I.A. Barnett & Anor. v The Commissioners for HMRC

In relation to the closure notice, Mr Jeremy Barnett submitted on behalf of the Appellants that part of the Basic Redress in this case was compensation for something other than the Appellant’s liability to pay sums to Barclays under the swap. This submission was supported by:

Mr Jeremy Barnett also drew out, through questioning of the Appellants, their feeling of being badly treated by the FCA in the review process. Mr Fox observed that the whole process was designed to obfuscate and that the FCA had been reprimanded for its poor processes in this review since then.

Further, both Appellants expressed in both their written statements and their oral answers, their view that discussions had been had between the FCA, Barclays and HMRC about the tax treatment of the redress payments but these conversations had been behind closed doors.

Mr Jeremy Barnett expressed the view that it was strange of HMRC not to offer witness evidence to contravene this evidence in the witness statements.

Mr Jeremy Barnett also highlighted that since Mr Bradley had chosen not to cross-examine the witnesses their evidence must stand.

Mr Jeremy Barnett asked us to rely upon the decision in Hexagon Properties v HMRC [2022] SFTD 901 as an authority for us to take an objective approach in looking at what the basic redress payment was really for.

In relation to the penalty, Mr Jeremy Barnett submitted that the Appellants cannot be said not to have taken reasonable care in submitting their returns. This is because they had a genuine belief that the tax to pay on the settlement had already been paid by deduction and because nothing in the redress scheme process alerted them to the need to include the redress payment in their returns or to seek professional advice about the tax treatment of it.

He submitted that it would be unfair to penalise the Appellants for not taking advice on what to include in their returns when they were precluded from doing so by the nature of the offer made under the redress scheme.

Mr Bradley, for the respondents, argued, in relation to the closure notices that:

On the penalties, Mr Bradley submitted that:

Given the core of this dispute is about the treatment of the money received by Mr Fox and Mr Ian Barnett under the FCA scheme, it is helpful to set out the elements of the offer letter:

The offer letter from Barclays was dated 30 May 2014. After an introduction making it clear that it is a second offer letter following a request from Mr Fox and Mr Barnett for Barclays to carry out an assessment of the consequential losses they were claiming. The letter reads as follows:

After some further information about interest rate risks for those with remaining loans outstanding and the procedures for accepting the offer, the letter includes the following statement:

There are two invitations in the letter to call to speak to someone if there are any questions and, finally, an apology that the Bank did not meet the relevant regulatory standards.

The Consequential loss decision follows, which allows a claim for £2,100 for financial consultancy fees because “professional advice was required as a direct consequence of the missale of the IRHP”.

The Consequential loss decision refuses claims for:

Finally, there is a summary table as follows:

The parties were in agreement that if the basic redress amount (the £371, 669.18 set out at the top of the table above) is to be treated as a payment to refund of all the amounts that would not have been paid by the Appellants had they not entered into the mis-sold swap, then it is subject to income tax and should have been included on their self-assessment returns.

Mr Jeremy Barnett also expressly conceded that the principles set out in the Wilkinson case were accepted by the Appellants. However, he sought to argue that the facts of Mr Barnett and Mr Fox could be distinguished from those in Wilkinson because they had started litigation, whereas there was none commenced or threatened in Wilkinson.

He also sought to rely on Hexagon “for its facts” as the basis for encouraging this Tribunal to look at the position of the parties objectively and in the round and as an example of how a settlement agreement to compromise litigation can be drafted in such a way to suit a taxpayer, much more effectively than had been the case for Mr Fox and Mr Barnett. Further he said that it is evidence to support their arguments that the settlement under the redress scheme is a settlement of a potential claim under litigation.

This submission forms part of the overall question of what the basic redress amount was for. Mr Bradley argues it was for what was set out in the letter, i.e. refund of amounts spent and there was no evidence it was for anything else.

We accept that there is evidence of an increasingly poor relationship between Mr Fox and Mr Barnett on the one hand and Barclays on the other and that, by 2012, this had reached the point of pursuing a claim against Barclays in civil litigation.

As Mr Bradley says, there is limited documentary evidence before us as to the scope of that claim, but we had unchallenged evidence from both Appellants that the scope was wider than mis-selling and covered complaints about their treatment more generally, including the classification of their business as being at risk, with the consequent negative impact on their banking arrangements. We accept that this was the case.

However, when Mr Fox and Mr Barnett decided to enter the FCA redress arrangement, they put that civil claim on hold.

When the redress offers were made to them, they had a choice either to accept the offer made or not. At the stage of the first offer, they did not accept the offer, but submitted additional amounts for consideration, one of which was accepted, as set out above.

When the second offer was made, they decided to accept the offer. Both Appellants’ evidence was that this decision was a difficult one to make, but that after such a significant financial and personal impact on their lives over such a long time, they decided that, on balance, it was better to move on with their lives and accept the offer.

At that time it would still have remained open to them to refuse the offer and revert to their civil claim. No doubt the associated risks and costs of pursuing such litigation fed into their decision to accept the offer. Both men knew that by accepting the offer, they were drawing a line under that option.

Mr Jeremy Barnett conceded that this Tribunal had no jurisdiction to consider or ameliorate the perceived unfairness of the FCA redress programme, but did invite us to find that the Appellants were excluded from obtaining professional advice regarding their redress scheme, as evidenced by the fact that a claim for legal fees was excluded. Further if they had had the relevant advice they would have structured it differently.

We cannot accept these arguments. The Appellants were not prevented from obtaining proper advice and professional advisers were not excluded from the proceedings. It is correct to say that the redress scheme declined to refund legal and accounting fees on the basis that the FCA did not believe that such advice was necessary. However, a general position that professional advice was not necessary is not the same as preventing or excluding it.

Whether or not Mr Fox and Mr Barnett would have taken a different approach if they had had advice at the time on the tax treatment of their redress payments is speculation. They did not seek tax advice and they accepted the redress offer that was presented to them in its entirety.

We do not believe that the position in Hexagon assists these taxpayers. As Mr Bradley pointed out, the decision explicitly did not reach a conclusion on the tax treatment of the settlement (see paragraph 3 of the decision), only a preliminary question on the loan relationship rules (which would be irrelevant in this case since they only apply to companies). We would also distinguish this case from being relevant, as Mr Jeremy Barnett submitted, as to the approach that a tribunal should take to the treatment of these redress payments as a matter of fact. The fact pattern in Hexagon was fundamentally different – the parties had taken part in the FCA redress scheme and received sums under it, however the settlement that was under consideration in the appeal to the Tax Tribunal was a settlement of a subsequent claim for damages against the bank.

Mr Jeremy Barnett is of course correct that Hexagon is an example of how a settlement of litigation can be structured and drafted. However, the example does nothing to further Mr Fox and Mr Ian Barnett’s case because we are considering the redress offer that was made to them and not a theoretical settlement that might have been made if they had been differently advised.

Having considered all of these points, we find that the payment of the basic redress amount of £371, 669.18 was to refund of all the amounts that would not have been paid by the Appellants had they not entered into the mis-sold swap, as set out in the redress offer letter.

Therefore we uphold the closure notices.

Turning to the penalty appeals, we must consider whether Mr Fox and Mr Barnett had taken reasonable care in completing and submitting their tax returns. If they have taken reasonable care, the penalties do not arise.

We would agree with Mr Bradley that the key question to answer here is whether the actions of Mr Fox and Mr Barnett were a reasonable course of action by reference to a prudent and reasonable taxpayer in the position of the taxpayer in question.

We have already decided above that they were not precluded from taking advice on the tax treatment of the redress payments. In the context of the penalties, the Appellants seek to argue that the redress offer letter gave them the impression that there was no further tax to pay and that this belief was, at least partially, based on the footnote that explains that tax has been deducted from the interest payments.

As Mr Fox and Mr Barnett were at pains to point out, they were and are experienced businessmen. Any experienced businessman understands the difference between a payment of interest and a payment of other sums. It was not reasonable for them to conclude that the footnote (set out in full above) suggested that all tax had been paid on the whole sum received under the redress scheme. The footnote is explicit that it relates to deduction of tax from interest and there is nothing in the footnote, or indeed elsewhere in the letter, to suggest that this represented the entirety of the tax due.

They used professional advisers to complete their returns and they provided evidence that their usual course of action was to provide their accountants with all the relevant information and paperwork for the year in order to complete the return. However, on this occasion, despite providing them with the details of the interest paid to them (and tax deducted from it), they did not tell their accountants about the redress element of the payment. Experienced businessmen would not be used to receiving sums of several hundred thousand pounds without tax to pay on the receipt. It was not reasonable for them to leave out the basic redress amounts from information provided to their accountants for the purposes of completing their tax returns.

We find that their actions and omissions were not a reasonable course of action and therefore they had not taken reasonable care. Therefore the penalties for the inaccuracies in their returns are validly imposed.

Mr Jeremy Barnett referred several times to the fact that Mr Bradley elected not to cross examine the two witnesses and that therefore their evidence must stand. This is, undoubtedly true and in fact, with regard to the statements of fact and expressions of their own beliefs regarding their tax position, Mr Bradley expressly accepted this position.

However, Mr Barnett also suggested that HMRC’s decision not to call a witness to challenge the assertions in that witness evidence regarding HMRC’s agreements or behind closed doors discussions as to tax treatment with either or both of the FCA and Barclays had the same effect, i.e. that this must stand as evidence of fact.

We feel that we must be robust in response to this suggestion. The comments made by Mr Fox and Mr Ian Barnett regarding what may or may not have happened between HMRC and third parties are assertions, that is they are guesses or speculation on their part. The witnesses themselves conceded that they did not know what had taken place between HMRC and Barclays and/or the FCA. HMRC’s decision not to call a witness to challenge those assertions does not have the necessary consequence that these assertions are shown to have been true. Mr Bradley did not address these points at all in his submissions. He would not have been at liberty to challenge the Appellants’ belief in these things. However, their evidence is not evidence of the underlying facts of activities that, by their own evidence, they were not party to.

In terms of our decision, we do not find that the existence or absence of these alleged discussions are relevant at all to reaching our conclusions. The tax treatment of payments is prescribed by law and this Tribunal’s role is to determine the facts and apply the law to them.

For the reasons given above, we refuse the appeals of Mr Fox and Mr Barnett against the closure notices and the penalties.

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.