James Anderson v PriceWaterhouseCoopers & Anor

Unless otherwise stated, all subsequent statutory references are to the provisions (the material parts of which are set out in the appendix) of the Taxes Management Act 1970 (“TMA”).

A partnership may be required, under s 12AA, by notice given by HMRC to “make and deliver” a partnership return.

Such a partnership return is required, by s 12AB(1), to include a “partnership statement” showing, addition to the amount of income, loss, consideration received and tax deducted or treated as deducted from any income of the partnership, the amount, in the case of each of the partners, “taking into account any such relief or allowance, is equal to his share of that income, loss, consideration or tax.”

Under s 12ABZB(1) a partnership return is, for tax purposes, “conclusive” in relation to whether a person has a share in the profits or losses of that partnership for any period and also what that person’s share in those profits or losses is.

If there is a dispute between that person and any one or more partners of the partnership as to whether what is stated in the partnership return is correct, it may be referred to the Tribunal for determination under s 12ABZB(3).

Section 12ABZB(5) provides that such a referral “must” be made before the “end of the period of 12 months” beginning with the day after the day on which the partnership return was “delivered” or, (which is not applicable in the present case) if the return was amended, within 12 months from the day after the day the amendment was made.

However, s 12ABZB(4) provides that a referral under s 12ABZB(3) does not include a dispute “to the extent that is in substance about the amount (before sharing) of the partnership’s profits or losses for a period.

Before considering the issues, and to put them in context, I have summarised the circumstances in which they arose. However, I should make it clear that what follows is solely for this purpose and anything I say should not be taken as a finding of fact in relation to any further proceedings in this matter.

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. Although, under the terms of the LLP agreement Mr Anderson was entitled to be given six months’ notice of termination, he retired from PwC on 30 November 2018.

Mr Anderson claimed that in requiring him to retire, PwC had had 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 by PwC to Mr Anderson comprising two distinct elements:

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”).

While he accepts that the first element was correctly treated as a share of profit chargeable to income tax, Mr Anderson contends that the Additional Payment was compensation in settlement of his claim for damages which should not have been included as a share of profit allocated to him in the Partnership Return. Paragraph 5 of the Referral states:

“5.

It is not disputed that the first element is correctly treated as a share of profit chargeable to Income Tax. However, JA [Mr Anderson] considers that the Additional Payment is not as a matter of fact a share of profit but compensation in settlement of his damages claim; and that he is not liable to pay Income Tax in respect of it.”

Mr Anderson became aware of how the Additional Payment had been treated on receipt of an email from PwC, dated 5 January 2021. This stated that the details of his profit share were available and that the computation had been finalised and submitted to HMRC.

On 10 December 2021 Mr Anderson made the Referral, under s 12ABZB(3), to the Tribunal. Although Mr Anderson now contends that the Referral was made in time it included an application for an extension of time for its admission.

I now turn to the issues.

It is common ground that there is no provision within the Taxes Management Act 1970 (“TMA”) under which the Tribunal may extend the time in which a referral under s 12ABZB(3) can be made. It is therefore necessary to consider whether there is any other provision under which the Tribunal may do so.

On an appeal from the Social Entitlement Chamber of the First-tier Tribunal in VK v HMRC [2016] UKUT 331 (AAC) (“VK”) the Administrative Appeals Chamber of the Upper Tribunal (Judge Jacobs, Judge Wikeley and Judge Mitchell) observed, at [2], that legislative provisions that confer authority to extend time do not have to be contained in an Act but may also be contained in secondary legislation:

“… if its enabling powers permit such provision to be made.”

The Upper Tribunal continued, at [3], noting that paragraph 4 of Schedule 5 to the Tribunals Courts and Enforcement Act 2007 (“TCEA”):

“… properly interpreted, authorised rules of tribunal procedure to confer power on the First-tier Tribunal to extend time..

The authorised rules of procedure in the Tax Chamber of the First-tier Tribunal are the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 of which the rule 21 provides:

Rule 5(1), which deals with the Tribunal’s case management powers, provides that, subject to the provisions of the TCEA “and any other enactment”, the Tribunal may regulate its own procedure.

Rule 5(3)(a), to which rule 21(3) refers, provides that the Tribunal “may by direction”:

Therefore, the starting point is that a referral under s 12ABZB(3) “must not” be admitted unless it is either within the time limit imposed by s 12ABZB(5) which, for present purposes, is the “end of the period of 12 months” beginning with the day after the day on which the partnership return was “delivered” or the Tribunal, if it is able to do so, extends the time for it to be admitted under rule 5(3)(a).

Although the parties agree that the Tribunal may extend the time for complying with a statutory time limit, either as an extension of time under rule 21 or an extension of the statutory time limit as envisaged in VK (see paragraph 19, above), they part company in relation to whether it has the power to grant such an extension in the case of a referral under s 12ABZB(5) and whether such an extension would conflict with a provision of another enactment.

Mr Whiscombe, for Mr Anderson, raised the argument that as the time limit was contained in the TMA, “another enactment” must refer to a statute other than the TMA. In the absence of any provision in another statute he contends that there is nothing to preclude an extension of time being granted by the Tribunal under rule 5(3)(a).

Mr Afzal, for PwC, contends that the reference to “another enactment” in rule 5(3)(a) refers to an enactment other than the Procedure Rules and that, as such, there is a conflict with the time limit in s 12ABZB(5) with the result that the Tribunal does not have the power to grant an extension of time for a referral under s 12ABZB(3). Ms Henshaw, for HMRC, agrees with Mr Afzal that an extension of time is precluded but contends that the reference to “another enactment” is a reference to the TCEA.

Given the reference to the TCEA and “any other enactment” in rule 5(1), I consider Ms Henshaw’s to be the better construction of rule 5(3)(a) and agree with her that the reference to “another enactment” is to the TCEA. However, for present purposes, it does not matter whether the other enactment is in fact the Procedure Rules or the TCEA as in both cases it would appear that the Tribunal is precluded from extending the time for a reference under s 12ABZB(3).

However, the Upper Tribunal in VK, having considered rule 21(3) of the Tax Chamber Procedure Rules (which it set out in full), noted, albeit obiter, that:

“43.

There is some jarring here with the wording of rule 5(3)(a), which ostensibly prevents an extension of time if that would conflict with an enactment setting a time limit. But the specific provision for extending time in rule 21 must have been intended to operate as an exception to the rule 5(3)(a) restriction.”

Mr Whiscombe contends that, although obiter, the approach in VK should be adopted in the present case with the effect that the Tribunal may extend the time limit in rule 21 “as an exception to the rule 5(3)(a) restriction.

However, I do not agree. As Mr Afzal submits, not only is the view expressed by the Upper Tribunal, which is not supported by any reasoning, obiter and therefore not binding, rule 5(3)(a) and rule 21 are silent as to the existence of any exception. Moreover, if the Upper Tribunal in VK were right it would render the restriction in rule 5(3)(a), “unless such extension … would conflict with the provision of another enactment setting down a time limit” otiose.

It therefore follows that as an extension of time would conflict with a provision of another enactment, namely s 12ABZB(5), the Tribunal does not have the power under rule 5(3)(a) to grant an extension of time to make a referral under s 12ABZB(3) with the result that any referral that is not made in time “must not” be admitted.

It is not disputed that the partnership return was submitted to HMRC on 26 October 2020 and that the Referral was made, more than 12 months later, on 10 December 2021.

Although accompanied by an application for an extension of time when it was made, Mr Whiscombe now contends that the Referral was in fact made within the s 12ABZB(5) time limit of “12 months beginning with the day after the day on which the partnership return was delivered” and, as such, an extension of time is not required. Neither Mr Afzal nor Ms Henshaw agree.

In essence this issue concerns the interpretation of s 12ABZB(5), in particular to whom the partnership return is to be “delivered” pursuant to paragraph (a) of that subsection.

Mr Afzal, with whom Ms Henshaw agrees, says it is HMRC whereas Mr Whiscombe, who accepts that delivery to HMRC is the most obvious interpretation of s 12ABZB(5), contends that time runs from when the partnership statement, which is required by s 12AB(1) to be included with a partnership return, is delivered to the individual partner making the referral under s 12ABZB(3).

Mr Whiscombe points out that as there is no statutory obligation on a partnership to notify each partner of the amount of taxable profit allocated to him or her it is possible that the time for making a referral under s 12ABZB(3) could already have started running or may even have expired before a partner is aware of a dispute to be referred to the Tribunal. Such a situation could arise through error or carelessness by a partnership that fails to timeously provide the individual partners details of their profit allocations. It could, Mr Whiscombe argues, even be abused by a partnership where a partner has left in acrimonious circumstances. He contends that such issues would not arise if his construction of s 12ABZB were to be adopted. He does concede, however, that to construe s 12ABZN(5) as meaning delivery of the partnership statement to the partner making the referral does requires “some gymnastics”.

Given that Mr Anderson first became aware of his partnership allocation on 5 January 2001 the effect of such an interpretation in the present case would be that the Referral, on 20 December 2021, was made within 12 months from the day after the day the partnership statement was delivered to him and no extension of time is required for it to be admitted.

However, rather then engage in the gymnastics required for Mr Whiscombe’s construction of s 12ABZB, I prefer that advanced by PwC and HMRC (which Mr Whiscombe also accepts as being the more natural and obvious interpretation) that the use of “delivered” in s 12ABZB(5) refers to the partnership return being delivered to HMRC. Such a construction is, in my judgment, clearly consistent with the TMA provisions regarding the filing of a partnership tax return.

For example, where a partnership is required by a notice issued by an “officer of the Board” of HMRC under s 12AA to “make and deliver” a partnership return, s 12AA(2) requires that partnership return to be delivered to that “officer”, ie it must be delivered to HMRC. It therefore follows that the phrase used in s 12ABZB(5) “the day on which the partnership return was delivered” must refer to the day on which it was delivered to HMRC.

Additionally, although s 12AB(1) provides that a partnership return “shall include” a partnership statement”, s 12ABZB(5) expressly refers to the delivery of a “partnership return” not a “partnership statement”. In my judgment, had s 12ABZB(5) been intended to refer to a “partnership statement” as opposed to a “partnership return” it would have said so. Also, given the reference to both a “partnership return” and “partnership statement” in the legislation the two terms cannot be interchangeable or one mean the other. Had that been intended it would not have been necessary for the legislation to refer to both.

Accordingly, as it was made on 10 December 2021, more than 12 months after the partnership return was delivered to HMRC on 26 October 2020, the Referral cannot have been made before the end of the period of 12 months beginning with the day after the day on which the partnership return was delivered as required by s 12ABZB(5).

In essence this issue concerns whether the dispute between the parties was “in substance” about the nature of the Additional Payment, ie whether it was a profit share (as contended by PwC) or compensation (as contended by Mr Anderson), or about the amount (before sharing) of the partnership’s profits.

Mr Whiscombe 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, with whom Ms Henshaw 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.

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 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. 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”.

Accordingly the Tribunal is precluded from admitted the Referral, which is “in substance” about the amount of the partnerships profits, by s 12ABZB(4).

For the reasons above I have concluded that:

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.