Gedir v HMRC [2016] UKFTT 188 (TC)

Analysis

In 2008, the appellant (A) was employed by Bear Stearns in the risk arbitrage unit before and during the period that it was acquired by JP Morgan. A received an offer from JP Morgan to continue to work in his role at the bank, which he accepted. But ultimately in September 2008, he took up a role with Goldman Sachs instead along with other members of his team at Bear Stearns. On leaving Goldman Sachs in 2010, A received a termination payment of £627,965 which he reported in his tax return.

A claimed foreign service relief on the termination payment. The ‘foreign service’ related to periods that A had spent working at Bear Stearns.

HMRC (i) concluded that foreign service relief was not due and raised an assessment for additional tax, (ii) charged penalties for inaccurate return and (iii) charged late payment penalties in respect of the increased payments on account which should have been made.

A appealed HMRC’s decision. A contented that:

1. (i) Whilst he was not entitled to full foreign service relief under s413 of the Income Tax (Employment and Pensions) Act 2003 (ITEPA), he was entitled to partial relief on a pro-rated basis under s414 because Goldman Sachs was the ‘successor’ to Bear Stearns within the meaning of s404.
2. (ii) No penalties for inaccurate return could be due because there was no inaccuracy, or in the alternative if there was an error, then no penalty should be due because A took reasonable care in submitting his return. The issue in dispute was unclear, A took tax advice on the issue, and it was a tenable position to interpret the legislation as permitting foreign service deduction. A had done all that a reasonable taxpayer could be expected to do. A should be entitled to full reductions for helping HMRC understand and giving access to records.
3. (iii) As foreign service relief was due, there was no late payment of payments on account. In any event, A did not accept that the penalties could be charged.

HMRC contended that:

1. (i) There was no association between Bear Stearns and Goldman Sachs as A’s employers. A chose to take employment with an unconnected company. The fact that the terms of employment were identical is not evidence of continuous employment. Goldman Sachs is not in the same group as Bear Stearns. The Goldman Sachs employment was a stand-alone employment and A was resident throughout that employment so no foreign service deduction was due.
2. (ii) A was careless because he failed to take reasonable care. Although A sought advice, that was not enough. A was required to consider the advice and the reasonable man would have taken further professional advice or sought HMRC’s advice before filing the return. A was not entitled to the full reduction because he did not help HMRC to understand, nor did he give access to records as evidence to show payments included in the compensation for the period A was employed by Bear Stearns was never provided.
3. (iii) Late payment penalties were due under Sch 56 Finance Act 2009 on the basis that: (a) foreign service relief was not due, (b) thus more tax should have been paid, (c) therefore more tax should have been paid on account for that year, (d) the increased payments on account had not been paid and (e) therefore the late payment penalties were due. However, upon reconsidering the issue after the hearing (it having been agreed that further written submissions would be made after the hearing), HMRC decided to no longer charge the late payment penalties.

Held:

1. 1. 1) The burden of proof is on A to provide evidence to support his case that Goldman Sachs was the successor to Bear Stearns.
   2. 2) As the term ‘successor’ is not defined anywhere in the Tax Acts, it should be given its ordinary meaning. Chapter 3 of Part 6 of ITEPA is intended to operate either in circumstances where an employee is employed by different members of the same group of companies, where there is an overarching common ownership or where there is a continuity in the existence of a business entity on a change of ownership.
   3. 3) The key element is the continuation of the whole business or a discrete party of it. It is not sufficient that all the employees are transferred, even if they take their clients or customers with them.
   4. 4) A did not provide sufficient evidence that the risk arbitrage unity of Bear Stearns transferred as an identifiable economic entity to Goldman Sachs. The fact that some components such as employees transferred is not sufficient to constitute Goldman Sachs as the ‘successor’ to Bear Stearns for the purpose of foreign service provisions. A failed to discharge the burden of proof.
   5. 5) Accordingly, A was not entitled to the foreign service deduction.
   6. 6) Regarding the penalties for inaccurate return, the test for establishing whether a taxpayer who uses an agent to complete his tax return has taken reasonable care to avoid inaccuracy is correctly set out in J R Hanson v HMRC [2012] UKFTT 314 (followed).
   7. 7) A taxpayer who consults an advisor he reasonable believes to be competent and experienced in the relevant field, and who is advised that his tax return may properly be completed on the basis of a particular view of the legislation, would normally be regarded as having taken reasonable care to submit an accurate return, even if he understood that there were other possible interpretations of that legislation. A tax payer is not obliged to take advice from another advisor in this situation, nor is a taxpayer obliged to seek advice from HMRC.
   8. 8) A took reasonable care to avoid an inaccuracy in his return. A’s appeal against the penalty for careless inaccuracy allowed and the penalty cancelled.

9) As HMRC decided to no longer charge the late payment penalties, this point no longer needed consideration.

MARILYN MCKEEVER J: Background [1] This appeal arises out of the unprecedented events surrounding the 2008 global financial crisis. The appellant, Mr Gedir was employed by Bear Stearns, the American investment bank, as the managing director of its European risk arbitrage business. In the turbulent period between March and August 2008, Bear Stearns was acquired …

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