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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Lobler v Revenue & Customs [2013] UKFTT 141 (TC) (12 February 2013) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02539.html Cite as: [2013] UKFTT 141 (TC) |
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[2013] UKFTT 141 (TC)
TC02539
Appeal number: TC/2011/5621
INCOME TAX – partial surrender of life policies – taxable income arising under chapter 9 Pt 4 ITTOIA – outrageously unfair effect ton taxpayer –application of HRA 1998
FIRST-TIER TRIBUNAL
TAX CHAMBER
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JOOST |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE CHARLES HELLIER |
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KAMAL HOSSAIN FCA FCIB |
Sitting in public at Bedford Square WC1B 3DN on 7 September 1012
The Appellant in person
Jack Lloyd for the Respondents
© CROWN COPYRIGHT 2013
DECISION
1.
In this appeal a remarkably unfair result arises as a result of a
combination of prescriptive legislation and Mr. Lobler
’s ill-advised actions.
3.
In outline Mr. Lobler
invested some US $1.4 million in a series of life
assurance policies with Zurich Life on 1 March 2006 and within the next two
years withdrew $1.4 million from the policies leaving the policies with
comparatively negligible value. The form in which he made the withdrawal was by
a partial surrender of each policy. As a result of the tax legislation in
Chapter 9 Part 4 of the Income Tax (Trading and Other Income) Act 2005
(“ITTOIA”) dealing with life insurance policies he is treated as having in
those years realised taxable income of some $1.3 million. He becomes liable to pay
some $560,000 in tax. He made no profit or gain as that term is commonly or commercially
understood and yet he becomes liable to pay tax which exhausts his life savings
and may bankrupt him. That is an outrageously unfair result.
4.
The appeal takes place at a time when there is great media and political
comment about a fair tax system. That interest focuses on the avoidance of tax
by those who have substantial income, but to our minds it is more repugnant to
common fairness to extract tax in Mr Lobler
’s circumstances than to permit
other taxpayers to avoid tax on undoubted income.
The facts in more detail.
5. There was no dispute about the facts.
6.
Mr. Lobler
and his family are Dutch. Early in 2004 he moved with his
family to England for work. In 2005 they sold their house in Holland and the
proceeds - all Mr.
Lobler
’s life savings, about £350,000 - were invested in a
life insurance policy (or series of policies) with Zurich Life, a life
insurance company in the Isle of Man
8.
This insurance policy investment product had been arranged for Mr Lobler
by HSBC Private banking. Mr.
Lobler
had told them about his situation and his
future plans and assumed thereafter he did not need any further independent
advice. He took no advice before withdrawing funds from the policies.
9.
In 2006 Mr. Lobler
bought a house in England. He started to withdraw
funds from the policy. First he withdrew $746,485 on 28 February 2007. This he
used to repay the loan from HSBC of $700,000 plus interest. Then on 29 February
2008 he withdrew a further $690,171. This he used to pay for his house and
works of renovation.
10.
He withdrew the monies from the policies by completing a form provided
by Zurich. The form contained four surrender options. Option A was for full
surrender, option B was for partial surrender across all policies and funds,
option C was for partial surrender across all policies from specific funds, and
option D was for full surrender of individual policies. Mr. Lobler
elected for
option C: he put an "X" in the box opposite the words "partial
surrender across all policies from specific funds"; he put the amount he
wished to raise in the next box and indicated the funds from which the
withdrawal should be made in the following section. He indicated that the
reason for the withdrawal was that he was buying a property.
11.
The monies were subsequently paid to him. Mr. Lobler
assumed that because
he had withdrawn no more than he had paid for the policies no taxable gain would
arise. He made no mention of the monies in his tax returns. But in pursuance of
its obligations under section 552 ITTOIA Zurich wrote to HMRC and Mr.
Lobler
following each withdrawal indicating the amounts which represented taxable
income arising on each of the withdrawals. Those amounts were $676,184 in the
case of 28 February 2007 withdrawal and $619,871 in the case of the 29 February
2008 withdrawal.
12.
HMRC opened enquiries in relation to Mr. Lobler
’s self-assessment
returns for the years ending on 5 April 2007 and 2008 and, on the closure of
the enquiries, amended the assessments to include the amounts to be treated as
income arising from the withdrawals from the policies.
13.
Mr. Lobler
says that he made a mistake in the way in which he withdrew
funds from the policies. He did not realise that the effect of making a partial
surrender was that almost all the amount he withdrew would be treated as
taxable income.
The legislation
The Application of the Legislation.
19.
Thus when Mr Lobler
received monies from the policy in 2007 and 2008:
(i) he made partial surrenders of his rights under the policy, (ii) the value
surrendered for the purposes of the section 507 calculation was the amount
received; (iii) for each year the section 507 calculation produced an amount
(a “gain”) equal to the amount received less 5% of the premium originally paid;
(iv) because that amount arose from the section 507 calculation a chargeable
event arose; (v) because there was a chargeable event there was for the
purposes of section 462 “a gain from a policy” and (vi) as a result of section
463 tax was to be charged on “the amount of the gains arising in the tax
year”.
20.
Mr Lobler
does not really dispute this analysis, and, though we have
struggled so to do, we can find no way to give a different interpretation to
the legislation. As Proudman J said in Mayes, “This is legislation which
does not seek to tax real or commercial gains. Thus it makes no sense to say
that the legislation must be construed to apply to transactions by reference to
their commercial substance….[the legislation] adopts a formulaic and
prescriptive approach. No overriding principle can be extracted form the
legislation…”.
21.
We should also note that in July 2008 Mr Lobler
terminated the policies
and received some $35,000. On the surrender of all rights under a policy,
section 484(1)(a)(i) provides for a chargeable event, and section 539 ITTOIA
provides for relief for “deficiencies”, calculated, by section 541 (and 491),
as the total amounts received under the policy, less the premium was paid for
it and less any amount which had previously been treated as a “gain”. The
result of this calculation was that in 2008 Mr
Lobler
had a deficiency of some
$1,230 (=( $746k+$690k +$35k)-$1,406k-($676k+$619k)). That could be set
against other taxable income of the year. But Mr
Lobler
did not have other
income approaching that figure. The relief was of no use to him.
Other considerations
22.
We considered whether the potential remedy of rectification affected the
analysis. If a court would order rectification of the forms on which Mr Lobler
made his application for funds so that they would take effect as the full
surrender of some of the subsidiary policies, then relying on the maxim that
equity treats what should have been done as done, we might treat the
applications as total surrenders. Were that the case the calculation of the
gain under Chapter 9 would be made after deducting the full amount of the
related premium, and no taxable (or no material taxable) income would arise.
23.
However the authorities in relation to rectification suggest that the
“party seeking rectification must show that: (1)the parties had a common
continuing intention, whether or not amounting to agreement, in respect of the
particular matter in the instrument to be rectified; (2) there was an outward
expression of accord; (3) the intention continued at the time of execution of
the instrument sought to be rectified; and (4) by mistake, the instrument did
not reflect that common intention.”(Lord Hoffman in Chartbrook Ltd v
Persimmon Homes Ltd [2009] AC 1101; and see also the comments thereon in Daventry
[2012] 1 WLR 1333). What is missing in Mr Lobler
’s case is the element of
common intention. There was nothing before us to suggest that Zurich had any
intention at all in relation to the withdrawals sought by Mr
Lobler
.
24.
Section 3 of the Human Rights Act 1998 requires that “[so] far as it is
possible to do so, primary legislation and subordinate legislation must be read
and given effect in a way which is compatible with” relevant rights under the
Convention for the Protection of Human Rights and Fundamental Freedoms. One of
those rights is that in Article 1 of the First Protocol to that Convention,
namely that every person is entitled to the peaceful enjoyment of his
possessions save as a State deems necessary to secure the payment of taxes. It
seems to us that the effect of the legislation as described above on Mr Lobler
is so outrageously unfair that it may not fall within that exception for the
collection of taxes. But even if that is the case, there is nothing we can do
about it. That is for three reasons.
25.
First, the duty to construe the legislation in accordance with the
Convention is “so far as it is possible to do so”. The legislation in Chapter 9
is so prescriptive that it does not seem possible to construe it any other way.
Its object is to deprive Mr Lobler
of these monies whatever their nature: there
is no room for even robust interpretation.
27.
Third, although section 7 of the Act provides that Mr Lobler
may rely on
a Convention right before this tribunal if he claims that HMRC have acted in a
way which, by virtue of section 6 is incompatible with a convention right,
section 6(2) provides that section 6 does not apply if, as a result of one or
more provisions of primary legislation, HMRC could not have acted
differently. It seems to us to be clear that HMRC could not have acted
differently in their interpretation of the legislation, but it may be arguable
that they could have decided not to make the changes to Mr
Lobler’s self
assessments in reliance on their power of management of the tax system in
section 1 Taxes Management Act 1970. But the jurisdiction given to this
tribunal in a case such as this does not extend to making orders to overturn
(or “review”) the administrative process of HMRC. Section 31 TMA permits the
bringing of an appeal against an amendment to a self assessment, but not
against the decision which resulted in the amendment: that gives us power to
adjudicate on the amount of the assessment and whether it was made under the
powers given by the Act, but not on the decision to make it. The power to
review HMRC’s decision rests with the High Court (see eg paragraphs [39ff] HMRC
v Hok Ltd [2012]UKUT 363 TCC).
28. Thus with heavy hearts we dismiss the appeal.
CHARLES HELLIER
TRIBUNAL JUDGE