Case Number: TC09756
Royal Courts of Justice, Belfast
Appeal reference: TC/2022/01357
CAPITAL GAINS TAX – whether individual resident in the UK during the relevant period on common law (pre-Finance Act 2013) principles – yes - whether HMRC made a valid assessment – section 29(1) Taxes Management Act 1970 - yes - whether taxpayer negligent/careless in submitting his self-assessment returns – yes – whether this negligence/carelessness led to a loss of tax – yes – appeals against tax assessments dismissed - appeals against penalties dismissed subject to reductions in quantum
Heard on: 9-10 and 13-15 October 2025
Judgment date: 14 January 2026
Before
TRIBUNAL JUDGE MARK BALDWIN
PATRICIA GORDON
Between
PATRICK KEARNEY
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellant: Mark Orr KC and Keith Gordon, both of counsel, instructed by Jon Preshaw Tax Ltd
For the Respondents: Colm Kelly of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs
DECISION
Introduction
This appeal is principally concerned with the tax residence of the Appellant (“Mr Kearney”) in the years 2004/05, 2005/06, 2006/07 and 2009/10 (the “Relevant Period”).
HMRC issued discovery assessments and a closure notice in respect of those years on the basis that Mr Kearney was UK resident and therefore chargeable to income tax and capital gains tax (‘CGT’) on certain income and gains. HMRC also issued penalty determinations on the basis that Mr Kearney acted negligently/carelessly. The figures in the revised assessments under appeal are very different from those in HMRC’s original assessments. In particular, the assessments which are the subject of this appeal only relate to capital gains tax.
The Tribunal is being asked to determine:
whether Mr Kearney was UK resident, or occasionally resident abroad within section 334 of the Income and Corporation Taxes Act 1988 (“ICTA”) in the Relevant Period;
whether the discovery assessments were validly made;
the validity and amount of HMRC’s penalty determinations.
Although an individual could be liable to CGT up to and including the tax year 2012/13 if he was ordinarily resident in the United Kingdom even if he was not resident in that year (see section 2(1) of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) (as in force during the Relevant Period)), we have not been asked to determine whether Mr Kearney was ordinarily resident in the UK in the Relevant Period on common law principles, although we have been asked to determine whether his residence position is affected by section 334 of ICTA. The Tribunal is not being asked to resolve any disputes as to quantum in respect of the discovery assessments and the closure notice; subject to resolution of the question of Mr Kearney’s residence status during the Relevant Period, we were told that the figures are not in dispute. Details of the various assessments etc are set out in the Appendix to this decision.
We should briefly set out the recent history of these proceedings. The Tribunal first listed the hearing of the appeal to take place from 5 to 12 October 2023. That hearing did not proceed because Mr Kearney applied for a postponement on health grounds. On 26 August 2025 Mr Kearney’s MP wrote to the Tribunal (although he misaddressed his letter) to “formally request the adjournment of the hearing scheduled for 9th to 16th October 2025”. On 7 September 2025 Mr Kearney confirmed that he was applying for an adjournment of the hearing on the basis that he had made a complaint to the Parliamentary and Health Service Ombudsman (that HMRC’s investigation was flawed and biased in a way which infringed Mr Kearney’s rights under article 6 of the European Convention on Human Rights) and an adjournment would allow the Ombudsman sufficient time to investigate his complaints. This application was refused by Judge Fairpo. On 29 September 2025 Mr Kearney’s representatives applied for a stay of proceedings on the basis that Mr Kearney was not well enough to give evidence. They recognised that a further stay was not likely to be attractive to the tribunal or to HMRC and suggested that Mr Kearney’s evidence could be dealt with by considering the contents of his witness statement augmented by a supplementary witness statement addressing any points of factual dispute identified by HMRC. HMRC objected both to any further postponement of the hearing and the suggested alternative way for Mr Kearney to give evidence. It is neither necessary nor appropriate to set out the health grounds on which the first and third postponement applications were made. It suffices to say that the Tribunal (Judge Fairpo) refused the latest application and directed that the hearing should go ahead in Mr Kearney’s absence.
We should record that Mr Kearney wrote a gracious letter to the Tribunal apologising for his absence.
In the event, whilst we would have much preferred to hear from Mr Kearney himself, particularly in relation to his UK business activity after his move to Gibraltar and his dealings with PwC when his tax returns for the Relevant Period were being prepared, we are confident that there is more than sufficient other evidence for us to reach, as we consider that we have reached, roust conclusions on the facts which are fair to Mr Kearney.
The Law
There is a broad measure of agreement between the parties as to the law applicable to this appeal, and we set that out first before turning to the evidence.
Personal Residence
The Finance Act 2013 introduced a statutory residence test (the “SRT”) as a means of determining whether individuals are resident in the UK for UK tax purposes. The SRT applies for the tax years 2013/14 and following. During the Relevant Period, however, the terms resident and ordinarily resident were not further defined by statute and were determined in accordance with their ordinary meaning and the common law.
The taxpayer in Levene v IRC, [1928] AC 217 (“Levene”), had been resident and ordinarily resident in the UK until 1919. During the next five years he spent about five months (mainly in the summer) each year staying in hotels in the UK and receiving medical attention or pursuing religious and social activities. He spent the remaining months staying in hotels abroad. The House of Lords declined to disturb the conclusion of the commissioners that Mr Levene had remained resident and ordinarily resident in the UK during those years. Viscount Cave LC made these comments (at p222) about “residence”:
“My Lords, the word "reside" is a familiar English word and is defined in the Oxford English Dictionary as meaning "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place". No doubt this definition must for present purposes be taken subject to any modification which may result from the terms of the Income Tax Act and Schedules; but, subject to that observation, it may be accepted as an accurate indication of the meaning of the word "reside". In most cases there is no difficulty in determining where a man has his settled or usual abode, and if that is ascertained he is not the less resident there because from time to time he leaves it for the purpose of business or pleasure. … [A] man may reside in more than one place. Just as a man may have two homes - one in London and the other in the country - so he may have a home abroad and a home in the United Kingdom, and in that case he is held to reside in both places and to be chargeable with tax in this country.”
In considering whether an individual is resident in the UK in any one year the enquiry is not limited to the situation in that year of assessment. As Viscount Sumner said in Levene (at p226):
“It is suggested that the Commissioners misdirected themselves in point of law, because they took into account, with regard to the earlier years, conduct which only occurred subsequently. I agree that the taxpayer’s chargeability in each year of charge constitutes a separate issue, even though several years are included in one appeal, but I do not think any error of law is committed if the facts applicable to the whole of the time are found in one continuous story. Light may be thrown on the purpose, with which the first departure from the United Kingdom took place, by looking at his proceedings in a series of subsequent years. They go to show method and system and so remove doubt, which might be entertained if the years were examined in isolation from one another.”
Lysaght v IRC, [1928] AC 234, also addressed the common law meanings of residence and ordinary residence. Mr Lysaght had lived in England and had run a company here as director and managing director until 1919. He retired but retained the post of advisory director. He sold his English residence and went to live in Ireland. During the relevant years he had no definite place of abode in England, but he came to England every month to attend directors’ meetings, remaining here for about a week each time. He contended that he was neither resident nor ordinarily resident in England. The special commissioners and Rowlatt J dismissed his appeal, but the Court of Appeal allowed it by a majority holding that the special commissioners had erred in law because his visits to this country were for strictly business purposes only, not involving any choice by him of England as a desirable abode, no intention of being present otherwise than in the course of his duties and no intention of making England his home in any ordinary sense of the word, the place where he worked being ‘much less dependent on his own volition and independent of social considerations.’ The House of Lords allowed the Crown’s appeal by a majority holding that the Court of Appeal had not been justified in interfering with the decision of the special commissioners, because their conclusion (that Mr Lysaght was UK resident based on his frequent and regular visits to the UK even though his family home was in Southern Ireland) was one that was open to them on the facts. As Lord Buckmaster put the point:
“A man might well be compelled to reside here completely against his will; the exigencies of business often forbid the choice of residence, and though a man may make his home elsewhere and stay in this country only because business compels him, yet none the less, if the periods for which and the conditions under which he stays are such that they may be regarded as constituting residence, as in my opinion they were in this case, it is open to the Commissioners to find that in fact he does so reside …”
In Revenue and Customs Comrs v Grace, [2009] EWCA Civ 1082 (“Grace”), the Court of Appeal assembled (at [6] and [7]) a list of useful factors to consider in deciding whether an individual was UK resident, drawn primarily from Lewison J’s decision in that case and an earlier decision of the Special Commissioners (Shepherd v Revenue and Customs Comrs [2005] STC (SCD) 644; affd [2006] EWHC 1512). Omitting factors relevant to ordinary residence, the factors are:
The word “reside” is a familiar English word which means “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”;
Physical presence in a particular place does not necessarily amount to residence in that place where, for example, a person’s physical presence there is no more than a stop-gap measure;
In considering whether a person’s presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place;
Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity;
However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as business obligations) and the sequence of visits excludes the elements of chance and of occasion;
Although a person can have only one domicile at a time, he may simultaneously reside in more than one place, or in more than one country;
Although residence must be voluntarily adopted, a residence dictated by the exigencies of business will count as voluntary residence;
Where a person has had his sole residence in the United Kingdom, he is unlikely to be held to have ceased to reside in the United Kingdom (or to have “left” the United Kingdom) unless there has been a definite break in his pattern of life;
No duration is prescribed by statute and it is necessary to take into account all the facts of the case; the duration of an individual’s presence in the United Kingdom and the regularity and frequency of visits are facts to be taken into account; also, birth, family and business ties, the nature of visits and the connections with this country, may all be relevant;
The availability of living accommodation in the United Kingdom is a factor to be borne in mind in deciding if a person is resident here;
The fact that an individual has a home elsewhere is not decisive; a person may reside in two places but if one of those places is the United Kingdom he is chargeable to tax here.
One important feature of the pre-SRT regime was the different approach taken to “leavers” (UK resident individuals claiming to have relinquished their UK residence) and “arrivers” (non-resident individuals who are alleged to have acquired UK residence).
The position of leavers was addressed by the Supreme Court in R (Gaines-Cooper) v HMRC, [2011] UKSC 47 (“Gaines-Cooper”). Referring to Viscount Cave LC’s comments in Levene, Lord Wilson said:
“14. Since 1928, if not before, it has therefore been clear that an individual who has been resident in the UK ceases in law to be so resident only if he ceases to have a settled or usual abode in the UK. Although, as I will explain in para 19 below, the phrase “a distinct break” first entered the case law in a subtly different context, the phrase, now much deployed including in the present appeals, is not an inapt description of the degree of change in the pattern of an individual’s life in the UK which will be necessary if a cessation of his settled or usual abode in the UK is to take place.
…
20. It is therefore clear that, whether in order to become non-resident in the UK or whether at any rate to avoid being deemed by [section 829 Income Tax Act 2007] still to be resident in the UK, the ordinary law requires the UK resident to effect a distinct break in the pattern of his life in the UK. The requirement of a distinct break mandates a multifactorial inquiry. In my view however the controversial references in the judgment of Moses LJ in the decision under appeal to the need in law for “severance of social and family ties” pitch the requirement, at any rate by implication, at too high a level. The distinct break relates to the pattern of the taxpayer’s life in the UK and no doubt it encompasses a substantial loosening of social and family ties; but the allowance, to which I will refer, of limited visits to the UK on the part of the taxpayer who has become non-resident, clearly foreshadows their continued existence in a loosened form. “Severance” of such ties is too strong a word in this context.”
The position is determined by a multi-factorial assessment. As Lord Hope said (at [62]-[63]):
“Is the question whether the taxpayer has become non-resident and not ordinarily resident in the United Kingdom to be determined simply by reference to the taxpayer’s intention when going abroad regarding the overall duration of his absence and counting up the days of any return visits? Or is it to be determined by evaluating the quality or nature of the absence and of any return visits that he has made?
63. There is an obvious attraction in keeping the test as simple as possible, especially as taxpayers are now responsible for self assessment when making their returns. But the underlying principle that the law has established is that it must be shown that there has been a distinct break in the pattern of the taxpayer’s life in the UK. The inquiry that this principle indicates is essentially one of evaluation. It depends on the facts. It looks to what the taxpayer actually does or does not do to alter his life’s pattern. His intention is, of course, relevant to the inquiry. But it is not determinative. All the circumstances have to be considered to see what light they can throw on the quality of the taxpayer’s absence from the UK. The question then is whether on its proper construction the booklet sets out tests which are so clear that they eliminate the need for an inquiry into whether there was in fact a distinct break.”
Mr Kearney says that he was not resident in the UK during the tax years in question.
Discovery Assessments
At the relevant time, section 29 of the Taxes Management Act 1970 (“TMA”) provided as follows:
“(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a) that any income which ought to have been assessed to income tax or chargeable gains which ought to have been assessed to capital gains tax ought to have not been assessed,
(b) that an assessment to tax is or has become insufficient, or
(c) that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
…
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a) in respect of the year of assessment mentioned in that subsection; and
(b) ... in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—
(a) (b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.”
In Anderson v Revenue and Customs Commissioners, [2018] UKUT 159 (TCC) (“Anderson”), the Upper Tribunal summarised at [24] the requirements for a “discovery” and an assessment made in consequence of a discovery as follows:
“We consider that the following propositions are now established by the various authorities:
(1) section 29(1) refers to an officer (or the Board) discovering an insufficiency of tax;
(2) the concept of an officer discovering something involves, in the first place, an actual officer having a particular state of mind in relation to the relevant matter; this involves the application of a subjective test;
(3) the concept of an officer discovering something involves, in the second place, the officer’s state of mind satisfying some objective criterion; this involves the application of an objective test;
(4) if the officer’s state of mind does not satisfy the relevant subjective test and the relevant objective test, then the officer’s state of mind is insufficient for there to be a discovery for the purposes of subsection (1);
(5) section 29(1) also refers to the opinion of the officer as to what ought to be charged to make good the loss of tax; accordingly, the officer has to form a relevant opinion and such an opinion has to satisfy some objective criterion; …”
Mr Kearney accepts that Officer Shanks had the required state of mind in relation to the question of his personal tax residence to meet the subjective condition for a discovery (point (2) in the excerpt from Anderson just cited) and that the condition in section 29(5) TMA is met, but he asserts that Officer Shanks’ state of mind did not meet the objective test (point (3) in the excerpt from Anderson just cited) and that his opinion as to what ought to be charged to make good the loss of tax did not satisfy the relevant objective criterion (point (5) in the excerpt from Anderson just cited).
Penalties
For the tax years 2004/5, 2005/6 and 2006/7 section 95 TMA provides that:
“(1) Where a person fraudulently or negligently—
delivers any incorrect return of a kind mentioned in section 8 or 8A of this Act (or either of those sections) as extended by section 12 of this Act, or
makes any incorrect return, statement or declaration in connection with any claim for any allowance, deduction or relief in respect of income tax or capital gains tax, or
submits to an inspector or the Board or any Commissioners any incorrect accounts in connection with the ascertainment of his liability to income tax or capital gains tax,
he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2) below.”
The difference specified in subsection (2) is the difference between the amount of income tax or CGT payable by the person for the relevant year/s of assessment and the amount/s that would have been payable if the return/s had been correct.
For the tax year 2009/10 paragraph 1 of Schedule 27 to the Finance Act 2007 provides (so far as relevant for us) that a penalty is payable by a person (P) if he gives HMRC a personal self-assessment return, the document contains an inaccuracy which amounts to, or leads to, an understatement of a liability to tax and the inaccuracy was careless (within the meaning of paragraph 3). Paragraph 3 provides that an inaccuracy in a document given by P to HMRC is “ ‘careless’ if the inaccuracy is due to failure by P to take reasonable care”.
It is common ground that “negligently” and “careless” refer to the same concept and should be approached in the light of the UT’s comments in HMRC v Hicks, [2020] UKUT 12 (TCC) at [120]:
“Whether acts or omissions are careless involves a factual assessment having regard to all the relevant circumstances of the case. There are many decided cases as to what amounts to carelessness in relation to the completion of a self-assessment tax return. The cases indicate that the conduct of the individual taxpayer is to be assessed by reference to a prudent and reasonable taxpayer in his position: see, for example, Atherton v HMRC [2019] STC 575 (Fancourt J and Judge Scott) at [37].”
Mr Kearney says that he has not been negligent/careless in relation to the relevant returns.
He also says that, whilst HMRC have followed their general practice of applying percentage discounts to reflect different aspects of Mr Kearney’s co-operation during the investigation (which practice Mr Kearney does not challenge), the discounts offered here are in some respects unduly harsh.
The Evidence
Mr Kearney
Although Mr Kearney did not appear before us, he did submit a witness statement. He explained that he left school aged 15 in 1969 and started to work in the business set up by his parents. The business was a small building contracting business based in West Belfast specialising mainly in the general repair and maintenance of residential properties. This business was wiped out because 99% of its workload was in protestant areas and they were physically threatened by loyalist paramilitaries. Mr Kearney and his father converted their business premises a successful hardware and building supplies business based in West Belfast. His parents retired in the mid-1980s due to ill health brought on by the stress of dealing with the “Troubles” and further intimidation which this time came from nationalist side of the community. Mr Kearney then took control of the business and diversified into property development with a degree of success. Mr Kearney puts his success down to his work ethic which followed the example set by his parents. He said that he worked every day (including weekends) for between 12 and 14 hours a day, with a few days off in the summer every year to spend time with his wife and children. He told us that running a business in Belfast in those days was not easy because of the “Troubles” and a struggling economy; every day brought different challenges, which he overcame with hard work and determination and the support of his family.
By the end of 2003 he had grown this business into (at least in Northern Ireland terms) a successful property development and investment company (called Patann Limited (“Patann”)) which had created numerous jobs and contributed in a significant way to the local economy. In March 2003 Mr Kearney says that he decided that it was time to take things a bit easier. He bought a holiday home in Spain and made plans to retire there while he had his health. He had no desire to end up like his parents, who had been unable to enjoy the fruits of their labour due to ill health brought about by stress and overwork.
Whilst spending time in Southern Spain living close to Gibraltar, Mr Kearney saw the opportunity of moving to Gibraltar as a long-term viable option for him. He sought advice from his UK tax advisors, PWC, on a retirement strategy. He discussed several places to retire, including Monaco, Belgium and Gibraltar. Gibraltar was a good place for him to retire to and, following advice from PWC, would provide him with a tax efficient way to manage his retirement plans. He wanted to ensure that he maximised the funds received from any sale of his shares in Patann and other assets and therefore tax was an important consideration in his retirement plans. Accordingly, Mr Kearney moved to Gibraltar in March 2004. He bought a fully furnished apartment in Gibraltar, where he lived while he sorted out the details and practicalities of executing his retirement plans. The apartment cost £370k, which (he says) was modest by Gibraltar standards and was intended to be temporary until he bought a house. Bank accounts were set up for him in Gibraltar by Grant Thornton. He retained one account in the UK, which was a joint account held with his wife.
Mr Kearney got to know a couple who had owned and traded restaurants in Spain and had moved to Gibraltar. Mr Kearney bought one of the houses in a marina development the husband in this couple was developing to live in and one of the apartments off plan as an investment. He lived between his original flat and his holiday home in Spain whilst the development was being constructed and moved into the townhouse on completion around late 2006 or early 2007.
At this time Mr Kearney says he was working on a part time basis designing and building luxury villas in Spain. The business model was like the business model he had developed in the UK, but on a much smaller scale as it was more of a hobby than a business. He would spend 3 or 4 hours a day working on these projects from his flat. He had site visits and meetings during the week in Spain and commuted there from Gibraltar. This venture was carried on through Patann SL, a Spanish Company which was established for him by Grant Thornton. We were shown a letter dated 8 January 2010 from a Spanish lawyer, Mr Leὁn Fernando del Canto, to PwC in which Mr del Canto said that Mr Kearney was a director of Patann Spain Limited SL, a Spanish building and development company which was incorporated in 2001. He described this company as a trading company which had developed, and is in the process of developing, several residential units in Sotogrande, Spain. He said that Mr Kearney has been managing and controlling the company since its incorporation and was involved in the day-to-day management of the business. He concluded by observing that Mr Kearney has been involved in businesses in Spain for at least 12 years. Just pausing here, if we take Mr del Canto at his word, it would seem that Mr Kearney’s Spanish business interests started as long ago as 1998 and so were co-existent with his UK business activities for at least 6 years before he moved to Gibraltar and were not, at least entirely, a substitute for his UK activities.
Mr Kearney said that he wanted to make sure he maximised the return on his capital and therefore continued to make investments. He invested in a property at Crawfordsburn in Northern Ireland, which he was introduced to by an estate agent he knew. The property was in a popular location and in a prime position on the seafront. He decided to acquire the property and instructed architects to work on it.
In addition to the property at Crawfordsburn, Mr Kearney told us that he also purchased an interest in land at Thornhill Road, Kingsway in Belfast. This was a speculative investment which he made along with a joint venture partner, and he had committed to this deal before giving up his UK residence. The opportunity involved purchasing a leasehold interest in a ransom strip of land for £5,000 but the opportunity to realise a profit from the transaction did not crystalise.
Mr Kearney says that he bought a power boat as a hobby, which he used extensively on trips around the coast of Spain, Portugal, Majorca, and the South of France. His first boat was second hand and cost £450k; it was named ‘Peggy’s Surplus’ after his deceased mother Peggy. The new house had a berth for the boat outside the front door. He trained and obtained his day skipper’s licence for a large power boat in 2005. He used the boat to commute between Gibraltar and Spain. When he was not in Spain supervising the building of villas, he says that he was at the marina cleaning and polishing the boat preparing it for the next trip to Morocco or Portugal or just a run up the coast to Marbella. He changed the yacht on two occasions. The second boat ‘Peggy’s Surplus 2’ cost £300k (plus trade in) and the third boat ‘Peggy’s Surplus 3’ a further £300k (plus trade in).
Mr Kearney told us that his friends who visited remarked on how well he had settled into his new routine which gave him a proper work/life balance. It was, he said, a totally different lifestyle to the previous years in Belfast where he worked 24/7 under constant pressure from the everyday challenges of running a business in Northern Ireland.
He also generally stayed in Spain at the weekend between Friday and Monday. His wife visited frequently, and the children and grandchildren visited often during school holidays. Different family members would visit at different times, usually staying in the house in Spain and then the house in Gibraltar when it was finished. Mr Kearney said that he and his wife enjoyed the local scene in Gibraltar focused on the boating community. They are teetotallers and early risers. They walked everywhere and enjoyed the laid-back environment that is a hallmark of the Mediterranean culture. Mr Kearney said that he swam regularly for exercise as well as walking, and he was able to read a lot more than he was able to when he was in Belfast.
Back in Belfast, Mr Kearney’s son Brian looked after the business with the assistance of an accountant and a management team. The plan was for him to keep the business ticking over whilst Mr Kearney put together the next phase of his retirement strategy, which was to sell his shares in Patann and his other business interests in Northern Ireland at the first opportunity. He said that Brian had worked with him from he left school at 16 (he was now 43) and knew the business as well as Mr Kearney did. Mr Kearney told us that he “travelled back to Belfast, when possible, given the 90-day rule”. He said that he was was “meticulous in ensuring that I complied with the 90 Day Rule which PWC had told me was fundamental to my Non-Resident Status in the UK”.
Mr Kearney said that in 2006 the opportunity arose to execute his “Phase 2” plan. He floated the idea with Neil Adair (“Mr Adair”), his relationship manager at Anglo Irish Bank (“Anglo”), and he put together a deal in which Mr Kearney’s shares in Patann would be sold to a new business alongside shares in businesses owned by Mr Adair himself and another individual, Mr Brian McConville (“Mr McConville”).
Mr Kearney says that he agreed to sell the shares in Patann to a new company named PBN Ltd (“PBN”) which purchased the shares in Patann on an earn out basis. The timeframe for the earn out was between 2006 and 2011. In June 2006 there was an initial payment to Mr Kearney of £12m with the balance of £8m due to be paid in June 2011 “secured by a 50% Share in the new company with Pre-emption rights over the remaining 50 % to secure the balance of my payment”. Before the deal took place, Mr Kearney acquired all other family members’ minority holdings in Patann.
Mr Kearney says that he was involved in negotiations about the deal which took place by telephone or, on occasion, in the UK, when he was there and “subject to me ensuring I did not breach my 90-day limit”. He believed this was a good deal for him and his family: as well as obtaining a good price for the business, he was able to exit the business by selling to someone he knew and trusted.
PBN was made up of three businesses: Patann, the property investment/development business which previously belonged to Mr Kearney, CDC Ltd, a property investment company which he owned 50/50 with Mr Adair, and MJM Ltd (“MJM”), a business specialising in the fit out of cruise ships based in Newry and owned by Mr McConville.
Mr Kearney explained the thinking behind PBN. The capital required to fund the growth of the property investment/development business would be generated from MJM’s trading profits. Whilst Mr Kearney was a 33% shareholder, he had no operational control of the business. Anglo, the funders of the new company, insisted that Mr Kearney sign a personal guarantee and remain as a non-executive director of the company. However, he says Anglo knew that he was resident in Gibraltar and that he would have no responsibility for the day-to-day operations of the business or its finances; his involvement was limited to PR for the company and to supervising the planning applications for the UK assets which had been acquired by PBN. The business was run by Mr Adair and his management team. His son Brian secured a senior role in the new business. Mr Kearney said that he was content to accept the terms of the deal on this basis because it was a good deal and Mr Adair knew the assets; there were no agent’s fees to pay, so it just made commercial sense to do the deal.
Mr Kearney cannot recall whether he attended board meetings. He met with Mr Adair on some occasions in Spain when he was over from the UK and they discussed the PBN’s business when they met. He recalls that he occasionally dialled in to board meetings and that he would sometimes attend meetings when he was in the UK, but he did not organise his schedule so that he could attend meetings. We should set out how Mr Kearney described his role:
“I was able to conduct 95% of the work required from my office at home in Ragged Staff, Gibraltar. My personal involvement amounted to travelling to the UK for a few days per month to visit the assets concerned and to review progress on the planning applications which had been worked up and submitted by the Professional teams employed by PBN who were responsible for managing the planning process on a daily basis with the planners and relevant councils. My role with PBN therefore differed very significantly from my role with Patann prior to my departure from the UK, when I had been the head cook and bottle washer and was responsible on a daily basis for all the operations required to run and manage Patann.”
Mr Kearney says that he was not involved in any of the specific deals which PBN undertook. His role was to give his opinion and advice on planning potential and process. As part of the deal with PBN, he purchased 4 apartments in two PBN developments in Belfast for £1m. He borrowed to make this acquisition, and his plan was to place the properties in trust for the benefit of his family.
Mr Kearney established Queensway Aviation (“Queensway”) in Gibraltar using some of his sale proceeds. Queensway was a trading company which acquired two private jets. He was able to use the private jet for trips to and from London, Belfast, and Dublin.
Mr Kearney said that he “was very aware of my time restrictions for visiting the UK. I understood from the advice I had been given that the 90-day limit was key to ensuring that I did not become UK resident for tax purposes and therefore to ensure that my retirement plan could be executed in a way which enabled me to preserve as much of my capital as possible”. So, he “went to extreme lengths to ensure that I did not breach the 90-day rule. Occasionally I stayed with my father or Ann in Belfast for a day or two subject to my arrival time but then travelled to Dublin and stayed with my son Christopher who worked in Dublin or with longstanding family friends who had lived in Dublin for many years and who have confirmed in writing to HMRC that I stayed with them in Dublin”. We were shown a letter from Mr Brian Murray who said that between 2004 and 2011 Mr Kearney stayed with Mr Murray and his wife at their home in Dublin “on a regular basis”, including when Mr and Mrs Murray were away; Mr Kearney had his own key and alarm number. Mr Murray cannot recall the exact dates but says that Mr Kearney is a “long time family friend and we both enjoyed his company” during this period as their sone left home in the 1990s.
The balance of £8 million due from the sale of Patann was never paid to Mr Kearney because of the financial crash which occurred in 2008.
PBN was very badly affected by the crash in the property market which took place in 2008. Property values in Northern Ireland were particularly badly affected and PBN had a significant amount of bank debt. The assets were all property related assets (both investment and development). Mr Kearney explained that, following the crash in 2008, he continued as before to monitor the planning applications made on UK assets. He also spent time trying to ensure that the properties benefitted from enhanced planning approvals as this would help maximise their value. Positive approvals were required to maintain the value of the assets, which was directly linked to the value of PBN which was in turn directly linked to PBN’s ability to pay him the remaining balance of the earn out.
Mr Kearney said that he spent some time in Dublin speaking to funders (Anglo/IBRC/ NAMA) with Mr Adair to convince them to continue backing PBN to ensure its survival. This was fundamental to him personally if he was ever to receive the balance of the earn out.
NAMA took over all the PBN loans from Anglo in January 2011 and Mr Kearney spent the period between 2011 to 2013 working with NAMA to maintain the value of the large PBN assets which were based on the mainland. This necessitated him spending a lot of his time in Dublin. Mr Kearney explained that NAMA was the ‘bad bank’ set up by the Irish government to trade its way out of the distressed loans and property assets the Irish government had to take on to bail out the banks and property industry in Ireland.
Mr Kearney also invested a significant amount of money in acquiring shares in Anglo as one of a group of investors who were known as the ‘Maple 10’. He was asked, along with 9 other investors, to acquire shares in Anglo to support the bank in light of the financial crisis. He says that he did not enter these transactions with the intention of making a profit. He saw the transaction as an opportunity to do something positive, to give something back to an organisation and people who had supported him. He was also concerned that, if he did not agree to do this, he might jeopardise his future relationship with the bank in the difficult times which everyone knew were coming. He was given various assurances that he would not lose because of the transaction. He financed the share acquisitions with loans from Anglo itself and Natwest in Gibraltar. He had numerous meetings with Anglo all of which took place in Dublin. Because of the financial crisis and the nationalisation of Anglo, he ended up suffering significant financial losses.
Mr Kearney returned to the UK in 2014. PBN management were struggling, and Mr Adair decided he no longer wanted to be involved with the company. He did a deal with NAMA on his personal guarantees so that he could exit his position as a shareholder and managing director. Mr Kearney said that it was clear that he needed to return to resume control of the company if was to have any chance of surviving and saving the jobs of all the employees (more than 200 people at that stage). Accordingly, Mr Kearney exercised his pre-emption rights over Mr Adair’s shares in PBN and returned to the UK to run the business and look for a new funder.
On his return to the UK, he sold his yacht and properties in Gibraltar and liquidated Queensway.
In answer to questions from HMRC, Mr Kearney (via PwC) told HMRC that, although he guaranteed the mortgages personally, the home in the UK was owned by Mrs Kearney. He said that he left clothes in the UK but not other personal possessions and that he had no art or antiques collection or classic car collection.
Alan Shanks (“Officer Shanks”)
Officer Shanks is a retired officer of HMRC. He joined HMRC in 1975 and worked in the Special Compliance Office between 2004 and his retirement in 2014.
Officer Shanks said that HMRC’s investigation of Mr Kearney was part of a a collaboration project between two branches of HMRC to consider wealthy individuals, certain accountants and people involved in property development. Mr Kearney was one of the individuals identified. He said that this case was similar to a few other property development cases worked in by HMRC in Belfast where individuals were claiming residence in Gibraltar but retained accommodation and business interests in the UK. The similarities between these cases and Mr Kearney’s fact pattern attracted his attention, but Officer Shanks said that he approached the case with an open mind.
Officer Shanks instructed colleagues to carry out in-depth research and background checks into Mr Kearney including property transactions shown in SDLT returns and at HM Land Registry. He also reviewed company accounts linked to the PBN group. He told us that from this exercise he discovered:
Mr Kearney was claiming to be non-resident from 23 March 2004 as per his 2003/04 SA return and P85 form dated 19 March 2004.
Mr Kearney was in receipt of rental income in excess of £1m per annum, as detailed in a memo from Centre for Non-Residents (“CNR”) dated 15 June 2004 and a note of telephone call from a Local Compliance Inspector dated 18 November 2009. In their memo the CAR had described Mr Kearney’s case as “ripe for future investigation” (once he had been outside the UK for a complete tax year).
Some UK properties had been retained by Mr Kearney after his claimed date of departure while other properties had been acquired after 23 March 2004.
Mr Kearney had received £12m in cash from a UK company restructuring, share exchange and refinancing (as per email from a Local Compliance Inspector dated 23 November 2009;
Mr Kearney was involved in a number of UK property sales and transfers as evidenced by SDLT and Land Registry documentation.
Mr Kearney had retained UK directorships and had not disposed of his accommodation in the UK.
It transpired that many of the SDLT returns related to transactions involving companies Mr Kearney was involved in, rather than by Mr Kearney himself. Two SDLT returns we reviewed related to the sale of Mr Kearney’s family home and the purchase of a ransom strip for £5,000. In both returns Mr Kearney’s address was given as his apartment in Gibraltar. Officer Shanks accepted that these transactions did not indicate that Mr Kearney was UK resident. He also accepted that nothing in the Experian searches he carried out in August 2009 suggested that Mr Kearney had been registered to vote in the UK in the period since his departure.
In August 2009 Officer Shanks received a copy of some classified adverts dated 21 April 2009 relating to the transfer of licences by a company called PBN Wineworld Limited. Mr Kearney was shown as a director of that company. Officer Shanks saw that as evidence of Mr Kearney’s involvement in UK businesses, although he conceded that it is not necessary for all directors of a UK company to be active in the UK. In cross-examination Officer Shanks agreed that he never asked the Spanish tax authorities for any information on Mr Kearney’s presence or dealings in Spain.
A printout (obtained on 28 August 2008) from Construction News of 10 July 2008 showed a planning application for a development of 107 residential units in Belfast by PBN Property Ltd, a company of which Mr Kearney was a director.
The documents we reviewed included an article (from PBN’s website) dated 31 May 2007, which described an “impressive refurbishment and expansion plan” for a shopping centre in Coulby Newham. PBN Property Ltd acquired the site. On 31 May 2007 PBN’s development team presented the scheme and met with local residents and the council. There are extensive quotations from Mr Kearney in the article.
Mr Kearney’s self-assessment returns gave Gibraltar addresses in 2006 and 2007 and UK addresses in 2008 and 2009. PwC were shown as his tax agent throughout this period.
On 17 November 2009 Officer Shanks spoke to Marie Swift (of CNR) where he observed that he was “now reviewing the affairs of Patrick Kearney and was seriously considering opening up a Code of Practice 8 investigation to attack the risk with regard to Patrick Kearney in that he was purporting to the resident in Gibraltar yet he appeared to be heavily involved in a lot of business activity in the United Kingdom and may indeed still be living in a residence here. It was also pointed out that again Mr Kearney like some others now under enquiry within SI Belfast was a member of the “property fraternity”. Officer Shanks agreed that this was a fair summary of what he thought at the time.
Officer Shanks exhibited a printout (dated 18 November 2009) of an article from Property Week (dated 8 September 2006) entitled “The power of three”. Primarily, this article was about Mr Adair, but it noted that he had spent the previous year establishing a property company (PBN) with “Gibraltar-based Patrick Kearney” and Mr McConville. It noted that PBN had made two significant acquisitions in addition to the portfolio brought to PBN by Mr Kearney and Mr McConville.
HMRC prepared a summary document relating to PBN in November 2009. It shows Mr Kearney, Mr Adair and Mr McConville each having 33 shares. In addition Mr Kearney is shown as receiving £12m cash and a £8.5m loan note. The value of the three businesses contributed came to £25 in aggregate. £20m of that value was derived from Patann (owned by Mr Kearney), £1m from Castleview (owned 50:50 by Mr Kearney and Mr Adair) and £5m from MJM Marine (owned by the McConville family). Castleview is shown as having been incorporated in July 2004
Based on this information, Officer Shanks submitted a Registration Report recommending that a Code of Practice 8 (“COP8”) investigation should be opened. Officer Shanks exhibited his handwritten review notes prepared to underpin the Registration Report. This was approved on 3 December 2009. The Registration Report included this passage:
“I have also established that as part of a group company restructure, share exchange and refinancing Patrick Kearney received £12m in cash, therefore, as he was non resident at that stage there was no liability to Capital Gains on this £12m. This case is similar to a few other cases now being worked in SI Belfast and especially two others who are claiming residence in Gibraltar and who are wealthy property entrepreneurs yet supposedly still retaining United Kingdom accommodation and handling a lot of their business activity in the United Kingdom. It is also believed a lot of individuals in Northern Ireland who have made substantial profits out of property deals over the past few years are all well known to each other and all appear to be involved in various marketed and bespoke avoidance schemes.”
On 8 December 2009, Officer Shanks issued a COP8 enquiry opening letter, including a section 9A TMA enquiry notice for the 2007/2008 year, to Mr Kearney and his accountant. In that letter he commented:
“Residence and ordinary residence is question of fact and degree and to assist your case concerning the claim to non residency in the United Kingdom I will require further information and documentary evidence. This will enable me to build up a case of this complex matter for consideration by our specific experts in this particular field. Therefore you will appreciate that by providing as much information as possible this will help your case if the evidence and information points to you being non resident in the United Kingdom.”
He then outlined ten matters, which required a response from Mr Kearney by 31 January 2010.
In a letter dated 27 January 2010, PwC acknowledged receipt of this letter and advised that a reply would hopefully follow shortly.
Following a telephone call with PwC on 9 February 2010, a meeting was organised for 17 February 2010 to progress the enquiry. During the meeting on 17 February 2010, PwC advised that they hoped to provide the requested information by the end of March 2010. Officer Shanks’ note of the meeting includes the following passages:
“Orla McAllister [of PwC] pointed out that she had dealt with Mr Kearney for some years and as far as she is concerned there is no reason to doubt why he is non resident and wondered why the specific level of detail was then therefore required. …
[Officer Shanks] went on to say that with specific enquiries in relation to residence status various stock type questions had to be asked and information obtained so that the HMRC Investigators and their residency specialists in CAR could come to a view and decision as to whether or not the person involved was actually non- resident or indeed resident in the United Kingdom for taxation purposes. Orla McAllister pointed out that Patrick Kearney left the United Kingdom and replicated in Spain/Gilbraltar what he had previously done in the UK ,with various businesses and companies. She went on to say that obviously he travels backwards and forwards to the United Kingdom but as far as she was concerned he clearly was non- resident. …
[Officer] Shanks also asked with regard to the submission of Return forms on a yearly basis and asked how these were finally agreed upon. Both Aidan Smith and Orla McAllister said that they would speak to him on the phone and occasionally meet with him whenever he is in the United Kingdom.”
Officer Shanks agreed that he did not learn anything at this meeting that supported his view that Mr Kearney was UK resident. His impression was that PwC were trying to put him off pursuing his investigation.
Officer Shanks said that it is normal practice for a compliance investigator to consider the issue of best judgement assessments before the expiration of normal time limits near the end of each tax year as explained in paragraph EM3251 of HMRC’s Enquiry Manual: “An officer may legitimately make an assessment with approaching time limits in mind if they have already discovered a loss of tax for the year in question, or they can rely on the presumption of continuity”. Accordingly, on 22 February 2010, Officer Shanks called PwC, spoke to Aidan Smith and told him that he was “now in the process of reviewing cases for protective assessments” and “would have to prepare normal time limit protective assessments” for the years 2003/4 to 2006/7.
On 23 February 2010, Officer Shanks wrote to Mr Kearney and PwC to advise them of his intention to raise normal time limit assessments in accordance with section 36 TMA for the purposes of making good to the Crown a loss of tax which may have been underpaid by reason of Mr Kearney’s fraudulent or negligent conduct for the years 2003/04, 2004/05, 2005/06 and 2006/07. Officer Shanks understands that the discovery assessment for 2003/04 was later vacated (and does not therefore form part of this appeal) although that took place after his retirement and he was not involved in that decision.
Mr Gordon pressed Officer Shanks in cross examination as to whether he really thought Mr Kearney was guilty of fraud or neglect. Officer Shanks replied that he might have been; he was contending that he was non-resident and, if he was wrong, he might not have been attending to the position or the rules.
Officer Shanks says that he estimated amounts for “other income” and “capital gains” based on the following evidence:
CNR memo dated 15 June 2004 outlining UK rental income (“rents of almost £1 million per annum”).
P85 form dated 19 March 2004 outlining rental income (“approx. £1m before interest deduction”)
Email from Local Compliance Inspector detailing £12m share reorganisation
Approximately 350 pages of printed SDLT and Land Registry documentation dated 1 September 2009. This led him to believe that there could have been a plethora of property disposals which could have led to a loss of tax due to Mr Kearney’s claimed non-resident status.
Contact with CNR technical residency experts regarding Mr Kearney’s claimed non-residency status.
Mr Kerney’s retention of directorships in the UK.
Officer Shanks expanded on his thought process when giving evidence before us, as follows:
So far as 20-04/5 is concerned, Officer Shanks said that he assessed rental income of £500k on the basis of the P85 submitted by Mr Kearney and the report from the CNR. This told him that Mr Kearney would have gross rental income of £1m and he allowed for expenses and interest. As far as chargeable gains are concerned, Officer Shanks had information from 20056 and 2006/7 that Mr Kearney had made chargeable gains. He knew that Mr Kearney’s business involved buying and selling properties. On that basis, he concluded that, as he did not have all the information he needed to calculate the gains for the year, he could estimate the gains.
As far as 2005/6 is concerned, he increased the rental profit assessed on the basis that he knew that Mr Kearney was buying property in the UK. The SDLT returns he looked at showed this. Officer Shanks took the view, if Mr. Kearney was buying more property, he would be receiving more rent. As fast as the capital gains concerned, he had a SDLT return that showed Mr Kearney as the vendor on the sale in 2005/6 for £1.3m and it seemed reasonable to him to take this as the figure.
As far as 2006/7 is concerned, he knew that Mr Kearney had been buying and selling property and therefore his income was likely to have gone up and he reflected this in the rental profit figure. Turning to chargeable gains, he knew that Mr Kearney had received £12m from the share transaction. The SDLT returns show him selling a property in Glen Road for £500k in August 2006. That give £12.5 million of potential gains and Officer Shanks said that he knew that there were other property deals. He had asked PwC for information from 2003/4 onwards, but had not received this by the time he made the assessments.
On his instructions, discovery assessments were issued on 26 March 2010 under section 29 TMA The tax liabilities assessed are as follows:
2003/2004 - £ 400,681.60
2004/2005 - £ 397,039.70
2005/2006 - £ 691,974.40
2006/2007 - £6,391,347.00
The assessed tax liabilities reflect the tax calculations attached to the assessments, as follows:
2003/2004 – UK interest - £1,704.51 - employment income (from Patann) - £2,165; Profit from partnerships £6,592; Profit from UK Land and Property £60,371; “Other income” £500k; Taxable capital gain £500k taxed @ 40%.
2004/2005 – employment income - £23,049; interest - £19,141; “Other income” £500k; Taxable capital gain £500k taxed @ 40%
2005/2006 – “Other income” - £750k; Taxable Capital Gain of £1m taxed @ 40%
2006/2007 – “Other Income” - £1m; Taxable capital gain of £15m taxed @ 40%
Officer Shanks considers that he raised valid discovery assessments because:
There was a risk that Mr Kearney remained UK resident as it appeared he was still heavily involved in a lot of business activity in the United Kingdom and retained his residence in Northern Ireland.
The figures he used for rental income adjustments were provided by Mr Kearney in his P85.
The majority of the 2006/07 Capital Gain (i.e., £12m) was brought to his attention by a colleague, prior to the opening of the investigation.
The remainder of the Capital Gain for the 2006/07 year (i.e. £3m) and the Capital Gains for 2003/04, 2004/05 and 2005/06 were estimated based on his review of almost 350 pages of information from HM Land Registry and SDLT returns.
Officer Shanks described Mr Kearney’s behaviour after his move abroad as “carrying on as before”. He was involved in business in the UK, he received £1m in UK rent, engaged in property deals and the share reorganisation. He was VAT registered for 6 months in 2006. He retained 11 UK directorships. He kept available accommodation in the UK (guaranteeing the mortgage on the family home) and came back here. Officer Shanks was concerned by the falls in rental income; only £500k was shown in 2003/4, whereas Mr Kearney estimated £1m on his P85. The returned rent fell over 3 years to £14k. Officer Shanks said he was unaware of what had been going on, to which Mr Gordon retorted that he had only just asked PwC for information.
In cross examination, Mr. Gordon took Officer Shanks through his calculations of income and gains which went into the assessments. Officer Shanks denied the income figures were plucked out of the air, but agreed that he had characterised Mr Kearney’s income as “other income” rather than rental income, even though it was only rental income that Officer Shanks thought Mr Kearney was receiving.
Rental income was subject to UK income tax even if Mr. Kearney was not resident. Officer Shanks said that Mr Kearney had shown £582,000 of income but estimated £1 million in his P85. Although there was no connection between Mr Kearney’s residence status and liability to tax on this income, Officer Shanks said that he had to make a decent estimate. He was aware that he would get more information and he would review the figures but needed to protect HMRC’s position in the interim. When challenged us to why he assessed the income as other income rather than rental income, Officer Shanks said that he did not know what other income there could be. He assessed “other income” because he did not know what income Mr Kearney might have.
Moving onto the CGT figures, Officer Shanks agreed that over the four years in question Mr. Kearney had made three disposals.
In 2006/7 Mr Kearney received £12m in cash from the share transaction. That notwithstanding, Officer Shanks had assessed a gain of £15m. Officer Shanks said that there could have been other disposals/gains. He agreed that, if a gain was entitled to 75% taper relief, which the gain on the £12m disposal would have been (as Mr. Kearney was disposing of shares in Patann that he had held for many years), then the gain on proceeds of £12m could not be more than £3m. This of course assumes there are no allowable costs and the proceeds are “pure gain”.
Officer Shanks said that he used £12m as his starting point in 2006/7, based on the proceeds Mr Kearney received from the share transaction, but he did not know what Mr. Kearney had done. Although he had looked at over 300 pages of SDLT returns in connection with his inquiry, he agreed that a lot of these transactions had nothing to do with Mr Kearney himself. In addition, many of them were purchases. He suggested that Mr. Kearney could have sold property outside the UK, but agreed that he had no evidence of this. So, £12m was the basis for his calculation, but he increased it because Mr Kearney could have disposed of property anywhere in the world and he simply did not have the information. He had to come up with some kind of figures and had nothing else to go on.
Looking at the disposal of the property in Glen Road, Mr. Kearney was disposing of the property to himself, his wife and his son. On that basis, Officer Shanks agreed that only one third of the gain would be assessable. If there were proceeds of £500,000, as indicated by the SDLT return, then the gain would not exceed pounds £166,000, even if there were no costs. That would not justify the huge uplift in assessed gains to £15 million.
The third disposal was of the matrimonial home, which was sold in 2005/6.
PwC provided various documents and information to HMRC on 14 April 2010. Their commentary largely reflects Mr Kearney’s narrative. However, PwC told HMRC that Mr Kearney extracted himself from his property development activities in Northern Ireland between November 2004 and June 2006, when he sold Pattan to PBN for cash, shares and loan notes. They said that Mr Kearney is not and never has been involved in the day today running of PBN.
PwC sent HMRC a schedule detailing Mr. Kearney’s whereabouts since leaving the UK. We will come back to this later. They said that since 2004 Mr. Kearney had spent on average 83 days a year in the UK. The purposes of his visits were described as residual business reasons, holidays and family visits. As a result of his substantial personal borrowing and exposure to Anglo, they said that Mr Kearney continued to spend approximately 30% of his time in the Republic of Ireland, managing his substantial personal borrowing and equity portfolio. When in the Republic of Ireland, he generally stayed with long-standing family friends or lately with his son. He normally flew directly to Belfast, dropped his wife off and travelled on to Dublin. When he is in the UK, he normally stayed with his wife or occasionally with his elderly father. Mr Kearney did not keep a car in the UK.
These documents and the overall position were reviewed by a colleague of Officer Shanks, who commented “I think our case needs building up and would suggest consideration be given to asking the below listed additional/further questions”.
On 24 August 2010 Officers Shanks and McMahon met PwC at PwC’s offices. The Officers’ note of the meeting includes the following passages:
“[Officer Shanks] went on to say that after having himself then appraised all the various findings and looked through the information he had consulted HMRC CAR Residency Unit in Bootle, Liverpool. He said the outcome of those conversations were that at the present time HMRC considered Patrick Kearney to be resident or ordinarily resident in the UK. …
Shanks said he would go through his review findings by way of raising various points and questions which obviously would need further clarification and documentation. He said this particular review now would identify further information which will assist both sides and then at that stage the case would have to be referred back formally to HMRC CAR Residency who would no doubt link in with the relevant solicitors. Shanks said there was no point going with a report now to CAR Residency as there was a lot of information still outstanding and further information required.”
Officer Shanks went through 40 questions with regard to the residence aspect and property matters. He sent his notes of the meeting to PwC on 8 September and expressed the hope that “my notes of the meeting … to include the relevant questions and comments concerning the residence aspect of Patrick Kearney … will hopefully assist yourselves providing further details, information and documentation. It is of course appreciated that it will take some time for this information to be obtained.”
On 6 July 2011 Officer Shanks wrote to give notice under section 9A TMA of his intention to open an enquiry into Mr Kearney’s 2009/10 tax return.
On 24 October 2011 Officer Shanks rang Aidan Smith of PwC to enquire about progress in relation to all the outstanding information and documentation concerning the residence issue. Mr Smith told him that, whilst they were gathering this all up, they were also awaiting Supreme Court’s decision in Gaines-Cooper.
On 21 March 2012Officer Shanks wrote to give notice under section 9A TMA of his intention to open an enquiry into Mr Kearney’s 2010/11 tax return.
On 25 April 2012 Officer Shanks spoke to Mr Smith in the margins of a discussion about another enquiry. He indicated that Mr Kearney still wanted to pursue his non-residence claim and a further response would follow concerning the items of information that were previously requested.
On 10 September 2012 PwC sent Officer Shanks Mr Kearney’s responses to the questions in his letter of 8 September 2010.
On 30 January 2013 Officer McVitty (from HMRC Belfast) wrote to HMRC’s residence specialists asking for “your technical opinion on whether the taxpayer concerned [Mr Kearney] can be considered to be UK resident, on the strength of the facts provided.”
A file note of a telephone call on 3 July 2013 records Officer Shanks asking Mr Smith about “progress following my letter of 24 Sept 2013 and in general terms with regard to the financial position of Mr Kearney( PK)”. Mr Smith apologised for overlooking the letter and said that he would attend to this “shortly”.
Fiona McVitty (“Officer McVitty”)
Officer McVitty became involved in this case in December 2012, when Officer Shanks requested assistance in putting together a submission for HMRC’s Residency Technical Specialist to determine the residency position of Mr Kearney. In January 2014, the enquiry was transferred to her to work as Officer Shanks preparing for his retirement and she had a working knowledge of the case
Officer McVitty outlined HMRC’s position on penalties in her letter of 15 February 2019. So far as the penalties under section 95 TMA were concerned, she set the penalty at 20% of the tax underassessed, having allowed discounts totalling 80% for the following reasons:
Disclosure –She allowed 20% out of a maximum 30% because Mr Kearney provided information and documents to HMRC as part of the enquiry and signed a mandate to enable further checks to be carried out. Mr Kearney also attended four meetings with HMRC throughout the enquiry. However, Mr Kearney maintained that he was non-UK resident even after hearing why HMRC’s residency technical specialist concluded that he had not loosened his ties to the UK. Officer McVitty pointed out that draft computations were only provided by PwC in November 2017 (when the enquiry was almost 8 years old). She emphasised that a 30% abatement in this category is usually only afforded when a voluntary disclosure has been made (which did not occur in this case).
Cooperation – She allowed 30% out of a maximum of 40% as she acknowledged that Mr Kearney cooperated throughout the enquiry (for example allowing his agent access to relevant records and provide a schedule showing CGT due if he were held to be resident), but caused a number of substantial delays in responding to HMRC requests.
Size & Gravity – She allowed 30% out of a maximum of 40% as the alleged omissions relating to the Old Penalty Regime years were material (now considered to be liable to be £1.8m CGT in the three years concerned compared to a £3k tax liability declared in Mr Kearney’s tax returns for the same periods). Mr Kearney also failed to follow the professional advice obtained from PwC.
On the new (FA 2007) penalty regime Officer McVitty set the penalty at 18.75% of the tax under assessed. She explained that the penalty range is determined by the behaviour which led to the inaccuracy, and whether the disclosure was prompted or unprompted. She considered that Mr Kearney’s behaviour was careless – although he obtained professional advice about how to become non-resident, he did not take reasonable care or attention to follow the advice that could be expected from a reasonable and prudent person given the tax at stake. She considered that the disclosure was prompted because Mr Kearney did not tell HMRC about the inaccuracies before he had reason to believe they had been discovered by HMRC. This meant that the penalty range was from 15% to 30%.
She then explained the total reduction of 75% afforded to Mr Kearney for quality of disclosure (how much assistance has been given during the enquiry). This is calculated by reference to:
Telling (where she allowed 20% out of a possible 30%) - information and documents were provided throughout, but it was not until November 2017 that any quantification of tax at risk was provided.
Helping (where she allowed 30% out of a possible 40%) – Information and documentation was not always provided timeously however assistance has been provided over the length of the enquiry as a whole. Mr Kearney attended meetings and signed a mandate allowing for extra checks to be carried out.
Giving (where she allowed 25% out of a possible 30%) - while Mr Kearney did allow access to relevant documents, HMRC had been required to use formal information powers on one occasion.
On 30 January 2015 Officer McVitty wrote to PwC to say that she had now had a response from HMRC’s residency technical team and to progress matters further she set out a long list of questions the residency technical team had asked her to put to Mr Kearney.
On 13 February 2015 Officer McVitty was sent a detailed report of Mr Kearney’s flight bookings with Easyjet.
On 28 July 2015 Officer McVitty and colleagues met Mr Kearney and his advisers at PwC’s offices in Belfast. The purpose of the meeting was described as “to take stock of both HMRC and PwC’s stance in relation to PK’s claim to non-residence between 23 March 2004 and 1 January 2014, when PK returned to the UK and gave up his residency status in Gibraltar”. As well as outlining HMRC’s understanding in detail, Officer McVitty and her colleagues asked for a significant amount of further information. When the question of quantum came up, she commented that “protective assessments had only been raised for earlier years (2003/04 to 2006/07) and that the figures therein had been based on estimated figures from previous returns submitted and information available in the public domain i.e. the sale of shares in 2006/07”.
On 23 December 2016 Officer McVitty received the residence specialists’ advice that:
“55. Having taken into consideration all the facts and evidence that has been provided I am not persuaded that Mr K effected the distinct break from the UK on 23 March 2004 that the common law requires in order to be regarded as not-resident. Nor have I seen any clear evidence that such a break was achieved at any subsequent point in time - albeit it would be for him to offer an alternative date for consideration.
56. I think that HMRC would, on the balance of probabilities, have a better than 50% chance of persuading a tribunal judge that Mr K did not make a distinct break from the as claimed and was resident in the UK in 2004/05 and in each subsequent year to at least 209/10.”
On 4 January 2017 Officer McVitty wrote to PwC to tell them that she had received this advice and to ask them to reconsider the amounts on Mr Kearney’s self-assessment returns.
On 7 April 2017, at a meeting at PwC’s offices Officer McVitty referred to the four protective assessments that had been issued and “advised that these figures were far too high. [Officer McVitty] said that these were not final assessments figures and had been based on estimated figures at the time the investigation began. [Officer McVitty] said that they could be revised if supporting information was provided”.
The 2003/4 assessment was withdrawn on 21 June 2018.
On 18 November 2019 a HMRC discovery specialist confirmed in internal advice that the 2003/4 assessment had not been made in time “… unless we believe the behaviour is negligent. Whilst there was a belief of a “6 year rule”, the legislation states that the time limit is 5 years from the 31st January next following the tax year which it relates. This is 31/01/2010 and as the assessment was raised on 26/03/2010 it was out of time. This would not have any impact on any of the other discovery assessments.”
At a meeting on 18 December 2019 (whilst Officer McVitty was on maternity leave) this position was confirmed to PwC. On 15 February 2019 Officer McVitty had raised assessments intended to operate as amendments to the 2010 assessments, but HMRC explained at this meeting that those assessments had not been validly raised (they were out of time as new assessments) and did not operate to vary the original assessments.
In cross-examination Officer McVitty agreed with Mr Gordon that in 2010 Officer Shanks had said that he would have his hands full dealing with residence and that PwC, whom she acknowledged to be a reliable firm, continued to maintain that Mr Kearney was not UK tax resident. She added that PwC’s advice would only be as good as the information Mr Kearney gave them. She accepted that relying on PwC’s advice would not be negligent, but said that Mr Kearney had not done what PwC advised him to. Although she accepts that PwC were completing Mr Keaney’s tax returns, and so must have been in contact with him, she can see no evidence of Mr Kearney updating PwC on his position or seeking to refresh their advice.
Looking at PwC’s letter of advice Officer McVitty thinks that Mr Kearney failed to follow their advice because he kept his home in Northern Ireland, Mrs Kearney remained UK tax resident, he retained UK directorships, came back to the UK and did not keep his visits to a minimum. On that basis she considers that he was careless.
The Documents Officer Shanks Reviewed
We have identified above some of the material Officer Shanks had reviewed when he raised the assessments in March 2010. Other documents from this time he reviewed include:
HMRC Form P85 (Leaving the United Kingdom) completed by Mr Kearney and giving his date of departure as 23 March 2004 and identifying 27 Ragged Staff as his new address in Gibraltar. He confirms that he will be spending time in the UK “Dependant on family commitments but <90 days per year” He indicates that he has an employment as a company director with Patann SL in Santa Ana. He confirms that he will have accommodation in the UK while he is away. He also confirms that he will be receiving income from UK property of around £1m before interest deductions in the year of departure and the following year and lists the various properties and tenants concerned. Other UK income post-departure will comprise property consultancy fees and UK company dividends.
On 19 March 2004 Mr Kearney completed HMRC Form NRL1 (Application by a non-resident individual to receive UK rental gross), again identifying the properties and tenants and estimating annual rents at £1m before interest deductions.
Information that PBN submitted a planning application for a residential development (107 units) at Castlehill Manor, Belfast in the Summer of 2008.
An article from Property Week (dated 8 September 2006) entitled “The power of three”.
A article from The Irish Times (dated
An entry in 4NI.co.uk for Hawthorne Properties giving an address in Belfast and Mr Kearney as the contact.
Other documentary evidence
We looked at Mr Kearney’s self-assessment returns for the years in question, and they showed:
2003/2004 – UK interest - £1,704.51; employment income - £2,165; Profit from partnerships £6,592; Profit from UK Land and Property £60,371 (on gross income of £508,805); Gains – nil. Mr Kearney claimed to be not resident in the UK, although he said he had spent 360 days in the UK in the tax year.
2004/2005 – employment income - £23,049; interest - £19,141; “profit from UK land and property – loss of £47,746 (on gross income of £582,881); self-employment income - £32,222; no gains. Mr Kearney said on his return that he was not resident, ordinarily resident or domiciled in the UK and had spent no days in the UK (excluding days of arrival and departure) in the tax year;
2005/2006 – UK interest - £35; no employment income; self-employment loss of £39,032; UK property income – loss of £17,229 (against gross income of £14,800); no gains. Mr Kearney said on his return that he was not resident, ordinarily resident or domiciled in the UK and had spent no days in the UK (excluding days of arrival and departure) in the tax year;
2006/2007 – no income/gains were shown.
Shortly before the hearing, HMRC applied for permission to introduce in evidence a report of proceedings on 4 November 2015 before the Committee for Finance and Personnel (“the Committee”) of the Northern Ireland Assembly. The Committee was looking into the sale of NAMA (NAMA refers to the National Asset Management Agency, which was established in 2009 by the government of the Republic of Ireland as one of a number of initiatives taken by the Government to address the serious crisis in Irish banking which had become increasingly evident over the course of 2008 and early 2009) assets in Northern Ireland and heard evidence from Mr Kearney. We allowed this evidence to be introduced as it seemed to us that, particularly given the absence of Mr Kearney, it constituted a useful account (in large part a prepared statement) by Mr Kearney of some of the matters we are concerned with prepared for formal submission to a public body (the Committee) but not prepared with this appeal in mind.
Passages from the report we were directed to include:
“I built the business up over a 40-year period, through three recessions, in what were very difficult times for all the people in Northern Ireland, with a determination and resolve that was born out of hard work and a refusal to quit, despite many pressures and problems in our society. ,,, Unfortunately, as we are all too aware, the world economy was unexpectedly turned on its head in 2008. … The property industry was particularly vulnerable, and the company that I had spent a lifetime building, like many others in Northern Ireland, found itself in serious difficulties overnight.
I will now deal with a number of points in past testimony that referred to me. First, I decided to retire in 2006, and I sold the business that I ran 24/7 for 35 years in June 2006. … Fifthly, it is no secret that I tendered for the build-out contract for the Millmount site in 2008. That is the business that I am in. There was nothing sinister or secret about my involvement in Millmount at that time. The bank had its distressed loan. I have no doubt that an independent expert will verify that the standard procedure of all banks in such a situation is to review their existing client base to ascertain whether there is any existing customer or customers who would be best placed to assist the bank in dealing with the distressed loan before proceeding down the cumbersome enforcement route. I happen to be considered a capable developer by the bank. However, my tender was, unfortunately, unsuccessful. That is the commercial reality of what happened at that time.
For the record, I have a 40-year unblemished record with all the banks and financial institutions that I dealt with. Importantly, on retiring in 2006, I repaid every penny of personal and company debt that I had ever incurred.
All I wanted to do was to run my company to the best of my ability, to repay any indebtedness and to deliver the business plan that was provided to NAMA when it acquired my company loans, which showed clearly NAMA being fully repaid. That opportunity was denied to me by NAMA, with no credible explanation.
…
There has been an unfounded accusation of improper behaviour and influence exerted on my behalf by First Minister Peter Robinson. The relationship with the First Minister has been falsely projected in testimony to the Committee as a cosy friendship with favours arrangement, and it blatantly states that I was involved in some form of corrupt behaviour. I take great exception to those unsubstantiated and untrue statements that reflect on my character and integrity. I have met Peter Robinson on a number of occasions in his capacity as First Minister of Northern Ireland. To describe the relationship as friendship is, at best, a gross exaggeration of the truth. I suggest that the person making the allegation should research the dictionary for the definition of friendship.
I was advised to seek political help for the situation that I found myself in by a long-standing family friend and associate, Alan Mains, whom I confided in following a meeting in Dublin with NAMA on 3 May 2013. I had been requested by my NAMA handlers to attend that meeting in Dublin to discuss the future of my company. I was led to believe that the meeting was to be a routine one to discuss NAMA plans for my company, and that I would not require anyone to attend with me. The meeting was not what I expected. NAMA threatened to appoint administrators if I did not cooperate fully with its terms and conditions. Following that meeting with NAMA, a request by me to meet the senior decision-makers in NAMA was refused. I wanted an explanation for the change in its strategy with regard to my company as, up till then, it had made it clear that I was part of its plans for the future of the business. For me, it was a life-or-death situation: I was effectively fighting for my family's and employees' welfare and future.
…
Here are some facts. First, Peter Robinson, the First Minister, wrote a letter on my behalf to the chief executive of NAMA asking him to meet me in person to discuss my company loans. He subsequently attended a social event held to acknowledge the substantial investment in my company and in Northern Ireland by JLC, my funders — nothing more. … Thirdly, regarding Millmount, my company was asked to tender for the buildout of Millmount by Anglo Irish Bank in 2008. The bid was unsuccessful at the time. I had no other involvement regarding Millmount until my company recently agreed to purchase it from the administrator, Ernst and Young, subject to contract.
…
I spent 35 years of my life, until 2006, working 24/7 building a business in Northern Ireland through very difficult and challenging times. I almost lost it due to the downturn and the behaviour of NAMA. Thankfully, I have managed, through my stubborn refusal to quit and be bullied, to obtain external investment to avail myself of an opportunity to rebuild my business and life. I am grateful for that opportunity, and I refuse to apologise for taking it.
…
I will go back to 2008, when we first got involved in [the Millmount site]; I think that the Taggarts owned it at the time. The balloon had gone up, and the Anglo Irish Bank had what it termed a "distress loan". I was contacted by senior executives at the bank to see whether we would be interested in assisting people to come over and to build the site out. Given the process, it said that it would have to put it out to tender to two or three different operations, and, unfortunately, we did not get it. That was it. That was what happened in 2008. Recently, it came back on, and I had the opportunity to bid for it. I have done so, and it has been agreed for sale to our company. It is currently in legals, as I said in my statement. There is nothing sinister about it; it is a commercial transaction.
…
[Discussing his offers to NAMA to buy the PBN debt to Anglo Irish] I was concerned with trying to save my business and 100 jobs. These are the guys who wanted me out. I was happy to work with NAMA. They waved the carrot of debt forgiveness, as they called it, in front of me and said that, if I cooperated, after five years, if I had been a good boy and they deemed that I had been a good boy, they might consider releasing me from my personal guarantees. In my world, those personal guarantees were invalid. I did not want debt forgiveness; I wanted to stay, run my company and pay back as much as I could. I had a lot of my own capital tied up in the company that had gone. The only way that I was ever going to get that back was to put the company back on its feet.
…
NAMA took all the rental income over that two and a half- or three-year period. I think that it was in excess of £100 million. It may be more than that, I think, from reading some of the press.”
The Whereabouts Schedule
Mr Kelly took us to a whereabouts schedule, which had been prepared by HMRC based on information provided by the PwC on 14 April 2010. HMRC’s understanding is that this was based on information which Mr Kearney provided to PwC.
From looking at Easyjet flight data, HMRC question the accuracy of some of dates. For example, the Easyjet flight data appears to show Mr Kearney flying from Belfast to the Algarve on 12 October 2004, whereas the whereabouts schedule suggests that he was in Spain/Gibraltar, having left the Republic of Ireland on 9 October 2004. Similarly, the schedule shows him leaving the UK (for the Republic of Ireland) on 9 January 2005 and does not pick up the fact that he flew from Belfast to Malaga on 12 January 2005. The schedule shows Mr Kearney to have been in Spain/Gibraltar on from 21 March to 5 April 2005 and being in the Republic of Ireland on 6 April 2005, whereas the Easyjet flight data shows him flying from Luton to Belfast on 3 April 2005.
Although there are clearly some discrepancies between the flight data and the whereabouts schedule, Mr Gordon and Mr Kelly accept that these are not significant. Mr Kelly is prepared to assume that the data PwC provided is broadly accurate. He does not suggest that these discrepancies show that Mr Kearney had been present in the UK for more than 90 days in any tax year. He does say that these discrepancies show that Mr Kearney was not rigorous in the information he provided to PwC. Mr Gordon says that these discrepancies do not suggest any material errors in PwC’s conclusions or indicate that they were advising on incorrect premises.
Mr Kearney says that he spent a significant amount of time in the Republic of Ireland. Mr Kelly questions the credibility of this claim this for two main reasons.
Firstly, there are a number of days in the whereabouts schedule which HMRC have marked “UK/ROI”. These are days where Mr Kearney says he was in the Republic of Ireland, but either there is no evidence of this and/or there is evidence of UK activity, such as where Mr Kearney’s credit card statements show that the card was used in the UK. So, for example, on 20 December 2006 the credit card is shown as being used at a toy shop and a branch of River Island in Belfast. Mr Kelly also pointed to some days shown as “ROI” on the schedule (days when Mr Kearney is supposed to have been entirely in the Republic of Ireland) when his credit card was used in the UK. So, for example, Mr Kearney is shown as “ROI” from 14 to 26 May 2008 but the credit card was used in Belfast on 19, 24 and 26 May.
Mr Kelly accepts that Mrs Kearney has use of the two credit cards (from Ulster Bank and Natwest) but makes the obvious point that no evidence has been adduced by Mr Kearney as to who used the cards in the UK on these dates and Mr Kearney cannot be cross examined about this.
Secondly, Mr Kelly drew our attention to the large number of days in each year on which Mr Kearney arrived in or departed from Belfast. Mr Kearney provided an explanation for this in 2012. In a written response to a question from HMRC he commented:
“A detailed schedule of my flights has been provided. My average days in the UK for all the years concerned are well within the 90 day annual limit. I drive or am driven to and from Dublin; occasionally I use the train. As the cost of landing and handling in Dublin for private aircraft is expensive compared to Belfast I choose to base the aircraft in Belfast. I drive to Dublin after leaving my wife in Belfast once I have had a chance to catch up with my kids and grandchildren. I do so because I am paranoid about adhering to the 90 day rule. Not really an inconvenience given the tax advantages and the fact that Southern Island is only 60 minutes away by car. As previously stated I stay with long-standing family friends of 50 years tenure.”
In the same letter, Mr Kearney said that there were no records of who used the credit cards in the UK. He thought it “most likely Ann” (i.e. Mrs Kearney).
Mr Kelly exhibited schedules of airport charges for Dublin Airport (from 31 March 2013) and Belfast International Airport (from 1 April 2012). The differences do not seem enormous, and the absolute prices do not seem particularly high, but they are difficult for a non-specialist to interpret and compare. For example, in Belfast a landing/navigation charge of £13.30 per tonne was levied whereas in Dublin the Summer runway movement charge was £8.64 per tonne. The parking charge in Dublin was £2.65 per 15 minutes in a light aircraft parking area. In Belfast the parking charge was £0.18 per two tonnes for each 15 minutes. Neither Mr Kelly nor Mr Orr sought to unravel these charges for us and apply them to Mr Kearney’s situation, but Mr Orr did observe that HMRC’s data only relates to Belfast International Airport for a single year, whereas (he observed) there are other local airports. To the extent that Mr Kelly is trying to use these figures to demonstrate that Mr Kearney’s comments about the relative cost of landing/parking his jet in Belfast or Dublin are wrong, we have been unable to come to that conclusion on this data. But we are with him to the extent that his point is that the absolute costs/differentials do not seem, at least on first impressions, to be particularly significant in the context of someone who can afford a private jet in the first place.
Given the strength of Mr Kearney’s evidence that he was very careful about the 90-day limit, that no one has suggested that he was not telling the truth (which would be a very serious matter and which would need to be the case if his “ROI/UK” days were in fact UK days) and given that there is a perfectly obvious explanation for the use of the credit cards in the UK (that Mrs Kearney was using them here), we accept that Mr Kearney was not in the UK on “ROI/UK” days.
The whereabouts schedule is a very large document which it would be difficult/impossible (at least for us) to attach to this decision. We summarise briefly below what it shows in terms of Mr Kearney’s presence in the UK. For these purposes, Mr Kearney’s days in the UK exclude his days of arrival and departure (as required by IR20 for periods before 6 April 2008) and excluding days HMRC have marked “UK/ROI” (in other words, we have taken Mr Kearney’s account of his time in the UK to be correct). The whereabouts schedule shows these days in or arriving in/departing from the UK:
In the tax year 2004/5, Mr Kearney’s UK days totalled 84. In addition, there were 11 days during which he arrived in the UK and 10 during which he departed from the UK. Mr Kearney had at least one UK day every month other than October and November.
In the tax year 2005/6, Mr Kearney’s UK days totalled 89. In addition, there were 22 days during which he arrived in the UK and 23 during which he departed from the UK. Mr Kearney had at least one UK day every month other than April and May.
In the tax year 2006/7, Mr Kearney’s UK days totalled 84. In addition, there were 42 days during which he arrived in the UK and 35 during which he departed from the UK. Mr Kearney had at least one UK day every month without exception.
In the tax year 2007/8, Mr Kearney’s UK days totalled 73. In addition, there were 33 days during which he arrived in the UK and 27 during which he departed from the UK. Mr Kearney had at least one UK day every month except April and July.
In the tax year 2008/9, Mr Kearney’s UK days totalled 61. In addition, there were 28 days during which he arrived in the UK and 28 during which he departed from the UK. The wording of IR20 changed at the beginning of this tax year, so that UK days included days of arrival if Mr Kearney was still here at midnight (so including days of arrival followed by another clear UK day). On that basis, his UK days totalled 82 with a further 28 days during which he departed from the UK. Mr Kearney had at least one UK day every month except November.
In the tax year 2009/10, Mr Kearney’s UK days totalled 109 in the period to the end of November 2009 (there was no information past 28 November 2009). In addition, there were 12 days during which he arrived in the UK and 11 during which he departed from the UK. Of the arrival days, 9 counted as UK days. Mr Kearney had at least one full UK day every month in this period.
PwC’s Advice
Before he moved to Gibraltar Mr Kearney was advised by PwC. We were shown a copy of their advice letter (dated 22 January 2003), in which PwC make the following comments relevant for our purposes:
“...
2 Relevant background details to [Mr Kearney’s proposed departure from N Ireland to live in Spain] are as follows:-
• Your private residence in N Ireland will be sold either before or after you leave here.
• You will move to Gibraltar after the end of June 2003.
• You have acquired (or will acquire) a flat in Gibraltar.
• Some time later you will then move to Spain where you have a permanent residence,
• You will live in Spain until at least 6 April 2009.
3 I understand that you and your wife propose to sell your N Ireland properties to Pataan Limited. Since the gains arising from this sale would be e significant, you would wish to avoid having to pay UK capital gains tax (CGT).
4 Gains arising on UK assets held as investments by an individual are not generally liable to UK CGT if at the time of the sale the individual is not resident or not ordinarily resident in the UK. In order to achieve that status, an individual who, like yourself, is both resident and ordinarily resident in the UK, not only has to become not resident and not ordinarily resident in the UK but to avoid UK CGT has to maintain that position for at least 5 complete and consecutive income tax years (a tax year runs from 6 April to the following 5 April). furthermore, the sale has to be made no earlier than the first day of the first tax year of non-residence; in other words, the sale must not be made in the period between the date of leaving the UK and the following 5 April.
5 In order to become non-resident from the date of leaving the UK an individual
• Must not be in the UK for more than 182 days in an income tax year (leaving out of account the year of departure).
• Must not be in the UK for more than 90 days on average over up to 4 years in an income tax year.
6 For purposes of these rules, days of arrival in and departure from the UK are ignored in counting the days spent in the UK.
7 Given these pre-requisites for establishing non-resident status, I will comment on your specific proposals. first, it is to your advantage that you will sell your house in N Ireland. It is possible to lose UK residency and yet retain a private residence in the UK; however the Inland Revenue have to be satisfied that the reason for retaining the house is consistent with the aim of living abroad. If your house is sold, that means that you have one fewer hurdle to cross in your intention of losing your UK resident status.
8 [dealt with presence in the UK in the tax year of departure]
9 [observed that spending a period of time in Gibraltar before moving to Span will not affect residence status]
10 [stressed the need to take local tax advice in Spain/Gibraltar]
11 In UK tax law there are no statutory definitions of residence or ordinarily residence: their meanings are derived from case law. Based on these cases the Inland Revenue has published guidelines, the more important of which are set out in paragraph 5 above. These guidelines contain an element of concession: the Revenue say that they will not give an individual the benefit of a concession if it is used for tax avoidance purposes. I mention this since there is an old case which decided that the purpose of return visits to the UK could be relevant in determining ordinary residence. In particular, coming to the UK to work on a regular basis or to attend to the affairs of a UK company or business could prevent non-ordinary residence in the UK being achieved. In these circumstances, if Patann Limited is to continue in business it would be preferable that you and your wife resign as directors and keep UK visits to a minimum. In addition, the rule relating to days of arrival in and departure from the UK as described in paragraph 6 above is concessional: if the Revenue took the view that it was being exploited for tax reasons they would not apply it. To be on the safe side, you should not assume that it will be applied. In this context, it would be important to keep and retain records as to the dates of visits to the UK.
12 In summary, therefore, so far as UK CGT is concerned, no liability wilt arise on the sale of your properties so long as:
• They are not sold in the period between leaving the UK and the following 5 April.
• Your visits to the UK do not exceed the limits set out in paragraph 5 above (subject to the comments in paragraph 11).
• You retain non-resident status for at least five income tax years.
…”
Mr Kearney’s Submissions
In his submissions Mr Orr pointed us to a number of pieces of evidence, which we will deal with shortly. Our summary of his submissions is, therefore, quite brief and high level. We mean no disrespect to him and have (we hope) addressed his points as we discuss the evidence; we simply wish to avoid unnecessary duplication and making an already long decision even longer.
Mr Orr says that the evidence does not support the assertion that Mr Kearney had an active role in the UK in the affairs of PBN or was engaging in material commercial property transactions on his own behalf. The only document created after 2006 is the Summary of Planning Decisions. Officer Shanks was able to identify only 6 property transactions in total, one of which related to Mr Kearney’s home and one a transfer to Mr Kearney, his wife and son.
Mr Kearney had a limited role in PBN. He was very much the “elder stateman” of the three individuals involved with PBN. Patann was a small company (valued at £20m) compared to the eventual £400m value of PBN.
Mr Kearney moved to Gibraltar and established a home there, with business and leisure interests.
Mr Kearney’s dealings with NAMA were conducted in Dublin.
Mr Kearney always observed the 90-day limit on presence in the UK, with accommodation available in Dublin when needed. He was not registered as a voter in the UK, nor was he in rateable occupation of residential property in the UK. It is accepted that he did not own a car in the UK.
So far as HMRC rely on section 334 ICTA, this provision is irrelevant where CGT is concerned, and chargeability depends on the presence or absence of residence and/or ordinary residence examined under common law principles.
Discovery
Mr Gordon submits that the historical cases concerning section 29(1) and its predecessors were analysed by the Upper Tribunal in Anderson. For the subjective test, the Upper Tribunal’s conclusion is found at the end of [28]. At [30] the Upper Tribunal describes the objective test as “A requirement that the officer’s belief is one which a reasonable officer could form.”
On the objective test for a discovery, Mr Gordon says that any subjective belief Officer Shanks held that tax had been under-assessed belief could not have been objectively reasonable, because the evidence available to Officer Shanks pointing towards retained residence was very slight. Mr Gordon’s analysis of the key evidence available to Officer Shanks is:
Mr Kearney had ongoing business interests in Northen Ireland. These were mainly through the company of which he was just one of the directors – the other directors being based in Northern Ireland.
The contemporary newspaper reports showed Mr Kearney as based in Gibraltar – not any suggestion that he was also based in the UK (despite the UK-focus of the articles).
Officer Shanks could identify only 1 day in the whole period since 2004 where Mr Kearney was physically present in the UK and engaged in business. When asked about his knowledge as to the number of days Mr Kearney spent in the UK after his departure, his response was “We did not know the facts”. When asked whether there was any evidence suggesting that Mr Kearney had spent too much time in the UK, he replied “No”. Officer Shanks purportedly made his discovery without any indication that Mr Kearney had spent too much time in the UK.
After Officer Shanks discussed with colleagues his wish to obtain any information if they uncovered any indication that Mr Kearney was spending too much time in the UK, they did not unearth anything. Officer Shanks’s own assessment was that he would have an his “hands full even trying to argue for taxation and residence”
His own discussions with PwC showed that he needed further information to allow him to form a view as to UK residence – that was the purpose of his letter in December 2009. That information requested (and required) by Mr Shanks was not provided until April 2010. It was only when that was analysed and processed by Mr Shanks and his colleague could it be suggested that a view could be taken as to Mr Kearney’s residence status.
HMRC’s own records showed Mr Kearney as residing in Gibraltar.
Mr Gordon says the Officer Shanks was predisposed to finding that Mr Kearney remained UK resident. He agreed with Mr Gordon during his cross examination that there was nothing in the email inviting him to take up the case to suggest any reason to doubt Mr Kearney’s non-resident status. Mr Gordon then invited Officer Shanks to confirm that he would therefore have started to look at this case with an open mind, but he replied that he already had “early suspicions”. This confirms that, given the lack of information to support his conclusion objectively, any conclusion Officer Shanks reached about Mr Keaney’s residence position could only have been reached as a result of a predisposition to come to that conclusion.
Mr Gordon next says that Officer Shanks could only conclude (certainly, could only reasonably conclude) that Mr Kearney had remained UK resident after the information was provided by PwC. In his letter of December 2009, he acknowledged that residence is a complex matter. It is something that requires information to be collated and then analysed. Given the very limited information available to Officer Shanks on which he could conclude anything, it was entirely reasonable for Officer Shanks to make the requests he did, assuming that he had a reason to suspect non-residence. The information as we know was provided in April 2010 – after the assessments were made.
Mr Gordon notes that the discovery issue was addressed by experts within HMRC. It is clear that the experts recognise that the materials obtained up until the February 2010 meeting with PwC were too thin to justify any discovery. Their view was that “it was likely that [Officer Shanks] only suspected until the meeting with PwC”. Unlike the HMRC experts at the time, we have had the opportunity to ask Mr Shanks what he learned at the meeting that would add to his suspicions. Other than push back from PwC, Mr Shanks confirmed to this Tribunal that nothing further was gleaned from that meeting. Mr Shanks “only suspected until the meeting with PwC” and, in the absence of any further information up to 26 March 2010, his knowledge at the time of the discovery assessments remained “only suspected”.
Mr Gordon accepts that Officer Shanks felt that he was under immediate time pressure to make assessments for the earlier years before April 2010. As it happens, he was wrong. But that does not alter the fact that his decision to make assessments when he did was premature; it was not objectively reasonable.
Quantum of Assessments/Best Judgment
Moving on to the question of quantum, Mr Gordon submits that, if a discovery has been made, then the officer may assess for the amount he thinks should be charged to make good the loss of tax. His submission is that this requires an exercise of rationality; an officer cannot simply pick a number without rational justification even if an assessing deadline is approaching. However, that is precisely what has happened in this case.
The question is whether the officer can justify the figures used based on the information then available. Looking at capital gains first, Officer Shanks knew that Mr Kearney had received £12m in the 2006/7 tax year. An officer acting rationally would have realised that that gain would have attracted 75% taper relief. Leaving aside that point, Officer Shanks assessed Mr Kearney for additional gains of £3m. Similarly, for the two previous tax years, Mr Shanks assessed Mr Kearney for additional gains of £500,000 and £1m.
Officer Shanks knew of two other disposals – one in the 2005/6 tax year and one in the 2006/7 tax year. The disposal in 2005/6 was of Mr Kearney’s former family home. He was one of two vendors. The sale price was just over £1.3m. The gain would have been somewhat less – given acquisition costs and disposal costs. A substantial proportion of the gain would have been covered by main residence relief; at the time, the last three years of ownership of a former main residence were exempt from capital gains tax. Therefore, there was no rational basis for suggesting that Mr Kearney made taxable gains totalling £1m in the 2005/6 tax year.
In respect of the 2006-07 tax year, the only other disposal was the £500k disposal made by Mr Kearney to himself, his wife and son. Thus rationally, there is no way to attribute to Mr Kearney any more than one third of this as a likely gain – and that is before one considers allowable deductions.
For the 2004/5 year, Mr Shanks could not identify any chargeable capital disposals.
In evidence, Officer Shanks admitted that “There might have been other gains” and he “had to come up with some figures”. So, although he denied “plucking the figures out of the air”, he was effectively doing just that. He had no factual basis to support the figures he put in. He might have thought that he was entitled to make up numbers in the way he did. However, section 29(1) and the case law tell us that he was not.
That cavalier attitude was replicated so far as the income tax side of the assessments is concerned. The last tax return before Mr Kearney went non-resident was the 2002/3 tax year. His tax return for 2002/3 included rental income £51,237, other income £34,113, and modest amounts from directorships, partnerships and interest. These income sources would have been taxable – even as a non-resident. Form P85 was completed by Orla McAllister at PwC and therefore it would have been somewhat surprising if those rents had been received but then omitted from the tax returns. Therefore, there was no reason whatsoever to assess for income tax at all – a point belatedly accepted by HMRC - let alone categorising it as other income.
The income tax elements of the assessments have gone away, but they formed an integral part of the original assessments. It was not a case of separate assessments for income tax and capital gains tax. Therefore, an invalidity in either aspect is sufficient to invalidate the whole. As it happens, the capital gains tax components were irrational in their own right. But, Mr Gordon says, he can rely on the irrationality of the income tax components as a further reason to show that the assessments made on 26 March 2010 were invalidly made.
Penalties
Moving on to penalties, these are relevant only if Mr Kearney is unsuccessful on all other grounds. However, being found to be resident does not automatically lead to penalties being payable. There must be negligence/carelessness, and this must be the cause of the inaccuracy. On the FA 2007 regime, this is clear from the paragraph 3(1) of Schedule 24 definition of carelessness; “if the inaccuracy is due to failure by P to take reasonable care”. So far as section 95 TMA is concerned, Mr Gordon says that the requirement of negligence being the cause of the under-assessment is a clear implication of the statutory code: It is the delivery of the inaccurate return that must be careless. If there is any remaining doubt, it is allayed by the FTT decision in Bayliss v HMRC, [2016] UKFTT 0500 (TC), at [52].
On the question whether Mr Kearney was negligent, Mr Gordon points to what he described as the “elephant in the room”: HMRC withdrew the 2003/4 assessment because they accepted that there had not been any negligence – and therefore they were not entitled to assess after 31 January 2010. Although she initially deflected the question, Officer McVitty did accept that the 2003/4 assessment was not valid because of the absence of negligence. The allegations of carelessness emerged only when HMRC wanted to charge penalties as well as the tax that they consider was due.
HMRC consider that the carelessness arose because Mr Kearney filed his tax return as a non-resident despite – as HMRC would have it – not complying with the advice given to him by PwC in their letter of 22 January 2003. However, PwC were in regular touch with Mr Kearney throughout his absence from the UK and they knew how plans had changed – for example, the fact that Mrs Kearney stayed in the UK and did not go with her husband. PwC completed Mr Kearney’s tax returns.
Officer McVitty’s concern was that there were factual differences between the basis of PwC’s advice and what subsequently transpired, but Mr Kearney did not obtain further advice from PwC to reflect his changed circumstances. However, HMRC bear the burden of proof here and there is no evidence is there that Mr Kearney did not obtain this further evidence. If we draw inferences from the evidence we do have, we can conclude that the opposite occurred. Given that PwC were in constant touch with Mr Kearney and prepared his returns on his behalf, it can be reasonably inferred that they were aware that Mr Kearney did not sell his Belfast home – and that his wife remained there – and the extent of Mr Kearney’s return visits to the UK. PwC have always continued to assert that Mr Kearney was clearly non-resident for as long as they were involved in this case in the light of all the additional information provided to HMRC in the course of the investigation and despite the Gaines-Cooper litigation which showed that day counts were not the only relevant factor.
Given that PwC continued to believe that Mr Kearney was non-resident – a view to which Mrs McVitty accepted that they were entitled to have – it cannot be said that PwC would have prepared Mr Kearney’s return on a different basis and, even if there was carelessness, there is no causal connection between that and the omission of the capital gains from the tax return.
In any event, the deviations from the advice are immaterial so far as Mr Kearney’s conduct is concerned. First, it must be remembered that the letter was written in the pre-Gaines-Cooper era. Officer McVitty accepted in evidence that, before the Supreme Court decision in that case, there was “a lot of emphasis in private sector on day counts”. That emphasis comes through in the advice letter. Secondly, the first of the four alleged deviations from the advice was the fact that Mr Kearney did not sell his family home. PwC would have known that the family kept a home in the UK. Their advice was not predicated on Mr Kearney selling the home. In black and white, it is said “It is possible to lose UK residency and yet retain a private residence in the UK”. The second of Officer McVitty’s complaints was that Mr Kearney was advised not to return to the UK regularly. In cross-examination she accepted that there was no regular attendance at board meetings in the UK but said that in four out of five years Mr Kearney spent Christmas in the UK. These visits do not breach the advice given. Three of the four visits were for 3 full days (four nights) and one was for five full days (six nights). This advice – together with the other two aspects that Mrs McVitty was concerned about – were in the context of ordinary residence which is not really relevant. Furthermore, those elements were described as “preferable” rather than obligatory for the advice to be valid. In any event, time spent in the UK was considerably reduced. Mr Kearney’s son became a director of Patann to reflect the additional duties he would be carrying out following his father’s departure overseas.
Quantum of Penalties
Mr Gordon says that, as a general rule, he does not challenge HMRC’s approach to discounts. However, where the maximum discount has not been given for a particular reason and that reason is not justified then he argues that a fuller discount should be given.
That was the approach taken recently by this Tribunal in Campbell. The Tribunal’s conclusions are at [149](5), (6). The point arising in the Campbell case appears here. A discount is being partly refused because the taxpayer does not accept that the return was wrong. In other words, the taxpayer is being penalised for daring to disagree with HMRC. Officer McVitty’s position was even more extreme than that experienced in the Campbell case because she is saying that Mr Kearney and PwC should have admitted the alleged error as soon as Mr Shanks wrote to them at the end of 2009.
A second complaint is the fact that PwC did not provide the tax figures until 2017. However, in the circumstances, they were perfectly entitled to wait until the residence situation was resolved. Despite initially asking for the numbers in 2009, HMRC were content to put this to one side until the question of principle had been resolved. PwC and HMRC were sensible to take that approach and it is not fair now to penalise Mr Kearney in that regard.
The third point made is that HMRC do not generally give full discounts in cases where the investigation is instigated by HMRC. As Mrs McVitty said that was an approach that was rigidly adhered to – despite HMRC’s own guidance making clear it is not mandatory. Mrs McVitty unlawfully fettered her discretion in this regard.
The fourth complaint concerns the length of the investigation. The underlying complaint was an allegation of Mr Kearney causing “a number of substantial delays in responding to HMRC’s requests”. However, when we took Mrs McVitty through the chronology, we can see that the situation is somewhat different.
Things moved slowly at first but that was because of the uncertainties created by the Gaines-Cooper litigation.
It made no sense to get fully embroiled in disputes about residence if adherence to the widely understood interpretation of IR20 was going to prove sufficient.
And whilst there was one occasion where PwC took their eye off the ball, there was no evidence of Mr Kearney causing delays.
On the other hand we saw large gaps between correspondence at HMRC’s end.
And this was a case where the taxpayer’s MP was asked to intervene because the long investigation was having an adverse effect on Mr Kearney’s health.
The next complaint was the fact that Mr Kearney allegedly failed to comply with advice received from PwC. However, Mr Gordon says that, when questioned, Officer McVitty accepted that the gravity of Mr Kearney’s failure was that he submitted tax returns that PwC prepared for him and which PwC believed to be correct. Mr Gordon says that following the advice of a reputable firm such as PwC can hardly be considered to be an aggravating factor.
The final complaint was that HMRC were required to issue a formal information notice, but HMRC had called PwC six weeks after putting in a substantial information request. There was no evidence that PwC or Mr Kearney were being unco-operative. A six-week turnaround period was wholly unrealistic. Officer McVitty chose to issue a formal notice. There was no requirement on her to do so. There was therefore no justification for not giving Mr Kearney the full discount available under that heading.
HMRC’s Submissions
Mr Kelly says that in some areas HMRC take no issue with the factual statements made in Mr Kearney’s statement. However, there are three key areas where HMRC do not accept the accuracy or truthfulness of Mr Kearney’s evidence/his account to HMRC during the investigation. Should the Tribunal consider that HMRC have identified factual issues which call for a convincing explanation by Mr Kearney, it should conclude that no such explanation exists. That is not a consequence of Mr Kearney not being well enough to give evidence, but a function of the unconvincing and contradictory accounts which he has offered during the investigation (in respect of which he claims no medical excuse). Those key areas of dispute are:
the degree Mr Kearney’s involvement in the business of PBN after his claimed date of departure;
the dates of Mr Kerney’s presence in the UK (though the precise day-count is not determinative); and
the extent to which Mr Kearney’s seeming presence in the UK can be attributed to activity in the Republic of Ireland.
Relying on Levene, Mr Kelly says that Mr Kearney’s ties to Gibraltar/Spain are principally relevant to his asserted residence there and are less relevant to his residence in the UK.
So far as post departure ties with the UK are concerned, Mr Kelly says that it is not disputed that Mr Kearney remained married to his wife during the relevant period and that Mrs Kearney remained UK resident and lived at the family home in Belfast. Again, undisputed, Mr Kearney retained access to the family home and kept clothes and other personal effects there. He guaranteed the mortgage on the family home and continued to pay the utility bills for the home in which Mrs Kearney continued to reside.
Mr Kelly says that the day-to-day aspects of Mr Kearney’s business ties to the UK remain “largely cloaked in mystery”. His witness statement refers to him working “24/7” prior to his asserted departure from the UK and then he refers to a reduced working schedule from 2004. During the investigation, Mr Kearney has given inconsistent accounts of his working pattern. In PwC’s letter of 14 April 2010, he is claimed to work at least 5 hours a day, 5 days a week. However, in a 10 September 2012 letter from PwC Mr Kearney stated that he worked 3-4 hours per day, 4 days a week. The difference in the weekly hours is less relevant than the fact that Mr Kearney has told HMRC inconsistent stories about whether he works a full or a part-time week.
These claims need to be considered in light of the known facts regarding PBN. Mr Kearney exchanged his shares in Patann for shares in PBN, as well as receiving £12m in cash and £8.5m in loan notes. The ‘The power of three’ article recorded that PBN’s was a “property company” which had purchased Carryduff Square shopping centre and the Parkway shopping centre in Middlesborough as well as Mr Kearney’s property portfolio, resulting in a £400m development portfolio. PBN’s own website announcement regarding the Parkway shopping centre described £11m of proposed development, with Mr Kearney being quoted and speaking on behalf of PBN. This article referred to Mr Kearney as a man whose “reputation as a property developer is established”, whereas the other two directors were a retired banker and the managing director of a fitting company.
Officer Shanks’ registration report also records the following information of which he was aware:
“For PBN Property Ltd in the 10 month accounting period to 31 December 2006 turnover increased by £4m from the previous accounting period to £9.1m. Capital Gains profits are reflected of £954,423 while tangible assets have increased by £31m to £71.1m.”
Officer Shanks also had the ‘The Anglo 10’article (from The Irish Times on 9 October 2009 – the copy in the hearing bundle was extracted on 17 February 2010) which described the Appellant, in 2009, as “one of the largest property developers in Northern Ireland through a number of companies”. The same article stated that PBN was developing shopping centres and retain parks in Glasgow, Middlesborough and Eccles.
In terms of his evidence to the Committee, Mr Kelly says that the comments (which were largely in the form of a prepared statement) show that Mr Kearney was not telling the truth when he claimed via PwC that “Apart from an initial article regarding the launch of PBN in 2006, which I was obliged to do as part of the transaction I have not been involved in the running of PBN”.
Mr Kearney personally guaranteed 7 business-related loan agreements after he left the UK. Two of these loans were for £1m each, but the other 5 were for £30m, £50m, £4.175m, £56.164m, £44.053m and £56.977m.
Mr Kearney remained a director of a large number of UK companies, including 13 formed after March 2004. Mr Kearney’s witness statement leaves the activities of these identified companies shrouded in mystery. At least in respect of PBN Wineworld Ltd, we have seen some indication of its commercial activities.
On the topic of discovery, Mr Kelly says that, when considering the objective element of the discovery test, all that is required is that “the officer’s belief is one which a reasonable officer could form.” When the Tribunal asked Officer Shanks to say why he thought the Appellant remained UK resident, Officer Shanks stated:
“He had retained a residence in the UK. He retained at least 11 directorships in the UK. He appeared to be involved in one or two property developments where he was in the UK himself. He was involved in some property transactions in the UK, buying property and occasional sales and not just in years in question but also in 2007/08. I know it was explained but I spotted that he had a registration for VAT in the UK. He had used UK addresses on a couple of return forms and on an SDLT return form. It appeared that he was coming back to the UK not just for personal visits. I think those are the main headlines without drilling down into the detail which came along later.”
Officer Shanks’ belief that Mr Kearney was UK resident was a reasonable one for him to hold based on the facts before him. The important points here are:
The CNR memorandum referred to “the retention of United Kingdom accommodation” and his notes of a telephone call on 17 November 2009 state that the Appellant “may indeed still be living in a residence here”. Officer Shanks’ note of telephone call dated 1 December 2009 states that the Appellant’s “private residences and main businesses are within Northern Ireland” Mrs Kearney’s continued residence in the family home in Belfast is undoubtedly the explanation for the continued availability of UK accommodation to the Appellant. However, that explanation does not lessen the strength of the tie to the UK represented by that available accommodation.
Officer Shanks’ registration report referred to Mr Kearney having “multiple UK directorships mainly with companies involved with property transactions”. In cross-examination, it was put to Officer Shanks that Mr Kearney’s directorships were non-executive and could have involved no remuneration. Even if that were the case the directorships would still represent ties to the UK. However, Officer Shanks did know that Mr Kearney was actively involved in the affairs of PBN.
Officer Shanks was aware that Mr Kearney had exchanged his shares in Patann for shares in PBN, as well as receiving £12m in cash and £8.5m in loan notes. The ‘The power of three’ article recorded that PBN was a “property company” which had purchased Carryduff Square shopping centre and the Parkway shopping centre in Middlesborough as well as Mr Kearney’s property portfolio, resulting in a £400m development portfolio. PBN’s own website announcement regarding the Parkway shopping centre described £11m of proposed development, with Mr Kearney being quoted and speaking on behalf of PBN.
Officer Shanks also had the ‘The Anglo 10’ article which described Mr Kearney, in 2009, as “one of the largest property developers in Northern Ireland through a number of companies”. The same article stated that PBN was developing shopping centres and retail parks in Glasgow, Middlesborough and Eccles.
SDLT records showed Officer Shanks that Mr Kearney was involved in six property transactions.
Officer Shanks was aware that the Appellant had registered for VAT from 15 March 2006, as a sole trader, with a trade of “Development building projects”, giving two Belfast addresses. In cross-examination, Mr Gordon suggested reasons why Mr Kearney may have registered for VAT and noted that the reason for registration may not necessitate UK residence. That may be the case. However, it misses the relevant point. Whatever the reason for registration, registering for UK VAT is a tie to the UK.
Officer Shanks was aware that Mr Kearney had given UK addresses on SDLT forms and on his 2007/08 and 2008/09 self-assessments. In addition, the full version of Mr Kearney’s return for 2004/05 gives a UK address.
Officer Shanks’ notes of the meeting with PwC on 17 February 2010 record Ms McAllister informing him that Mr Kearney “travels backwards and forwards to the United Kingdom” and that from 2006 he used his private jet to make “trips backwards and forwards to the United Kingdom” That he was returning to the UK for the purposes of work was evident from the media articles referred to above. See for example the statement that “We greatly value the opinions of the people who know Parkway best and that's why we are here today with our architect and agents to hear the views of the wider community”
None of these factors on its own established that Mr Kearney was UK tax resident. However, Officer Shanks’ task was not to consider each factor in isolation, but to consider their cumulative effect. That is what he did and in so doing formed a reasonable belief that Mr Kearney remained UK resident.
As to whether Officer Shanks made a best judgment assessment, Mr Kelly says that the parties are agreed that Bi-flex and Johnson provide relevant guidance as to how significant the officer’s failing must be before he fails the ‘best judgment’ standard. However, the Tribunal should be cautious about the shorthand of asking whether Officer Shanks had made a ‘reasonable estimate.’ ‘Reasonable’ when used here is used in its public law sense i.e. not irrational. That is why the authorities express the test in such terms as asking whether the estimate is “an inference which no reasonable person could draw” (Johnson, at 393) or “some spurious estimate or guess in which all elements of judgment are missing” or whether the officer acted “dishonestly or vindictively or capriciously” (Bi-flex, at 5). To find that an officer has acted irrationally, dishonestly, vindictively, irrationally, etc is to be highly critical of them. It is no small thing to find that an officer’s estimate was not made to the best of their judgment. That is why Mr Gordon must rely on examples in the authorities where the officer in question has ignored the known facts in plucking a figure from the air (Ritchie, at [380]-[381] or where assessments have been issued to an uncooperative taxpayer in terrorem (Cussens, at [28]). Officer Shanks’ estimates are simply not in that category.
Officer Shanks in his witness statement the information which he drew on in making his estimates. These were the memo from CNR referring to “rents of almost £1 million per annum”, the P85 form outlining rental income (“approx. £1m before interest deduction”), the email from the local compliance inspector outlining the £12m payment from the corporate reorganisation and the 350 pages of SDLT returns which (Officer Shanks said) led him to believe that there could have been a “plethora” of property disposals which could have led to a loss of tax due to Mr Kearney’s claimed non-resident status. He supplemented this in his oral evidence explaining as follows:
2004/05– the £500,000 income figure was based on the P85 form which stated that Mr Kearney would have income from letting of approximately £1m in 2004/05, against which Officer Shanks allowed £500,000 of estimated expenses and interest deductions. The £500,000 taxable gains figure was estimated based on Mr Kearney’s disposals of property in subsequent years, of which Officer Shanks had evidence.
2005/06 – the £750,000 income figure was estimated based on the previous year’s figure of £500,000 as well as Officer Shanks view that Mr Kearney was acquiring more properties that might generate income. The £1m taxable gains figure was estimated on the Appellant’s disposals of property, including 350 Saintfield Road.
2006/07 – the £1m income figure was estimated based on the previous two years income figures (referring back to the P85 form), assuming that Mr Kearney’s income from properties would increase over time. The £15m taxable gain figure was estimated based on the £12m of cash and £8.5m loan notes paid on the share exchange as well as the disposal of 334A Glen Road.
Should the Tribunal conclude that some element of any of the assessments was not made to the best of Officer Shanks’ judgment, then the appropriate course is not to set aside the entire assessment, but to use its powers to correct the amount of the assessment (CEC v Pegasus Birds [2004] EWCA Civ 1015, at [28]-[29]). The parties are already inviting the Tribunal to do just that.
On penalties, HMRC’s case is that Mr Kearney was negligent/careless when filing his returns on the basis that he was non-UK resident, having not followed PwC’s advice and having failed to seek updated advice. It must have been clear to him that some of the factual assumptions underlying the PwC advice did not reflect the reality. There are two strands to his negligence/carelessness. First, filing his returns while relying on the PwC advice knowing the numerous factual differences between the facts assumed by the advice and reality. In Gedir v HMRC [2016] UKFTT 188 (TC), the Tribunal identified the following relevant factors when assessing the correct test for establishing whether a taxpayer who uses an agent to complete his tax return has taken reasonable care to avoid an inaccuracy in the return (at [115]). The essential elements are:
The taxpayer consulted an advisor he reasonably believed to be competent ;
He provided the advisor with the relevant information and documents;
He checked the advisor’s work to the extent that he was able to do so; and
He implemented the advice.
Mr Kearney did not provide PwC with all the relevant information and did not implement their advice.
Secondly, Mr Kearney did not seek updated advice once it was clear to him that he was not acting as the PwC advice contemplated. His negligence/carelessness is analogous to that of the taxpayer in Hargreaves v HMRC [2022] UKUT 34 (TCC).
On causation, Mr Kelly says that this has been addressed very recently by the Court of Appeal in the context of extended time limit discovery assessments where the tax loss has been brought about carelessly, in Mainpay Ltd v HMRC [2025] EWCA Civ 1290 (“Mainpay”), at [118]:
“It is not in dispute that HMRC has the burden of proving that section 36(1) applies (as the UT accepted in paragraph 153 of decision 2). On the facts of this case HMRC had made out a prima facie case that Mainpay had been careless, and that that carelessness had brought about a loss of tax. There was then an evidential burden on Mainpay, if it wished to contradict that prima facie case, to adduce evidence to show, on the balance of probabilities, that it had taken reasonable care, and/or that any lack of care did not bring about the loss of tax. Mainpay did not do that.”
HMRC have made out a prima facie case of negligence/carelessness. Mr Kearney has adduced no evidence at all as to what the contents of the further advice would have been if given. In his cross-examination of Officer McVitty Mr Gordon referred to meetings in which PwC stated their view that Mr Kearney was non-UK resident. However, there is no evidence that this was based on updated advice, rather than simply re-stating a previously stated view. At no point has anyone suggested that updated advice was requested and given. Having known HMRC’s case on negligence/carelessness since the statement of case in 2022, Mr Kearney has tellingly never claimed that he asked for and was given updated advice. In those circumstances, in the absence of any evidence, any submission by Mr Kearney as to what advice would have been would be mere speculation.
Turning to the quantum of penalties, Mr Kelly says that the approach adopted by Officer McVitty is correct. As to the areas of dispute which were covered in cross-examination:
Disclosure/telling – the Appellant has been given 20% out of a possible 30% reduction. That is appropriate in circumstances where HMRC’s investigation into his tax affairs arose because of HMRC’s own enquiries (in the colloquial sense) rather than Mr Kearney being forthcoming about the facts which show that he remained UK resident.
Co-operation/helping – Mr Kearney has been given a 30% out of a possible 40% reduction. That is appropriate due to the delays caused by Mr Kearney during the investigation.
In Officer Shanks’ opening letter of 8 December 2009 he requested documents and information, including “schedules of income from investments, employments, directorships, partnerships, share disposals and property transactions from United Kingdom sources”. Mr Kearney did not provide any schedules until 24 November 2017. During cross-examination of Officer McVitty, there was discussion of Officer Shanks’ note of a telephone call on 24 October 2011. It was put to Officer McVitty that there was no point in Mr Kearney/PwC doing the work required to provide the information sought until the outcome of the Gaines-Cooper litigation was known. HMRC note that is not the approach which PwC took. As recorded in Officer Shanks’ note, PwC were undertaking to gather the information while awaiting the outcome of Gaines-Copper: “The accountant said whilst they were gathering this all up they were also awaiting the outcome of the recently decided litigation case before the Supreme Court namely Gaines-Cooper”.
Officer Shanks made a further request for information in his notes of meeting, which were sent to PwC under cover of his letter dated 8 September 2010. A response was not received until 10 September 2012.
In cross-examination, Mr Gordon suggested that the fault for any delays might lie with PwC and not Mr Kearney. There is no evidence of that. Where taxpayers intend to blame their advisors, it is incumbent on them to provide evidence of this, including by waiving privilege if necessary. Mr Kearney has made no effort to do this. The Tribunal must assume that the fault for any delays should be attributed to Mr Kearney.
Giving – Mr Kearney has been given 25% of a possible 30%. That is appropriate where HMRC had to issue an information notice on 11 March 2015 to obtain the information and documents required to check the Appellant’s tax position. That notice sought information which had been requested on 30 January 2015. Officer McVitty’s oral evidence was that the first response which PwC made to her 30 January 2015 request was a phone call on 27 March 2015 to say that they were compiling a response.
discussion
We turn now to consider the issues arising in this appeal.
Was Mr Kearney Resident in the UK during the Relevant Period?
There is no dispute that one question we need to answer here is whether Mr Kearney substantially loosened his ties with the UK during the Relevant Period.
Mr. Kearney undoubtedly had homes, in the sense of places to live, in Gibraltar and Spain throughout the Relevant Period, but that is not determinative of the position. A person can be resident in more than one place at the same time, and the question is not whether Mr Kearney became resident in Gibraltar (he certainly became a Gibraltar taxpayer), but whether he ceased to be UK tax resident as a result of a substantial loosening of his ties.
The question is to be answered on a multi-factorial basis, i.e. by looking at all relevant factors over a period, not necessarily just the Relevant Period itself. The Relevant Period is quite long, and circumstances changed over its course. For example, Patann merged into PBN in 2006, Mr Kearney bought a private jet after that transaction and, of course, the Global Financial Crisis (GFC), which had a significant negative impact on Mr Kearney and PBN, occurred primarily in 2008. There was, however, no suggestion from HMRC or Mr Kearney that his residence position changed (incrementally or as a result of any particular event) at any point during the Relevant Period.
Against that background, therefore, we turn to consider Mr. Kearney’s ties with the UK and the extent to which they changed after 23 March 2003.
Mr Kearney certainly spent significantly less time in the UK after 23 March 2003 than he did before. He was, he told us, very careful to make sure that he never spent more than 90 days in the UK in any tax year. We have discussed in relation to the whereabouts schedule the questions HMRC have raised in relation to that position and explained why we accept his statement that he was never in the UK for more than 90 days in any tax year. That was clearly significantly less than the time he spent in the UK in preceding years.
At all times Mr Kearney had available accommodation in the UK. His wife remained UK tax resident, although she spent a significant amount of time outside the UK with Mr Kearney, and she always maintained a family home in the UK. Mr Kearney’s evidence is that he stayed in this house from time to time. When he was in the UK, he told us that he stayed with his wife, as one would expect, or with his elderly father. Throughout the Relevant Period, therefore, Mr Kearney had and utilised available accommodation in this country.
Mr Kearney’s wife and growing family all remained in the UK. As we have already observed, his wife was UK tax resident throughout the Relevant Period and she did not make any kind of permanent move to Gibraltar. As one would expect, she spent time outside the UK with Mr Kearney and was outside the UK significantly more than she had been before Mr. Kearney took up residence in Gibraltar, but the fact remains that she and all other members of the family remained resident the UK.
Mr Kearney clearly had close ties to his family; his evidence is that, whenever he flew into Belfast en route to Dublin, he would take time to visit his family before he went onto the Republic of Ireland. Those days of arrival would not have counted towards Mr. Kearney’s days in the UK, but they were nevertheless times (on top of his “UK days” for the 90-day count) when he had meaningful family interactions in the UK. More importantly, they indicate a continuing close family bond and familial ties with the UK despite Mr Kearney’s “move” to Gibraltar.
There is no evidence that Mr Kearney loosened any social ties, such as memberships of UK-based clubs or associations, as a result of taking up residence in Gibraltar, or that he had assets, such as a collection of classic cars, to which he was attached and which he either sold when he moved or took to Gibraltar to with him. The explanation for this almost certainly lies in the fact that Mr Kearney was entirely devoted to the business he had built up since the mid-1990s. He described himself was working in the business “24/7” until he moved to Gibraltar.
This brings us to the most important of Mr Kearney’s connections with the UK, his business connections. Mr Keaeney’s evidence, which is not disputed, is that before he moved to Gibraltar he devoted himself wholeheartedly, almost every waking moment, to his business. His evidence, which is not disputed on this point, is that after he moved to Gibraltar he worked less in this business than he did before. His evidence is that he left the day to day running of the UK business to his son, who had worked with him for a significant number of years before he left, and other senior members of staff.
Mr Kearney also built up a small property development business, working in southern Spain. He described this is a hobby; in much the same way that some people take up hobby farming, Mr. Kearney seems to have taken up hobby property developing. There is some inconsistency in the accounts of how much time that activity took up, but there is no real dispute about the fact that Mr. Kearney developed this activity and that this activity was clearly focused outside the UK. This activity was carried on from Mr Kearney’s home in Gibraltar or on various building sites in Southern Spain.
As well as his home in Gibraltar, Mr Kearney owned a property in southern Spain and his evidence is that he largely spent the weekends in Spain and lived in Gibraltar from Monday to Friday, except when his Spanish property development business required his attention in Spain during the working week. This clearly reduced the amount of time Mr Kearney spent in the UK and his focus on the UK. Despite all of this, however, the evidence suggests that Mr Kearney did not retire from his involvement in the business he had built up over so many years. Indeed, it would be very surprising indeed for someone who had devoted his attention so completely to that business to simply abandon it to others when he moved to Gibraltar, particularly given that his retirement planning involved monetising his stake in the business.
The clear evidence in what Mr Kearney told the Northern Ireland Assembly and what PwC, on his behalf, told HMRC is that Mr Kearney continued to be involved in the business he had built up at least until the time that it was merged into PBN in 2006.
We were shown a copy of a Companies House print out of Patann’s register of officers and we can see from this that Mr Kearney was appointed as a director on 25 January 1994 and has always remained, and still remains, a director of that company.
Whilst Mr Kearney clearly did not retire from all involvement with Pattan, exactly what his involvement was and where he carried out his functions is, as Mr Kelly said, somewhat shrouded in mystery. Mr Kearney has never provided an account of what he did in the UK for Patann before the merger in 2006, whereas his witness statement does contain some narrative around his activities after the merger.
The passage in Mr Kearney’s witness statement where he touches on his involvement in the UK business between March 2003 and the 2006 merger reads as follows:
“Back in Belfast my son Brian looked after the business with the assistance of an accountant and a management team. Our plan was for him to keep it ticking over whilst I put together phase 2 of my retirement strategy, which was to sell my shares in Patann Ltd and my other business interests in Northern Ireland at the first opportunity. Brian had worked with me from he left school at 16, now 43, and knew the business as well as I did. I travelled back to Belfast, when possible, given the 90 day rule. I was meticulous in ensuring that I complied with the 90 Day Rule which PWC had told me was fundamental to my Non-Resident Status in the UK.” (our underlining)
The next paragraph in Mr Kearney’s witness statement discusses the genesis of the monetisation/merger plan. We were struck by Mr Kearney raising his travelling back to Belfast at this point in his witness statement. Although Mr Kearney says nothing about this, the obvious inference to draw is that at least some of his travels back to Belfast were business-related and the 90-day rule acted as a brake on the time he could spend here.
If, as he says is the case, Mr. Kearney regarded himself as having retired in 2006 but still needed to carry on activities for the merged PBN business in the UK and to come here on a monthly basis to do that, we consider that it is most unlikely that Mr Kearney’s activities in the UK on behalf of Patann before the merger would have been any less.
The inference we draw from Mr Kearney not having provided an account, either to HMRC during the course of their investigation or to this Tribunal in his witness statement, of what he did for Pattan before the merger in 2006 and where he did it is that such a narrative would not be helpful to him and would (at least) confirm the conclusion we have drawn from the evidence we have.
Mr Kearney has described his activities for Patann SL and his new leisure activities, such as social membership of the golf club in Spain and his acquisition of a power boat, in a way that suggested that this is all he was doing. We do not accept that for a moment. As we have already observed, we find it very difficult to accept that Mr Kearney would simply leave his business to his son and not be involved with it and similarly we find it difficult to accept, given the focus of the business on UK real estate, that his involvement would not have required activity in the UK.
In any event, what we think about the likelihood of Mr Kearney stepping back completely from Patann does not matter, because Mr Kearney’s own evidence to the Northern Ireland Assembly is that he behaved in exactly the way we would have expected. He told the Committee that “I spent 35 years of my life, until 2006, working 24/7 building a business in Northern Ireland through very difficult and challenging times”. There may be an element of hyperbole here, as Mr Kearney was clearly not working 24/7 for Patann in the period 2004-2006 (although he was before then), but it is impossible to reconcile this statement (which was a carefully prepared statement to a public body conducting a very serious, high profile enquiry) with the idea that Mr Kearney had little involvement with Patann after the Spring of 2004.
Our conclusions are entirely consistent with what PwC told HMRC. In their letter of 14 April 2010, having observed that in late 2002/early 2003 Mr Kearney decided that he wanted to “take a less active role in the property development activities of both Patann UK Limited and KP Developments”, they narrated his move to Gibraltar and his new activities there, the merger of Patann into PBN and the fact that Mr Kearney was not involved in the “day-to-day running” of PBN. They then observed that “Since 2004 Mr Kearney has spent an average of 83 days per annum in the UK. The purpose of the visits is for residual business reasons, holidays and family visits.”. The phrases we have underlined make it clear that, whilst Mr Kearney was reducing his role in the UK real estate business (of Patann and then PBN) from his previous “24/7” commitment, he was not ceasing to perform any business functions and his continuing business interests required some UK presence/activity.
So that there can be no doubt about this, based on the evidence we have just discussed, we find as a fact that Mr Kearney continued to be involved in the management of the business of Patann, notwithstanding his move to Gibraltar, and that involvement required his presence and activity in the UK at least to the same extent as he worked for PBN in the UK after the merger in 2006 (as to which see the next paragraph).
If we look at the period after the merger, Mr Kearney was clearly involved in the business of PBN in the UK. His own witness statement records:
“My personal involvement amounted to travelling to the UK for a few days per month to visit the assets concerned and to review progress on the planning applications which had been worked up and submitted by the Professional teams employed by PBN who were responsible for managing the planning process on a daily basis with the planners and relevant councils.”
The part of PBN Mr Kearney was involved with was the property development business. On his evidence, he had oversight of the planning application process. As Judge Baldwin observed in the hearing (and no one disagreed with him), planning is a crucial aspect of property development: the planning process will determine whether a development project can go ahead and, if it can, what form it will take. Mr Kearney continued to be involved in the UK on a regular basis in one of the most important aspects of PBN’s business.
Mr Kearney’s witness statement narrated an increasing involvement in the business after the GFC. A lot of his discussions with NAMA/Anglo Irish seem to have taken place in Dublin, as would be expected, but his witness statement confirms that he continued with his oversight of planning applications, and does not indicate a reduced level of UK activity.
We consider that Mr Kearney may have loosened his business ties to the UK in that he did not work in the UK 24/7 after he moved to Gibraltar, but throughout the Relevant Period he retained outright ownership of (or of a very significant stake in) a substantial business focused on UK real estate, he remained a director of the company/ies carrying on that business and (we have found) he carried on performing high value functions for that business on a regular basis in the UK.
In addition to his involvement with Patann/PBN during the Relevant Period, we have also seen that Mr Kearney continued to be involved in real estate opportunities in the UK. As part of the deal with PBN, he purchased four apartments in two PBN developments in Belfast for £1m. He purchased the property in Crawfordsburn to be refurbished and appointed architects to work on the project. There was also the (relatively small in acquisition value terms) ransom strip acquisition in Thornhill Road, Belfast, albeit Mr Kearney says that he was committed to that project before he left for Gibraltar.
Mr Kearney clearly retained a profile in the Northern Ireland business community. His evidence before the Northern Ireland Assembly included some detailed consideration of an approach to his company to build-out a project referred to as Milltown. He said:
“I will go back to 2008, when we first got involved in [the Millmount site]; I think that the Taggarts owned it at the time. The balloon had gone up, and the Anglo Irish Bank had what it termed a "distress loan". I was contacted by senior executives at the bank to see whether we would be interested in assisting people to come over and to build the site out. Given the process, it said that it would have to put it out to tender to two or three different operations, and, unfortunately, we did not get it.”
As he explained:
“The bank had its distressed loan. I have no doubt that an independent expert will verify that the standard procedure of all banks in such a situation is to review their existing client base to ascertain whether there is any existing customer or customers who would be best placed to assist the bank in dealing with the distressed loan before proceeding down the cumbersome enforcement route. I happen to be considered a capable developer by the bank. However, my tender was, unfortunately, unsuccessful. That is the commercial reality of what happened at that time.”
Mr Kearney’s standing was such that he was considered by Anglo to be a suitable person capable of resolving the difficult situation the Bank found itself in and he was approached and asked to tender (albeit unsuccessfully as it turned out) to do this. It is inconceivable that he would have been invited to tender to take on such a function if he was not active (and visibly so) in the property development industry. If he had been (or was perceived as being) semi-retired since 2004, focused on Spanish/Gibraltarian leisure and business pursuits and largely invisible in the Belfast business community, we cannot see how anyone would have thought him to be “capable” or “best placed to assist the bank”.
Standing back, therefore, we see that Mr Kearney had acquired homes in Gibraltar and Spain and some leisure interests in Gibraltar and leisure and business interests in southern Spain, but he still retained significant family and business ties to the UK. He had the same level of accommodation available after his departure as before and his family remained in the UK as much as they did before and he stayed in close contact with them. He retained significant business connections with the UK, not only through his economic interests in Patann/PBN but also his involvement in those businesses.
Looking at the list of useful factors assembled by the Court of Appeal in Grace, and set out at [10] above, we comment as follows:
The taxpayer must not have a 'settled abode' in the UK if they are to be considered not UK resident. Mr Kearney clearly did not have his only home (in the sense of available living accommodation) here, but that is not the test of residence. He undoubtedly had a home available to him in the UK (where his wife lived) throughout the Relevant Period, He used that home as well as staying with his father and he stored clothes in the UK.
There is no suggestion that Mr Kearney’s presence in the UK was any kind of stop gap measure.
In terms of the amount of time Mr Kearney spent here, that was clearly constrained by the 90-day rule. However, he spent a significant number of days in the UK each tax year during the Relevant Period, on one occasion 89 days. In addition to his clear UK days, he had days of arrival and departure when he was in the UK for part of the day and we have seen that he made good use of his days of arrival to keep in touch with his family en route from Belfast to Dublin. Looking at the nature of his presence in this country, PwC told HMRC that this was for business, family and holiday purposes. He had significant connections with the UK, of course, because he had only lived here until March 2003, his family was here as were his significant business interests.
Mr Kearney came back to the UK for business and family reasons on a significant number of days in each tax year throughout the Relevant Period and there was no reason at any point to expect him to come for fewer days in each year or for different reasons.
Mr Kearney came to the UK regularly for business reasons. His visits were not a regular week every month, but his business obligations him brought back to the UK on a very regular basis. There is no suggestion that his business visits were the result of chance.
Mr Kearney clearly had homes in Gibraltar in Spain and was considered a resident and taxpayer of Gibraltar. None of this stops him being resident in the UK.
Some of Mr Kearney‘s presence in the UK, but by no means all of it, was driven by business needs, but this does not make it any less relevant.
Mr Kearney did not establish a distinct break in his life in the UK. Although he spent much less time in the UK than he did before March 2003, that is clearly not enough. If it were, then the day count test would be all that mattered, and Gaines-Cooper makes it clear that this is not correct. Mr Kearney’s family remained in the UK and some of his visits were for family reasons. He took a lot of trouble to spend time with his growing family whenever he came to the UK. Accommodation remained available to him in the UK and he took it up throughout the Relevant Period. His significant business interests in the UK remained, and he came to the UK regularly to take care of them throughout the Relevant Period.
Mr Kearney’s visits were regular and frequent and he had significant birth, family and business ties to this country. His visits were in part driven by those family and business connections.
Throughout the Relevant Period Mr Kearney had living accommodation available to him in the UK, with his wife or his father, and he utilised that.
See (6) above.
For all these reasons, we consider that Mr Kearney did not substantially loosen his ties with the UK at any point during the Relevant Period and that he remained resident in this country throughout the Relevant Period.
HMRC’s secondary argument: section 334 ICTA
HMRC have a “back up” argument if Mr Kearney is not found to be UK tax resident on common law principles. In such a case, they say that he would be treated as UK tax resident by virtue of section 334 ICTA. This provision was repealed for income tax purposes from (and including) the tax year 2007/8. It was in force during most of the Relevant Period and provided as follows:
“Every Commonwealth citizen or citizen of the Republic of Ireland—
(a) shall, if his ordinary residence has been in the United Kingdom, be the assessed and charged to income tax notwithstanding that at the time the assessment or charge is made he may have left the United Kingdom, if he has so left the United Kingdom for the purpose only of occasional residence abroad, and
(b) shall be charged as a person actually residing in the United Kingdom upon the whole amount of his profits or gains, whether they arise from property in the United Kingdom or elsewhere, or from any allowance, annuity or stipend, or from any trade, profession, employment or vocation in the United Kingdom or elsewhere.”
As we have decided that Mr Kearney was UK tax resident based on the common law rules, we do not need to come to a view on whether section 334 applies here. In any event, as explained above, we are looking at Mr Kearney’s residence status only for the purposes of CGT and we agree with Mr Gordon that section 334 has no application where CGT is concerned; see Hankinson v HMRC, [2009] UKFTT 384 (TC), at [39]-[40].
Did Officer Shanks make a discovery?
Before us Mr Gordon accepted that Officer Shanks concluded that Mr Kearney was UK tax resident during the Relevant Period, although he says that Officer Shanks only reached this conclusion because he was predisposed to do so from the outset of his enquiry. If that were the case, Officer Shanks’ conclusion would not amount to a “discovery” for the purposes of section 29(1) TMA. This is because not only must Officer Shanks have reached a conclusion (which it is common ground he did) but that conclusion must meet an objective test of being “one which a reasonable officer could form” (Anderson at [30]) and clearly a conclusion that was reached only because the officer was predisposed to reach it from the outset could not be a reasonable one.
One very important point to bear in mind here is that, when formulating the necessary subjective belief on the part of the officer, the Upper Tribunal in Anderson expressly accepted that:
26 Any test which is devised as to the necessary subjective belief on the part of the officer must be a practical and workable test. The expression of the test has to recognise that at the appreciate that in certain respects he may not be in possession of all of the relevant facts. Further, the officer may foresee that a discovery assessment might give rise to questions of law some of which might not be straightforward.
27 In Revenue and Customs Comrs v Lansdowne Partners LP, when considering the meaning of “be aware of” for the purposes of section 29(5), it was said that “awareness” was a matter of perception not conclusion and that it was possible to say that an officer was “aware of” something even when he could not at that stage resolve points of law and even though he was not then aware of all of the facts which might turn out to be relevant. Although the word “discover” and the phrase “be aware of” cannot be treated as synonyms, we consider that if it is possible to be aware of something when one does not know all of the relevant facts and one cannot foretell how relevant points of law will be resolved, it cannot be said to be premature for an officer to “discover” that same something even when he knows he is not in possession of all of the relevant facts and does not know how relevant points of law will be resolved.
… Having reviewed the authorities, we consider that it is helpful to elaborate the test as to the required subjective element for a discovery assessment as follows: “The officer must believe that the information available to him points in the direction of there being an insufficiency of tax.” That formulation, in our judgment, acknowledges both that the discovery must be something more than suspicion of an insufficiency of tax and that it need not go so far as a conclusion that an insufficiency of tax is more probable than not.”
To make a discovery, an officer must conclude that the information available to him at least points in the direction of there being an insufficiency of tax. Whilst the officer must have more than a suspicion of an insufficiency of tax, he does not need to conclude that an insufficiency of tax is more probable than not, in other words, he does not need to believe that he can prove his case in a tribunal to the civil standard. He can reach a sufficient conclusion even when he knows he is not in possession of all of the relevant facts and does not know how relevant points of law will be resolved.
We should also bear in mind the cautionary observation of the Upper Tribunal that “It is not for a tribunal hearing an appeal in relation to a discovery assessment to form its own belief on the information available to the officer and then to conclude, if it forms a different belief, that the officer’s belief was not reasonable” (Anderson at [30]). It is not our job to decide what we would have concluded based on the evidence Officer Shanks had; our task is to decide whether his conclusion (that the information available to him at least pointed in the direction of there being an insufficiency of tax) was a reasonable one to reach.
We remind ourselves of the information Officer Shanks had considered by the time he raised his assessments. This comprised:
HMRC Form P85 (Leaving the United Kingdom) completed by Mr Kearney and giving his date of departure as 23 March 2004 and identifying his new address in Gibraltar. He confirms that he will have accommodation in the UK while he is away. He also confirms that he will be receiving income from UK property of around £1m before interest deductions in the year of departure and the following year and lists the various properties and tenants concerned.
On 19 Mach 2004 Mr Kearney completed HMRC Form NRL1 (Application by a non-resident individual to receive UK rental gross), again identifying the properties and tenants and estimating annual rents at £1m before interest deductions.
Officer Shanks says he knew that some UK properties had been retained by Mr Kearney after his claimed date of departure while other properties had been acquired after 23 March 2004.
Mr Kearney was involved in a number of UK property sales and transfers as evidenced by SDLT and Land Registry documentation. It transpired that many of the SDLT returns related to transactions involving companies Mr Kearney was involved in, rather than by Mr Kearney himself. Two SDLT returns we reviewed related to the sale of Mr Kearney’s family home and the purchase of a ransom strip for £5,000.
Mr Kearney had retained 11 UK directorships.
A copy of some classified adverts dated 21 April 2009 relating to the transfer of licences by a company called PBN Wineworld Limited. Mr Kearney was shown as a director of that company. Officer Shanks saw that as evidence of Mr Kearney’s involvement in UK businesses.
A printout (obtained on 28 August 2008) from Construction News of 10 July 2008 showed a planning application for a development of 107 residential units in Belfast by PBN Property Ltd, a company of which Mr Kearney was a director.
An article (from PBN’s website) dated 31 May 2007, which described an “impressive refurbishment and expansion plan” for a shopping centre in Coulby Newham. PBN Property Ltd acquired the site. On 31 May 2007 PBN’s development team presented the scheme and met with local residents and the council. There are extensive quotations from Mr Kearney in the article.
The “Power of Three” article from Property Week (dated 8 September 2006) which noted that Mr Adair had spent the previous year establishing a property company (PBN) with “Gibraltar-based Patrick Kearney” and Brian McConville. It noted that PBN had made two significant acquisitions in addition to the portfolio brought to PBN by Mr Kearney and Mr McConville.
An article from The Irish Times dated 9 October 2009 entitled “The Anglo 10” which describes Mr Kearney, who it says is “based in Gibraltar” as “one of the largest property developers in Northen Ireland through a number of companies”. It describes Mr Kearney as “most prominently involved in the Belfast-based business, PBN Property, with a number of partners” and identifies a number of UK developments PBN is involved in.
HMRC prepared a summary document relating to PBN in November 2009. It shows Mr Kearney, Mr Adair and Mr McConville each having 33 shares. In addition, Mr Kearney is shown as receiving £12m cash and a £8.5m loan note. The value of the three businesses contributed came to £25 in aggregate. £20m of that value was derived from Patann (owned by Mr Kearney), £1m from Castleview (owned 50:50 by Mr Kearney and Mr Adair) and £5m from MJM Marine (owned by the McConville family).
An entry in 4NI.co.uk for Hawthorne Properties giving an address in Belfast and Mr Kearney as the contact.
Officer Shanks’ notes of the meeting with PwC on 17 February 2010 record Ms McAllister informing him that Mr Kearney “travels backwards and forwards to the United Kingdom” and that from 2006 he used his private jet to make “trips backwards and forwards to the United Kingdom”
Officer Shanks was aware that Mr Kearney had registered for VAT from 15 March 2006, as a sole trader, with a trade of “Development building projects”, giving two Belfast addresses.
Officer Shanks was aware that Mr Kearney had given UK addresses on SDLT forms and on his 2007/08 and 2008/09 self-assessments. In addition, the full version of Mr Kearney’s return for 2004/05 gives a UK address.
In his registration report he observed, “For PBN Property Ltd in the 10 month accounting period to 31 December 2006 turnover increased by £4m from the previous accounting period to £9.1m. Capital Gains profits are reflected of £954,423 while tangible assets have increased by £31m to £71.1m.”
We consider that it was reasonable for Officer Shanks to conclude that the information available to him pointed in the direction of there being an insufficiency of tax. From the information available to him, he knew that Mr Kearney was claiming not to be UK tax resident. He could see that a number of transactions had taken place which could have generated gains which would be subject to tax if Mr Kearney were UK tax resident. The £12m in cash generated by the corporate reorganisation is one such transaction. Mr Kearney had estimated that he would be receiving significant amounts of rental income. Very little income was shown on his returns, and a disposal of the rental properties would be an obvious explanation for that discrepancy.
So far as Mr Kearney’s residence status was concerned, the information available did not prove that Mr Kearney remained UK tax resident, but it pointed in that direction, as it indicated that Mr Kearney, regardless of the amount of time he spent in the UK, had not made the required “distinct break”. Officer Shanks had been told that Mr Kearney was travelling back-and-forth to the UK and that he had retained accommodation and substantial business interests here. He could see that Mr. Kearney’s company was involved in a substantial merger transaction. Mr Kearney’s businesses continued to be active, and their profitability had materially increased. All this activity appeared to come from UK real estate, and it would be reasonable to conclude that Mr. Kearney continued to be involved in that. Official documents gave Mr Kearney’s address as being in the UK.
None of these pieces of information on their own would suggest that Mr Kearney remained UK tax resident, and none of them on their own or even cumulatively would prove that on the balance of probabilities, but taken together a reasonable officer might well conclude that they gave rise to much more than a suspicion of an insufficiency of tax and pointed in that direction. It does not matter that Officer Shanks’ enquiries had not concluded and that he knew he needed more information. All that matters is that the information he had could reasonably be taken as pointing in the direction of an insufficiency of tax.
Mr Gordon pressed on us HMRC’s own discovery experts’ views that Officer Shanks did not make a discovery before he met PwC, after the assessments were raised (which Mr Gordon says was optimisticanyway, as Officer Shanks did not learn anything much in his initial meeting with PwC after the assessments were raised). This point was discussed by the experts in relation to the subjective requirement for a discovery, and the experts simply thought that it was probably best to speak to Officer Shanks to find out when the discovery was made, as it was “likely that [he] only suspected until the meeting with PwC”. It has, however, been conceded that Officer Shanks had the required (subjective) state of mind when he raised the assessments. The experts do not address the objective condition. In any event, even if the HMRC experts were of the view that the objective condition was not met when the assessments were raised, the question is whether we consider that the objective condition was met at that time. For the reasons discussed, we consider that it was and, having reviewed all the evidence, we would (if that were the case) respectfully part company with HMRC’s experts.
We should just add at this point that the first two items on the list of information in paragraph [223] point to an insufficiency of income tax on UK rental income. Income tax is, of course, charged on the profits from a UK property rental business wherever the property owner is resident. In effect, Officer Shanks was confronted here with two potential insufficiencies, one of income tax and on one of capital gains tax. Only the second turned on Mr Kerney’s residence position. The only issue between the parties relates to capital gains tax, although, as we will see, the income tax assessment Officer Shanks raised is not irrelevant to the outcome of this appeal.
For the reasons set out above, we have concluded that Officer Shanks discovered (within the meaning of section 29(1) TMA) that chargeable gains which ought to have been assessed on Mr Kearney had not been assessed.
Were the assessments Officer Shanks raised of the amount which ought in his opinion to be charged in order to make good to the Crown the loss of tax?
As we have seen from Anderson, there are two requirements here. The first is that the officer must decide the amount which needs to be assessed to make good to the Crown the loss of tax and that decision must meet an objective criterion. Although this is a phrase which comes from the VAT legislation not TMA, which does not in terms impose a “best judgment” requirement, by way of shorthand we describe an assessment which meets this test as a “best judgment” assessment.
It is common ground that we should look to distil the objective requirement from Johnson v Scott, 52 TC 383 (“Johnson”), and Bi-flex Carbbean Ltd v The Board of Inland Revenue (“Bi-flex”),(1990) 63 TC 515.
Johnson considered estimated assessments in respect of alleged understated trading profits and in respect of income from interest and property. The taxpayer submitted that the inferences which the Inspector submitted to the Commissioners they ought to make on the facts were not, to use his phrase, "legal evidence" upon which they were entitled to act. Walton J observed that “the real point is that such inferences (which [the taxpayer’s counsel] would undoubtedly dismiss as mere guesses) are, of necessity, all that the Crown can lay before Commissioners in such a case as the present.” He went on to observe (at p393):
“Indeed, it is quite impossible to see how the Crown, in cases of this kind, could do anything else but attempt to draw inferences. The true facts are known, presumably, if known at all, to one person only - the Appellant himself. If once it is clear that he has not put before the tax authorities the full amount of his income, as on the quite clear inferences of fact to be made in the present case he has not, what can then be done? Of course all estimates are unsatisfactory; of course they will always be open to challenge in points of detail; and of course they may well be under-estimates rather than over-estimates as well. But what the Crown has to do in such a situation is, on the known facts, to make reasonable inferences. When, in para 7(b) of the Case Stated, the Commissioners state that (with certain exceptions) the Inspector's figures were 'fair", that is, in my judgment, precisely and exactly what they ought to be - fair. The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims. Where an inference, of whatever nature, falls to be made, one invariably speaks of a "fair" inference. Where, as is the case in this matter, figures have to be inferred, what has to be made is a "fair" inference as to what such figures may have been. The figures themselves must be fair. So far from representing an inference that the Commissioners did not appreciate the Inspector's figures fully, this demonstrates that they did. I think the point can be put conversely in another way. At times during Mr. Hall's address to me it almost appeared as if what he was requiring by way of his "lawful proof" was a duly audited certificate as to the Appellant's undisclosed expenditure. Of course, this was not what he was seeking; but once it is clear that this is not, and in the nature of things cannot be, available, then it follows as night follows day that some form of estimate must be made”
The points we draw from the phrases we have underlined are that it is perfectly permissible for an inspector to estimate the amount of tax due by making reasonable/fair inferences, but what an inspector cannot do is make “wild or extravagant claims”.
In Bi-flex the tax authority (“the Board”) undertook an audit of the appellant company’s affairs for the years 1971 to 1974. The Board were unable to trace any tax returns for those years and duplicates were duly provided by the company, which claimed however that all its other books and records relating to those years had been lost in a fire in 1975. The Board did not accept the figures in the duplicate returns and assessed the Company to further tax under subs (2)(b) of s 39 of the Income Tax Ordinance, subsequently re-enacted as s 83 of the Income Tax Act, which provided:
(1) The Board shall proceed to assess every person chargeable with the tax as soon as may be after the day prescribed for delivering the returns.
Where a person has delivered a return, the Board may--
accept the return and make an assessment accordingly; or
refuse to accept the return and, to the best of its judgment, determine the amount of the chargeable income of the person and assess him accordingly.”
One of the company’s grounds of appeal to the Privy Council was that the assessments were not made to the best of judgment as required by section 83(2)(b). The Privy Council (Lord Lowry giving its decision) identified similar statutory provisions which had been enacted in different Commonwealth jurisdictions permitting the Revenue in given circumstances to make a best of judgment assessment which had been discussed in a number of cases.
In N Ltd v Commissioners of Taxes, (1962) 24 S.A.T.C. 655, a decision of the High Court of Nyasaland, the court observed (at p658):
"The onus is upon the appellant, by satisfactory evidence, to show that the assessment ought to be reduced or set aside, that is, the appellant has to attain the standard of proof in a civil suit to prove his case. When the evidence of the appellant and his books are satisfactory, which is an identical standard of proof, the burden of proof is shifted from the appellant to the Commissioner. The circumstances that the facts are peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. Obviously, the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer or, in a company, of its agents. In the absence of some record in the mind or in the books of the taxpayer, it would more often than not be quite impossible to make a correct assessment. The assessment would necessarily be a guess to a more or less extent and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books. The application of section 41 is not excluded as soon as it is shown that an element of the assessment is a guess or that it is very probably wrong. It is prima facie right and remains right until the appellant shows it is wrong. The taxpayer must, as a general rule, show not only negatively that the assessment is wrong but also, positively what correction should be made to make it right or more nearly right."
In C.I.T., United and Central Provinces v Badridas Ramrai Shop, (1937) LR 64 Ind. App. 102, the Privy Council (per Lord Russell of Killowen) observed at page 115:--
"The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary."
In a case from Guyana, Argosy Co. Ltd v Inland Revenue Commissioner, [1974] 1 WLR 514, the Privy Council (per Donovan) commented at page 516:--
"Once a reasonable opinion that liability exists is formed there must necessarily be guess-work at times as to the quantum of liability. A resident may be known to be living well above the standard which his declared income would support. The commissioner must make some estimate, or guess, at the amount by which the person has understated his income. Or reliable information may reach the commissioner that the books of account of some particular taxpayer have been falsified so as to reduce his tax. Again the commissioner may have to make some guess of the extent of the reduction. Such estimates, or guesses may still be to the best of the commissioner's judgment--a phrase which their Lordships think simply means to the best of his judgment on the information available to him. The contrast is not between a guess and a more sophisticated estimate. It is between, on the one hand, an estimate or a guess honestly made on such materials as are available to the commissioner, and on the other hand some spurious estimate or guess in which all elements of judgment are missing."
In Trautwein v Federal Commissioner of Taxation, (1936) 56 CLR 63, a decision of the High Court of Australia, Latham CJ observed:
“In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.
The application of s 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right--and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, 'at least as a general rule', go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say 'as a general rule' because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the commissioner for further consideration."
In Bi-flex the Privy Council noted that there were no reported cases dealing with the corresponding UK provision. This was section 29(1)(b) TMA, which at that time provided:
Except as otherwise provided, all assessments to tax shall be made by an inspector, and-- ….
if it appears to the inspector that there are any profits in respect of which tax is chargeable and which have not been included in a return under Part II of this Act, or if the inspector is dissatisfied with any return under Part II of this Act, he may make an assessment to tax to the best of his judgment."
The Privy Council was referred to what they described as the “helpful judgment” of Woolf J in Van Boeckel v Customs and Excise Commissioners, [1981] 2 All ER 505, dealing with a similar provision relating to VAT, section 31(1) of the Finance Act 1972. The Privy Council endorsed and accepted Woolf J’s comments (at p511C):
"The second contention which was made before the tribunal was that the commissioners made no real investigations into the manner in which the Hop Pole was run, either by interviewing a manager or by visiting the public house when it was open. In view of the taxpayer's state of health and the fact that the officers well knew that he played no active part in the actual running of the Hop Pole this was an omission so serious as went to the root of the whole assessment.
With regard to that second contention, the approach to the provisions of s 31 which I have indicated earlier in this judgment again, in my view, makes it clear that the criticisms of the commissioners were not justified. In fact, quite clearly on the material which was before the tribunal the commissioners had made substantial investigations in this case. As I have indicated, unless the situation is one where no material is before the commissioners on which they can reasonably base an assessment, the commissioners are not required to make investigations. If they do make investigations then they have got to take into account the material disclosed by those investigations. Obviously, as a matter of good administrative practice, it is desirable that the commissioners should make all reasonable investigations before making an assessment. If they do that it will avoid in many cases, the necessity of appeals to the tribunal. However to try and say that in a particular case a particular form of investigation should have been carried out is a contention which, in my view, as a matter of law, bearing in mind the wording of s 31(1), is difficult to establish."
In Bi-flex itself the officer (Mr Chang) had attempted to calculate the company’s likely profits by looking at the accounts of other undertakings. There were wide variations of gross profit and turnover between these undertakings and, when cross-examined, Mr Chang had admitted that he had not been able to distinguish between firms which did their own selling and those which had employed agents, nor had he known which firms had offered credit or how discounts had affected the company's figures compared with those of other firms. At p522 the Privy Council commented:
“The members of the Court of Appeal considered that to rely on such a microscopic examination, as Warner J.A. put it, of Mr. Chang's figures conflicted with the principles on which a best of judgment assessment should be approached and pointed out that Mr. Chang had, in the absence of any books from the Company, used an acceptable accounting method to make the best assessment he could on the sparse material available. There must necessarily be a large element of guess-work in an assessment made in such circumstances and their Lordships on this point are in complete agreement with the Court of Appeal. So far as the Company's first ground of appeal is concerned, they are of the opinion that the best of judgment assessment was a proper one in the circumstances of this case.
The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right. It is also relevant, when considering the sufficiency of evidence to displace an assessment, to remember that the facts are peculiarly within the knowledge of the taxpayer.”
Bi-flex was decided in 1990. The present section 29 TMA was substituted by Finance Act 1994 and, as we have already noted, the current section 29(1) does not in terms contain any “best judgment” requirement. That notwithstanding, we were invited by Mr Kelly and Mr Gordon to look to Bi-flex for guidance in distilling the objective requirement referred to in Anderson. We have approached our analysis on that basis, but we do consider it to be of more than just passing interest that in 1994 Parliament re-enacted section 29 without the words “best judgment”.
Looking at the extracts from Bi-flex and the earlier decisions referred to by the Privy Council in Bi-flex, set out above and in particular the passages we have underlined, we learn the following about the objective requirement:
The requirement for objectivity does not preclude the officer making a guess which turns out to be wrong - N Ltd);
The requirement of objectivity does preclude an officer from acting dishonestly or vindictively or capriciously. The officer must exercise judgment and make what he honestly believes to be a fair and proper estimate; there must necessarily be guess-work, but it must be honest guess-work - Badridas;
The contrast is between a guess honestly made on such materials as are available, which meets the objective standard, and a spurious estimate or guess in which all elements of judgment are missing - Argosy;
There is no need to carry out an investigation unless there is no material on which the officer can reasonably base an assessment – Van Boeckel;
A large element of guess-work/estimation may be required where only sparse material is available; Bi-flex.
These points are entirely consistent with the conclusion we drew from Johnson, that it is perfectly permissible for an officer to estimate the amount of tax due by making reasonable/fair inferences, but what an inspector cannot do is make “wild or extravagant claims”.
These conclusions inevitably mean that a taxpayer has a high hurdle to jump before they can impugn an assessment on the basis that it does not meet the objective/best judgment requirement. The reason for that is, as this Tribunal (Judge Frost and Mr Farooq) observed in Wyatt v HMRC, [2024] UKFTT 00867 (TC) (“Wyatt”), at [26], that an overassessment can be dealt with through the normal appeal process and Parliament is unlikely to have wished to encourage collateral attacks on assessments beyond the normal appeal process. A similar point was made by the Court of Appeal in relation to challenges to VAT best judgment assessments in CCE v Pegasus Birds Ltd, [2004] EWCA Civ 1015 (“Pegasus Birds”) at [38]. In that case it was held that that an assessment would only fail the “best judgment” test if there had been no honest and genuine attempt to make a reasoned assessment of the VAT payable. Even in such a case, the Court of Appeal was not persuaded that the correct response was to set aside the whole assessment.
Pointing to Pegasus Birds, Mr Kelly suggested in argument that, if we concluded that some element of any of the assessments was not made to the best of Officer Shanks’ judgment, then the appropriate course is not to set aside the entire assessment, but to use our powers to correct the amount of the assessment, which (he said) is what the parties are already inviting the Tribunal to do. To the extent that Mr Kelly is submitting that, if the assessment fails to meet the objective requirement, our response should be to adjust the quantum of the assessment and no more, we do not agree with him. Whatever may be the position with the VAT legislation, it is clear from Anderson that an assessment raised under section 29(1) TA must meet the objective requirement.
In Pegasus Birds, the Court of Appeal held that an assessment only failed the best judgment test if there had been no honest and genuine attempt to make a reasoned assessment of the tax payable, and we respectfully consider that to be a very neat summary of the various observations we have seen in the cases we have discussed. On that basis we would agree with Mr Kelly that, if there is more than one component of a single assessment and there has been some honest and genuine attempt to make a reasoned assessment in relation to at least one component, then the assessment meets the objective requirement and the proper response is to adjust the quantum through the normal appeal process. However, if there has been no honest and genuine attempt to make a reasoned assessment in relation to any component, then the entire assessment will fall.
Perhaps unsurprisingly, we were not pointed to very many Tribunal cases where section 29 assessments have fallen at this hurdle.
In Wyatt HMRC considered that the taxpayer had undertaken developments of various properties as a trading venture. However, the Officer made it clear that assessments would be issued on an alternative basis, to include property disposals as both on trading account and on capital account. Unfortunately, however, the assessments did not set out separate assessments for the tax due (i) if the disposals were trading transactions and (ii) if they were capital disposals. Instead, the assessments each contained a single figure which was the sum of the amount that would be due on a trading transaction and the amount that would be due on a capital disposal. The assessments therefore purported to tax the same disposal proceeds twice – once as a trading disposal and once as a capital disposal. HMRC themselves raised the point that the assessments did not (as a matter of fact) reflect the officer’s opinion. The Tribunal decided that the assessments were not validly made. While reaching that conclusion, it made these points:
“25. The assessment must not exceed the amount which, in the officer’s opinion, makes good the loss of tax. In the officer’s opinion the tax due was at most the amount due on the basis of a trading transaction (or, if higher, the amount due on a capital transaction, but not both). Because the Relevant Assessments in each case exceeded that figure, they fall outside the boundaries of the assessment power.
26. It might be suggested that the overassessment is something that can be properly dealt with through the normal appeal process. Section 50 TMA provides that, where on an appeal to the tribunal, the tribunal decides that an assessment overcharges the appellant, then the assessment is to be reduced accordingly. We are conscious that Parliament is unlikely to have wished to encourage collateral attacks on assessments beyond the normal appeal process covered by s 50.
27. However, to take such an approach overlooks a point of fairness noted by HMRC.
28. By making an assessment that exceeds the amount that the officer actually believes to be due, HMRC deprives the taxpayer of the option of simply accepting the assessed figure. The taxpayer is instead compelled to enter into an appeals process even if they agree with the officer’s view.
29. We therefore consider that s 29 TMA should be read as constraining the power of an officer to raise an assessment to be no more than the maximum amount which in their opinion needs to be charged to make good the loss of tax.
30. This is not to say that the officer cannot make assumptions, possibly very generous assumptions, in order to ensure that the assessment is not insufficient to cover the loss of tax. But where the officer has clearly expressed their opinion as to the maximum possible tax liability then they are not entitled to assess for more than that figure.”
Cussens v HMRC, [2019] UKFTT 0543 (TC), concerned income tax assessments made by HMRC under section 29(1) TMA on the basis that they had made a discovery, that the appellant had failed to declare trading profits for the relevant fiscal years. HMRC said that the assessments were fairly based upon inferences that flow from information in their possession. HMRC had calculated trading profits on dealings in cars bought from British Car Auctions and sold on “trade” using a 50% net profit margin the Tribunal described as “unthinkable … in such a highly competitive second-hand car market. We doubt that even that level of net profit margin would have been achieved if the cars were being sold retail”. The Tribunal described HMRC’s actions as follows:
“28. In our judgement when the figure of 50% net profit margin was adopted by the respondents, that could not possibly have been a fair inference and/or a judgement which could properly be characterised as "best". We are entirely satisfied that if any judgement whatsoever was brought to bear upon this issue, it certainly cannot be described as "best". It smacks of being a situation where, because the appellant had been uncooperative and was sticking his head in the sand, the respondents decided to issue assessments almost " in terrorem", in a bid to persuade the appellant to engage properly in the matters under review.”
Not surprisingly, the Tribunal quashed all the assessments.
Ashraf v HMRC, [2018] UKFTT 97 (TC) (“Ashraf”), concerned income tax assessments for several years. Each notice was accompanied by a calculation of the amount charged by that assessment. The tribunal was unable to see what the description was of the amounts of income charged by HMRC’s assessment. They asked HMRC, who replied in post-hearing submissions:
“HMRC contend they have not been able to identify an income source and so have not allocated it to trading income as in Johnson [v] Scott. HMRC have allocated the amounts to other income is the self-assessment calculations sent to Mr Ashraf with the discovery assessments”
The Tribunal described the question before it as: can section 687 (Charge to tax on income not otherwise charged) ITTOIA cover the amounts which the appellant was said to have received in that case? The Tribunal held that it could not apply to the deficit HMRC had identified between Mr Ashraf’s income and expenditure. On the basis that HMRC had failed to identify a taxable source of income, the Tribunal discharged the assessments, even though the taxpayer, in an effort to settle the case, admitted to a deficit of outgoings over explained incomings of around £70,000 and was wholly unable to say in cross-examination from what source the deficit arose.
In Ritchie v HMRC, [2017] UKFTT 449 (TC) (“Ritchie”), the Tribunal considered (at [381]) that the amount assessed made no sense on any measure of the gain. In addition, the round sum nature of the amount assessed suggested it was a figure plucked from the air simply to "protect" HMRC's position. That case concerned the extent to which a gain on a property disposal attracted principal private residence relief. There were two issues: time apportionment a dispute over the permitted area. The inspector raised assessments on a gain of £200,000. She said this had nothing to do with time apportionment. On that basis, it could only reflect the permitted area dispute, but, given an overall gain of £1.8 million and HMRC's view throughout that the permitted area was 0.5ha and not the total area of 0.7ha, then the gain on the non-permitted areas would be c £515,000 (two-sevenths of £1.8 million), not £200,000.The inspector knew what the District Valuer thought on this point and so she had more than a suspicion to work on. In that light, her assessment made no sense.
These cases all represent relatively extreme situations: where the officer raised an assessment for an amount far higher than the amount of he had decided he should assess, where a tax liability was calculated on an “unthinkable” assumption and used to justify the issue of an assessment in terrorem, where an assessment purported to charge an amount of income but HMRC could identify no source, where an assessment flew in the face of everything the inspector knew.
In the light of that discussion, we turn now to the assessments Officer Shanks raised. In his witness statement, he said that he estimated amounts for “other income” and “capital gains” based on the following evidence:
CNR memo dated 15 June 2004 outlining UK rental income (“rents of almost £1 million per annum”).
P85 form dated 19 March 2004 outlining rental income (“approx. £1m before interest deduction”)
Email from Local Compliance Inspector detailing £12m share reorganisation
Approximately 350 pages of printed SDLT and Land Registry documentation dated 1 September 2009. This led him to believe that there could have been a plethora of property disposals which could have led to a loss of tax due to Mr Kearney’s claimed non-resident status.
He supplemented this in his oral evidence, explaining as follows:
2004/5– the £500,000 income figure was based on the P85 form which stated that Mr Kearney would have income from letting of approximately £1m in 2004/05, against which Officer Shanks allowed £500,000 of estimated expenses and interest deductions. The £500,000 taxable gains figure was estimated based on Mr Kearney’s disposals of property in subsequent years, of which Officer Shanks had evidence.
2005/06 – the £750,000 income figure was estimated based on the previous year’s figure of £500,000 as well as Officer Shanks’ view that Mr Kearney was acquiring more properties that might generate income. The £1m taxable gains figure was estimated on the Appellant’s disposals of property, including 350 Saintfield Road (the family home).
2006/07 – the £1m income figure was estimated based on the previous two years income figures (referring to the P85 form), assuming that Mr Kearney’s income from properties would increase over time. The £15m taxable gain figure was estimated based on the £12m of cash and £8.5m loan notes paid on the share exchange as well as the disposal of 334A Glen Road.
The first point to make is that Officer Shanks gave an account of his methodology. Whether he was right (which he very clearly was not by a country mile), whether we would have gone about the task in the same way he did or think that we (or indeed Officer Shanks himself) could have come up with a better estimate of the relevant tax amounts are not the right questions to ask. We agree with Mr Kelly that expressions like “reasonable estimate” (indeed, “best judgment” itself) can be apt to mislead to the extent they suggest that the assessing officer needs to engage in a protracted, scientific process designed to get as close to the figure which ultimately proves to be the correct one as they can. As Judge Frost and Mr Farooq observed in Wyatt, “an officer can make assumptions, possibly very generous assumptions, in order to ensure that the assessment is not insufficient to cover the loss of tax”. To the extent that the presenting officer in Wyatt suggested that the officer must try to calculate a figure he thinks the taxpayer would accept, we consider that he was wrong. What matters is whether the officer was making an honest and genuine attempt to make a reasoned assessment of the tax payable.
As far as the income figures are concerned, Mr Gordon described Officer Shanks’ approach as “cavalier”. We do not agree with Mr Gordon’s point here. When he raised the assessments, Officer Shanks had two documents signed by Mr Kearney which estimated his gross annual rental income at £1m and his annual rental profit after deduction of finance costs at £500k. Using forecasts contained in official documents signed by Mr Kearney (and which identified the properties and tenants concerned) as the basis on which to calculate his income tax liability does not suggest to us that Officer Shanks was not making an honest and genuine attempt to make a reasoned assessment of the tax payable. He assumed an annual increase in rental profits. We might not have assumed the levels of increase he did, but there was thought in his methodology, and assuming a level of increase in profit, because of subsequent property acquisitions, or just rising rents, is not an irrational thing to do. None of this represents an “unthinkable” basis for calculating Mr Kearney’s income, nor does it fly in the face of anything Officer Shanks knew.
Turning to capital gains, Officer Shanks knew that Mr Kearney had received £12m in the 2006-07 tax year. Mr Gordon criticises Officer Shanks for not realising that the gain would have attracted 75% taper relief. The amount of taper relief available depended on the nature of the asset disposed of and the holding period. It did not need to be claimed, but only a taxpayer would know the amount of taper relief to be applied to a gain. Similarly with allowable deductions against sale proceeds, only a taxpayer will know what they are. It is not uncommon for founders of companies to have a low base cost in their shares if the value of the business comes from their endeavours and finance was provided by a third party. Again, only a taxpayer will know the position here. It may not end up being correct, but it was not unthinkable for Officer Shanks to start from an assumption that Mr Kearney’s gain on disposing of his shares in Patann was equal to the proceeds he received and that approach did not fly in the face of anything he knew.
Officer Shanks did, however, assess Mr Kearney for additional gains of £3m in 2006-07. We do not think, as Mr Kelly suggested at one point, that the additional £3m can be explained by the loan notes. The face value of the loan notes was £8.5m. One would expect the transaction to have been structured so that Mr Kearney rolled over any gain on his Patann shares into the PBN shares and loan notes he received, so that he was only taxable when he monetised those assets and the chargeable gain in 2006-07 remained £12m. If the transaction had been structured so that Me Kearney was taxable on receipt of the loan notes, there is no reason to think that the gain would not have been £20.5m. We cannot see any basis on which the loan notes could explain a £15m gain.
Similarly, for the two previous tax years, Mr Shanks assessed Mr Kearney for additional gains of £500k (2004/5) and £1m (in 2005/6).
Officer Shanks knew of two other disposals beyond the share transaction – one in the 2005/6 tax year and one in the 2006/7 tax year. For the 2004/5 year, Mr Shanks could not identify any chargeable capital disposals.
The disposal in 2005/6 was of Mr Kearney’s former family home. He was one of two vendors. The sale price was just over £1.3m. Mr Gordon says that the gain would likely have been somewhat less, given acquisition costs and disposal costs, and a substantial proportion of the gain would have been covered by main residence relief; at the time, the last three years of ownership of a former main residence were exempt from capital gains tax. Therefore, there was no rational basis for suggesting that Mr Kearney made taxable gains totalling £1m in the 2005/6 tax year.
In respect of the 2006/7 tax year, the only disposal was the £500k disposal made by Mr Kearney to himself, his wife and son. Thus rationally, Mr Gordon says, there is no way to attribute to Mr Kearney any more than one third of this as a likely gain – and that is before one considers allowable deductions.
Essentially, Mr Gordon’s submission is that, although he denied “plucking the figures out of the air”, Officer Shanks was effectively doing just that.
If we look at the gains on the two disposals which have been identified, we can see that it might be reasonable at first sight for Officer Shanks to increase the £12m figure for 2006/7 to at least £12.5m. He saw a transaction between Mr Kearney as vendor and Mr Kearney, his wife and son as purchasers, but Officer Shanks would not necessarily know the proportions in which the three vendors were requiring the property nor would he know what the gain was (or whether the proceeds figure was subject to adjustment under section 28 TCGA). He might reasonably proceed on the basis the Mr Kearney’s on that transaction was £500k.
Similarly in relation to a disposal of the matrimonial home, main residence relief needs to be claimed. As Ritchie demonstrates, there are conditions which need to be satisfied and the whole of any gain might not be covered by the relief. Officer Shanks would not know the proportions in which Mr and Mrs Kearney owned the property, nor the amount of the gain arising on the disposal or the proportion which qualified for relief. In those circumstances, it does not seem to be at all unreasonable to assume a gain of £1m for 2005/6.
Even on that basis we are still left with at least £2.5 million of “unaccounted” gains in 2006/7 and £500k in 2004/5. Officer Shanks’ explanation for this was that he knew that Mr Kearney’s business activities involved the regular buying and selling of real estate and he took the view that it was not unreasonable to assume that that activity continued throughout the Relevant Period. Officer Shanks appealed to the principle of continuity, but we agree with Mr Gordon that the principle of continuity (in terms) does not apply in the context of CGT. Nevertheless, we do not think it is unreasonable to assume that someone whose investment activities involve buying and selling real estate assets on a regular basis will continue to do that throughout any given period. Here there was no reason for Officer Shanks to think that Mr Kearney would stop buying and selling properties. The SDLT returns demonstrated that Mr Kearney was involved, albeit through corporate vehicles, in real estate transactions.
Putting all of that together, it does not seem to us to be unthinkable for Officer Shanks to take the view that Mr Kearney continued to dispose of real estate investment assets throughout the Relevant Period, nor is it unreasonable for Officer Shanks to make generous estimates of the amounts of gains Mr Kearney made.
For all these reasons we consider that, when looking at the individual components of the assessments Officer Shanks raised, there is no evidence that he did not engage in an honest and genuine attempt to make a reasonable estimate of the amounts of tax due. Quite the country, his own evidence and our analysis would suggest that he did exactly what was required of him.
If we are wrong in our conclusion that, at least in part, Officer Shanks’ assessments were the result of an acceptable process, the next question we need to ask is whether assessments which are something of a curate’s egg, containing elements which individually are the result of an honest and genuine attempt to make a reasonable estimate of the amount of tax due and elements which do not meet that requirement, are invalidated in toto by the presence of the components which do not meet the required standard. Mr Gordon raised this point in the context of his suggestion that the income tax component of the assessments was “cavalier” and failed to meet the required standard. His submission is that an assessment for a single amount of tax made up of components one or more (but not all) of which is the subject of a “random guess” or otherwise not the result of an honest and genuine attempt to make a reasonable estimate of the amount of tax due will fall in its entirety.
Mr Gordon pointed to Wyatt as authority for his submission. In that case there was no suggestion that the two amounts calculated by the officer, the CGT amount and the income tax amount, were individually wrong. His mistake was adding the two figures together and assessing for an amount which was significantly greater than the amount he had decided should be assessed. As the tribunal observed, and there cannot be any doubt about this, section 29 does not allow an officer to assess an amount different from the amount he has decided is due. That is not the situation we find ourselves in at all.
We do not agree with Mr Gordon’s submission at all. As we can see from cases such as Pegasus Birds, an assessment will only fail the best judgement criteria if no honest and genuine attempt to make a reasoned assessment of the tax payable has been made. In circumstances where a significant amount of, perfectly adequate, effort has been put into calculating part of the assessment and then the resulting figure has been rounded up to protect the revenue or a further component (for whatever reason) fails to meet the objective criterion, it is not the case that no honest and genuine attempt to make a reasoned assessment of the tax payable has been made.
We consider that, where an officer has devoted a significant amount of genuine and honest effort to calculating the amount of tax due and some of the components of his assessment meet the required standard but (looked at individually) some (for whatever reason) do not, the correct approach is to correct the inaccurate assessment through the ordinary section 50 appeal process. We accept that there is no authority (or none identified to us beyond Wyatt) for this proposition, but we cannot accept that parliament would have intended that such an assessment should fall in its entirety. That would be a bizarre way to approach the management of the public finances.
For completeness, we do not consider that Ashraf is authority for the proposition Mr Gordon says it is (that misdescribing an amount of income which has been adequately quantified invalidates an assessment). It is authority for a very different proposition, with which we agree entirely, that an income tax assessment fails the section 29(1) objective criterion if HMRC cannot identify a source of income.
For the reasons we have just set out, we have concluded that Officer Shanks’ state of mind when he concluded that Mr Kearney was UK tax resident and that there was a consequential loss of tax met the objective test (point (3) in paragraph [24] of Anderson) and that his opinion as to what ought to be charged to make good the loss of tax satisfied the relevant objective criterion (point (5) in paragraph [24] of Anderson). Mr Kearney accepts that Officer Shanks had the required state of mind in relation to the question of his personal tax residence to meet the subjective condition for a discovery (point (2) in paragraph [24] of Anderson) and that the condition in section 29(5) is met. The assessments were also raised in time and so it follows that the assessments were validly raised.
Was Mr Kearney negligent/careless?
Mr Kearney’s self-assessment returns for the Relevant Period did not include chargeable gains, because he considered that he was neither resident nor ordinarily resident. We have explained why we consider that Mr Kearney was resident throughout the Relevant Period. His self-assessment returns were, therefore, incorrect. To be liable to a penalty, Mr Kearney must have been negligent/careless when he submitted his return and that negligence/carelessness must have been the cause of the inaccuracy in his self-assessment.
HMRC say that he was negligent/careless because he took advice from PwC about ceasing to be UK resident and ordinarily resident but did not follow that advice. For his part, Mr Kearney says that he was not negligent/careless. He took advice from PwC and followed it and engaged PwC to prepare his tax returns.
The factors to be considered in deciding whether Mr Kearney was negligent/careless in circumstances where he has engaged a professional adviser are those identified by the Tribunal in Gedir:
The taxpayer consulted an advisor he reasonably believed to be competent;
He provided the advisor with the relevant information and documents;
He checked the advisor’s work to the extent that he was able to do so; and
He implemented the advice.
Relevant to factor (4), in Hargreaves at [77] the Upper Tribunal held that, in deciding whether a taxpayer who had taken professional advice on what he needed to do to escape CGT had been negligent in completing his tax return, the FTT “was entitled to its conclusion that there was a prima facie case that Mr Hargreaves had been negligent in failing to obtain further advice from PwC”. There were differences between what PwC had told Mr Hargeaves to do and what he did, and the FTT “… was entitled to conclude that these changes of circumstances would have caused a reasonable taxpayer to ask PwC whether it would still be appropriate to claim to be resident outside the UK throughout 2000–01 and that Mr Hargreaves’ failure to do so amounted to a prima facie case of negligence”.
No one suggested that PwC were not competent to advise Mr Kearney on his residence position, nor did anyone suggest that Mr Kearney was able to check PwC’s advice on residence. The question we need to address is a blend of factors (2) and (4).
We have set out relevant passages from PwC‘s advice at [134] above. The important points they make are:
They assume that Mr Kearney will sell his private residence in Northern Ireland, but later tell him that this is not crucial.
They tell Mr Kearney that, to avoid a CGT liability on his proposed real estate sales, he needs to become not resident and not ordinarily resident in the UK and maintain that position for at least five complete and consecutive tax years.
To become non-resident, he will need to observe the day count limit. In operating the day count, dates of arrival and departure are ignored, but “to be on the safe side” Mr. Kearney should not assume that this concession will be applied.
In the context of a passage addressing ordinary residence, Mr Kearney is told that coming to the UK to work on a regular base or to attend to the affairs of a UK company or business could prevent non-ordinary residence. As a result, Mr Kennedy is told that, if Patann needs to continue in business, it would be preferable that he and his wife resign as directors and keep UK visits to a minimum.
They tell Mr Kearney that he will not be liable to UK tax on disposing of his properties as long as his visits to the UK do not exceed the time limits, subject to the comments about business links with the UK.
PwC’s advice was subject to some considerable analysis in the course of the hearing. Mr. Gordon says that Mr Kearney did not do anything PwC told him not to do in the context of avoiding UK tax residence. At paragraph 2 of their letter, they are assumed that his house would be sold, but they expressly told him that this was not necessary. Whilst he maintained his links with Patann and other businesses, PwC had simply told him that this was important in the context of not maintaining ordinary residence in the UK. They did not say that he needed to avoid these links to avoid UK residence, as opposed to ordinary residence.
In some respects, PwC‘s advice is not a model of clarity. In paragraph 2 of their letter they say that Mr Kearney’s home in Northern Ireland will be sold, but go on in paragraph 4 to say that it is possible to retain a private residence in the UK and still lose UK resident status. Then they say that it is “to your advantage” that the home will be sold as HMRC would need to be satisfied that the reason for retaining a UK home was consistent with a person’s aim of leaving the UK. Someone reading that letter could fairly conclude that, whilst it was not necessary that they sold their home in order to become non-resident, retaining it would not be a neutral/positive factor as, if they retained a UK home, they would need to justify doing so in light of their aim to be non-resident.
Also in paragraph 7, the writer tells Mr Kearney that the sale of his UK home means that he will have one less “hurdle” to cross in his intention of losing his UK residence status. At no point in the letter to do PwC explain what these hurdles are. There is, for example, no reference to a distinct break. However, no one reading that letter could fairly conclude that there were a not several factors, hurdles, in retaining or losing UK residence status. Although the letter stresses the importance of the day count, it very clearly does not say that the day count is everything. If that were the writer’s position, he would not have referred to hurdles or discussed additional factors.
So far as the day count is concerned, the author describes aspects (unidentified) of HMRC’s guidelines as a concession, which would be denied in avoidance cases, and he links this point to what he describes an old case on ordinary residence and continuing business links. The author says that, if Patann is to continue in business, which clearly did, it will be preferable for Mr Kearney and his wife to resign as directors “and keep UK visits to a minimum”. He immediately follows this by observing that the rule which leaves out of account in the overall day count days of arrival and departure is concessionary and might be denied if HMRC took the view that this concession was being exploited for tax reasons. The inter relationship of all these points is not crystal clear, but the author clearly links continuing business connections to a potential inability to discount days of arrival and departure in the day account.
By the time we get to paragraph 12, Mr Kearney is told that what is important is not exceeding the day count subject to the long discussion in paragraph 11.
Someone who read this letter in the round would take from it that, if the individual wanted to avoid being liable to UK CGT by reason of non-residence, they would need to limit their days in the UK in line with the day count, ideally not retain a private residence unless that was consistent with non-resident status and limit their UK business interests unless they were prepared to resign as directors of the relevant companies and keep their UK visits to a minimum. They should also include dates of arrival and departure in the day account.
There are significant differences between the impression one might collect from this letter about what needed to be done and what Mr. Kearney did. We know that he and his wife retained a home in the UK. We know that Mr Kearney retained his directorships and that he did not keep his UK visits to a minimum. If his days of arrival and departure are included in the day count, he would be way over the limit.
Give all of these points (even without the added complication of the lack of precision in PwC’s letter, for example the way it refers to one fewer hurdle without the referring to what all the hurdles are and the cautionary comment that parts of HMRC’s guidance are concessionary), we consider that a reasonable person in Mr Kearney’s position, rather than subjecting PwC‘s letter to a very precious dissection, would have gone to PwC and told them that there were significant differences between what they appeared to be telling him to do and what he had in fact done.
We do not consider that a reasonable person could draw from this letter that they could keep a family home in the UK, ignore a very large number of days of arrival and departure in their day count, retain their UK directorships and business interests in the UK and come to the UK to attend to the affairs of their UK businesses and (at least without further thought) conclude that they were not UK tax resident. The only thing that a reasonable person could do in that position would be to go back to the author of the letter, explain exactly what they had done and ask for further advice on the actual fact pattern.
On this basis, HMRC have clearly established a prima facie case of negligence, the evidential burden must shift to Mr Kearney. Only he and PwC know what passed between them. Mr. Kearney has not produced any evidence, not even in his witness statement, of what passed between him and PwC when PwC were preparing his tax returns. He has not told us what he told them, if indeed he told them anything at all, or what further advice, if any, PWC gave him. Nor is there any evidence from PwC about what Mr Kearney told them when they were preparing his tax returns or what advice they gave him.
Mr. Gordon said that Mr Kearney dealt with PwC over a number of years and it is hard to see how they could have allowed him to complete his tax return in the way he did without being satisfied about his residence position, and of course PwC continued to maintain their position that Mr Kearney was not resident throughout the course of HMRC’s inquiry. There is quite some force in this submission. We would have expected PwC to be pro-active in re-analysing Mr Kearney’s residence position every year by reference to the fact pattern in that year, but we think it is going too far to say that, just because Mr Kearney was advised by a firm of PwC’s status and they filled in his tax returns for him, it is more likely than not that Mr Kearney would have been asked, and would have told PwC, about the differences between what PwC appeared to be advising in their letter and what he had in fact done. PwC might not have thought it worth asking Mr Kearney about the fact pattern because they assumed he had followed their advice, or they may have made some cursory enquiries (for example, about Mr Kearney’s day count that year) which were inapt to identify the real issues.
The only conclusion we can draw from the complete lack of evidence from Mr Kearney and PwC about what passed between them is that Mr Kearney did not tell PwC of the differences between what PwC appeared to be advising in their letter and what he had in fact done.
Turning back to our point that PwC may not have asked Mr Kearney about his residence status, a taxpayer is responsible for their tax returns, and we do not consider that a reasonable taxpayer in Mr Kearney’s position, even one advised by a firm as august as PwC, would have waited for PwC to make enquiries about their residence status each year. A reasonable taxpayer in Mr Kearney’s position would have realised that there were material differences between what PwC appeared to be advising and what he did and drawn PwC’s attention to them. There is, of course, no evidence about this at all.
It is not sufficient for there to be a penalty that Mr Kearney was negligent or careless in completing his self-assessment returns. That negligence or carelessness must also have been the cause of the inaccuracy in his return. This effectively requires us to ask what would have happened if Mr. Kearney had told PwC about the differences between PwC’s advice and the actual fact pattern. Would PwC nevertheless have advised Mr. Kearney to complete his tax returns on the same basis?
The best evidence of this, of course, would come from PwC themselves, but there is no evidence from PwC’s on this point.
In the years leading up to the decision of the Supreme Court in Gaines-Cooper views in the adviser community on the weight that could be put on the day count in determining whether a person was UK tax resident clearly evolved. Officer McVitty herself acknowledged that there was a lot of stress put by professional advisors on the day count at that time. However, we can see from the decision in Gaines-Cooper itself that that view was not universally held among advisers.
At [57] Lord Wilson refers to a letter in July 2001 from HMRC to various representative bodies and the “big five” firms of accountants. He concluded that, in the light of the wide circulation of that letter, it was hard to imagine that tax practitioners did not realise that HMRC required that an individual (other than one sent abroad to work full-time) who claimed to have become non-resident should genuinely have left the UK as required by the ordinary law.
At [56] he referred to a meeting between Arthur Andersen and HMRC from which he concluded that Arthur Andersen, at any rate, were under no illusion about the enquiry needed into a claim for non-residence when not dealing with people sent abroad to work.
At [50] Lord Wilson refers to evidence put before the court that HMRC‘s practice in relation to people who said that they had gone non-resident changed in 2004/5. HMRC said they did not have the alleged practice before that time of not enquiring into a distinct break, but what does seem to have happened was that HMRC increased their level of scrutiny of claims by individuals to have become non-resident around that time.
We were not shown any evidence about exactly when views began to change within the adviser community about the importance of a distinct break in addition to the 90 day count, but Lord Wilson‘s comments in Gaines-Cooper would suggest that the advisor community, certainly sophisticated firms such as PwC and Arthur Andersen, was well aware of the need for a distinct break long before the time the returns we are concerned with were being prepared.
This would suggest that, if PwC were aware of Mr Kearney’s fact pattern, they might well have concluded that he was UK tax resident and not allowed him to submit his tax return returns in the way that he did.
In addition to these points, we can see from the letter that PwC wrote that they considered that there was far more involved in Mr Kearney ceasing to be UK tax resident than the 90-day count, and indeed there was some sophistication in the way that the 90-day count applied to days of arrival and departure. PwC’s advice letter evidences the approach that Lord Wilson would have expected them to have understood by the Autumn of 2001.
The only evidence that Mr Gordon points to that suggests the PwC would have taken the view that Mr Kearney was not UK tax resident, was that they continued to maintain that position throughout HMRC’s inquiry. That was undoubtedly the case. However, as Mr Kelly said, we do not know whether this is based on any further analysis by PwC or whether they were simply repeating and defending Mr Kearney’s position, given that they were appointed to represent him in his dealings with PwC and (presumably) to do their best to defend his position. We do not think that we can conclude from the fact that PwC continued to represent Mr. Kearney throughout HMRC’s enquiry into his residence position and defend the position he took in his returns that they would have advised him when he submitted his tax returns that he was not UK tax resident and that they would have prepared his tax returns for him to submit in the way that they did.
The passage that Mr Kelly pointed us to in Mainpay suggests that, once HMRC have shown a prima facie case of negligence, whether causative of the inaccuracy or not, the evidential burden shifts to the taxpayer to show that there was no negligence that caused the inaccuracy. We do not need to consider this point in any detail because HMRC have established a prima facie case of negligence including causation. For the reasons just explained, there is more than a prima facie case that, had they known what Mr Kearney had done, PwC would not have prepared his tax returns for him to submit on the basis that he was not UK tax resident.
For all these reasons HMRC (on whom the burden of proof on this issue lies) have satisfied us that that Mr Kearney was careless or negligent in the way he completed his tax returns and that carelessness or negligence was the cause of the insufficiency of tax shown in those returns. In principle, therefore, Mr. Kearney is liable to the penalties HMRC have assessed.
In reaching this conclusion we have not lost sight of the point Mr Gordon calls the “elephant in the room”, that HMRC have not used the extended assessment time limits, available where a taxpayer is negligent, to assess Mr Kearney. Officer Shanks raised his assessments in 2010 because he was worried that he was running out of time, and indeed the ordinary time limit for the 2003/4 year had already expired. He could have used negligence to justify later assessments but chose not to do so. We agree with Mr Kelly that HMRC’s failure to assess based on negligence (particularly for 2003/4) does not prevent them assessing a penalty on the basis of negligence/carelessness. The issues are separate. In any event, Officer Shanks explained why he thought Mr Kearney might have been guilty of negligence/carelessness.in cross examination and told PwC at the time that he was raising assessments (albeit within the normal time limits) for tax lost through Mr Kearney’s fraud/neglect.
Should the Quantum of the Penalties be reduced?
We can deal with the question of penalty discounts relatively briefly. Under the old penalty regime HMRC had a policy of reducing penalties by reference to disclosure, cooperation and seriousness. Perhaps slightly surprisingly, the total discounts could amount to 110% of the potential lost revenue (which is the maximum penalty).
Looking at the discount for disclosure (where HMRC‘s policy normally allows the reduction by up to 20%, but allows a potential 30% discount on an unprompted disclosure) Officer McVitty gave Mr Kearney the full 20% discount for prompted disclosure. Mr Gordon says that Officer McVitty unlawfully fettered her discretion here by not being prepared to give the full 30% disclosure and reserving this for prompted disclosures. This is HMRC’s published policy, which Officer McVitty should follow. It is clear that 30% is (and should be) an exceptional discount as the additional 10% is what can make the total discount (at least in theory) exceed the potential lost revenue (the maximum penalty) and compensate for the other two discounts not being awarded in full. Mr Kearney did not make a prompted disclosure, and so we agree that Officer McVitty was correct to award a 20% disclosure discount here.
Officer McVitty did refer when outlining how she reached a 20% discount to Mr Kearney continuing to maintain his non-residence position. We do not consider that it is at all appropriate to reduce the penalty discount just because a taxpayer has maintained their position in a difficult case, which this clearly is. Clearly, if a taxpayer maintains a wholly unreasonable position the outcome might be different. It would be wrong to reduce the disclosure discount for this reason here, but 20% (rather than the exceptional 30% discount) is appropriate given the prompted nature of Mr Kearney’s disclosure.
So far as cooperation is concerned, Officer McVitty allowed 30% out of a maximum of 40%. She suggested that Mr Kearney had caused a number of substantial delays in responding to HMRC‘s requests. Although this enquiry clearly went on for very long time, there were also significant delays on HMRC‘s part and no suggestion so far as we can see that Mr. Kearney himself was the cause of any delays. There is no reason we can see not to give Mr Kearney the full 40% discount for cooperation.
So far as size and gravity are concerned, Mr. Kearney is at fault because he did not draw PwC’s attention to the material differences between their advice and the actual fact pattern on a fundamental and significant issue (his residence status) where he was engaged in tax planning (on his own evidence, tax was a factor in his decision to move outside the UK) and in two of the three years in issue the tax amounts were substantial. We would award a lower discount than Officer McVitty did, but we do not consider that we should do so in a way which increases the ultimate penalty above the 15% fixed in the new regime for prompted disclosures of careless inaccuracies where the taxpayer has been fully cooperative . So, we would award a 25% discount here.
The upshot of this is that the penalty loading will be 15%, rather than the 20% in Officer McVitty‘s assessments, as the abatements we have allowed total 85%.
As far as the new penalty regime is concerned, the minimum penalty is 15% and the penalty range is 15-30%. We can see no reason not to give Mr. Kearney similar full discounts for cooperation, in the form of telling, helping and giving. That leaves Mr Kearney with a penalty of 15% of the tax lost.
Disposition
For the reasons set out above, we have concluded that:
Mr Kearney was resident in the UK throughout the Relevant Period;
the assessments Officer Shanks raised were validly raised in accordance with 29(1) TMA; and
Mr Kearney was careless/negligent when he submitted his self-assessments returns for the tax years in question, and his carelessness/negligence led to a loss of tax; but
the penalties should be reduced to 15% of the potential lost revenue in each of the four years.
As the figures in the assessments have been agreed between the parties, subject only to the resolution of Mr Kearney’s residence status, the appeals against the tax assessments are dismissed, but the appeals against the penalties are allowed to the extent only that the penalty loading is reduced to 15%.
Right to apply for permission to appeal
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.
Release date: 14th January 2026
Appendix
(Details of assessments etc)
1. HMRC made the following discovery assessment pursuant to section 29 of the Taxes Management Act 1970 (“TMA”) which was subsequently revised following a statutory review:
Year | Date | Initial Amount | Revised Amount |
2004/5 | 26.03.2010 | £397,039.70 | £681,653.60 |
2005/6 | 26.03.2010 | £691,974,40 | £86,039.40 |
2006/7 | 26.03.2020 | £6,391,347 | £1,065,946.20 |
2. On 30 June 2021, HMRC issued a closure notice pursuant to section 28A TMA, amending the self-assessment contained in Mr Kearney’s return for 2009/10, resulting in an additional amount of £98,787.78 in tax being due.
3. HMRC issued the following penalty determinations pursuant to section 95, TMA (2004/05, 2005/06 and 2006/07) and Schedule 24, Finance Act 2007 (“FA 2007”):
Year | Date | Amount |
2004/5 | 19.03.2019 | £136,330.72 |
2005/6 | 19.03.2019 | £17,207.88 |
2006/7 | 19.03.2019 | £213,189.24 |
2009/10 | 22.02.2019 | £18,522.71 |
