In Morris and another v HMRC, the First-tier Tribunal (“the FTT”) has confirmed that it does not have jurisdiction to determine a dispute relating to the correct valuation of assets which were the subject of a contractual settlement with HMRC.
Following the death of Mr Sutton in 2005, his farm was left on trust to his four sisters. In the resulting Inheritance Tax account, the farm was valued at £650,000. The estate was not taxable for Inheritance Tax purposes because it was below the nil rate band threshold, taking into account agricultural property relief.
The farm was subsequently sold by public auction for £800,000.
The estate was administered, but in 2009 the estate's solicitors became concerned that the disposal of the farm had been treated incorrectly for capital gains tax ("CGT") purposes, in particular, that a capital gain possibly arose from the fact that the disposal proceeds were £800,000 but the base cost was £650,000. The solicitors wrote to HMRC drawing the issue to their attention.
Mr Sutton's executors made a claim to capital losses of some £18,000. This was on the basis of a claim under section 191 of the Inheritance Tax Act 1984, that the sale proceeds be substituted for the probate value at the date of the death.
HMRC rejected the executors' loss claim, and referred the issue of the farm's value to the District Valuer. In 2009, the District Valuer determined that the value of the farm at Mr Sutton’s death had in fact been £740,000. The executors confirmed their acceptance to this valuation.
Following some correspondence in relation to penalties, HMRC informed the executors that they would seek to negotiate a contract settlement of the tax and penalties due following the revised valuation, rather than making a formal determination of the penalties. HMRC proposed a total sum for tax, interest and penalties of £26,650. The tax element of this included CGT in relation to the farm of £10,796.
The executors made a counter-offer of £26,612 which was accepted by HMRC.
In September 2010, the executors made a complaint against HMRC, arguing that there had not been a proper valuation of the farm. HMRC did not uphold the complaint and explained that if this refusal was not acceptable, then the executors had 30 days to appeal the decision to the FTT. The appellant proceeded on this basis.
The matter came before the FTT in August 2014. HMRC argued that the FTT had no jurisdiction to determine the issues raised by the executors, namely whether the valuation and the resulting tax liability was correct, and the appeal should therefore be struck out pursuant to Rule 8(2)(a) of the Tribunal Rules.
Judge Jonathan Cannon determined that the FTT does not have jurisdiction in relation to contract settlements, which operated outside the statutory regime of assessments and appeals. Accordingly, the executors' appeal was struck out.
Whilst the decision of the Judge to strike out the appeal is not surprising, it is regrettable that the executors were misled into believing that they had a remedy in the FTT (that the executors had been so misled was accepted by HMRC's representative during the course of the appeal hearing). Indeed, the Judge himself commented that: "It is most unfortunate that Mrs Morris and Mrs Gregson have been led down the path of a Tribunal appeal only to find that the Tribunal does not have jurisdiction."
Contract settlements with HMRC are of course very common and taxpayers need to ensure that they are satisfied with all of the terms of any such proposed settlement before reaching agreement with HMRC, as they will not then be able to appeal the settlement to the FTT. As the Judge explained, the enforcement of a contractual settlement by HMRC has to be undertaken through proceedings at law in debt, and if a taxpayer wishes to dispute the enforceability of a contractual settlement he must do so in the course of defending such proceedings.