Tribunal was correct to find taxpayer failed to meet required condition to change his accounting date
The Upper Tribunal (UT) has dismissed an appeal by a taxpayer who claimed that the First-tier Tribunal (FTT) erred in law when deciding that he could not change his annual accounting date in order to give himself a 20 month basis period.
The FTT (( UKFTT 537 (TC)) found that the taxpayer had failed the test in ITTOIA 2005, s 217 by not having existing accounts with an accounting period of less than 18 months when he notified HMRC of the change.
The taxpayer had an annual accounting date of 31 July. In the tax year 2009/10, he decided on professional advice to change his accounting date to 5 April and so bring into account in that tax year income earned in the 20 month period 1 August 2008 to 5 April 2010 (the ‘long accounts’).
A total of four sets of accounts (including the long accounts) were produced by the taxpayer. The others were the ‘schedule accounts’, which comprised the long accounts apportioned between two periods (the 2019 schedule accounts and the 2010 schedule accounts); the ‘return accounts’, which contained the self-employment pages of the tax return, and included profit and loss information and balance sheet information; and the ‘new accounts’, produced during the enquiry opened by HMRC on 12 January 2012, which covered the same period as the schedule and return accounts, but were prepared on the accruals basis.
The reason for creating a 20 month, rather than a 12 month, basis period in 2009/10 was that it enabled the taxpayer to bring forward his liability to tax on eight months’ income which otherwise would have been subject to income tax in the tax year 2010/11. This was advantageous to him because in 2010/11 the top rate of income tax increased from 40 per cent to 50 per cent.
In order to make the change of accounting date the taxpayer was obliged to meet the conditions set out in ITTOIA 2005, s 217. HMRC did not challenge his right to change his accounting date, but maintained that he had not done so. The FTT was required to decide whether the conditions in s 217 had been met.
The dispute centred on the condition in ITTOIA 2005, s 217(1)(b) and whether the taxpayer’s accounts satisfied the 18 month test set out in s 217(3). Under the terms of s 217(3) the test was met ‘if the period of account ending – (a) with the new accounting date in the tax year in which the change of accounting date occurs …is not longer than 18 months.’ The FTT interpreted s 217 as requiring the basis period to be declared when the tax return was submitted in order for the 18 month test to be met. If the 18 month test only needed to be met at any point in the future, and had not actually been met at the filing date, yet the other conditions in s 217 were met when the tax return was filed, it could not have been known at the point of filing what the basis period actually was for that tax return and the tax liability could not be determined.
For the change in accounting date to be effective, the taxpayer was obliged to show that his period of account to 5 April 2010 was no longer than 18 months. The parties disagreed over which of four sets of documents produced by the taxpayer were his ‘accounts’; there was also a dispute over the period to which he drew up accounts, which the taxpayer considered to be eight months and HMRC to be 20 months.
The FTT decided that the return accounts were not ‘accounts’, and the new accounts were prepared too late to be relevant. The long accounts were the only accounts that actually reflected the taxpayer’s financial performance over the period to which they related. The taxpayer therefore failed the s 217 test because he did not have accounts with an accounting period of less than 18 months to the accounting date of 5 April 2010 when he notified the change in his accounting date. The appeal was dismissed.
The taxpayer appealed to the UT, claiming that the FTT had made four errors of law, which were: (1) the finding that for the purpose of ascertaining the relevant ‘period of account’ for the purposes of s 217(3) the long accounts were the relevant accounts rather than the 2010 schedule accounts; (2) if, as the FTT found, the test was which were ‘the more important’ accounts, it should have found the schedule accounts were more important for the taxpayer than the long accounts; (3) the finding that the return accounts were not accounts at all; (4) the new accounts should have been held to be relevant, as s 217 did not set a deadline by which the accounts that determined the ‘relevant period of account must be drawn up.
The UT agreed with the FTT that of the various competing accounts put forward the long accounts best fitted the description in ITA 2007, s 989 of being ‘the accounts of the business.’ The ‘period of account’ was the period covered by the long accounts. The UT also agreed with the FTT that the return accounts did not constitute accounts. Even if the return accounts were accounts, there was no reason why they would constitute the ‘accounts of the business’ in preference to the long accounts. Finally, the new accounts could not be relied on because they only came into existence after 31 January 2011 when the taxpayer submitted his tax return. The taxpayer’s appeal was dismissed.
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