Tax Tribunal Rules on Personal Expenditures and Loan Write-Off Disputes in James Keighley & Anor v The Commissioners for HMRC

Citation: [2024] UKFTT 30 (TC)
Judgment on

Introduction

In the case of James Keighley & Anor v The Commissioners for HMRC, the UK First-tier Tribunal (Tax Chamber) presided over appeals concerning income tax, corporation tax, and national insurance contributions (NICs) matters. This case centers around alleged personal expenditures on a company credit card and the impairment loss claimed by a company on a loan write-off to an associated entity. The Tribunal carefully examined (1) whether behaviors that resulted in tax under-assessment were deliberate or careless, (2) the application of the connected party and unallowable purpose provisions in corporate tax law, (3) the validity of HMRC’s discovery assessments, and (4) proper deductions for business expenses labeled as ‘petty cash’.

Key Facts

The appellants faced different but connected issues. The first appellant, Mr. James Keighley, appealed against discovery assessments issued by HMRC, which were based on the allegation of deliberate behavior for personal expenditures incurred using a company credit card. The second appellant, Primeur Ltd, contested corporation tax delineations, specifically loan relationship debits from debt write-off to associated company Valley Dale Properties Ltd (VDP), and an appeal on the deductibility of petty cash expenses. The company argued that it and VDP were not connected companies and that the write-off was for commercial purposes. Moreover, it contended that HMRC reassessments were either procedurally mistaken or invalid due to a settlement agreement.

The Tribunal applied several legal principles in its analysis:

  • Presumption of Continuity: It is assumed that prior under-reporting of income persists until proven otherwise.
  • Deliberate Behavior: In line with Supreme Court case Tooth v HMRC, for behavior to be classified as deliberate, there must be an intention to mislead HMRC. This principle determines the timeframe within which HMRC can issue discovery assessments.
  • Connected Companies and Unallowable Purpose (Sections 466, 472, CTA 2009): The provisions examine if companies are ‘connected’ through control and whether transactions, like loan write-offs, are for a business purpose or an unacceptable purpose like tax avoidance.
  • Discovery Assessment Validation (Schedule 18, FA 1998): This concerns the carelessness requirement for HMRC to issue a discovery assessment and the time limit for doing so.
  • Section 54 Agreement (TMA 1970): Under this Act, an appeal is effectively settled if it’s withdrawn, or if an agreement is reached, preventing the issue from being relitigated.
  • Reasonable Care in Context of Penalties (Schedule 24, FA 2007): Focuses on whether the taxpayer (or their agent) failed to take reasonable care, resulting in an incorrect tax return.

Outcomes

The Tribunal addressed each matter as follows:

  • Credit Card Expenditure: It was found that the first appellant’s behavior was deliberate, upholding HMRC’s discovery assessments and related penalties.
  • Loan Relationship Issue: Both companies were not connected, and the loan write-off had an unallowable purpose, resulting in the disallowance of the claimed tax-deductible debit, while upholding the validity of the October 2020 discovery assessment.
  • Petty Cash: The Tribunal allowed partial deductibility of the petty cash expenses but still viewed the overclaimed deduction as resulting from careless behavior, directing HMRC to recalculate the penalty based on this judgment.
  • Procedure and Settlement: The Tribunal determined that the ‘revenue amendment’ was not a valid discovery assessment and no section 54 TMA settlement agreement had been reached that would prevent re-litigation of the issue.

Conclusion

In summation, James Keighley & Anor v The Commissioners for HMRC offers a comprehensive look at several intricate tax law principles. Key takeaways include the strict interpretation of what constitutes ‘deliberate’ and ‘careless’ behavior concerning the presumption of continuity, the importance of distinguishing connected parties in corporate relationships, and the precise applicability of unallowable purposes in loan relations. The relevance of proper procedural conduct in issuing tax assessments and the finality accorded by section 54 agreements was underscored. This case reaffirms the onus on taxpayers to provide clear evidence for deductions claimed and elucidates the stringent requirements HMRC must fulfill to lawfully reassess tax liability.