John Buckingham v The Commissioners for HMRC

Mr Buckingham has for 35 years held shares in the Dr Pepper Snapple Group (“DPS” or “DPSG”) and its predecessor companies. In 2018, DPSG merged with Keurig Green Mountain Inc (“Keurig”) using a special purpose vehicle; the merged company is known as Keurig Dr Pepper Inc (“KDP”). DPSG and KDP were incorporated under Delaware law.

Immediately prior to the merger, a “Special Dividend” of $103.75 per share was paid to DPSG shareholders, including Mr Buckingham, who received £109,812.75. He included that amount on his self-assessment (“SA”) tax return as capital, because the overall capital value of his shareholding was significantly less than it had been before the merger. However, documentation published at the time of the Special Dividend stated that $29.50 of the $103.75 was income, with the balance being capital.

HMRC received information under the Foreign Account Tax Compliance Act (“FATCA”) which included the income part of the Special Dividend paid to Mr Buckingham. HMRC purported to open an enquiry into his SA return under Taxes Management Act 1970 (“TMA”), s 9A. The case officer was Mr Robbie Butler. He considered the facts and the relevant law as well as consulting HMRC’s manual and an internal specialist. Having done so, he decided $29.50 of the Special Dividend was taxable as a distribution under UK law and that the balance of $74.25 was capital. He issued a closure notice to that effect, increasing Mr Buckingham’s overall tax liability by £10,599.15.

Mr Buckingham appealed that closure notice, and on 10 November 2020 Ms Laube, an HMRC review officer, correctly decided that HMRC had been out of time to open an enquiry under TMA s 9A. The closure notice was withdrawn.

On 15 December 2021, Mr Butler issued Mr Buckingham with a “discovery” assessment under TMA s 29; that assessment reflected the earlier closure notice amendment. Mr Buckingham appealed the discovery assessment and asked for a statutory review.

On 30 March 2022, Ms Amelia Vickerman issued her review decision, holding that the whole of the Special Dividend was income for UK tax purposes, and that the discovery assessment was therefore “varied” so as to increase the tax due from Mr Buckingham by a further £26,267.21.

Mr Buckingham notified his appeal to the Tribunal. In his grounds of appeal, he accepted Mr Butler’s income/capital split, but disagreed with Ms Vickerman’s review decision. At or around the same time, he paid the extra tax charged by Mr Butler’s assessment.

We accepted that Mr Butler had met the conditions for issuing a “discovery” assessment, but we asked HMRC for submissions as to how the provisions of TMA s 29 interact with those relating to statutory review. We noted in particular that Mr Butler had “discovered” that “an amount” of income tax “ought to have been assessed but has not been assessed”, but by the review decision, Ms Vickerman decided that a higher “amount” of income tax had not been assessed. We asked HMRC whether a review decision increasing the “amount” of a discovery assessment must also meet the other requirements of TMA s 29 and related sections, in particular with relation to time limits.

Having taken time to consider the matter, Mrs Donnelly did not answer those questions, but instead asked that the Tribunal use its power under TMA s 50(7)(c) to increase the discovery assessment to reflect Ms Vickerman’s conclusions, and we proceeded on that basis.

Ms McSweeney, acting on behalf of her husband Mr Buckingham, relied on the same US information as had underpinned Mr Butler’s assessment; Ms Vickerman in contrast had not considered most of that material. Ms McSweeney concurred with Mr Butler’s analysis of the law, which was itself consistent with HMRC’s own published guidance.

Having considered the facts and the evidence and applied the law, we agreed with Ms McSweeney that Mr Butler’s discovery assessment was correct.

A Tribunal can increase an HMRC assessment under TMA s 50(7)(c) if it has first decided that the appellant has been undercharged by that assessment. We did not so decide, and we therefore did not increase the assessment made by Mr Butler. As a result, the position remains as set out in that assessment, and is not varied to reflect Ms Vickerman’s review decision.

We also considered whether Ms Vickerman’s review decision had been issued outside the statutory time limit. In a case such as this, where an appellant has asked for a statutory review, TMA s 49E(6) requires HMRC to issue a review decision within 45 days beginning with the day on which the appellant is provided with HMRC’s “view of the matter” or “such other period as may be agreed”. Ms Vickerman did not contact Mr Buckingham until day 46; she then said she would assume he had agreed to an extension unless he objected.

We decided that TMA s 49E(6) could not have retrospective effect, so that an extension has to be agreed before the end of the 45 day period; in addition there had to be a positive agreement between the parties, so HMRC could not rely on an appellant’s silence. The effect of that conclusion is that the statutory review decision issued by Ms Vickerman is replaced by a deemed decision that Mr Butler’s assessment is upheld, see TMA s 49(8).

However, the Tribunal only became aware of this time limit issue after the hearing. We considered whether to ask the parties to provide any further evidence and submissions, but decided it was not in the interests of justice to do so for the reasons given at ¶146.

We confirm the assessment issued by Mr Butler, so that Mr Buckingham’s liability remains as there set out. We refuse to increase that assessment to reflect the review decision issued by Ms Vickerman.

The Tribunal was provided with a Bundle of Documents prepared by HMRC which ran to 726 pages (including 30 pages of legislation and a single case law authority), together with a supplementary bundle of 514 pages, and a separate link to parts of “the Delaware Code Online”.

The Bundles included the following:

Mr Butler provided a witness statement and gave evidence-in-chief led by Mrs Donnelly; he was cross-examined by Ms McSweeney and answered questions from the Tribunal. We found him to be an entirely honest and credible witness.

Ms Vickerman also provided a witness statement, gave evidence-in-chief led by Mrs Donnelly, was cross-examined by Ms McSweeney and answered questions from the Tribunal. Her evidence about the process she had gone through in making her review decision was vague, and parts were difficult to reconcile with the statements made in that decision. Overall, we did not find her to be an entirely reliable witness, and we make related findings of fact at ¶54ff.

Mr Buckingham did not provide a witness statement and relied on the documents provided in the Bundle to support his case for the income/capital split of the Special Dividend.

The facts in this part of our decision are based on the evidence summarised above, including our findings about the reliance which could be placed on Ms Vickerman’s evidence. There is a further finding of fact about Delaware law at ¶120.

DPSG was a leading US listed coffee and beverage company established under the laws of Delaware in 2007. It included well-known brands such as Dr Pepper, Snapple, 7UP, and Canada Dry. Over time it had made a series of acquisitions, including the “Schweppes” part of the former Cadbury Schweppes plc. DPSG was listed on the New York Stock Exchange (“NYSE”) and filed annual, quarterly and current reports with the US Securities and Exchange Commission (“SEC”).

Keurig was a leading producer of speciality coffee and related coffee-making machines; like DPSG it was incorporated under the laws of Delaware.

On 29 January 2018, Keurig announced it was acquiring DPSG and would pay $18bn in exchange for 87% of the stock of a newly created merged company. Those who had been shareholders of DPSG would thus own 13% of KDP, the new company. Under the merger proposal, those shareholders would receive a Special Dividend of $103.75 per share and shares in KPD. This was funded as to $29.50 from DPSG’s earnings and profits, with the balance of $74.25 being provided by the other investors in exchange for the right to shares in the merged company, together with various debt funding arrangements.

Companies listed on the NYSE are required to notify the SEC about major events of which shareholders should be aware, and to do so using Form 8K. On 30 January 2018, DPSG filed form 8K with the SEC; it was signed by James Baldwin, DPSG’s Executive Vice President and General Counsel. It said that the merger agreement “provides that the Company will declare and pay a cash dividend of $103.75 per share”, and that DPSG “expects that only a minority of the amount of the SD [Special Dividend] will be out of earnings and profits”.

DPSG also published a list of questions and answers for its shareholders. In answer to the question “Will the special cash dividend be taxed like other dividends on DPSG common stock?” the company said:

In answer to the question “How do I calculate the change in tax basis resulting from the portion that is a return of capital and any subsequent adjustments to E&P”, the company said:

The merger took place on 9 July 2018, following which KDP was listed on the NYSE. The day after the merger, KDP declared the Special Dividend of $103.75. The value of each share held by DPSG shareholders dropped, as they each owned significantly less of the new merged KDP entity than they had done of DPSG as a stand-alone company.

In August 2018, KDP filed a Form 8937 with the US Internal Revenue Service (“IRS”). An amended version of that Form was filed on 2 January 2019. It began by saying:

Having defined the Special Dividend, the Form then said, under the heading “Describe the quantitative effect of the organisational action on the basis of the security in the hands of a US taxpayer as an adjustment per share or as a percentage of old basis”:

The KDP Annual Report includes the following passage on page 1:

The Note 3 there referenced is part of KDP’s Consolidated Financial Statements, which were included within the Annual Report. Note 3 sets out the financial information relating to the merger, including an analysis of the sources of the consideration by which it was funded, as follows:

Mr Buckingham is 84 years old. He had purchased shares in Cadbury plc in 1988, shortly before the Cadbury-Schweppes merger, and continued to hold the shares through the various restructurings; he thus held shares in DPSG at the time of the KDP merger. The value of his shareholding dropped from $175,280 to $39,102 following the merger.

KDP provided Mr Buckingham with two Forms 1042-S “foreign person’s US Source Income Subject to Withholding” relating to the Special Dividend. One stated that $44,712 was a “dividend”, subject to US withholding tax, and the second that $107,781 was a “return of capital”. The total was thus $152,493, or £114,526. Mr Buckingham received £109,812.75 on 2 November 2018; the difference between this figure and £114,526 was accounted for by US withholding tax and bank charges.

Before completing his 2018-19 SA return, Mr Buckingham sought advice from two firms of accountants in his local area, but both declined on the basis that they had no specialist knowledge of foreign shareholdings. However, he understood their informal view to be that the most likely treatment was as a capital gain. He then looked at various internet forums to see if they provided assistance. In the past, he had visited his local tax office if he had difficult questions about his tax affairs, but that office had closed and his previous experience of phoning HMRC was that they provided “no real help”.

Mr Buckingham completed his 2018-19 SA return on the basis that the full £114,526 of the Special Dividend was capital, because of (a) the significant fall in value of his shareholding, which had been compensated for by the Special Dividend, (b) his own research and (c) the informal comments from the firms of accountants. He did not add any further explanation of the transaction in what is called the “white space”.

The SA return was submitted in paper form; it was registered as received by HMRC on 19 September 2019, well before the filing date for a paper return of 31 October 2019. In addition to the Special Dividend, the SA return also included other share-related amounts.

On 13 July 2020, HMRC received information from the US tax authorities under the FATCA about Mr Buckingham’s US dividends, including the “dividend” part of the Special Dividend, being $44,712.

On 2 October 2020, Ms Kiran Klare of HMRC wrote to Mr Buckingham asking for information about money received from shareholdings in US companies (“the opening letter”). She described this as a “compliance check”, and said she believed Mr Buckingham’s 2018-19 SA return “may be inaccurate”. She did not refer to TMA s 9A or to any other UK tax provisions.

Mr Buckingham responded to the opening letter, and on 2 February 2021, Ms Klare wrote again, asking Mr Buckingham to reconcile the figures provided via FATCA with those on his tax return. At that point, Mr Butler took over the case from Ms Klare, and Mr Buckingham provided him with both Forms 1042.

On 12 May 2021, Mr Butler told Mr Buckingham that his preliminary view was that the Special Dividend was split into identifiable income and capital elements, with the $44,712 identified as a “dividend” by DPSG being taxable as such in the UK. On 10 June 2021, he told Mr Buckingham he was seeking internal specialist technical advice; he took that advice from within the Wealthy/Mid-sized Business Compliance team at HMRC. The specialist agreed with Mr Butler, noting that Form 8937 confirmed the capital/income split. Mr Butler also considered the legislation at s 402 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) see ¶109, as well guidance in the HMRC Company Tax Manual at CTM15205, see ¶106.

On the basis of Form 8937 and both Forms 1042-S, the legislation, the technical advice, and the guidance in CTM15205, Mr Butler wrote to Mr Buckingham on 8 July 2021, saying he was amending his 2018-19 SA return on the following basis:

In the same letter, Mr Butler said:

On 27 August 2021, Mr Butler issued a letter headed “final closure notice” relating to the “check” of Mr Buckingham’s 2018-19 tax return; this stated that it had been issued under TMA s 28A and constituted a “formal notification” that the enquiry had been closed. The substance of the notice reflected the changes explained in Mr Butler’s earlier letter. The extra tax due was £10,599.15: this took into account foreign tax credit relief, and the fact that one of the consequences of the amendments was that Mr Buckingham lost his personal allowance for that year.

On 13 September 2021, Mr Buckingham requested a statutory review of Mr Butler’s decision. On 10 November 2021, Ms J Laube, the review officer, wrote to Mr Buckingham saying:

On 9 December 2021, Mr Butler reviewed the facts of the case and decided that a discovery assessment could be raised because he had “discovered” that “an amount of income tax…ought to have been assessed but has not been assessed” and as Mr Buckingham had not provided any information about the Special Dividend in the “white space”, the condition in TMA s 9(5) had been met, namely that Mr Butler “could not have been reasonably expected, on the basis of the information made available to him” before the discovery, to be aware of the insufficiency.

On 15 December 2021, Mr Butler wrote to Mr Buckingham, cancelling the closure notice and issuing a discovery assessment under TMA s 29 which mirrored the changes made by the closure notice, so that the extra tax due was again £10,599.15. Under the heading “what to do if you disagree”, the letter said:

On 29 December 2021, Mr Buckingham appealed the discovery assessment and asked for it to be “reviewed by an independent tribunal”. On 5 January 2021, Mr Butler emailed Mr Buckingham, saying that if he wished to appeal to the Tribunal he had to do that directly and not via HMRC, but that if he wanted an HMRC statutory review, he was to confirm this as soon as possible. Mr Buckingham wrote back on 10 January 2022, asking for a statutory review. In an email dated 24 January 2022 timed at 11.09 am, Mr Butler emailed Mr Buckingham; the “Attachments” line of the header reads “20220125 Buckingham J letter re appeal and independent review.docx (58.24 KB)”. The text reads:

The attached letter is dated 25 January 2022, but was plainly sent to Mr Buckingham on 24 January 2022.

In Mr Buckingham’s appeal letter, he also complained about HMRC’s delay in opening a timely enquiry; their delay in cancelling the closure notice and their further delay before issuing the discovery assessment. On 5 January 2022, Mr Butler said that he had passed a copy of Mr Buckingham’s letter to HMRC’s complaints officer, who would respond separately in relation to these delays.

On 10 March 2022, Ms Vickerman, the review officer, emailed Mr Buckingham a copy of a letter in which she said “I have been unable to complete the review by the statutory deadline”, adding:

Mr Buckingham did not write back to say he objected. On 30 March 2022, Ms Vickerman issued her review letter. It said that the conditions for making a discovery assessment had been met, both because TMA s 29(5) was satisfied, but also because Mr Buckingham had been “careless” within the meaning of TMA s 29(4) because he had failed to seek advice “from an agent or other knowledgeable person”.

Ms Vickerman went on to say that Mr Buckingham had not “provided any information regarding the nature of the payment or any information suggesting, for example, which reserve the [Special Dividend] payment was made out of and under which mechanism” and thus the “only information” she had considered was “that which Keurig Dr Pepper have made available publicly”; she then referred only to the Annual Report, saying:

This citation is from page 1 of the Annual Report, which we have already set out at ¶32. Ms Vickerman’s extract omits the final phrase, which read “Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information related to the DPS Merger”. When asked in the hearing whether she had looked at Note 3, Ms Vickerman first said she was unable to recall, and then that she did not look at KDP’s financial accounts because they were not “available”. Since Note 3 is part of the financial accounts which are contained within the Annual Report (see ¶33), we find as a fact that Ms Vickerman did not look at that Note, although it was available to her.

Ms Vickerman’s review decision also said that in the Annual Report, the Special Dividend “appears to be described as a straightforward dividend”. The Tribunal was unable to locate any reference in the Annual Report to the Special Dividend being so described, and asked Ms Vickerman if she was able to assist, but she too was unable to find any reference to that term, and we find as a fact that it was not so described.

There was no reference in Ms Vickerman’s review decision to:

We find as facts that when Ms Vickerman made her review decision, she did not consider the information on Forms 1042-S or on Form 8937. We come to that conclusion because had she done so, it is highly improbable that she would not have made reference in her review decision to those documents and the information they contained. Instead, she explicitly stated that Mr Buckingham did not provide any relevant information, and the only “publicly available” information to which she made reference was one incomplete citation from the KDP Annual Report.

In addition to considering page 1 of the Annual Report, Ms Vickerman took into account certain provisions of the Delaware Code. These also formed part of HMRC’s submissions for the hearing and we return to them at ¶115 below.

Ms Vickerman concluded that:

She then said:

No further discovery assessment was issued. On the following day, Ms Vickerman wrote again to Mr Buckingham, saying that the figures in the passage set out above were incorrect, and that:

On 2 April 2022, Mr Buckingham notified his appeal to the Tribunal. He said he now accepted that Mr Butler had been correct that the Special Dividend consisted of a capital element of £83,551 and an income element of £32,234, and he was appealing against Ms Vickerman’s review decision.

As noted above, the closure notice was cancelled by HMRC following a statutory review carried out by Ms Laube. We confirm for completeness that we agree with her decision. This is because TMA s 9A includes the following provisions:

Mr Buckingham delivered his 2018-19 return on 19 September 2019, well before the filing date of 31 October 2019. Any enquiry had thus to be opened before 20 September 2020. Ms Klare’s opening letter was issued on 2 October 2020. It was thus out of time, as Ms Laube correctly decided.

The burden was on HMRC to show that the conditions existed for a discovery assessment to be made under TMA s 29. Unfortunately, the version of that section (and of TMA s 8 and s 34) included in the Bundle was that originally promulgated in 1970, despite the section having been entirely replaced by provisions included in Finance Act 1994, and those replacement provisions having subsequently been significantly amended.

Mrs Donnelly apologised and arranged for the current version to be emailed to Mr Buckingham and the Tribunal. Ms McSweeney did not object to the late provision of the correct legislative provision.

TMA s 29 is headed “ Assessment where loss of tax discovered” and so far as relevant to this appeal, reads as follows:

The references in TMA s 29 to tax returns which have been “made and delivered…under section 8…of this Act in respect of the relevant year of assessment” are to SA tax returns. As it was not in dispute that Mr Buckingham had “made and delivered” an SA tax return for 2018-19, we did not ask HMRC to provide the current version of TMA s 8 (rather than the 1970 version which had been included in the Bundle).

The first requirement before an assessment can be made under TMA s 29 is that an officer of the Board (or the Board) “discover” that “an amount” of income tax or CGT had not been assessed, or an assessment already made is or has become insufficient, or that any tax relief is or has become excessive.

Mrs Donnelly’s skeleton argument clearly set out the reasons why they considered Mr Butler had made a “discovery” when, having received information under FATCA about the Special Dividend, he established that this had been treated in its entirety as capital; that this was not the correct tax treatment, and thus “an amount” of income tax had not been assessed; she went on to say that it was irrelevant that Mr Butler had previously purported to issue a closure notice on the same basis.

She confirmed in her oral submissions that HMRC were relying on Tooth v HMRC [2021] UKSC 17, in which the Supreme Court said, obiter, that discovery assessments which met the other requirements of TMA s 29 were validly made as long as they were issued within the relevant time limit, and that there was no requirement for the discovery to be “new” or not “stale”.

The Tribunal agrees with Mrs Donnelly that this is the effect of Tooth. We note that, shortly before the hearing of Mr Buckingham’s appeal, the Upper Tribunal (“UT”) in Harrison v HMRC [2023] UKUT 00038 (TC) considered whether Tooth was binding on lower courts in relation to its dicta on staleness, and found that it was. We respectfully agree with that judgment. As a result, we also agree with Mrs Donnelly that Mr Butler made a “discovery” within the meaning of TMA s 29.

Where, as here, the taxpayer filed an SA return for the relevant year, a discovery assessment can only be made if either TMA s 28(4) or (5) is met. The former is that the taxpayer acted “carelessly or deliberately”; the latter that the officer “could not have been reasonably expected” to have been aware of the tax shortfall on the basis of information which:

Mr Butler did not make his discovery assessment under TMA s 29(4) on the basis that Mr Buckingham had acted carelessly or deliberately. Instead, he relied on TMA s 29(5), holding that he “could not have been reasonably expected” to have been aware of the tax shortfall on the basis of the information contained within Mr Buckingham’s SA return.

It was common ground that this return contained no further information, such as a description in the “white space” which would have alerted a reasonable officer to the nature of the Special Dividend.

However, by TMA s 29(6)(c), information “made available” includes that “contained in any documents…which, for the purposes of any enquiries into the return…are produced or furnished by the taxpayer to the officer”. In this case, Mr Buckingham provided Mr Butler with Forms 1042-S, which contained key information about the Special Dividend. At the time that information was provided, Mr Butler plainly considered he was undertaking an enquiry into Mr Buckingham’s return under TMA s 9A, because he went on to issue a closure notice under TMA s 28A.

We considered whether documents provided by a taxpayer at a time when the HMRC officer in question considers he is undertaking an enquiry into a return under s 9A, was information contained in documents provided “for the purposes of any enquiries into the return”. However, we decided that the word “enquiries” in that subsection has to be read as meaning those opened in accordance with HMRC’s s 9A powers. The Forms 1042-S were therefore not provided by Mr Buckingham in the course of a s 9A enquiry, because no such enquiry had been validly opened, and in consequence TMA s 29(6)(b) does not assist Mr Buckingham.

As a result, we agreed with HMRC that the condition in TMA s 29(5) was met, and that in consequence Mr Butler had met all relevant conditions for the discovery assessment which he issued on 15 December 2021.

We next considered how TMA s 29 interacts with the powers of an officer carrying out a statutory review.

As is clear from our findings of fact:

The statutory review provisions in TMA s 49A to 49I apply to the great majority of HMRC’s direct tax decisions; materially identical legislation applies in relation to VAT and some other indirect taxes.

By TMA s 49C(5), the review officer has the power to uphold, cancel or vary the decision which has been appealed. In this case, Ms Vickerman varied Mr Butler’s decision by increasing the amount of tax, and did so in reliance on both TMA s 29(4) and (5). HMRC’s Statement of Case asked that Tribunal to “confirm the discovery assessment in the increased amount of £36,866 in accordance with the review conclusion”.

However, the decision under appeal was made on the basis that Mr Butler had “discovered” that “an amount” of income tax “ought to have been assessed but has not been assessed”. By the review decision, Ms Vickerman decided that a higher “amount” of income tax had not been assessed,

Mr Butler also decided that he “could not have been reasonably expected” to have been aware of the tax shortfall on the basis of the information contained within Mr Buckingham’s SA return. Ms Vickerman held that Mr Buckingham had also been “careless”.

TMA s 34 provides that HMRC can issue an assessment “not more than four years after the end of the year of assessment to which it relates”; TMA s 36 provides for a longer time limit of six years if a person has been careless, and 20 years if a person has acted deliberately.

We asked HMRC whether they had any submissions on how the discovery powers in TMA s 29 interacted with TMA s 49C(5), and in particular:

The Tribunal said that it had no view on the answer to those questions, but invited Mrs Donnelly’s comments. She asked for an adjournment, which we granted. At the end of the period of time she had requested, she did not give direct answers to our questions, but asked us to use our powers under TMA s 50 to vary Mr Butler’s discovery assessment upwards in line with the review decision.

TMA s 50(6) reads:

TMA s 50(7) reads:

The Tribunal confirmed to the parties that if we decided Mr Buckingham had been undercharged by Mr Butler’s assessment, so that it should be varied upwards in line with Ms Vickerman’s review decision, we would increase the assessment, but that as Mr Buckingham had accepted Mr Butler’s assessment it would otherwise “stand good”, in other words, remain unchanged.

We have already found that Mr Butler was correct to decide that TMA s 29(5) was satisfied, because no information had been provided on Mr Buckingham’s return as to the nature of the Special Dividend.

Ms Vickerman’s review letter said she also considered “the failure to seek advice from an agent or other knowledgeable party to be careless”; she used the same wording in her witness statement. Mrs Donnelly similarly submitted that Mr Buckingham had been careless because “he believed he required professional input to complete his return and failed to acquire that input”.

Ms McSweeney strongly contested Ms Vickerman’s decision that Mr Buckingham had been “careless”. She said he had sought advice, but had been unable to find anyone with the expertise to help him, and had also looked at various online forums. She did not accept that HMRC would have been able to give him a definitive answer, pointing out that Mr Butler and Ms Vickerman had both consulted separate internal experts, who had come up with two entirely different conclusions

The term “careless” is defined elsewhere in the tax code as “lack of reasonable care”, see FA 2007, Sch 24, and we find that it has the same meaning in the TMA. We do not accept that Mr Buckingham was careless because “he believed he required professional input to complete his return and failed to acquire that input”. He sought professional advice but was unable to find anyone with the requisite skills. As he said, it is clear from the differing views within HMRC that the issue is not straightforward. The burden is on HMRC to show that a person has acted carelessly, and we find that they have not met that burden in relation to Mr Buckingham.

HMRC relied on First Nationwide v HMRC [2012] EWCA Civ 728 (“First Nationwide”). That case refers to earlier judgments, some of which are also further considered below.

First Nationwide was a subsidiary of the Nationwide Building Society. In 2003, it entered into a complex series of structured finance transactions to raise funds. The relevant issue for the purposes of this appeal was whether preference dividends paid out of the share premium account of a Cayman Island company called Blueborder Cayman Ltd (“Blueborder”) were “income” or “capital” for UK tax purposes.

Moses LJ, giving the only judgment with which Rix LJ and Briggs J (as he then was) concurred, said this:

At [16] Moses LJ referred to the judgment of Lord Reid in IRC v Reid's Trustees (1949) 30 TC 431 (“ Reid ”) where capital profits realised on the sale of properties were distributed to shareholders by way of dividend. Moses LJ said that “this was crucial to the identification of the payments as income”, adding that Lord Reid had said at p 450:

At [17] Moses LJ referred to Lord Reid’s later judgment in Rae v Lazard Investment Co Ltd (1963) 41 TC 1, [1963] 1 WLR 555 (“Lazard”), saying:

At [18] Moses LJ considered Courtaulds Investments Ltd v Fleming (1969) 46 TC 111 (“Courtaulds”), which concerned a distribution made by an Italian company to its shareholders out of share premium reserve; the payment was not effected by way of dividend but instead by exercise of a specific procedure under Italian law whereby surplus capital may be returned to shareholders. Buckley J had held in that case that the nature of the shareholders' rights, and by extension the nature of the payment made by the company, had to be determined by application of Italian law. The result was that for the purposes of English law and UK taxation, the distribution was capital.

Moses LJ went on to note that under Cayman Island law, payments out of share premium account were income, not capital as had been the position in the UK before the law changed in 1948. At [26] he said that:

He then said at [27]:

As noted above, Lord Reid’s leading judgment in Lazard was followed in First Nationwide. In addition to the passages already cited above, his judgment concluded by saying:

Both Lord Guest and Lord Pearce similarly rejected the submission that the distribution must be treated as income of the shareholders, even though had the Maryland company been an English company, it could only have effected the distribution by way of dividend. The issue of whether the payment was of an income or capital nature was, the court held, a question of fact, to be determined by considering its characterisation under the law of Maryland. Lord Pearce stated at p 573:

Mr Butler had referred to and relied on the guidance in HMRC’s Company Tax Manual at CTM15205 relating to “distributions: general: dividends, distributions and company law. Under the heading “dividends”, the Chapter says:

HMRC’s Savings and Investment Manual at SAIM5210 is headed “Foreign Dividends” and begins:

Under the heading “dividends of a capital nature” SAIM5210 says:

ITTOIA Chapter 5, Part 4 sets out the charging provisions for Savings and Investment Income. Chapter 4 of that Part is headed “Dividends from non-UK resident companies”. Within that Part, s 402 is headed “charge to tax on dividends from non-UK resident companies. So far as relevant, it reads:

As correctly identified in HMRC’s Savings and Investment Manual, section 402(4) was introduced as part of the Tax Law Rewrite process. The Notes issued at the time said at [1634]:

Questions of foreign law are questions of fact for the Tribunal. By way of example, in Lazard, the Special Commissioners at first instance had found as a fact that under the law of Maryland the dividend was capital in nature, see the judgment of Lord Reid at page 25. Similarly, in this case it is for the Tribunal to determine whether the Special Dividend paid under Delaware law was income, capital, or part income and part capital.

In the courts, questions of foreign law are determined as facts after the hearing of expert evidence, see s 4 of the Civil Evidence Act. However, Rule 15(2)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Tribunal Rules”) provides that the Tribunal may “admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom”. Rule 2 of the Tribunal Rules provides that the Tribunal “must seek to give effect to the overriding objective” of “dealing with cases fairly and justly” when it “exercises any power under these Rules”, and that this includes:

Neither party sought to rely on expert evidence. We considered whether to adjourn the case with directions for this to be provided, but decided not to do so, for the following reasons:

On behalf of Mr Buckingham, Ms McSweeney said that DPSG and KPD were both incorporated under Delaware law, and in accordance with that law, the Special Dividend had been split as between income of $29.50 and capital of $74.25. She relied in particular on the following points, which to avoid repetition we have where relevant cross-referenced to our earlier findings of fact:

Mrs Donnelly asked the Tribunal to confirm the position taken by Ms Vickerman in her review letter, which was as follows:

In support of Ms Vickerman’s statements about Delaware law, on 25 January 2023, HMRC provided Mr Buckingham and the Tribunal with a link to an extract from the online version of the Delaware Code, being Title 8, §241 to §246. Mr Buckingham did not object to the late provision of the intranet link to this document. Within those provisions, §244 is headed “reduction of capital”, and reads:

Mrs Donnelly submitted that ways in which a Delaware corporation can reduce its capital are limited to those set out at §244, and she repeated the statement made by Ms Vickerman that KDP’s Annual Report did not say that the Special Dividend was “the result of a reduction of capital, a partial liquidation, or some other mechanism for returning capital to shareholders”, but instead “appears to be described as a straightforward dividend”. However, Mrs Donnelly (like Ms Vickerman, see ¶56) was unable to locate any reference in the Annual Report to the Special Dividend being described as a “straightforward dividend”.

When asked by the Tribunal how her submissions could be reconciled with the documentation issued by KDP, Mrs Donnelly said that the income/capital split on Form 8937 and on Forms 1042-S were for IRS purposes and did not reflect the position under Delaware law; the two were, she said “different”.

She also emphasised that KDP’s information about the income/capital split was addressed to US residents and that other holders had been advised to “consult their own tax advisers”, see ¶30; she submitted that this further supported HMRC’s position.

On the basis of the evidence provided, we find as a fact that $29.50 of the Special Dividend was income and $74.25 was capital under Delaware law. We come to that finding because:

We first set out the parties’ submissions on how the Special Dividend was to be classified for UK tax purposes, followed by our view.

Ms McSweeney submitted that the UK tax treatment followed that in the US. In consequence, $29.50 was an income dividend taxable under ITTOIA s 402(1), and the balance was excluded by s 402(4) as a “dividend of a capital nature”. Referring to First Nationwide, she said that “the legal mechanism” and “mechanics of distribution” by which the Special Dividend was paid were that only the $29.50 was paid out of earnings and profits, with the balance being capital. Moreover, that capital element was plainly a payment which reduced the “corpus” of the company because the capital value of investors’ holdings in the new KDP shares were worth significantly less than their previous holdings in DPSG.

Mrs Donnelly and Ms O’Reilly both made submissions on this issue. Although they had initially said, consistently with Ms Vickerman’s review decision, that no part of the Special Dividend was capital under Delaware law, they then submitted that the treatment in the overseas jurisdiction was not a relevant consideration.

This was, they said, consistent with the citation from IRC v Reid’s Trustees at [16] of First Nationwide, which says:

At this point, we told Mrs Donnelly and Ms O’Reilly that we were finding HMRC’s case hard to follow, and agreed to a short adjournment so they could consider their position. When we reconvened, Ms O’Reilly said that HMRC “apologised for confusing everyone” and asked for permission to make written submissions after the hearing to allow them to explain their case.

We indicated that we were very unlikely to agree to this application and outlined our reasons, but said we would consider it more fully after the hearing. Having done so, we confirm that the application is refused. This is because:

In short, it is plainly not in the interests of justice to adjourn the hearing to allow HMRC to provide a further explanation of their case.

Our starting point, as required by First Nationwide, is “the legal mechanism” by which the Special Dividend was paid. In Lazard, the payment was capital under Maryland law, and received as such by shareholders in the UK, see Lord Pearce’s summary cited at ¶105. In First Nationwide, the distribution was out of a share premium account and would have been capital had it been made by a UK company, but was income under the laws of the Cayman Islands and likewise income in the hands of UK shareholders.

On the facts of this case, $29.50 of the Special Dividend was paid out of DPSG’s earnings and profits, and the balance was paid as capital. It could not have been paid as a distribution of earnings or profits because there were insufficient funds of that nature to do so; in that respect it was entirely different from all previous DPSG dividends. As Ms McSweeney said, the “corpus” or value had been reduced: this is reflected in the lower value of Mr Buckingham’s shareholding in the merged company. This too supports classification of the $74.25 as capital.

We also note that ITTOIA s 402(4) was introduced in order to reflect the position set out in Lazard and Reid, in other words, specifically to exclude “dividends of a capital nature” from taxation as income. This is clear from the Explanatory Notes and reflected in HMRC’s guidance at SAIM5210. The $74.25 was such a capital dividend and so not taxable as income.

We have already rejected HMRC’s submission that the capital/income split shown on the documentation was not in accordance with Delaware law. We also reject their later submission that treatment of the dividend in the overseas jurisdiction is irrelevant to its classification for UK tax purposes: that submission is entirely inconsistent with the ratios of Nationwide and Lazard. The citation on which Mrs Donnelly and Ms O’Reilly relied (see ¶123) does not assist. It says (emphasis added):

In this case, DPSG’s profits were exhausted in payment of the income part of the dividend; the balance did not come from “surplus profits”.

For all the above reasons, we refuse to increase the amounts taxable on Mr Buckingham under TMA s 50(7) to reflect Ms Vickerman’s review decision.

We add that HMRC’s case was also:

The above is sufficient to decide the appeal in Mr Buckingham’s favour. However, when considering the documents after the hearing, it appeared to us that Ms Vickerman may have been out of time to issue her review decision. This possibility was not identified by the parties, so we had no related submissions. We first set out the law and the facts, followed by a discussion and our conclusions.

The key relevant provision is TMA s 49E, which is headed “Nature of review etc” and reads:

As is clear from the foregoing, TMA s 49E requires that a statutory review decision be issued within 45 days of the “relevant day”, unless another period “has been agreed”. The definition of “relevant day” depends on whether (a) the appellant asked for review, or (b) HMRC offered the review.

In this case Mr Buckingham asked for a review; it was not offered by HMRC. The “relevant day” was thus 45 days from the date on which HMRC provided their “view of the matter” letter or “such other period as may be agreed”. As is clear from our findings of fact, see ¶49 and ¶50; the “view of the matter” letter was provided on 24 January 2022, not 25 January 2022. Day 45 was therefore 9 March 2022.

Mr Buckingham heard nothing from Ms Vickerman on or before 9 March 2022. However on 10 March 2022, Ms Vickerman emailed him a copy of a letter in which she said “I have been unable to complete the review by the statutory deadline”, adding:

Mr Buckingham did not write back to say he objected. Ms Vickerman issued her review decision on 30 March 2022.

As is clear from TMA s 49E(8), where HMRC do not issue the statutory review to the appellant within the 45 days, or within “such other period as may be agreed”, the review “is to be treated as having concluded that HMRC's view of the matter in question…is upheld”; in other words, the reviewer is deemed to have confirmed the decision appealed against.

In Mr Buckingham’s case, this means that if Ms Vickerman missed the statutory deadline, the review decision she issued is a nullity; instead, she is deemed to have confirmed Mr Butler’s discovery assessment.

However, that will not be the position if a different period has been agreed instead of the 45 days. We therefore considered whether:

In our view, the natural reading of the relevant provisions is that HMRC must issue their statutory review within the 45 day period, unless before the expiry of that period, the appellant has positively agreed to an extension of time and not simply failed to respond. We come to that conclusion for the following reasons:

We therefore conclude that Ms Vickerman’s statutory review decision was out of time, and was instead displaced by a deemed decision that Mr Butler’s discovery assessment was to be upheld.

However, this point was only identified by the Tribunal after the hearing, and the parties had not had the opportunity to make submissions. We nevertheless decided that it was not in the interests of justice to ask for further submissions, for the following reasons:

For the reasons set out above, we confirm the discovery assessment made by Mr Butler. We add for completeness that neither party sought to adjust the split he had calculated for UK tax purposes, namely that allowing for exchange differences and withholding taxes, the income element of the Special Dividend was £32,234 and the capital element £83,551. In addition, neither party sought to argue that any adjustments were required to the calculation of capital gains based on that lower figure. We therefore uphold his assessment in its entirety.

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 Rules. 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.