It is normally very clear to both parties when a tax dispute has been settled by way of agreement, but this is not always the case, especially when the 'agreement' was based on a misunderstanding. This is what occurred in Edoh v HMRC [2013] UKFTT 015 (TC).

Mr Edoh appealed against HMRC's conclusion, in closing their enquiries into his tax return for 2004/05, that £19,400 which he had claimed as expenses in respect of payments made to subcontractors of Techdata Services for work carried out on IT equipment, should be added to his profits.

Before the First-tier Tribunal ('FTT'), HMRC argued that the FTT did not have jurisdiction to reopen the appeal, claiming that it had been determined by agreement under Section 54 Taxes Management Act 1970 ('TMA 1970'). The FTT rejected HMRC's arguments and allowed Mr Edoh's appeal.  

Background

In December 2006, HMRC opened an enquiry into Mr Edoh's tax return for 2004/05 and in June 2009 issued a closure notice in respect of their enquiry and imposed a penalty.

At a meeting held in 2007 with HMRC after the enquiry was opened, Mr Edoh confirmed that his accountant had completed his tax return and that she had made some mistakes. His original tax return for the year had been mislaid by HMRC and when his accountant sent in a copy she had copied the wrong accounts.

HMRC took a note of the meeting but Mr Edoh refused to agree or sign the notes as he was of the view that several errors had been made. He subsequently sent to HMRC what he stated was a copy of the original correct return.

In October 2010, Mr Edoh wrote to HMRC querying why, in the revisions made by HMRC to his profits for 2003/04, they had still not taken into account the £19,400 which he had paid to subcontractors for work carried out on the business' IT equipment.

HMRC replied to Mr Edoh stating that they could not understand why he was querying figures "which he had agreed eight months previously". In evidence before the FTT Mr Edoh stated that there had been a misunderstanding and that he had not signed any agreement or agreed anything in writing. At the time of the meeting held with HMRC in January 2009, he had not understood the implications of verbally agreeing HMRC's figures which he had done simply in order to avoid prolonging the matter.

Mr Edoh wrote to HMRC confirming that he did not accept their refusal to allow the £19,400 as an expense of the business and appealed against HMRC's conclusion.

In May 2012, HMRC wrote to Mr Edoh claiming that his appeal had been formally determined and that Mr Edoh had actually written to the FTT in February 2010 stating that the appeal was settled and the matter closed.  

Taxpayer's submissions

Mr Edoh submitted that he had not signed any agreement. He had tried to clear any tax that was rightfully due but had not understood the implications of this. Much of the confusion had arisen from HMRC losing his 2004/05 return and his accountant compounding the confusion by copying the wrong accounts when resubmitting a copy return.

He said that as a result of losing his previous accountant he had been forced to try and sort out the matter himself without any professional assistance.  

HMRC's submissions

HMRC submitted that the FTT did not have jurisdiction to re-open the appeal as it had been determined by agreement. HMRC submitted that for 2004/05 HMRC had used adjustments which they thought were agreed with Mr Edoh.

HMRC submitted that the burden of proof was on the appellant taxpayer in respect of the assessment and on them only in respect of the penalty.  

The FTT's decision

The FTT found in favour of Mr Edoh and allowed his appeal.

The FTT noted that throughout the bundle of documents produced to them, Mr Edoh had repeatedly claimed that the £19,400 was in respect of the expense of the work done on his computers. There were invoices which evidenced that this was so and a letter from Techdata Services confirmed that their sub-contractors, who had worked on the computers, were responsible for paying their own tax.

Whilst the FTT accepted that in February 2010 the taxpayer wrote to the FTT stating that the matter was settled, the FTT was of the view that he had been misled to a degree by HMRC and was of the belief that the invoices had been accepted. It was only once he had taken professional advice that he was able to appreciate the position. In the view of the FTT, it was extremely doubtful that the appeal had been determined by way of agreement and accordingly the FTT had jurisdiction to determine Mr Edoh's appeal.

The FTT was satisfied that it was incorrect to add the sub-contractors' fees of £19,400 to his profit and the penalty was reduced to reflect the fact that the tax owed had been over estimated by HMRC.

Comment

Perhaps surprisingly, a settlement agreement reached between a taxpayer and HMRC pursuant to section 54 TMA 1970, does not need to be in writing. That being said, HMRC are required to set out the terms of any unwritten agreement afterwards. Cases like this highlight the importance of reading through any such terms carefully, and ideally with professional advice, as it is quite possible for unrepresented taxpayers to come away from a meeting with HMRC with a very different perspective on what, if anything, has been agreed, compared to HMRC. It is also of some concern that the FTT concluded that Mr Edoh had been misled to a degree by HMRC. HMRC quite rightly expect taxpayers and their advisers to act with the utmost integrity at all times and to make their position clear. It is not unreasonable for taxpayers to expect the same high standards from HMRC.