SPC00458

Assessment – Error or Mistake Relief – Assessment Excessive – No relief for bad debts – taxpayer not entitled to bad debt relief – Debts not bad in disputed years – Taxpayer agreed the assessments -  Assessments final and conclusive – Appeal dismissed – Taxes and Management Act, s 33 &  s54.

THE SPECIAL COMMISSIONERS

	HENNESSY AUGUSTUS SATUSI THOMPSON	Appellant

	- and -

	THE COMMISSIONERS OF INLAND REVENUE	Respondents

			Special Commissioner:	Michael Tildesley					

Sitting in public in London on 10 December 2004

The Appellant appeared in person

Ingrid Simler, Counsel instructed by the Solicitor for Inland Revenue, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The Appeal

1.	The Appellant is appealing against the Respondents’ refusal of his claim for error/mistake relief under section 33 of the Taxes Management Act 1970 (hereinafter referred to as TMA 1970) in respect of Schedule D assessments for tax years 1989/90 to 1994/95 inclusive on 29 October 1999. The error relied upon by the Appellant related to the availability of bad debt relief for the tax years in question.
The Legislation

2.	Section 33 TMA 1970 provides so far as relevant for this Appeal:
(1)	If any person who has paid tax charged under an assessment alleges that the assessment was excessive by reason of some error or mistake in a return, he may by notice in writing at any time not later than six years after the end of the year of assessment in which the assessment was made, make a claim to the Board for relief.
(2)	On receiving the claim the Board shall inquire into the matter and shall, subject to the provisions of this section, give by way of repayment such relief in respect of the error or mistake as is reasonable and just. 
Provided that no relief shall be given under this section in respect of an error or mistake as to the basis on which liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when the return was made.
(3)	In determining the claim the Board shall have regard to all the relevant circumstances of the case, and in particular shall consider whether the granting of relief would result in the exclusion from charge to tax of any part of the profits of the claimant, and for this purpose the Board may take into consideration the liability of the claimant and assessments made on him in respect of chargeable periods other than that to which the claim relates.
(4)	 If any appeal is brought from the decision of the Board on the claim the Special Commissioners shall hear and determine the appeal in accordance with the principles to be followed by the Board in determining claims under this section and neither the appellant nor the Board shall be entitled to require a case to be stated under section 56 of this Act otherwise than on a point of law arising in connection with the computation of profits.

3.	Section 33 provides the tax payer with a mechanism to make a claim to the Board of Inland Revenue for the return of tax paid due to an error or mistake in the return. The Board is afforded a wide discretionary power in respect of the relief given and its decision is subject to a right of appeal to the Special Commissioners. Lord Justice Brooke in Eagerpath Ltd v Edwards (Inspector of Taxes) [2001] STC 26 described the statutory scheme set out in  section 33  as anachronistic and incompatible with the rights based culture in which we now live. The Special Commissioner in Wall v IRC [2002] STC (SCD) 122 expressed the opinion that section 33 should not be restrictively construed as a result of  Lord Justice Brooke’s judgment in Eagerpath.
4.	 There are several pre-requisites before a claim under section 33 can be considered. The tax payer must make the claim in writing to the Board and the relief claimed must not be later than six years after the end of the year of assessment in which the assessment was made.  The tax payer is required to pay up front the tax charged under the disputed assessment and must demonstrate that the tax assessment is excessive as a result of an error or mistake in the return. The definition of error or mistake includes errors of omission and commission, errors arising from a misunderstanding of the law, and erroneous statements of fact. The onus is upon the Appellant to establish on the balance of probabilities the error or mistake.
5.	Subject to the provisions about discovery and error or mistake an assessment for tax becomes conclusive either when the taxpayer fails to appeal within the permitted time limit, or when the Commissioners determine the appeal or when the appeal is abandoned by the taxpayer or is settled by agreement. Section 54  of TMA 1970 deals with settlements by agreement:
(1)	Subject to the provisions of this section, where a person gives notice of appeal and before the appeal is determined by the Commissioners, the inspector or proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in the manner or had discharged or cancelled it, as the case may be.
(2)	Subsection (1) of this section shall not apply where, within 30 days from the date when the agreement was come to, the appellant gives notice in writing to the inspector or other proper officer of the Crown that he desires to repudiate or resile from the agreement.
(3)	– (5) not relevant.

6.	The purpose of a section 54 agreement is to achieve finality in the determination of tax liabilities and will carry the same force as a final determination by the General or Special Commissioners. If the agreement is to be effective, it must relate to a tax assessment which is under appeal to the Commissioners. The tax payer may give notice to repudiate the agreement within 30 days from the date of the agreement. 
7.	The TMA 1970 provides two situations where fairness may require either Inland Revenue or the taxpayer be given the opportunity of reopening an assessment which has in other respects become conclusive. The Revenue’s power is to make a discovery assessment under section 29(3) TMA 1970, whereas the taxpayer’s power is to make an error or mistake claim under section 33. The Court of Appeal in Cenlon Finance Co Ltd v Ellwood [1962] AC 782 and the House of Lords in Scorer (Inspector of Taxes) v Olin Energy Systems Ltd [1985] STC 218 decided that a discovery assessment  by the Revenue will fail if it relates to a matter covered  by a section 54 agreement.  Lord Keith of Kinkel in Scorer at 223 decided upon an objective test for determining whether the disputed matter had been covered by the agreement:
	“The situation must be viewed objectively ,from the point of view of whether the Inspector’s agreement to the relevant computation, having regard to the surrounding circumstances including all the material known to be in his possession, was such as to lead a reasonable man to the conclusion that he had decided to admit the claim which had been made”. 
8.	The Court of Appeal in Eagerpath was asked to consider whether the established principles as to the interaction between section 54 and a discovery assessment applied equally to the interaction between section 54 and an “error or mistake” claim. The Court of Appeal, however, did not make a determination on this issue. Instead the Court of Appeal dismissed the Appeal on a preliminary point, namely that the question about the interaction between section 54 and the “error or mistake” did not constitute a question of law in connection with the computation of profits, which is the basis for an appeal under section 33 (4) against a Special Commissioner’s decision. 
9.	Section 74 (1) of  Income and Corporation Taxes Act 1988 (hereinafter referred to as ICTA 1988) provides that 
“Subject to the provisions of the Tax Acts, in computing the amount of profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of -  
(j) any debts, except bad debts proved to be such, and doubtful debts to the extent that they are respectively estimated to be bad and, in the case of the  bankruptcy or insolvency of a debtor the amount which may reasonably be expected to be received on any such  debt shall be deemed to be the value thereof”.
(The above is the version of section 74 which was in force at the time of the disputed assessments).
10.	The question whether a debt is a bad or not is a question of fact. Revenue Interpretation (RI 81) expresses the view that a deduction for bad or doubtful debts is to be made in arriving at the profits of the year in which the debts become bad or doubtful. Revenue Interpretation is based upon a construction of section 74 which follows the House of Lords judgment in Absalom v Talbot [1944] 1 All ER 642  on the provisions of Income Tax Act 1918, Schedule D, case 1 and 11, r3(i), the predecessor  to section 74 (1)(j).
The Authorities
11.	I was referred to the following authorities:
Cenlon Finance Co Ltd v Ellwood [1962] AC 782 
Scorer(Inspector of Taxes) v Olin Energy Systems Ltd [1985] STC 218
Eagerpath Ltd v Edwards (Inspector of Taxes) [2001] STC 26

The Issues

12	On 11 November 1996 the Appellant requested adjustments to the tax  assessments made on him for the years 1989/90 to 1994/95 on the grounds that bad debt relief had not been included in his accounts.	

13.	On the 9 February 1998 Mr Girvan, HM Inspector of Taxes, sent a copy of his calculations of the Appellant’s assessments for the periods 1985/86 to 1994/95 to which the Appellant purportedly agreed under section 54 of  TMA 1970. Mr Girvan’s calculations of the Appellant’s overall profit (loss) for the tax years which are the subject of this Appeal are as follows:
1989/90:	£43,679
1990/91	£9,832
1991/92:	(£29,937)
1992/93	(£8,999)
1993/94	£12,420
1994/95	£15,180
Loss is in brackets 

14.	On 29 October 1999 Mr Golding, an Officer duly authorised by the Board of Inland Revenue decided that the Appellant was not entitled to “error or mistake” relief.  On 15 November 1999 the Appellant appealed against the refusal of section 33 relief, which was sent to the Tribunal on 24 October 2003.
15.	The disputes in this Appeal concern both the substantive issue about bad debt relief and procedural issues about whether the Appellant has met the conditions for making an “error or mistake” claim under section 33 of TMA 1970.
16.	The central issue regarding bad debt relief is when the debts became bad or doubtful. The Respondents contended that the earliest date the debts were considered bad was mid-late 1995 and, therefore, should be included in the assessment for 1996/97. The Appellant submitted  that he would pay tax on bad debts and would not be able to recover  the tax because his profits in  subsequent years were not sufficient to cover the bad debt relief. This outcome was unfair on the Appellant. He considered that he made a mistake in not regarding these debts as doubtful from the start and creating the necessary provision. The Appellant was, therefore, seeking to allocate the bad debt relief to the tax year when he incurred the debt.
17.		In respect of the procedural matters, the Respondents contended that the Appellant submitted his claim for “error or mistake” relief outside the six year time limit in respect of the 1989/90, 1990/91 and 1991/92 assessments, which was contested by the Appellant.  The assessments for 1991/92 and 1992/3 were nil returns, to which section 33 did not apply because there was no tax to pay.  Further the Respondents stated that the Appellant had not paid the Schedule D tax due on the disputed assessments, which was accepted by the Appellant. However, the Appellant argued that it was the practice of the Board of Inland Revenue to consider a section 33 claim if the only reason for preventing relief being given was that tax on the assessment remained unpaid. Under section 33(4) the Special Commissioners are required to determine an appeal against the Board’s refusal to grant “error or mistake” relief in accordance with the principles to be followed by the Board in determining claims under this section. 
18.	The final matter in dispute was whether a section 54 agreement was reached on the assessments in question. The Respondents submitted that the evidence was unequivocal supporting the existence of such an agreement. Thus the Appellant was prevented from raising the same matters covered in the agreement under a section 33 claim in accordance with the decision in Eagerpath.  The Appellant challenged the evidence, arguing that the purported agreement made in February 1998 did not incorporate the ongoing dispute about bad debt relief. He also doubted whether Eagerpath was conclusive about the interaction between section 54 and section 33 dealing with “error or mistake” relief.
The Facts
19	I heard evidence from the Appellant, and Mr Girvan and Mrs Hammond for the Respondents. A bundle of documents was presented.
20.	The Appellant traded as an accountant/tax consultant and was charged to tax under Schedule D Case 11 on the annual profits or gains arising to a UK resident from a profession or vocation. His accounts were drawn up to 31 March each year.  He was assessed to tax on the preceding year basis in respect of the matters under Appeal. The Appellant was a sole practitioner.
21. During the period 1993 – 1995 the Appellant lodged various Notices of Appeal  against assessments for the years 1986/87 through to 1994/95 to be heard before the General Commissioners. The Appellant contended in the Notices that the assessments were excessive. Further he stated that retirement relief, capital allowances and  adjustments for losses carried forward had not been given for specific years. The assessments for 1989/90 and 1990/91 had been delayed because of an investigation by the Specialist Revenue departments into the tax treatment of deeds of covenant by accountancy practitioners. The investigation revealed nothing untoward in respect of the Appellant’s dealings with deeds of covenant. The Appellant at the time was suffering from a long period of illness, first with kidney stones and then with suspected bone cancer. The Appellant still has health problems.
22.	 On 1 March 1995 Mr Girvan, Deputy District Inspector, responded to the various Notices of Appeal and letters submitted by the Appellant. In respect of the period 1988/89 to 1990/91, Mr Girvan said:
	“Again, the same letter (17 June 1994), paragraph 4, explains the statutory position, and in the circumstances of this case I cannot accept the late appeal which you made on 20 October last. Accordingly, your request for a late appeal to be admitted for these two years will be brought before the Commissioners at their meeting on 16 May. Even if the Commissioners rule against you on that date, that would not prevent you from making an error or mistake claim, the conditions for which were again explained in the letter”.
The bundle of documents did not include Mr Girvan’s letter of 17 June 1994.
23.	Mr Girvan wrote again on the 10 July 1995 where it would appear that the Commissioners accepted the late appeals for the periods 1986/87 to 1990/91 listing them for hearing in September. However, Mr Girvan indicated that the Revenue would object to the Appeals for these tax years on the basis that an agreement had been made pursuant to section 54 of TMA 1970:
	“The accounts were submitted at various dates between 16 June 1989 (March 1986 and March 1987, and April 1993 (March 1989 and March 1990 accounts). For various years, including review into your affairs undertaken by the Specialist Inland Revenue department, there was a long delay in agreeing these, but eventually amended assessments using the exact figures shown by your computations were issued on 17 January 1994, and these amendments determined the assessments under section 54 TMA 1970”.
Mr Girvan commented in the letter upon potential relief under section 33:
	“As I mentioned in my earlier correspondence, some relief can be given under section 33 (error or mistake) if the tax charged under the relevant assessment has been paid and relief can then only be given by repayment, not by amending the assessment which remains unchanged as it is final and conclusive”.
24.	Mr Girvan and the Appellant reached early agreement on the assessments for 1991/92 and 1992/93. In his letter of 1 March 1995 Mr Girvan proposed suggested figures for the assessments for these years based on the Appellant’s computations.  The Appellant agreed to these figures in his reply of 12 May 1995. On 10 July 1995 Mr Girvan confirmed that these assessments had been withdrawn from the Commissioners’ hearing consequent upon the agreement.
25.	On the 14 May 1996 the General Commissioners at Hertford determined the 1993/94 and 1994/95 assessments for the Appellant in the amount of £28,104 and £50,518 respectively. The Appellant, however, pointed out to the Clerk to the General Commissioners on the 22 May 1996 that the decision did not reflect his agreement with HM Inspector of Taxes in that the assessments did not incorporate the deductions for capital allowances. Mr Girvan confirmed the terms of the agreement with the Appellant regarding the capital allowances. 
26.	On the 11 November 1996 the Appellant wrote to Mr Girvan requesting revision of the accounts submitted from 1989 to 1994. The reason given for the revision was that material facts had now emerged, namely, three clients: Oakland Homes Ltd, Albert Thorn Ltd and Albert Saunders were not going to pay their bills to the Appellant.  Further Oakland Homes Ltd had issued a writ against the Appellant’s firm. The Appellant provided a revised schedule of debtors and work in progress:
Original	1989 (£)	1990 (£)	1991 (£)	1992 (£)	1993 (£)	1994 (£)	
Work in Progress	40,000	40,000	40,000	40,000	40,000	70,000	
Debtors	22,416	22,013	73,000	183,439	216,216	246,236	
Revised							
Work in Progress	10,000	5,000	5,000	5,000	5,000	12,000	
Debtors	6,000	6,000	10,000	15,000	15,000	15,000	

27.	On the 22 November 1996 the Appellant provided evidence of two additional bad debts. TA Watson Wood Green in the sum of £29,375 which was supported by a letter from Panos Eliades, Franklin & Co advising the Appellant that the said company had been placed into Creditors Voluntary Liquidation. Stanley Marcelis in the sum of  £4,112.50 who had been made bankrupt in August 1995.
28.	On 3 December 1996 Mr Girvan replied to the Appellant stating that the assessments on his business for the years up to 1994/95 were now final and conclusive. Further he did not see any grounds for mending any of the assessments under the error or mistake provisions because the accounts were prepared and submitted by the Appellant using accepted accountancy practice including a proper calculation of the end of year position regarding debtors and work in progress. Mr Girvan noted that the writ issued by Oakland Homes Ltd was only issued in December 1995, which in his view did not affect the proper valuation of the debtors or work in progress position at any balance sheet before March 1995.
29.	The Appellant responded on 9 December 1996 pointing out that it was wrong to include substantial income which had not been paid in his tax computation. He accepted that the amounts were included in his accounts but this was because the Appellant genuinely believed that he would be paid eventually. Further he was disappointed with Mr Girvan’s stance about claiming “error or mistake” relief and asked for this letter to be treated as a letter of Appeal to the Special Commissioners. 
30.	On 4 March 1997 Mr Girvan replied repeating his assertion that the assessments were all final and conclusive. Also he expressed the view that the “error or mistake” relief was not designed to cover the position where there was a change of mind after the event. According to Mr Girvan section 33 included a provision that where the original return was made in line with the prevailing practice then no relief under section 33 would be available.
31.	In May 1997 there was further correspondence between the Appellant and Mr Girvan, principally about the 1995/96 accounts. The Appellant, however, referred to the decision of the General Commissioners on 13 May 1997 giving consent for the Appeal to be lodged before the Special Commissioners and noting that the file had been sent to Head Office for direction/agreement to avoid an appeal hearing.
32. The Revenue’s Head Office decided that a number of assessments, which Mr Girvan considered had been settled, were not settled properly. As a result of that  decision, Mr Girvan called a meeting with the Appellant on the 26 November 1997 with a view to agreeing a spreadsheet showing all the years in doubt setting out the figures from the Appellant’s computations including the retirement and mortgage relief claims so that the correct position could be established. Mr Girvan minuted that the main technical point open was the problem with bad debts. Mr Girvan explained to the Appellant that the debts effectively became allowable when the decision was made  that they were bad which in his case was in 1995/96 for the majority of the debts. The main debt was with Oakland Homes Ltd for whom the Appellant continued working until middle or late 1995 even though the Appellant had not been paid for a long time. Mr Girvan recorded that the Appellant considered the person in charge of Oakland Homes Ltd   a very charming  customer who would eventually pay his debts. The Appellant never suspected that he would not get paid. According to Mr Girvan, the Appellant appeared to accept that the relief for this debt would be in 1995/96.
33.	On the 9 February 1998 Mr Girvan sent the Appellant a copy of his calculation for the assessments for the period 1985/86 to 1994/95 taking into account all the information now agreed about the Appellant’s bad debts, mortgage payments and retirement and pension plans. Mr Girvan asked for the Appellant’s written agreement to the figures under section 54 of TMA 1970.  The schedule included bad debt relief of  £29,375 in 1994/95; £4112 for 1995/96 and £231,236 for 1996/97, against the entry for bad debt relief for 1996/97 Mr Girvan inserted a question mark. On 11 February 1998 the Appellant responded to the letter of 9 February 1998:
	“Thank you for your letter of 9 February 1998, the contents of which we agree”.
34.	In his evidence before me the Appellant did not accept that his response of 11 February amounted to an unequivocal acceptance of the assessments proposed by Mr Girvan.  The Appellant considered that he was still able to pursue the bad debts, which in his view had not been resolved by the exchange of letters. He referred to the question mark inserted against the bad debts recorded for 1996/97. The Appellant attached no significance to the reference to section 54 in Mr Girvan’s letter of 9 February 1998.  He submitted that formal assessments would be issued following the letter and those assessments would carry an automatic right of appeal to the Commissioners.
35.	Mr Girvan was in no doubt that the exchange of letters in February 1998 constituted a section 54 agreement which finalised the Appellant’s tax liabilities for the period from 1985/86 to 1994/95. He pointed out that the Appellant was a practising accountant and tax consultant and it was reasonable to assume that the Appellant understood what Mr Girvan was saying in his letter of 9 February 1998.  Mr Girvan stated that during the meeting with the Appellant he explained the years for which bad debt relief was not available. However, Mr Girvan specifically remembered reassuring the Appellant that this did not necessarily amount to a denial of relief for these losses altogether.  The Appellant would be able to allocate the bad debts to his 1996/97  accounts and carry forward losses to subsequent years, which all things being equal would take up the relief. He put the question mark against the bad debts for 1996/97 because he was trying to be helpful to the Appellant, indicating that they might be allowed in future years. There were no question marks about the assessments up to and including 1994/95. Mr Girvan believed that the Appellant fully understood what he was saying about the bad debts.
36.	On 12 March 1999 the Appellant contacted Mrs Hammond, HM Inspector of Taxes at the Stevenage Office, who had taken over the Appellant’s file following the move of Mr Girvan to another office. The Appellant wished to discuss his bad debts and to explore whether it was possible to make adjustments to his 1988/89 and 1989/90 assessments. Mrs Hammond reviewed the file and discovered  that the bad debts had been previously  discussed and agreed with Mr Girvan.  She informed the Appellant that the assessments up to and including 1994/95 were final. She did, however, explore with the Appellant whether he had any paperwork to suggest that the debt of Oakland Homes Ltd was bad before 1995. The Appellant responded that he had invoiced the company and that although the fees were mounting up Oakland Homes paid in dribs and drabs. The first he knew that Oakland Homes would not honour its debts was when he was contacted by its new accountants, Coopers and Lybrand, informing him that he would not be paid his fees.  Mrs Hammond confirmed her discussion with the Appellant by letter dated 13 April 1999. She also advised him that she did not consider that “error or mistake” relief would be available to him in respect of the bad debt with Oakland Homes Ltd.
37.	The Appellant replied to Mrs Hammond’s letter on 15 April 1999 indicating that he agreed with the assessment up to and including 1994/95 but that he wished to pursue the “error or mistake claim”. As agreed he included the bad debt within his 1996/97 return. On 29 April 1999 he issued  formal notices of Appeal for the 1989/90 to 1993/94 assessments  on the grounds of “error or mistake” relief.  Mrs Hammond on 21 April 1999 requested the Appellant to provide a breakdown of the bad debt relief claimed for each year end, which he did and is set out below:
Year end	Debtors	Amount (£)	
31 March 1989	Thorn and Co	20,000	
31 March 1990	Albert Saunders	21,000	
31 March 1991	Albert Saunders
Widdington Homes Ltd	30,000
40,000	
31 March 1992	Oaklands Homes Ltd
Trendcrete Ltd	100,000
70,000	
31 March  1993	Oakland Homes Ltd	75,000	
31 March 1994	Oakland Homes Ltd	50,000	

38.	The assessment summary for 1985/86 to 1994/95 prepared by Mr Girvan, which was attached to his letter 9 February 1998 identified that the Appellant incorporated bad debts of £7,308 (Borwick Coach Works) in his accounts for the year ending 31 March 1993. Mr Girvan had allowed bad debt relief in the sum of £29,375 (TA Watson) for the year ending 31 March 1994. Mr Girvan also noted that bad debts of £34,112 ( £30,000 Bedding & North and £4,112 Stanley Marcells) would be included in the accounts year ending 31 March 1995 and that the outstanding balance (£231,236) would be allocated to the tax year 1996/97.
39.	Respondents’ counsel challenged the Appellant on apparent discrepancies between the bad debt relief claimed in the schedule provided to Mrs Hammond and the amount recorded for debtors in his accounts. The Appellant gave evidence that the amounts now claimed as bad debt relief had been included in his profit figure for the relevant year for the purposes of the Schedule D tax computation. He also confirmed on oath that the debts had not been paid. He produced no documentary evidence to substantiate the dates when the debts for Thorn and Co, Albert Saunders, Widdington Homes and Tendcrete Ltd became bad. The Appellant explained that he had to make commercial judgments about whether his clients were good for the money owed. He agreed with the accounts given by Mr Girvan and Mrs Hammond about when he knew that Oakland Homes would not pay the fees owed to him. He accepted that his relationship with Oakland Homes Ltd broke down sometime after April 1995, although there were earlier signs that the relationship was deteriorating as evidenced by his note to the 1994/95 accounts. The note read that “there is a potential bad debt from Oakland Homes Ltd and from other companies of £200,000”. The Appellant’s basic contention was that he should have included a provision for bad debts in his accounts but failed to do so.
40.	The Appellant accepted that he had not paid the tax due on the disputed assessments. However, he relied on the guidance in the Inspector’s Manual at 3751J which stated that “error or mistake relief would not be denied if the only reason preventing relief was that the tax on the assessment remained unpaid”. The Respondents confirmed that this was the position. 
41.	The Appellant relied on the letter of Mr Girvan of 1 March 1995 as the date when the Appellant instigated his claim for “error or mistake” relief.  The Respondents were of the opinion that the Appellant did not make his claim until 29 April 1999 when he put it in writing. However, the Respondents were prepared to concede that the starting date was the 12 March 1999 when he raised the issue with Mrs Hammond who failed to inform him that his claim should be in writing.
42.	On 29 October 1999 Mr Golding, Assistant Director for Inland Revenue, refused the Appellant’s “error or mistake” claim for the period 1989/90 to 1994/95. The Appeal was not sent to the Special Commissioners until 23 October 2003. The Appeal was originally listed for hearing in June 2004 but was adjourned because of the Appellant’s health.
Decision
43.	I am proceeding on the basis of determining the Appellant’s Appeal against the Respondents’ decision to refuse “error or mistake” relief for the tax years 1989/90 up to an including 1994/95. The bundle of documents referred to additional disputes in relation to other tax years which were not part of this Appeal.  I have decided to focus on the substantive issues in dispute rather than dealing with the Appeal by way of preliminary matters arising from the procedural objections of the Respondents. 
Bad Debt Relief
44.	The Appellant’s claim for bad debt relief to be allocated between the tax years in dispute was the substantive issue of this Appeal. During the hearing Respondents’ counsel expressed reservations about the validity of some of the debts raised by the Appellant, which he claimed to be bad. This specific issue was not raised in the Respondents’ skeleton argument. In those circumstances I have restricted my determination on the agreed issue identified in the skeleton arguments, namely, when did the debts identified by the Appellant become bad debts.
45.	The Appellant named five bad debtors in the schedule provided to Mrs Hammond. They were: Thorn and Co (£20,000), Albert Saunders (£51,000), Widdington Homes Ltd (£40,000), Trendcrete Ltd (£70,000) and Oakland Homes Ltd (£225,000).
46.	The Appellant was liable under Schedule D to pay income tax on the annual profits arising or accruing  from his profession.  Section 60 of  ICTA 1988 as at the date of the disputed assessments charged income tax on the full amount of the Appellant’s profits of the year preceding the year of assessment. Under section 74  of ICTA 1988 the Appellant was not entitled  to deduct debts in computing the amount of profits to be charged under schedule D except bad debts proved to be such and doubtful debts to the extent that they were respectively estimated to be bad. Thus the  statutory provisions required the Appellant to account for fees charged for work done in the particular year of assessment regardless of whether he received those fees when computing his Schedule D profits. He was entitled to deduct bad debts incurred wholly and exclusively for the purposes of his profession from the Schedule D profits for a particular year of assessment  provided he proved that they were bad in  that year of assessment. The date when a debt became bad determined the assessment period in which the Appellant deducted the bad debts from his Schedule D profits. 
47.	The onus was upon the Appellant to establish the date when the debts changed to bad debts. The Appellant’s principal evidence in respect of the debts of Thorn and Co, Albert Saunders, Widdington Homes Ltd and Trendcrete Ltd was the information provided in the schedule to Mrs Hammond. This information consisted of a statement of the debt and debtor allocated to a specific accounting year. The schedule was not corroborated by documentary evidence. The Appellant provided no evidence about the steps taken to recover these four debts.   The Appellant mentioned the debts of  Albert Saunders and Thorn and Co in his letter to Mr Girvan of 11 November 1996 when he said: “Material facts have now emerged which necessitate the revision of the accounts submitted”. The contents of the letter  suggested  that the debts of Albert Saunders and Thorn & Co became bad in 1996 which contradicted the information provided in the schedule that these two debts were bad in 1989/90, 1990/91 and 1991/92.  The Appellant’s evidence in respect of the debt owed by Oakland Homes Ltd was unequivocal. He stated upon oath that he agreed with the “notes of interview” prepared by Mr Girvan and Mrs Hammond on 26 November 1997 and 12 March 1999 respectively. In those notes the Appellant did not consider the Oakland Homes’ debt bad  until 1995  when he was contacted by  Coopers & Lybrand, the company’s new accountants, telling him that the debt would not be paid. Prior to that contact the Appellant believed that Oakland Homes Ltd would honour its debts based upon his commercial judgment.
48.	I have concluded from the evidence that the Appellant has failed on the balance of probabilities to satisfy me that the information contained in the schedule of  debts provided to Mrs Hammond was accurate. There was no evidence to support his assertion that the debts of Widdington Homes Ltd (£40,000) and Trendcrete Ltd (£70,000) were bad in 1991/92 and 1992/93 respectively. The Appellant’s evidence in respect of the debts of Albert Saunders and Thorn & Co was that they  became bad in 1996 which contradicted the dates of  1989/90, 1990/91 and 1991/92 in the schedule. Likewise he considered the Oakland Homes’ debt  bad in 1995 which did not accord with the dates of 1992/93, 1993/94 and 1994/95 in the schedule.   
49.	In his “skeleton argument” elaborated upon at the hearing, the Appellant put forward the view that he made an “error or mistake” by not creating a bad debt provision for  the named debts in the schedule in the accounting year when they were incurred. His argument was based on the proposition that there was now clear evidence that the debts would not be paid and he would be paying tax on income he did not receive if he was unable to allocate them to the years in which the debts were incurred.  I have already decided that there is no evidence to support a finding that the named debts were bad or doubtful  in the accounting years specified in the schedule. Therefore, the success of the  Appellant’s argument depends upon  whether he is able to rely on hindsight to determine when the named debts became bad or doubtful in order to create the necessary bad debt provision.  
50.	The use of hindsight as the method for determining bad or doubtful debts does not fit with the construction of section 74 (1)(j) of ICTA 1988. That section requires the tax payer to make a judgement of whether a debt is bad or doubtful  based upon the facts known to him at the time of drawing up his profit and loss account for the purposes of his Schedule D tax computation. The Appellant gave evidence that he applied his commercial judgment about whether his clients “were good for the money” when drawing up his accounts for the years in question. The Appellant decided that they “were good for the money” and the debts were, therefore, sound. The fact that his commercial judgment has proved to be wrong by subsequent events does not entitle him under section 74  to go back and revisit his Schedule D tax computation for the years in question. Instead  section 74 enables him to claim relief for those  debts in the accounting years when evidence comes to light to substantiate a judgment that the debts have become bad.   In the Appellant’s case, the Oakland Homes’ debt became bad in 1995, whilst the debts with Albert Saunders and Thorn & Co became bad in 1996. 
51.	I, therefore, find against the Appellant that he was entitled to claim bad debt relief for the debts of Thorn and Co (£20,000), Albert Saunders (£51,000), Widdington Homes Ltd (£40,000), Trendcrete Ltd (£70,000) and Oakland Homes Ltd (£225,000) in the accounting years 1989/90 up to an including 1994/95 because:
i.	The Appellant has failed to satisfy me on the balance of probabilities that the debts became bad in the years 1989/90 to 1994/95.
ii.	Section 74 enables the Appellant to claim relief for bad or doubtful debts in the accounting years where there was evidence to substantiate a judgment that the debts have become bad. In the Appellant’s case, the Oakland Homes’ debt became bad in 1995, whilst the debts with Albert Saunders and Thorn & Co became bad in 1996. 

Section 54 Agreement

52.	The Respondents contended that “error or mistake” relief  was not available to the Appellant because he agreed to the assessments for the disputed years on 11 February 1998 following a meeting with Mr Girvan which dealt with the issue of bad debt relief. This agreement under section 54 of TMA 1970 rendered the assessments final and conclusive.  The Appellant disagreed with the Respondents’ contention. He believed that the agreement on the 11 February 1998 left open the question of bad debt relief. The Appellant also questioned whether the decision in Eagerpath was conclusive authority for the denial of “error or mistake” relief following the making of a section 54 agreement.

53. Eagerpath involved an appeal from a Special Commissioners’ decision to refuse the Appellant  relief  under section 33  TMA 1970 because of the prior existence of a section 54 agreement covering the subject matter of the “error or mistake” claim. The Special Commissioner considered that the legal principle decided in Cenlon and Scorer, namely, the Revenue would not be able to make a subsequent discovery assessment of a matter covered by a section 54 agreement, applied equally to a taxpayer making an “error or mistake” claim.  The Appellant’s representative before the Special Commissioner conceded this point without legal argument. In the subsequent appeal proceedings before the High Court and the Court of Appeal, the Appellant’s representatives sought to re-open the question whether a prior section 54 agreement precluded a taxpayer from making an “error or mistake” claim.  The High Court and Court of Appeal, however, dismissed the Appeal on a preliminary point of law dealing with the extent of the right of appeal from a decision of the Special Commissioners. Thus neither the High Court nor the Court of Appeal in Eagerpath  decided on the legal relationship between a section 54 agreement and a section 33 claim. In those circumstances it is necessary for me to decide first on a point of law whether the Appellant is prevented from making an “error or mistake” claim by virtue of an agreement under section 54 which covers the subject matter of the claim.

54.	I am dealing with the situation predating the self-assessment regime for computing income tax and which depended upon the taxpayer and the Revenue reaching agreement in order to settle the vast majority of appeals. The argument in favour of a section 54 agreement prohibiting a tax payer from making claim under section 33 relies upon extending the legal principle established in Cenlon in respect of discovery assessments by the Revenue to “error or mistake” claims by the taxpayer. Although the Court of Appeal in Eagerpath made no conclusive finding on the relationship between section 54 and section 33, Robert Walker LJ carried out a detailed analysis of the statutory provisions governing discovery assessments (section 29(3) TMA 1970) and error or mistake claims (section 33). He pointed out that the respective provisions gave either the Revenue or the taxpayer the opportunity to reopen an assessment which had in other respects become conclusive. He noted that neither provision referred to raising the question of an undercharge or overcharge after an assessment had been settled by agreement but the absence of an express provision did not deter the Court of Appeal in Cenlon from ruling that the Revenue was prohibited from making a discovery assessment following a section 54 agreement. Robert Walker LJ recorded that the statutory provisions dealing with discovery assessments and error or mistake claims were separate and expressed in different language. However, in practice the court has interpreted section 29(3) very widely which has narrowed the apparent difference between the scope of a discovery assessment and that of an “error or mistake” claim.   

55.	Brooke LJ, however, in Eagerpath was very critical of the restrictions imposed by section 33 on the ability of the taxpayer to recover overcharged tax. He considered that section 33 was strangely inconsistent with modern rights-based law which leads to the conclusion that section 33 should not be restrictively construed.  However. I consider that the comments of Brooke LJ were directed at the procedural requirements of section 33, such as time limits, rather than the relationship between sections 33 and 54. Further the use of agreements to resolve disputes is not in my view inconsistent with the principles of rights-based law.  I am persuaded by the analysis of Robert Walker LJ about the similarities between discovery assessments and “error or mistake” claim and the pivotal role played by agreements in resolving tax appeals in reaching the conclusion that the legal principle established in Cenlon applies equally to the relationship between sections 54 and 33.

56.	The questions that remain to be answered in this Appeal is whether in fact the Appellant reached a section 54 agreement with the Revenue and if so whether the terms of that agreement covered the subject matter of his “error or mistake” claim, namely, bad debt relief. I consider that the exchange of correspondence between the Appellant and Mr Girvan on 9 and 11 February 1998 is compelling evidence that they reached a section 54 agreement. In his letter Mr Girvan asked specifically for the Appellant’s agreement to the figures pursuant to section 54 to which the Appellant unequivocally agreed.  
57.	The dispute is, therefore, about whether the agreement embraced the issue of bad debt relief. The Appellant said it did not, however, the test is an objective one not subjective, namely, what the reasonable man would conclude from the surrounding circumstances including all the material known to be in the knowledge and possession of the Appellant. From November 1996 the issue of bad debts featured prominently in the correspondence between Mr Girvan and the Appellant The notes of the meeting on 26 November 1997 between the parties recorded in some detail the position regarding the bad debts. The outcome from this meeting was Mr Girvan’s letter of 9 February 1998 to the Appellant setting out his calculation for the assessments for the period 1985/86 to 1994/95 after taking into account all the information now agreed about the Appellant’s bad debts. The Appellant referred to the question mark appended to the bad debt relief for 1996/97 as casting doubt on the conclusiveness of the agreement. However, Mr Girvan explained that he did this in order to be helpful to the Appellant and remind him of the contents of their discussion on 26 November 1997 about the allocation of bad debt relief. Mr Girvan gave evidence that he believed that the Appellant understood what was being said about the bad debts. The Appellant was a practising accountant and tax consultant who was on notice that the Revenue was seeking to resolve the disputed assessments including bad debt relief by means of a section 54 agreement. 
58. I am satisfied that a reasonable man would conclude from the set of circumstances described in paragraph 57 that the Appellant had agreed to the assessments proposed  by Mr Girvan in his letter of 9 February 1998 including the issue of bad debt relief. Thus I consider that the Appellant is precluded from pursuing his claim for “error or mistake” relief in respect of the bad debts because he agreed on 11 February 1998 to Mr Girvan’s proposed assessments for 1989/90 up to and including 1994/95 set out in the 9 February 1998 letter with appendix. The Appellant’s agreement on 11 February 1998 was in the nature of a section 54 agreement with the statutory consequences of section 46(2) TMA 1970 that it conclusively and finally resolved the disputed assessments. 
Procedural Matters
59.	The Respondents raised a series of procedural objections based on the construction of section 33 which they said  prevented the Appellant from making an “error or mistake” claim. The first objection was that he had not paid the tax due on the disputed assessments, which the Appellant accepted. However, the Appellant referred to  the Inspector’s Manual at 3751J which stated that “error or mistake” relief would not be denied if the only reason preventing relief was that the tax on the assessment remained unpaid. The Respondents conceded this point.
60.	 The second objection was that the Appellant submitted his “error or mistake” claim in writing outside the six year time limit for the 1989/90, 1990/91 and 1991/92 assessments. The Respondents were of the opinion that the Appellant did not make his claim until 29 April 1999 when he put it in writing. However, the Respondents were prepared to concede that the starting date was the 12 March 1999 when he raised “error or mistake” relief with Mrs Hammond who failed to inform him that his claim should be in writing. The Appellant relied on the letter of Mr Girvan of 1 March 1995 as the effective date when he gave notice of his “error or mistake” claim. Mr Girvan’s letter did not meet the requirements of section 33, which places the obligation upon the tax payer to make his claim in writing.  However, the facts of this case demonstrate that the Revenue is prepared to accept claims for “error or mistake” relief  which are not in writing. On the evidence presented to me, I find it difficult to reconcile the apparent inconsistency in the Respondents ‘approach to claims for “error or mistake” which are not in writing by the claimant. The Respondents were prepared to accept the Appellant’s claim made at the meeting with Mrs Hammond on 12 March 1999, but not the statement in Mr Girvan’s letter of 1 March 1995. In that letter Mr Girvan, as with Mrs Hammond, did not advise the Appellant to put his claim in writing.  It may be that Mr Girvan explained the requirements to make a section 33 claim in other correspondence referred to in his letter of 1 March 1995, which unfortunately was missing from the bundle of documents provided to me at the hearing.  “Error or mistake” was from 1995 a consistent theme of the correspondence in the bundle between Mr Girvan and the Appellant.
61.	The final procedural matter raised by the Respondents related to the nil assessments for 1991/92 and 1992/93. Section 33 does not apply to nil assessments because valid claims can only be made where tax has been charged under an alleged excessive assessment. The Appellant did not challenge this submission of the Respondents. Mr Golding added a further ground of refusal of “error or mistake” relief for the 1991/92 assessment relating to loss relief, which in his view was not caught by section 33 because the claim for loss relief is not made in a return. Neither party raised this ground at the hearing.
62.	Counsel for the Respondents submitted that I had to apply the strict letter of the law in dealing with the procedural objections and effectively find against the Appellant in relation to his failure to pay the tax due and submit a written claim within six years. There was no dispute between the parties regarding the final point about the nil assessments for 1991/92 and 1992/93.  Section 33 (4) requires me when considering an appeal against a refusal of “error or mistake” relief to have regard to  the principles followed by the Board in determining claims under this section.  The facts of this Appeal show that the Board exercises its discretion in relaxing the strict procedural requirements for entertaining an “error or mistake” claim. I am also mindful of the criticisms of section 33 by Brooke LJ in Eagerpath which suggest that the procedural requirements for making a claim should not be restrictively construed. I would, therefore, have been reluctant to have dismissed the Appellant’s claim if the only points in issue had been his failure to pay the tax due and to submit a written claim within the six year time limit.

Determination

63.	I dismiss the Appellant’s Appeal against the Respondents’ refusal of  “error or mistake” relief on 29 October 1999 in respect of the assessments for 1989/90 up to and including 1994/95 on the following grounds:

a)	There is no “error or mistake” in the returns for 1989/90 up to and including 1994/95 because the Appellant was not entitled to claim bad debt relief for the debts of Thorn and Co (£20,000), Albert Saunders (£51,000), Widdington Homes Ltd (£40,000), Trendcrete Ltd (£70,000) and Oakland Homes Ltd (£225,000) in the said years (see paragraphs 44-51).
b)	The assessments for 1989/90 up to and including 1994/95 are final and conclusive by virtue of the agreement made on 11 February 1998 under section 54 of the TMA 1970 with the statutory consequences of section 46(2) of the TMA 1970. Thus there is no “error or mistake” in the return, but rather a failure on the part of the Appellant to pursue his right of Appeal to the Commissioners (see paragraphs 52 – 58).
c)	No error or mistake relief is available for 1991/92 and 1992/93 because the assessable profits for the said years are nil and no tax has been charged (see paragraph 61).

MICHAEL TILDESLEY
CHAIRMAN

RELEASE DATE: 26 January 2005

SC 3113/03