second paragraph.  He did not respond adequately to HMRC’s requests for information; sometimes he seems to have ignored those requests rather than explain why he would decline to supply the information or that the information was not available.  He seems to have adopted a dismissive attitude throughout the enquiry and to have regarded HMRC’s routine requests for information in support of his expenses claims as somehow impugning his integrity.  
The workload of the General Commissioners and their Clerk in the relevant period

19.	A key issue in relation to both the travel expenses and the secretarial assistance expenses was, what workload of hearings did Mr Evans have during the years in dispute?   Accordingly, one of the main points on which evidence was taken was the question of the number of hearings (meetings) taking place in the three divisions in the relevant years, and the number of cases listed at those hearings.  While it might be reasonably expected that there would be a definitive record of those statistics, it transpired that that was not the case – or, at least, that there was nothing to that effect that was put into evidence. 
20.	Mr Evans was required to prepare a sheet (Form M2/1) that recorded dates and venues of hearings and number of cases listed, and was initialled by both the Clerk and the Inspector presenting the cases at a particular hearing.  While that appears promising as a reliable record, the sheets available to the Tribunal covered only March 1999 to December 2000; Mr Evans stated that he regarded these sheets as supporting documents in relation to his fees and so they were not kept after his fees had been settled by the DCA.  The DCA discouraged the retention of unnecessary documentation.  Also, the sheets were prepared for each Inland Revenue District rather than Commissioners’ Division, so that – as was openly accepted by all the witnesses – it was difficult to extrapolate from these few sheets to any meaningful conclusion.
21.	There was available to the Tribunal a report sent by Mr Evans to the DCA (then, the Lord Chancellor’s Department) in January 1995 giving the number of hearings in the previous calendar year for all three divisions:  Central 51, South 37 and North (where Mr Evans at this time was not Clerk and had been given statistics by his colleague at that division, Mr Thomas) 35.  This also gave the number of cases listed and cases heard at each Division for each of the years 1990 to 1994.  In 1994 in all three Divisions in aggregate the cases listed were 14,985 and the cases heard were 5,727.  However, this report was an isolated item; there were no similar data for other years.  Further, the period covered by this report preceded the introduction of income tax self-assessment, and it was common ground that the number of cases brought before the General Commissioners reduced significantly at that point.  
22.	Mr Evans produced copies of his annual calendars of hearings for (most of) 1995 to 2007, recording the hearings arranged for each of the three divisions and the Commissioners panelled for each day.  This was very much an informal record and, without suggesting it did not serve its originally intended purpose, it was difficult for the Tribunal to draw any wider information from its contents.  
23.	HMRC produced photocopies of extracts from the “Brown Books” – these being the records of General Commissioners’ hearings maintained by HMRC.  In terms of providing a useful picture of the workload in the relevant period these suffered from the same constraints as the other records described above – the information contained was only a brief summary of events, and they were maintained by Inland Revenue Districts rather than by reference to the divisions of the General Commissioners.
24.	Mrs Evans described the type of paperwork she prepared for Mr Evans.  Almost all of it was typed individually on an electric typewriter.  She confirmed that over time HMRC had taken over the production of some types of documents.  The evidence of Mr Peter Williams to the Tribunal was that by 1989 the majority of documentation connected with meetings of the General Commissioners was computer generated.   It appears that there was some discretion for Clerks to different divisions to decide how some of the documentation should be produced and provided to the parties.  The evidence of Mr Terry Williams to the Tribunal was that the production of stated cases for the purposes of onward appeals was an uncommon occurrence.  
25.	The Tribunal finds the following facts:
(1)	Following the introduction of income tax self-assessment in 1996 the number of appeals brought before the General Commissioners reduced significantly.  There was no longer the need to process large numbers of “delay” cases.  Accordingly, the workload of the clerk was significantly lower after that time than before. 
(2)	There had been a move towards more of the documentation involved with appeals to the General Commissioners being produced and provided by HMRC.  Also, for more of the documentation to be generated by computer, rather than being typed individually.  Accordingly, during the tax years in dispute the documentation expected to be produced by the clerk was smaller than it had been several years before that period. 
Relevant law

26.	For all the tax years under consideration except 2003-04 the relevant legislation was the Income and Corporation Taxes Act 1988 (“ICTA”) while for 2003-04 the relevant legislation was the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
27.	Section 19 ICTA and ss 5 & 6 ITEPA impose the basic charge on emoluments or income from any office or employment.   Mr Evans’ appointments as Clerk to the three Divisions were offices.  
28.	Section 198 ICTA provides:
“(1) If the holder of an office or employment is obliged to incur and defray out of the emoluments of the office or employment—   
(a) qualifying travelling expenses, or   
(b) any amount (other than qualifying travelling expenses) expended wholly, exclusively and necessarily in the performance of the duties of the office or employment,
there may be deducted from the emoluments to be assessed the amount so incurred and defrayed.
(1A) “Qualifying travelling expenses” means—   
(a) amounts necessarily expended on travelling in the performance of the duties of the office or employment, or   
(b) other expenses of travelling which—    
(i) are attributable to the necessary attendance at any place of the holder of the office or employment in the performance of the duties of the office or employment, and   
(ii) are not expenses of ordinary commuting or private travel.
What is ordinary commuting or private travel for this purpose is defined in Schedule 12A.”
29.	Schedule 12A was added with effect from the tax year 1998-99, which is after the first two tax years under consideration in the current case.  In the current case HMRC do not dispute that the relevant travel (discussed below) was “qualifying travel” but they do contend that the amount of expenses claimed by Mr Evans was excessive.
30.	For 2003-04, s 336 ITEPA provides: 
 (1)     The general rule is that a deduction from earnings is allowed for an amount if—
(a)     the employee is obliged to incur and pay it as holder of the employment, and
(b)     the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
(2)     The following provisions of this Chapter contain additional rules allowing deductions for particular kinds of expenses and rules preventing particular kinds of deductions.
(3)     No deduction is allowed under this section for an amount that is deductible under sections 337 to 342 (travel expenses).
31.	Section 337(1) ITEPA provides:
 (1)     A deduction from earnings is allowed for travel expenses if—
(a)     the employee is obliged to incur and pay them as holder of the employment, and
(b)     the expenses are necessarily incurred on travelling in the performance of the duties of the employment.
32.	Again, HMRC do not dispute that the relevant travel (discussed below) falls within s 337 but they do contend that the amount of expenses claimed by Mr Evans was excessive.
33.	Section 29 TMA gives HMRC the power to raise “discovery assessments” and so far as relevant provides:
 (1)     If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
(b)     that an assessment to tax is or has become insufficient, or
(c)     that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
…
 (3)     Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a)     in respect of the year of assessment mentioned in that subsection; and
(b)    in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4)     The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
34.	Finally, s 95 TMA relates to penalties and provides:
(1)     Where a person fraudulently or negligently—
(a)     delivers any incorrect return of a kind mentioned in section 8 or 8A of this Act (or either of those sections as extended by section 12 of this Act), or
(b)     makes any incorrect return, statement or declaration in connection with any claim for any allowance, deduction or relief in respect of income tax or capital gains tax, or
(c)     submits to an inspector or the Board or any Commissioners any incorrect accounts in connection with the ascertainment of his liability to income tax or capital gains tax,
he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2) below.
(2)     The difference is that between—
(a)     the amount of income tax and capital gains tax payable for the relevant years of assessment by the said person (including any amount of income tax deducted at source and not repayable), and
(b)     the amount which would have been the amount so payable if the return, statement, declaration or accounts as made or submitted by him had been correct.
(3)     The relevant years of assessment for the purposes of this section are, in relation to anything delivered, made or submitted in any year of assessment, that, the next following, and any preceding year of assessment. 
35.	We record that Miss Murray submitted, without further argument, that the outcome of the appeal before the Court of Appeal in Tower MCashback LLP 1 and another v Revenue and Customs Commissioners (High Court report at [2008] STC 3366) might have a bearing on the terms of the closure notice in the current case.

The first issue: Travel expenses deductions

36.	The dispute relates to deductions claimed by Mr Evans in relation to the period April 1996 to March 2004 for travel to the homes of General Commissioners to discuss business matters; travel to stationers to purchase or photocopy forms, letters, notices and the like; and travel to purchase postage stamps.  Mr Evans did not keep a record of these business miles travelled.  Mr Evans’ estimate is that each journey involved a 25 mile round trip, being from Sutton Coldfield to central Birmingham and back.  
37.	HMRC accept that these trips are not private travel within the meaning of the relevant legislation, and that a rate of 40 pence per mile is appropriate, but contend that the aggregate number of miles claimed was excessive.
38.	In the year under enquiry (2003-04) Mr Evans claimed a deduction for travel expenses of £1,300.  Mr Terry Williams’ evidence was, 
“I used an average of ten business miles per week to arrive at an annual business mileage of 500.  I applied the usual business mileage rate of 40p per mile to give a deduction of £200.  That was the amount I proposed.”
39.	Having considered all the evidence put before us, the Tribunal considers that while Mr Evans has not discharged the burden of proof on him in relation to the figures put forward by HMRC, a higher figure for travel expenses than that proposed by HMRC should be allowed.  We consider that given the level of work and approximate number of meetings in the period covered by the tax years in dispute, it was reasonable for Mr Evans to have made one trip each week for the allowable purposes stated.  Using the distance of 25 miles and the cost of 40 pence per mile, we substitute an allowable deduction of £500 per annum in respect of travel expenses, for each of the tax years in dispute.

The second issue: Secretarial Assistance Expenses Deductions

40.	In relation to the secretarial expenses, HMRC accepted that both the “necessarily” and “in the performance of the duties” elements of the test were satisfied but challenged that the amounts claimed were disproportionate (dealt with as this second issue) and that the amounts were not “paid” by Mr Evans (dealt with as the third issue, below).
41.	One of the points raised by HMRC during their enquiry was whether Mrs Evans was an employee of her husband.  Mr Barry Williams for HMRC informed the Tribunal that HMRC now accepted that she was not, and the Tribunal was not required to consider that point.  Mrs Evans paid income tax on her earnings.  
42.	In the year under enquiry (2003-04) Mr Evans claimed a deduction for clerical assistance expenses of £14,950.  Mr Terry Williams’ evidence was, 
“Information obtained from the Tax Office in Birmingham indicated that no Stated Cases were requested in the period 20 February 2003 to 5 April 2004.  I estimated that the other routine secretarial and administrative work by Mrs Evans would, on the information provided by Mr Evans during the meeting, amount to no more than five hours per week.  At an hourly rate of £10, which is approximately twice the national minimum wage, the yearly sum would be about £2,500.  This was the amount that I proposed should be allowed for the year ended 5 April 2004.”  
43.	Mr Barry Williams for HMRC submitted that the amount of the sums was properly reviewable by the Tribunal in determining what deduction should be allowed to Mr Evans.  This was supported by Lawrence J in Copeman v Flood [1941] 1 KB 202 at 204:
“[The Tribunal] cannot interfere with the prerogative of a company to pay to its directors whatever it thinks fit. … but they can find in a proper case that sums paid by a company as remuneration to its directors are not wholly and exclusively laid out or expended for the purposes of the company's trade, and it is their duty to direct their minds to that question.”
44.	In her opening remarks Miss Murray for Mr Evans suggested that HMRC could not challenge the proportionality of the amounts, even where the parties were connected.  In her closing remarks she conceded that the Tribunal should address proportionality but maintained that Copeman v Flood was confined to situations where, as in that case, the remuneration was vastly disproportionate.
45.	The evidence of both Mr and Mrs Evans was that they were available full time, seven days per week, to answer the duties of Mr Evans’ appointments, and that they occasionally received telephone calls and visitors at weekends.  Miss Murray submitted that Mr Evans required full time assistance of a specialist secretarial nature.  Mr Evans told the Tribunal in his evidence that he had spoken with a friend who ran a large agency for temporary secretaries, who had told Mr Evans that it was not practical to hire a secretary to provide the service required as it would mean that person attending all day.
46.	There was a consistent pattern over the years that Mrs Evans’s remuneration was approximately one third of the Clerk’s fees earned by Mr Evans.  Mr Evans testified that the arrangement was looked at during or shortly after the end of each year and an amount of 30% to one-third still seemed appropriate.  He stated that he regarded the situation as he and his wife being partners in a business and they evaluated the proportion of the work done by each of them.  
47.	While that is a perfectly proper arrangement for a husband and wife to agree, the Tribunal considers that the test to be applied in arriving at the amount correctly deductible under s 198 ICTA is, what would Mr Evans have been willing to pay a third party secretary for the relevant services?  In other words, if that money had been leaving the Evans household then what would Mr Evans have paid?  
48.	Miss Murray submitted that it was incorrect for HMRC to impose an hourly rate of pay; the amount paid to Mrs Evans was a considered decision and the fact that it was calculated as a fraction of the total fees did not detract from its validity.  
49.	Mr Evans conducted his three Clerk appointments as his full-time occupation.  Without in any way commenting on his performance of his duties as Clerk, the Tribunal does note that the arrangements he made in respect of the “back office” functions of that role were not designed for maximum efficiency.  He did not acquire a photocopier, nor a PC and printer, nor a telephone answering machine, nor a postage franking machine.  The Tribunal is of the view that if Mr Evans had retained the services of an administrator who had charged him according to time spent on tasks then those basic facilities of a modern office would have been seen as desirable if not essential, and would have enabled the work to be performed by a part time administrator.  
50.	Having considered all the evidence put before us, the Tribunal considers that:
(1)	We are required to consider proportionality of amount.
(2)	The original arrangement between Mr and Mrs Evans predates by a considerable period the tax years in dispute and, while we accept that matters were reviewed occasionally, the payment of a flat one-third of fee income does not determine an appropriate rate of pay for Mrs Evans.
(3)	There was no necessity for a full time assistant during the period of the tax years in dispute.  While that may have been appropriate at the outset and may have been convenient subsequently, it was not necessary during the period of the tax years in dispute and Mr Evans could have organised the administrative aspect of his Clerks’ appointments so as to require only part time assistance.
(4)	The Tribunal considers that while Mr Evans has not discharged the burden of proof on him in relation to the figures put forward by HMRC, a higher figure for secretarial expenses than that proposed by HMRC should be allowed.  We consider that given the level of work and number of meetings in the period covered by the tax years in dispute, it was reasonable for Mr Evans to have made provision for secretarial assistance amounting to 2 ½ to 3 days per week.  Using an approximate rate of pay of £10 per hour, we substitute an allowable deduction of £11,000 per annum in respect of secretarial expenses, for each of the tax years in dispute.

51.	We have already noted that Mrs Evans paid income tax on her earnings.  Mr Barry Williams for HMRC assured the Tribunal that any disallowance of secretarial expenses applied to Mr Evans would be reflected by HMRC in an adjustment of Mrs Evan’s earnings and her associated income tax liability.

The third issue: Was there a defraying or payment of the secretarial expenses?

52.	Mr Barry Williams for HMRC submitted that Mr Evans’ remuneration as clerk was paid into a bank account in the joint names of Mr & Mrs Evans.  The relevant legislation required that for there to be a deductible expense an amount must be defrayed or paid by Mr Evans to his wife.  What actually happened was that Mrs Evans drew on the account, as she was entitled to do as a joint holder of the account.  All sums in that account were already (by virtue of being in the account) jointly owned by herself and her husband; she was drawing only what she already owned.  Accordingly, it could not be said that Mr Evans had “paid” his wife, and the word “defrayed” was to be taken as equivalent to “paid”.
53.	Miss Murray for Mr Evans cited the High Court decision in Garforth v Newsmith Stainless Ltd [1979] STC 129.  There a bonus was voted to two individuals who were directors of the company.  The amounts were credited to the current accounts of the directors in the books of the company but, apparently because of the company’s cashflow position, the directors did not withdraw the money from the company.  The Inland Revenue claimed that PAYE should have been deducted from the sums as they had been paid to the directors.  The company argued that there had merely been a bookkeeping entry; payment did not occur until the cash was withdrawn by the individuals.  Walton J quoted the statement of Jenkins LJ in Re Vestey's Settlement [1950] 2 All ER 891 (at 901) that the word 'payment' is a word which has no one settled meaning but which takes its colour very much from the context in which it is found.  Walton J stated (at 133),
“I therefore come back to the question whether, on the facts of the present case, there was 'payment' to the directors. The argument really is, on the one hand, that all that happened was that the balances in the directors' loan accounts with the company were increased without them getting anything out of it unless and until they withdrew their money from the company, and, on the other hand, that the money was placed unreservedly at their disposal, they could have had it at any moment they chose, and that amounts to payment. As between those two contrasting views, I have no hesitation at all in saying that, in my judgment, when money is placed unreservedly at the disposal of directors by a company that is equivalent to payment; …”
54.	The Tribunal had in evidence copies of bank statements which showed that Mrs Evans held investments in her own name.  In her evidence Mrs Evans told the Tribunal that her withdrawals from the joint account were not just for housekeeping expenses but included payment of her own credit card balances, payment of her own income tax liabilities, amounts for gifts to grandchildren and exceptional amounts such as sums to invest in her ISAs.  
55.	Miss Murray submitted that there was no necessity for there to be any regularity of payments.  She handed up a schedule summarising movements in Mrs Evans’ investments, which Miss Murray submitted substantiated withdrawals from the joint account towards Mrs Evans’ sole benefit in amounts exceeding the sums Mrs Evans was due under her secretarial arrangement with her husband.   Although the Tribunal was unable to draw that conclusion from the schedule, we find it not determinative for the reason set out in the next paragraph.
56.	Having considered all the evidence put before us, the Tribunal considers that the fact that the fees were received into a joint account is not fatal to Mr Evans’ claim to have defrayed or paid sums to Mrs Evans.  In Newsmith Walton J had no hesitation that a bookkeeping entry recording a right to call for discharge of a debt could be construed as actual payment for PAYE purposes.  We accept the evidence of Mr and Mrs Evans that Mrs Evans had a right to draw out of the joint account amounts equal to her secretarial remuneration. That led to the same result as in Newsmith, that the money was placed unreservedly at the disposal of Mrs Evans and so was equivalent to payment.
57.	Accordingly, we find that the sums in question were defrayed or paid to Mrs Evans, within the meaning of the relevant statutory provisions.
The fourth issue: Penalty

58.	In his evidence Mr Terry Williams explained how the penalties had been calculated.  A colleague of his who specialised in penalty determinations had followed the usual practice of starting with the maximum penalty permitted by s 95 TMA (being 100% of the income tax) and then granting abatement of that maximum by reference to three factors.  Of a possible abatement of 20% in relation to disclosure, a reduction of 10% had been made.  Of a possible abatement of 40% in relation to co-operation, a reduction of 35% had been made.  Of a possible abatement of 40% in relation to seriousness, a reduction of 20% had been made.  That resulted in a penalty of 35% of the relevant tax.
59.	Mr Barry Williams for HMRC referred the Tribunal to the often quoted words of  Alderson B in Blyth v Birmingham Waterworks (1856) 11 Exchequer Reports 781 at 784:
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might have been liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done.”        
60.	Mr Barry Williams submitted that Mr Evans’ inclusion of figures on his tax returns that had been proved to be incorrect was sufficient evidence of negligence.  That supported the charging of a penalty under s 95 TMA, and it also, if required, justified the issue of discovery assessments under ss 29 & 36 TMA. 
61.	Miss Murray invited the Tribunal to consider whether the allegation of negligence had been made out.  The payments to Mrs Evans had been reasonable and possibly below the market rate; HMRC had accepted the mileage rate used by Mr Evans but challenged the number of journeys on business purposes; information in relation to tax years prior to that under enquiry had not been requested before the discovery assessments were issued; it was clear from Blyth that the test was an objective one, while HMRC had regarded it as relevant that Mr Evans was a former Inspector of Taxes.   
62.	Having considered all the evidence put before us, the Tribunal considers that there was negligence on the part of Mr Evans in submitting his tax returns, given the adjustments that it was now being necessary to impose.  The abatements allowed by HMRC with respect to seriousness and disclosure in calculating the penalty were broadly correct.  The Tribunal considers that the abatement given in relation to co-operation is generous.   The Tribunal takes on board Miss Murray’s comments that Mr Evans’ previous experience as an Inspector of Taxes should not result in any harsher treatment or higher standard being demanded of him.  However, we consider that on the basis of the evidence that we heard the abatement given in relation to co-operation should be reduced from 35% to 30%.  Accordingly, the penalty is increased to 40% from the percentage level originally imposed by HMRC of 35%.

Decision

63.	The appeals are allowed in part.  
The closure notice and the assessments shall be varied so as:
(1)	  To reduce the amount of the deduction for travel expenses in each tax year to £500.
(2)	  To reduce the amount of the deduction for secretarial and administrative assistance in each tax year to £11,000.
(3)	The penalty is increased to 40% of the relevant tax (after adjustment by (1) & (2) above).
Liberty to the parties to apply for clarification or determination of figures.

Right of appeal to Upper Tribunal

64.	Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal, which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identify the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision, and state the result the party making the application is seeking.
65.	This document contains the full written reasons for the Decision.

TRIBUNAL JUDGE

RELEASE DATE: 22 March 2010