One of the problems of trying to design a nice, neat efficient computer system to administer and collect taxes is that the poor, unfortunate officers at HM Revenue and Customs are concerned that they have to deal with people – and as many can confirm, sometimes people can be wayward, forgetful or just act in a different way to that expected…

This leads to Tax Cases…

In S. Sehgal, a lady claimed repayment of capital gains tax on the grounds that she had never made the relevant claim.

However, she had paid the tax, signed her Tax Return, declaring the gain, plus relevant documents had been filed at Companies House showing she had been a shareholder in the Company at the time it was sold.  The documents were filed at the time she was Company Secretary.

She argued she was not beneficial owner of the shares, but had just left everything to her husband to deal with.  The First Tier Tribunal inferred that (before her divorce) she had broadly consented to this pattern.

It is apparent that afterwards she wished she had not, but this was not really the issue before the Court, which is whether she was entitled to overpayment relief under Para 2 Schedule 1 AB TMA 1970.

The courts found she was not because the evidence showed she was the legal owner of the assets sold, and there was no real evidence produced to suggest she was not also the beneficial owner.  Hence, it seemed fair to assume her original tax return was correct and the tax was due.

Interestingly, the Courts also recorded the fact that the share sale and associated tax payment had been raised in divorce proceedings and so had effectively been considered already in the settlement.

Although academic, because of the underlying decision, the Judge found that HMRC had not proven the claim was time barred.


The lessons for professionals advising on family wealth disputes are:-

a) Always consider tax consequences from a commercial/family law context as well as tax compliance.

b) Make sure proper documentation backs up the true intentions of the clients.

The statutory rules that specify the maximum penalties which can be levied by HMRC according to certain types of conduct ranging from negligent behaviour to deliberate and concealed are familiar. However, the rules in force prior to April 2008 allowed HMRC to take an approach of giving abatements and mitigations for various categories of conduct such as abatements for disclosure, cooperation and seriousness.

A recent case (Dr J Kohal) has been heard by the First-tier tribunal (FTT), finding that they were not obliged to follow the approach taken by HMRC. Instead, the judge advised that the FTT should take an overall view of the appropriate penalty for the offence in question according to the law.

In this case, Dr Kohal had declared that he had no income for 2003/04 on his tax return when in fact he had worked and received bank deposits of nearly £80,000. HMRC concluded that the taxpayer had been negligent in completing the return and imposed a penalty of 60%. Before the penalty was imposed, HMRC gave abatements of 20% for seriousness and 20% for cooperation to reduce the penalty from the 100% maximum charge to 60%. Following the instruction by the judge to ensure that the most appropriate penalty was levied, the FTT ignored the abatements given by HMRC and agreed that the 60% penalty imposed was too high for negligent conduct. The FTT ruled that the penalty should be reduced to 45%.

Whilst the case related to legislation that has now been out of date for a number of years, this case serves as a reminder of how the tribunals serve as a buffer to protect the taxpayer from the occasional heavy hand of HMRC. More importantly, this case demonstrates the fact that HMRC practice is not the law, and taxpayers should seek to challenge when they disagree with HMRC’s interpretation.