Buckingham v Revenue and Customs (NCOME TAX AND CAPITAL GAINS TAX - Special Dividend from US company - HMRC discovery assessment on the basis that the Special Dividend was part income and part capital )

Factual and Procedural Background

The Appellant has held shares in Company A and its predecessor companies for 35 years. In 2018, Company A merged with Company B using a special purpose vehicle; the merged entity is known as Company C. Both companies were incorporated under Delaware law.

Immediately prior to the merger, a Special Dividend was paid to Company A shareholders, including the Appellant, who received a substantial amount. The Appellant included the entire amount on his self-assessment tax return as capital, based on the significant decline in the overall capital value of his shareholding post-merger. However, documentation at the time indicated that part of the Special Dividend was income, with the remainder capital.

HM Revenue and Customs (HMRC) received information under the Foreign Account Tax Compliance Act (FATCA) identifying the income portion of the Special Dividend. HMRC opened an enquiry under the Taxes Management Act 1970 (TMA) section 9A, and the case officer concluded that a portion of the Special Dividend was taxable as income and the rest as capital. A closure notice was issued increasing the Appellant's tax liability accordingly.

The Appellant appealed this closure notice. An HMRC review officer subsequently found that the enquiry was opened out of time, leading to the closure notice being withdrawn.

HMRC then issued a discovery assessment under TMA section 29, reflecting the earlier amendment. The Appellant appealed this discovery assessment and requested a statutory review.

The review officer issued a decision holding that the entire Special Dividend was income for UK tax purposes, increasing the tax due further. The Appellant appealed to the Tribunal, accepting the initial income/capital split but challenging the review decision.

Legal Issues Presented

1. Whether the review decision increasing the Special Dividend's taxable income portion was issued within the statutory time limits.
2. How the discovery assessment provisions under TMA section 29 interact with statutory review provisions under TMA sections 49A to 49I.
3. The proper classification under UK tax law of the Special Dividend paid by a Delaware-incorporated company: whether it is income, capital, or partly both.
4. Whether the Appellant acted carelessly or deliberately in relation to his tax return, affecting the applicability of time limits for assessments.

Arguments of the Parties

Appellant's Arguments

• The Appellant treated the Special Dividend as partly capital based on the significant reduction in shareholding value after the merger.
• The Appellant relied on US documentation and forms which split the dividend into income and capital portions, consistent with Delaware law.
• The Appellant denied carelessness, asserting he sought professional advice but could not find specialists with relevant expertise.
• The Appellant disputed the review officer's failure to consider key documents and the classification of the entire dividend as income.
• The Appellant argued that the statutory review decision was issued out of time and thus invalid.

Respondents' Arguments (HMRC)

• HMRC initially treated part of the Special Dividend as income and part as capital but later, through the review officer, asserted the entire amount was income.
• HMRC relied on case law and statutory provisions to support the classification of the entire dividend as income under UK law.
• HMRC contended the Appellant had been careless by failing to obtain professional advice, potentially extending the time limit for assessments.
• HMRC argued that the statutory review decision varied the discovery assessment and requested the Tribunal to confirm the increased assessment.
• HMRC submitted that the US tax treatment and documentation were not determinative of UK tax classification.
• HMRC requested the Tribunal to use its powers under TMA section 50(7)(c) to increase the discovery assessment in line with the review decision.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal first confirmed that the initial closure notice issued under TMA s 9A was invalid because it was issued out of time, consistent with the statutory time limits and confirmed by the HMRC review officer.

It then considered the validity of the discovery assessment under TMA s 29. The Tribunal accepted HMRC’s submission, supported by Tooth and Harrison, that discovery assessments are valid if statutory conditions are met, even if the discovery is not new, provided the time limits are observed. The Tribunal found that the case officer met the conditions for issuing the discovery assessment, relying on TMA s 29(5) because the tax shortfall could not have been reasonably detected from the information provided in the Appellant’s return or accompanying documents.

The Tribunal analyzed the interaction between discovery assessments and statutory reviews. It noted that the review officer varied the discovery assessment by increasing the taxable amount, relying on both carelessness (TMA s 29(4)) and the discovery condition (s 29(5)). However, the Tribunal found that the review officer did not consider key evidence (Forms 1042-S and Form 8937) that supported the initial case officer’s income/capital split, and her decision was therefore unreliable.

Regarding carelessness, the Tribunal rejected HMRC’s claim that the Appellant was careless, finding that he had reasonably sought professional advice but was unable to find suitable expertise, and that HMRC failed to meet the burden of proof on this issue.

The Tribunal then considered the classification of the Special Dividend under UK law. It applied the legal principles from First Nationwide, Reid, Lazard, and Courtaulds, focusing on the mechanism of distribution under Delaware law. The evidence, including official US tax forms and company documentation, established that $29.50 per share was income (paid from earnings and profits) and $74.25 per share was capital (not paid from earnings and profits but funded by investors). The Tribunal found it credible that the IRS accepted this split and that the documents were consistent with Delaware law.

The Tribunal rejected HMRC’s argument that the US tax treatment and Delaware law were irrelevant, emphasizing that UK tax law requires consideration of the foreign law mechanism to determine income versus capital.

Finally, the Tribunal addressed whether the review officer’s decision was issued within the statutory 45-day deadline under TMA s 49E. It concluded that the decision was out of time because the Appellant did not positively agree to an extension before the deadline expired, and silence could not be treated as agreement. As a result, the review decision is replaced by a deemed decision upholding the original discovery assessment.

The Tribunal also refused HMRC’s late application to make further submissions clarifying their position on the classification of the Special Dividend, citing procedural fairness and the need to avoid further delay.

Holding and Implications

The Tribunal upheld the discovery assessment issued by the initial case officer, confirming that only the income portion of the Special Dividend is taxable as income under UK law, while the capital portion is not taxable as income.

The Tribunal refused to increase the assessment to reflect the later review officer’s decision, which was found to be both procedurally out of time and substantively incorrect due to failure to consider key evidence.

The direct effect of this decision is that the Appellant's tax liability remains as originally assessed under the discovery assessment, with the income/capital split accepted as $29.50 income and $74.25 capital per share. No broader precedent was set beyond the application of existing principles to the facts of this case.