Case: Upper Tribunal decides conditions for changing accounting date not met
 UKUT 0028 (TCC)
Mrs Justice Rose, Judge Jonathan Richards
Decision released 29 January 2019
Income tax – Whether appellant met criteria in ITTOIA 2005, s. 217 for a change in basis period – Application of ‘18 month test’ – Whether various financial statements were accounts – Appeal dismissed
Grint v R & C Commrs  BTC 506
The appellant appealed the decision of the FTT (Grint  TC 05286) that had concluded that the 18 month test in ITTOIA 2005, s. 217 had not been met.
The appellant started work as an actor in September 2000 and prepared accounts to 31 July each year. The appellant decided to change his accounting date to 5 April in the tax year 2009–10. This meant that his basis period for tax purposes would be 20 months in 2009–10.
Various ‘accounts’ were prepared:
•An accounting report covering the 20 month period from 1 August 2008 to 5 April 2010. This was in the format of ordinary trading accounts, with an accountant’s report, profit and loss account, balance sheet and notes. They were entitled ‘the unaudited accounts of Mr R Grint’ and they were produced to and signed by Mr Grint in October 2010 under a statement which said ‘I approve the accounts … I acknowledge my responsibility for the accounts’. They were used to discuss Mr Grint’s financial performance over the 20 month period and Mr Grint knew that they would be used as the basis for drawing up two accounts covering two shorter periods as part of the process of changing the accounting period. The FTT referred to these as the ‘Long Accounts’.
•A time apportioned version of the Long Accounts splitting the figures in the Long Accounts between the periods 1 August 2008–31 July 2009 and 1 August 2009–5 April 2010. Drafts of these were prepared by the tax department of the accountants prior to the meeting in October 2010 but they were not shown to Mr Grint at that meeting, although he was later shown a draft of them and said that he was happy with them. The FTT referred to these as the ‘2009 Schedule Accounts’ and the ‘2010 Schedule Accounts’, and together as the ‘Schedule Accounts’. It was the information from the Schedule Accounts that was used to complete Mr Grint’s 2009–10 tax return.
•The two self employment pages of Mr Grint’s 2009–10 tax return (one covering the 12 month period ending 31 July 2009 and one covering the approximately 8 month period to 5 April 2010) included pages containing profit and loss and balance sheet information. The FTT referred to these as the ‘2009 Return Accounts’ and the ‘2010 Return Accounts’, and together as the ‘Return Accounts’.
•Following an HMRC enquiry Mr Grint’s accountants prepared two new sets of accounts, covering the same periods as the Schedule Accounts and Return Accounts, but prepared on the accruals basis. The FTT referred to these as the ‘2009 New Accounts’ and ‘2010 New Accounts’, and together as the ‘New Accounts’. These accounts were signed by Mr Grint and submitted to HMRC on 21 June 2012.
The appellant put forward four alleged errors of law on the part of the FTT:
(1)The finding that that the Long Accounts were the relevant accounts rather than the 2010 Schedule Accounts for the purposes of establishing the relevant ‘period of account’ for ITTOIA 2005, s. 217(3);
(2)The finding that the Long Accounts were ‘the more important’ accounts;
(3)The finding that the Return Accounts were not accounts at all; and
(4)That the New Accounts should have been held to be relevant as ITTOIA 2005, s. 217 does not set a deadline by which the accounts must be drawn up.
The UT considered the first and second grounds of appeal together.
The appellant argued that the FTT had imported an additional qualification into ITTOIA 2005, s. 217 that accounts must be general purpose accounts or accounts relied on by the business for its general commercial or trading purposes and that this would cause problems for businesses that drew up accounts primarily for completing their tax returns. The Appellant also argued that the Schedule Accounts were the more important accounts to him as they supported his change in accounting period which would enable him to make a substantial tax saving.
The UT considered that the FTT had to decide which, of the various competing sets of accounts, were ‘the accounts of the business’ for the purposes of ITA 2007, s. 989 and ask whether the period for which those accounts were drawn up was longer than 18 months. The UT agreed with the FTT that the Long Accounts better fitted the description of ‘ the accounts of the business’ and that the ‘period of account’ was the period covered by those accounts. The UT also dismissed the notion that the importance of accounts referred to by the Court of Appeal in Jenkins Productions Ltd v IR Commrs (1944) 29 TC 142 intended to consider a wide range of subjective factors including their effect on the taxpayer’s tax liability. The UT commented that importance should be assessed in the context of the question being asked which is what set of accounts are more properly described as the accounts of the business.
On the third ground for appeal, the UT agreed with the FTT that the self-employment supplementary pages were not accounts. Counsel for the appellant argued that this could cause problems for small businesses that just input data into the supplementary pages without drawing up accounts. If that meant that the default basis period rules applied, that could be very different to the basis period used for the return. The UT commented that even if the Return Accounts were relevant, the appellant would need to establish that the 2010 Return Accounts should be used in preference to the Long Accounts to determine the ‘period of account’ for ITTOIA 2005, s. 217.
On the fourth ground, the FTT had used a purposive interpretation to conclude that the accounts must exist at the time that the taxpayer’s basis period was determined. For the appellant, this meant when his 2009–10 tax return was filed on 31 January 2011. The UT considered that this is demonstrated by the statutory scheme and that the New Accounts could not be relied on as they came into existence after the tax return was submitted on 31 January 2011.
This decision highlights the differences between the legislation and practice. While the legislation envisages accounts being drawn up, HMRC does not require it. Helpsheet 222 published by HMRC states:
‘Your accounting period is the period your accounts cover. If you don’t have accounts, it’s the period your books and records cover.’
Interestingly, the UT sought to put forward an alternative reading of the statutory provisions, but this was rejected by both parties. The UT considered that the ‘18 month test’ might have been imposed by Parliament to restrict the length of the basis period that could arise on a change of accounting date to 18 months. Prevailing practice does not support this interpretation and basis periods of longer than 18 months (made up of two shorter periods) are accepted by HMRC provided that the period ending on the new accounting date is less than 18 months.
For commentary on the conditions to be met for recognising a new accounting date, see In-Depth at ¶230-650.