Case: FTT decides that declaration of trust was invalid and did not qualify for post-cessation trade relief
 UKFTT 0740 (TC)
Judge Marilyn McKeever, Mr Julian Sims
Decision released 17 December 2018
Income Tax and Capital Gains Tax - Post-cessation trade relief – Income Tax Act 2007, s. 96 – TCGA 1992, s. 261D - Whether valid trust created - Whether trust can be “payment” - If there was a payment, was it a “qualifying payment” - Were there “relevant tax avoidance arrangements”
Sinclair  TC 06873
The taxpayer was an accountant and had been a partner in a firm. A claim was made against the taxpayer (by a former client and her company) in respect of advice that he had given whilst a partner. Proceedings were commenced in the High Court in March 2011 claiming damages of £1.7 million.
The taxpayer sold a property at a substantial capital gain in April 2011.
The taxpayer engaged lawyers to deal with his claim and incurred legal fees. The invoices for the tax year 2011–12 totalled £38,948.58, the taxpayer paid £21,195.71 in the 2011–12 tax year, and claimed relief under ITA 2007, s. 97(3)(c) for £38,749 in the 2011–12 tax year.
On 30 March 2012 , the taxpayer sent an e-mail to himself stating that £400,000 of funds in various accounts in his name were held irrevocably in trust for a client account and were paid on behalf of the former partnership as part of the settlement as a post cessation payment of the practice. He claimed post cessation relief for the £400,000 in the 2011–12 tax year.
The taxpayer invested these funds by making high interest loans which led to the loss of most of the funds.
The claim was settled in February 2013 by way of a Tomlin Order and the quantum was agreed at £850,000. The taxpayer’s share of the damages was £550,000. This was paid in two tranches of £275,000 (plus interest) on 14 August 2013 and £275,000 (plus interest) on 13 February 2014.
Post cessation relief allows for tax relief against general income and/or gains where a professional person has to make payments for certain purposes after the cessation of their business. Relief is only given in the tax year that the payment is made and cannot be carried forward or carried back (although relief can be given against future receipts from the ceased business). No relief is due where the payment is made in connection with certain tax avoidance arrangements.
The First-tier Tribunal (FTT) found that post-cessation trade relief for £21,195.71 should be granted in respect of the legal fees paid in 2011–12.
The FTT concluded that the e-mail of 30 March 2012 did not create a valid trust for two reasons. First, there was no certainty of subject matter as there were two claimants (the former client and her company), but the e-mail did not state how much of the £400,000 was held for each. Second, the trust was conditional as it was stated to be paid as part of the settlement, but at that time, there was no settlement agreed.
As the FTT concluded that there was not a valid trust, there could not be a payment for the purposes of post-cessation trade relief. However, it went on to consider if there had been a payment, whether it would have been a qualifying payment.
To be a qualifying payment under ITA 2007, s. 97(2), the payment must either be to remedy defective work done or by way of damages (whether awarded or agreed) in respect of defective work. The Tribunal stated that as a matter of fact, the purported payment could not be made in remedying defective services. As the damages had not been awarded or agreed in 2011–12, the taxpayer could not unilaterally agree to pay a sum of money. The Tribunal concluded that even if there had been a payment, it was not a qualifying payment.
Finally, HMRC argued that even if the taxpayer had succeeded on the previous points, ITA 2007, s. 98A would deny relief as the payment was tax-generated. HMRC contended that the declaration of trust had been made just before the end of the 2011–12 tax year so that post-cessation trade relief could be claimed against the gain on the disposal of the property (to meet the anticipated liability under the claim for damages) in that tax year and that the declaration of trust constituted relevant tax avoidance arrangements.
The FTT interpreted ITA 2007, s. 98A as requiring the payment to be made in connection with arrangements and that the payment and the arrangements were not the same thing. The FTT concluded that if the declaration of trust had been valid, that would have been the payment itself and not an arrangement and that the rule at ITA 2007, s. 98A would not have operated to deny relief.
The FTT therefore, decided that the taxpayer’s claim for post-cessation trade relief in 2011–12 should be limited to the £21,195.71 of legal fees paid in that tax year.
This decision highlights the limited nature of post-cessation relief. Relief can only be claimed against income and gains of the tax year that payments are made and those payments must be qualifying payments.
For commentary on post-cessation trade relief, see In-Depth at ¶262-750ff.