Russell Cockburn considers the use of tax case decisions in disputes with HMRC
One of the things I get slightly annoyed about when I am advising others on disputes with Inspectors of taxes is the way they occasionally use tax case decisions to bolster their arguments. Not annoyed in the sense that I actually object to them referring to tax cases (this is, of course, perfectly legitimate), but annoyed about the manner and circumstances or context in which such references are sometimes used to seemingly support HMRC’s arguments. This happens even when the cases referred to bear little or no real resemblance to the real facts of the matter in dispute, even though admittedly perhaps the general principles they deal with are the same, at least to some extent
There seems to be a trend, for some officers at least, to pick on any old tax case and refer to it in general terms as supporting their position on an argument, even when it bears only a passing resemblance to the case in point. I have dealt with several technical and enquiry cases over the past 12 months or so where the HMRC officer concerned has alluded in correspondence to a particular case law judgement as offering him or her real and authoritative precedent which, while technically having some general applicability to the matter under discussion, actually on closer examination carries very little real weight.
Am I alone in gaining the impression that there is a misconception in some quarters of the HMRC that a quick reference to a case decision, no matter how long ago or which actually has very few similarities of facts to the case being argued, should act to cause the adviser to quickly roll over and accept HMRC’s arguments at face value? I have dealt with cases recently where the particular judgement referred to was in reality so far removed from the taxpayer’s true circumstances that I found it hard to understand why, or indeed how, the officer had come to the conclusion that their case reference could do any other than provide only very tenuous support for their arguments.
Referring to a tax case law judgment decision can, of course, be a very powerful tool when making an argument that a particular set of circumstances cannot support a claim for a tax relief or a business expense deduction. Similarly, general points of principle laid down in case law over hundreds of years do form an important facet of our legislative and judicial system and provide a framework within which we all have to operate. But referring to a case that exhibits facts and circumstances that are far divorced from the matter in hand is surely a disingenuous tactic when seeking to defend an argument if the situation and facts it dealt with can be clearly distinguished from the case under review.
As a junior tax inspector many years ago I was obliged to learn by heart a plethora of tax case law judgments and decisions as part of my training. This was presumably so that I would be able demonstrate, both on examination and when running cases in real life, that I had learned and understood the fundamental principles of many areas of UK tax law formed as it is of written statute, statutory regulations, and of course the tax courts’ decisions.
Case law is most useful where tax law is unclear, ambiguous or in dispute. But I was always told that to be of real benefit when making an argument a specific case law decision must be genuinely and factually ‘comparable’ to the case I was dealing with. While many cases will often deal with what may initially appear to be similar points of law and principles, I was exhorted to ensure that any case decision I referred to in correspondence or during discussions with an adviser, taxpayer or accountant should always bear a fairly close resemblance on to the facts of my case, both in absolute and relative terms as well as subjectively.
I have recently been dealing with a dispute about the allowability of some claimed repairs expenses on a rental property where the landlord had been obliged to carry out fairly extensive work on a set of underground drains shortly after purchasing a new small rental property. During several months of negotiations with the vendor the buyer had tried comprehensively, but to no avail, to obtain a reduction in the purchase price of the property to cover some or all of the drainage repairs that he knew would have to be carried out shortly after completing the purchase. The vendor was, however, adamant that he would not reduce the price and was actually in a very strong negotiating position given that the property was in a small provincial town where the rental property market is very buoyant due to the presence locally of one large and high-profile employer. This business employs a large number of workers and regularly brings in a lot of young professionals who typically only stay for a year or so and who therefore generally rent locally rather than buy. Hence the buyer ended up paying the original asking price for the property with no reduction to take account of the repairs that were going to be necessary.
It actually turned out that when having the drains repaired the new owner was able to spend considerably less than his original survey had suggested by using one of the modern plastic extrusion techniques rather than having the existing drains physically dug up. Hence he ended up with a new plastic drainage system underground inside the old one rather repairing the old ceramic pipework. The eventual costs was only about £4,000, as opposed to the ordinal estimate of some £10,000. This was disclosed in a short explanatory on the Land and Property page of his tax return as repairs expenditure; namely, he included a brief note explaining what had been done in the ‘white space’ on his returns.
The inspector wrote out shortly after receiving the return and initially, (and perhaps unsurprisingly as it is a real favourite) quoted our old friend the ‘Law Shipping – 12 TC 621’ case as authority for disallowing what she regarded as capital expenditure incurred shortly after acquisition and which thereof must have been reflected in the purchase price. Briefly, the argument was put forward that the required repairs were essentially of a capital nature having been incurred shortly after acquisition of the property and presumably therefore had been reflected in the purchase price, i.e. the client had “got it cheap”. This argument was swiftly dispensed with on the grounds that if required the taxpayer landlord could produce his extensive file of emails and correspondence, notes, etc. to demonstrate that at no stage was any reduction of the valuation and purchase price ever countenanced by the vendor.
To be fair the inspector accepted this initial argument fairly quickly, especially on being told that tenants were moved into the property immediately after the repurchase was completed (“they just had to put up with a bit of a smell”!), and that the repairs to the drains had not affected the purchase price at all. This was a telling point in the old Law Shipping case, i.e. the asset in question, (there the ship, here the rental property), was useable from day one, whereas in the Law Shipping case the ship asset bought had to undergo extensive repairs before it could go to sea at all.
However, the inspector then tried another tactic and came back with a revised argument, referring to the “helpful note” (and belatedly I rather wished I hadn’t bothered in the first place!), included on the client’s tax return about the actual nature of the repairs work done. She contended that the repairs should be treated as capital on the authority of the New Zealand Auckland Utility case, (2000 BTC 249).
At this point I have to admit to becoming rather more than just a little annoyed, (one might even say that I literally lost it!). Admittedly and technically yes, there may have been some merit in the officer’s arguments. The Auckland case did indeed involve the repairs of drains with a new plastic extrusion technique and the outcome in court there eventually was that the expenditure was treated as capital not revenue because it had, in effect, resulted in the installation of what was regarded as an entirely new and much improved drainage system.
However, while this was clearly rather similar to the circumstances of the case I was dealing my response, I have to say, expressed in rather more terse terms than I normally use when corresponding with HMRC, was to refer to the basic concept of comparability. Put briefly, I politely asked the inspector to consider whether the £4,000 or so spent on this very small two-bedroomed rental property in a provincial town in the north of England could really be properly compared with the many millions of New Zealand dollars spent in the city or Auckland (or more correctly beneath it) on the replacement of the drainage system for an entire city more than 11,000 miles away? Of course there was indeed some technical merit in her argument, but really? I awaited her response with some nervousness, but thankfully all I got was a fairly spartan “we will be taking this matter no further despite the technical merits of the HMRC’s position”. Result!
Of course one can never discount a reference to a tax case decision on the issue of comparability alone, but there can be little doubt that when one faces such an argument in a case one is dealing with for a client it is often all too tempting to be overwhelmed with the seeming force of the use of a case law based argument from HMRC. A case that is referred to out of context will in fact carry little weight with a Tax Tribunal. They will normally see through an attempt to relate a truly very different set of facts to the case in hand.
Case law certainly has an important part to play in clarifying tax law, but when it is used in circumstances that are so far from any real comparison, as was the case here, then it behoves the adviser to stand his ground and respectfully request that a little fact-based reality is reintroduced to bring matters to a successful conclusion.
Some readers might say that I was lucky here, while others will sympathise with the inspector who, of course, often has the unenviable task of dealing with disputes that may exhibit unusual features or appear superficially to resemble a cited case. That may be so, but my job here was simply to attempt to bring some reality and common sense to the case, which thankfully had a successful outcome for the client.
Russell Cockburn is a tax consultant, lecturer and author, and a former HMRC inspector. He can be contacted on 01909 824542 or by email at firstname.lastname@example.org
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