Harry Potter actor fails in £1m tax refund appeal

Harry Potter star Rupert Grint has failed in his latest attempt to claim a £1m tax refund, after an Upper Tribunal ruled the actor was not able to change his accounting date in the way he had intended, because his accounting records did not support the necessary requirements

The tribunal heard that since about 2000, Grint had used an accounting date of 31 July each year, drawing up annual accounts to that date and that his basis period coincided with  the period covered by those annual accounts.

In the tax year ending 5 April 2010 Grint wanted to change his accounting date to 5 April instead of 31 July. He hoped this change would result in his basis period for the tax year ending 5 April 2010 being the period from 1 August 10 2008 to 5 April 2010, a period of about 20 months. By doing so, he sought to have the profits of the additional eight months taxed at the tax rates prevailing in the tax year 2009/10 and not at the higher rates prevailing in the tax year 2010/11.

HMRC originally accepted the change of accounting date as permanent and as having the effect intended. However, following a VAT control visit of Grint at the offices of his accountants Clay & Associates, HMRC were shown files which contained other accounting documents prepared for the actor.

As a result, HMRC said it was not clear that Grint had established the change of accounting date. The matter was taken to the First Tier Tribunal (FTT) which focused on identifying which of various alleged ‘accounts’ drawn up over the period should be treated as the ‘accounts’ for the purpose of determining whether the period of account relevant to section 217(3) was longer than 18 months.

This required the FTT to consider first what characteristics a document had to have in order to be ‘accounts’ and then, since the FTT identified more than one document that should be regarded as ‘accounts’, how to decide which of the rival contenders should be regarded as fixing the period of account for the purposes of determining whether Grint had met the 18 month test.

The Upper Tribunal looked again at these issues, as Grint appealed on the basis that the FTT had erred in its conclusions. [Rupert Grint and Her Majesty’s Commissioners for Revenue and Customs, [2019] UKUT 0028].

Accounts

Under consideration were the ‘long accounts’ covering the 20 month period from 1 August 2008 to 5 April 2010. After opening an enquiry HMRC reasoned that the ‘period of account’ for the purposes of section 989 ITA, was the period covered by the long accounts which was longer than 18 months. That meant in turn that section 216(3) did not apply because the conditions in section 217 had not been met and it followed that section 216(3) did not operate to produce a basis period, for 2009/10, of 1 August 2008 to 5 April 2010.

There also existed a time apportioned version of the long accounts splitting the figures between the periods 1 August 2008–31 July 2009 and 1 August 2009–5 April 2010. The FTT referred to these as the ‘2009 schedule accounts’ and the ‘2010 schedule accounts’, and together as the ‘schedule accounts’. Information from the schedule accounts was used to complete Grint’s 2009–10 tax return.

In addition the two self employment pages of Grint’s 2009–10 tax return (one covering the 12 month period ending 31 July 2009 and one covering the approximately eight 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 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’.

Error

At the Upper Tribunal, Grint sought to argue there were four alleged errors of law on the part of the FTT. These were that the long accounts were the relevant accounts, rather than the 2010 schedule accounts; that the long accounts were ‘the more important’ accounts; that the return accounts were not accounts at all; and 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 Upper Tribunal considered the first and second grounds of appeal together.

Grint 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. He 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 Upper Tribunal 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.

It 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 Upper Tribunal 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 Upper Tribunal 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 Upper Tribunal agreed with the FTT that the self-employment supplementary pages were not accounts. Grint’s counsel 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 Upper Tribunal 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. In Grint’s case, this meant when his 2009–10 tax return was filed on 31 January 2011. The Upper Tribunal 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.

As a result, Grint’s appeal was dismissed.

A Croner-i tax writer said: ‘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.’

Rupert Grint and Her Majesty’s Commissioners for Revenue and Customs, [2019] UKUT 0028] is here.

Report by Pat Sweet

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