Harold Wiesenfeld & Anor v The Commissioners for HMRC

1. Mr Wiesenfeld and Mr Strom (together the “Appellants”) appeal to this Tribunal against a decision (the “Decision”) of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 16 November 2018.

2. In the tax years ended 6 April 2010, 2011, 2012 and 2013, the Appellants were involved in a property development business carried on in Poland. In relevant tax returns for those years, they claimed relief against income tax for losses they claimed to have incurred in connection with that business. HMRC, however, formed the view that the losses were incurred, not by the Appellants, but by a company incorporated in Poland, Alex Harold Sp zoo (the “Company”) which they controlled and that the Appellants were not, therefore, entitled to claim relief for the losses. Having opened enquiries into the Appellants’ tax returns for the relevant years, HMRC issued closure notices denying the Appellants the loss relief that they had claimed. HMRC also imposed penalties for what they regarded as careless inaccuracies in the Appellants’ tax returns for the relevant years.

3. The Appellants appealed to the FTT against both HMRC’s closure notices and the penalties. In the Decision, the FTT dismissed the appeals against the closure notices. It concluded that the Appellants were liable to penalties, but reduced them in amount.

4. With the permission of the Upper Tribunal, the Appellants now appeal against the FTT’s decision on the penalties. The Appellants do not have permission to appeal against the FTT’s decision on the closure notices and HMRC have not cross-appealed against the FTT’s decision to reduce the penalties. Having applied to the Upper Tribunal for permission to appeal only against the FTT’s decision on the penalties, the Appellants subsequently sought to amend their grounds of appeal so as to include an appeal against the FTT’s decision on the closure notices. In a case management decision released on 19 June 2019, the Upper Tribunal refused the Appellants permission to amend their grounds of appeal and gave reasons for its refusal. Relevant statutory provisions

5. It was common ground, as it had to be, that if the Company rather than the Appellants carried on the property development activity, the Appellants were not entitled to relief for any losses that the Company incurred. It was also common ground that, if the Appellants carried on the property development activity in partnership, the partnership would be “transparent” so that the Appellants would be entitled to relief for losses incurred in the partnership business. We will not quote statutory provisions relevant to these uncontroversial propositions.

6. Schedule 24 of Finance Act 2007 (“Schedule 24”) provides for penalties to be payable if a self-assessment return relating to income tax contains an “inaccuracy” (paragraph 1 of Schedule 24).

7. Paragraph 4 of Schedule 24 links the amount of penalty to the degree of culpability for the inaccuracy. If the inaccuracy arises because of a “failure to take reasonable care”, as to which it is common ground that HMRC bear the burden of proof, it is categorised as “careless” and attracts the lowest level of penalty. “Deliberate” inaccuracies attract penalties at a higher rate. Inaccuracies that do not arise from a failure to take reasonable care, or from deliberate actions, attract no penalty.

8. Schedule 24 sets out a detailed and prescriptive mechanism for calculating a penalty by applying a penalty percentage to “potential lost revenue” and then mitigating the penalty to reflect, for example, the degree to which the taxpayer co-operated with HMRC in correcting the inaccuracy in the return. Since the relevant dispute in this appeal relates to the threshold question of whether a penalty is due, and not how such a penalty should be calculated if it is due, we will not set out these provisions. The decision of the FTT

9. References in square brackets are to paragraphs of the Decision unless the context requires otherwise. The relevant procedural background and pleadings before the FTT

10. The Decision does not contain a record of the procedural background or pleadings that were before the FTT. Since those matters are relevant to our conclusions, we therefore set out our own summary.

11. On 13 January 2017, HMRC issued closure notices to the Appellants denying relief for the losses that they had claimed. On 1 March 2017, HMRC imposed penalties on both Appellants. The Appellants appealed to HMRC against both the closure notices and penalties and HMRC completed an internal review of their decisions on 4 May 2017.

12. On 2 June 2017, the Appellants notified their appeals against both the closure notices and the penalties to the FTT. The Appellants’ Grounds of Appeal focused on the closure notices. Little, if any, argument was provided as to why HMRC were not entitled to charge penalties (and we infer that this is because the Appellants hoped to establish that, since they were entitled to relief for the losses as claimed, there was no “inaccuracy” in their returns and so no question of a penalty being due).

13. On 17 October 2017, HMRC served Statements of Case in relation to both Appellants’ appeals. HMRC’s Statements of Case focused exclusively on the closure notices and advanced no positive case as to why the Appellants were liable to penalties.

14. On 4 November 2017, the FTT made case management directions (the “Directions”). Direction 2 required both HMRC and the Appellants to serve witness statements by 5 January 2018. Direction 8 provided as follows: 8 Witness attendance at hearing: At the hearing any party seeking to rely on a witness statement may call that witness to answer supplemental questions (but the statement shall be taken as read) and must call that witness to be available for cross-examination by the other party (unless notified in advance by the other party that the evidence of the witness is not in dispute).

15. On 11 January 2018, Mr Wiesenfeld provided an extremely brief witness statement. The entirety of the evidence set out in his witness statement was as follows: I rely on attendance and submissions by my accountant who has full authority in the matter. The evidence is all included in the bundles which my accountant sent in December and the bundle supplied by Mr Schryber [a reference to Dr Schryber who was the HMRC officer presenting the case] at the same time. My accountant will put forward the case which will stress the point that at all times both myself and Mr Strom believed the company to hold the property in Poland on Trust for them in equal shares. I do not believe there is more to be said at this time.

16. The FTT’s hearing bundle included an unsigned, undated witness statement from Mr Strom in virtually identical terms.

17. Mr Weissbraun provided a witness statement dated 10 January 2018. Again, that was brief. In addition to a short paragraph setting out his views on the circumstances in which contracts could be the subject of rectification, the totality of Mr Weissbraun’s witness evidence was as follows: The evidence is all included in the bundles which I sent in December and the bundle supplied by Mr Schryber at the same time. I will put forward the case which will stress the point that at all times Mr Strom, Mr Wiesenfeld and I believed the company to hold the property in Poland on Trust for them in equal shares. From the moment the project was entered into, everyone concerned was aware that only as a result of Polish law was the project forced to be entered as that of a Polish Company.

18. There was evidently some slippage in the FTT’s case management timetable as the hearing was listed for 7 November 2018. Before the hearing, HMRC realised that their Statements of Case did not articulate any positive case on the penalties. On 24 October 2018, when serving their skeleton argument, HMRC told Mr Weissbraun that they would be applying to amend their Statements of Case and to put forward further witness evidence. HMRC made an application to that effect to the FTT on 25 October 2018, enclosing a copy of their proposed Amended Statement of Case (and copied their application to Mr Weissbraun on behalf of the taxpayers). HMRC sent Mr Pumfrey’s proposed witness statement to the FTT and to Mr Weissbraun on 29 October 2018.

19. In their Amended Statements of Case, HMRC put their case on carelessness as follows (using the Statement of Case for Mr Strom as an example):

12. For the reasons given above, HMRC submit that the Appellant’s two tax returns contained errors, namely the claims for relief for the Polish Losses. HMRC submit that if he had taken reasonable care to ascertain how the Polish development business was being operated then he would have concluded that the losses accrued to the Polish company and not to himself. HMRC therefore submit that the errors in the returns were down to carelessness on the part of the Appellant, and the penalties were properly charged within the terms of Schedule 24 to the Finance Act 2007.

20. As Mr Carey fairly accepted, this pleading was somewhat short in particulars. It was not said, for example, what steps a reasonable taxpayer would have taken to check the accuracy of the returns or which such steps Mr Wiesenfeld or Mr Strom failed to take.

21. Mr Pumfrey’s witness statement explained why he had formed the view that the Appellants’ behaviour was careless. In summary, Mr Pumfrey made the following points: (1) The Appellants had both signed the Partnership Agreement (referred to in more detail below) that referred to the activities being undertaken by the Company. (2) The Appellants knew that the Company had submitted accounts to the Polish tax authorities showing that the Company had made losses. They should, therefore, have known that the Company (rather than the Appellants themselves) had incurred those losses. (3) A reasonable taxpayer in the position of the Appellants would have taken advice on the ability or otherwise to claim relief for the losses. However, Mr Pumfrey had not been made aware of any specific advice that the Appellants took to confirm that they were entitled to relief for those losses.

22. On 31 October 2018, the FTT wrote to both parties to say that HMRC’s applications to amend their Statements of Case and to rely on Mr Pumfrey’s witness evidence would be allowed unless the Appellants objected by 4pm on 5 November 2018 and that if there was any objection, the application would be determined at the hearing on 7 November.

23. On 1 November 2018, Mr Weissbraun emailed the FTT and HMRC to say that the Appellants had no objection to HMRC’s applications. Given the FTT’s letter of 31 October 2018, that meant that both applications were allowed. However, the fact remained that the Appellants had only articulated their case on penalties very shortly before the hearing.

24. The FTT hearing took place on 7 November 2018. Neither Appellant attended the hearing, but Mr Weissbraun attended on their behalf. The FTT recorded Mr Weissbraun’s explanation as to why Mr Strom was not attending namely that “he was suffering from serious and long-lasting ill-health” but did not make a positive finding that this was the case. We acknowledge Mr Carey’s point to the effect that no medical evidence was provided. However, we accept the assurance of Mr Weissbraun, who has acted as Mr Weissbraun’s accountant for several years and therefore knows him well, that Mr Strom suffered a stroke in 2015 which has left him paralysed, profoundly deaf and confined to a wheelchair. Mr Strom, therefore, had a good reason for not attending the hearing. The FTT made no finding as to why Mr Wiesenfeld did not attend the hearing. Before us, Mr Weissbraun explained that his advice at the time was that Mr Wiesenfeld’s attendance was not necessary and, since Mr Wiesenfeld understandably felt apprehensive about attending the hearing and being subjected to cross-examination, it was decided that he would not attend. That is not a good reason for his non-attendance, particularly given Direction 8 of the Directions referred to at [14] above.

25. Mr Pumfrey, HMRC’s witness, did attend the hearing as required by Direction 8 of the Directions. However, no challenge was made to his witness evidence (see [17] of the Decision). The FTT’s decision

26. The FTT found at [7] that Mr Wiesenfeld claimed relief for losses in all tax years from, and including, 2009-10 to, and including, 2012-13. Mr Strom only claimed relief for losses in his tax returns for the 2011-12 and 2012-13 tax years.

27. Mr Wiesenfeld’s tax returns for the years from 2009-10 to 2012-13 stated that he did not carry on business in partnership (see [33]). The FTT made no finding as to whether Mr Strom’s tax returns for 2011-12 and 2012-13 contained a similar statement. However, we were shown copies of Mr Strom’s tax returns for those years that were in evidence before the FTT and have concluded that, like Mr Wiesenfeld, Mr Strom did not claim in those tax returns to be carrying on business in partnership.

28. Central to the Appellants’ case before the FTT against both HMRC’s closure notice and the penalties was their argument that the Appellants carried on business in partnership and that the Company held its assets on trust for the Appellants. That, the Appellants argued, entitled them, as opposed to the Company, to claim relief for losses associated with the Polish property business.

29. In support of their case, the Appellants relied on a document headed “Partnership Agreement” dated 10 June 2007 (a date before the Company was incorporated on 10 August 2007). We will refer to that document as the “Partnership Agreement” (even though the FTT’s ultimate conclusion was that the Polish property venture was not carried on in partnership between the Appellants).

30. The FTT quoted the entirety of that document at [20] as follows: This partnership agreement is made between Alexander Strom of [address] and Harold Wiesenfeld of [address]. Both parties will provide equal funds from their own private resources or through bank facilities to purchase and develop property primarily in the Lodz area of Poland. The partnership will be managed through the offices of Mr Wieslaw Nowakowski… Any loan facility entered into will be the equal responsibility of the partners personally. Mr Nowakowski will have no personal responsibility or liability. In compliance with Polish legislation which permits foreign nationals to invest in property only through a limited company, a company will be formed named Alex Harold Ltd in whom title to any properties bought and traded will be [vested]. The company will be registered at Mr Nowakowski’s home address. Mr Nowakowski (a Polish national) will hold 2% of the shares in Alex Harold Ltd and will be authorized to sign agreements under a Power of Attorney. The balance of 98% of the shares will be held by Alexander Strom who frequently travels to Poland on other textile related business and who will be holding 50% of the remaining 98% shares in trust for Harold Wiesenfeld. The beneficial owners of the properties will be Alexander Strom and Harold Wiesenfeld who will each have beneficial ownership of 48% of any property or assets purchased and will be equally responsible for costs, profits and losses.

31. The FTT directed itself that the onus was on the Appellants to establish that they were entitled to relief for the losses which they had claimed (see [45]). It rejected the Appellants’ case that the Polish business was carried out in partnership with the Company holding its assets as nominee for the Appellants deciding, at [52], that the evidence “paints the clearest possible picture that it was the [Company] and not the individuals that was engaged in the Polish property venture”. The FTT gave the following principal reasons for that conclusion: (1) The Partnership Agreement could not have operated as a declaration of trust made by the Company since it was not entered into by the Company not least since it was made before the Company even existed (see [47]). There was no contemporaneous document stating that the Company was buying any property otherwise than for its own benefit (see [51(2)]). (2) The Partnership Agreement could not have evidenced a common intention of the Appellants that, when the Company was formed and came to acquire assets, it would hold those assets on trust for the Appellants in equal shares since that would be to ignore the fact that the Partnership Agreement envisaged that Mr Nowakowski was to hold some beneficial interest in both the assets of the Company and shares in the Company (see [21] to [23] and [48]). (3) The Company had borrowed money (from Bank Zachodni WBK and from Strom International Limited) to finance the purchase price of properties. By contrast, there was no evidence that the Appellants had taken out loans in their own names (see [50]). (4) The Company drew up accounts showing that it was trading. It submitted tax returns to the Polish tax authorities between 2008 and 2012 with those returns showing trading losses in four years and a profit in one year (see [51(3)]). (5) The Appellants did not “register a partnership with HMRC” and did not submit partnership tax returns (see [51(4)]). Moreover, in their tax returns for the relevant years, the Appellants had stated expressly that they were not in partnership. (6) The FTT considered evidence that the Appellants had put forward of an architect who provided services in connection with the Polish property business successfully suing Mr Strom for damages in Poland arguing that this demonstrated that the business was carried on in partnership (and the architect was aware of this) since she had sued Mr Strom and not the Company. However, the FTT decided that evidence was inconclusive since conceptually, the Company’s shareholders (or directors) could under Polish law have become liable for debts owed by the Company (see [41] and [49]).

32. The FTT reached the above conclusions by reference to documentary evidence and the brief witness statements of the Appellants and Mr Weissbraun to which we have already referred. During the hearing, Mr Weissbraun had asked the FTT for permission to give oral evidence at the hearing dealing with the existence of a trust. The FTT explained, and rejected, this request in the following passages of the Decision.

18. Mr Weissbraun stated that he was prepared to give evidence under oath that he had heard Mr Wiesenfeld declare in his presence that the Company was holding its assets on trust for Mr Wiesenfeld and Mr Strom. We considered however that this would amount to no more than hearsay and that although HMRC would have the opportunity to cross examine Mr Weissbraun on what he had heard they would be unable to cross examine Mr Wiesenfeld himself. As such this evidence would have limited value. Had Mr Weissbraun wished to call Mr Wiesenfeld as a witness he could have done so, but he did not.

19. We also had the benefit of brief witness statements from Mr Wiesenfeld and Mr Strom. Again the appellants had plenty of opportunity to make more detailed witness statements but they did not. We therefore relied on the evidence which was presented to us and which made clear that they intended to enter into a partnership.

33. The FTT’s conclusion that the Appellants were not carrying on the Polish property business in partnership resulted in it dismissing the Appellants’ appeals against the closure notices. It then went on to consider the penalties directing itself that the burden was on HMRC to show that the Appellants were “careless” and that the penalties were properly calculated (see [62]). It observed that, thereafter “it is for the taxpayers to show a reasonable excuse or special circumstances” In fact here is no statutory defence of “reasonable excuse” to the penalties at issue in this appeal. Paragraph 11 of Schedule 24 would permit HMRC, or the FTT on appeal, to reduce penalties by reason of the presence of “special circumstances”, but no such circumstances were argued to be present. .

34. As to the threshold condition for application of the penalties, the FTT directed itself at [63] that:

63. An inaccuracy in a return is careless if the inaccuracy is due to a failure to take reasonable care. It is not careless for a taxpayer to prepare his tax return using a basis which HMRC disputes, provided the basis adopted is objectively reasonable.

35. The FTT concluded that the Appellants had been careless. Their reasons are brief and we will quote them in their entirety:

64. However, in this case, Mr Strom traded in the UK both as a sole trader and through a limited company and so would be aware of the difference. The document of 10 June 2007 stated that Mr Strom travelled frequently to Poland on business and implied that Mr Wiesenfeld did not. In both cases, developing property in Poland was an unusual and complex activity which apparently turned sour fairly quickly. Any reasonable taxpayer would take advice on his tax position. Both individuals had experience of UK property development and could be expected to understand the principles of calculating profits and losses.

65. In our view, given that the factors listed above, which paint the clearest possible picture that the Polish Company carried on the Polish trade, claiming losses as individuals was, at the least, careless. (The reference to the “factors listed above” at [65] appears, in context, to be a reference to paragraph [51] that sets out reasons why the FTT concluded that the evidence in favour of a partnership was “very weak”).

36. Having reached this conclusion, the FTT went on to consider the amount of the penalties that should be imposed. It decided to reduce the penalties but, since HMRC have not appealed against that aspect of the Decision, we need say nothing more about the reasons underpinning that conclusion. The Grounds of appeal against the Decision

37. The Appellants appeal against the Decision on three grounds: (1) Ground 1 – The FTT erred in concluding that the oral evidence that Mr Weissbraun was proposing to give consisted, insofar as it was relevant to the penalties, of hearsay evidence. (2) Ground 2 – Whether or not Mr Weissbraun’s evidence consisted of hearsay evidence, the FTT was wrong to decline to exercise its power to admit that evidence As originally formulated, Ground 2 read “To the extent that Mr Weissbraun’s evidence consisted of hearsay evidence, the FTT was wrong to decline to exercise its power to admit that evidence”. That formulation would mean that Ground 2 only needed to be considered if that evidence was hearsay. However, it was clear that the Appellants wish to challenge the FTT’s exercise of discretion in refusing to admit the evidence, hearsay or not, and we therefore permitted an amendment to the formulation of Ground 2 during the hearing. . (3) Ground 3 – The FTT was not entitled on the facts that it found or on the evidence before it, to conclude that HMRC had discharged their burden of proving that they had behaved “carelessly”.