allanbeardsworth

(The blog heading is meant to be a better lede than 'the tax case Terence Hill (Berkeley) Limited)

We recently watched the film The Social Network again, the story of the creation of Facebook by Mark Zuckerberg and others, notably Cameron and Tyler Winklevoss. It was Friday night relaxation, but, maybe there was still a hint of tax in my brain since at a certain moment there was a telling line.

There was a long part of the film held in lawyers' offices in which Jesse Eisenberg, playing Mark Zuckerberg, did a sterling job of making his character appear obnoxious and too clever by half. Then, end of the evening, just Jesse and Rashida Jones, the actress playing Marilyn Delpythe junior lawyer are left behind in the office; he suggests they go out for something to eat, she says she has to decline as to do so would be unprofessional, and then, and here's the crunch, she tells him “you're going to lose; you're going to pay something”; telling him that litigation is all about character, and a jury will side with the Winklevoss.

(It's amazing what you can google; this is an extract from a webpage on some legal aspects from the film.

 

“I invented two characters–one was Rashida Jones's 'Marilyn,' the youngest lawyer on the team and a far cry from the other women we see in the movie. She's plainly serious, competent and, when asked, has no problem speaking the truth as she sees it to Mark,” Sorkin writes.

 

I've not found a webpage on the tax aspects, though. {Starter for ten: had it been a UK case, the Winklevi would have paid tax on their compensation}

 

Where is this leading? Well, the bald fact about litigation being character critical was very evident in the recent case Terrace Hill (Berkeley) Limited v HMRC [2015] UKFTT 75.

Until the end of December 2014, when I retired from being a partner at Deloittes, one of my favourite roles in my job was doing regular internal tax updates, often principally focussed on tax cases; selecting cases because of their importance, amusement, general principles or topicality; including each year naming a case of the year. Alas, I can no longer do that, but I haven't lost my keen interest in tax cases and so, on occasion, when I think it appropriate, I will blog about cases, my first being Terrace Hill.

 

The caveats

 

I've only read the case a couple of times, on a wet Bank Holiday. I haven't gone to Companies House to look at the accounts of Terrace Hill (Berkeley) Limited, nor done any formal research. I just found the case interesting, and chose to blog about it.

 

Main points to take away from the case

 

A large part of many First-Tier Tribunal decisions are based on the credibility or otherwise of the witnesses;

 

First-Tier Tribunals are decided on the balance of probabilities;

 

The burden of proof is on the taxpayer;

 

HMRC can seek, and sought here, penalties of £1m.

 

The judgment

 

HMRC lost; the taxpayer prevailed on the balance of probabilities, and therefore paid the lower amount of tax it had self assessed as its liability, and the penalty fell away.

 

Another day, another taxpayer, another decision

 

It could so easily have gone the other way with the same facts but less strong witnesses. HMRC will be very disappointed to have lost; it probably doesn't create a significant precedent, though.

 

The facts

 

The Terrace Hill group had a 50% stake in an SPV which in August 2000 bought a property in Mayfair; by December 2000 the tenants had all left. The site was demolished and a grade A 35,000 square foot office property was constructed. The construction was completed in September 2013. The property was substantially let by September 2014, fully let by May 2015 and sold by July 2015. In the intervening years, 9/11 had happened, causing a fall in the London property market.

 

The property was sold for £39.4m. I infer that the total project cost were somewhat north of £28m (para 80) but can't be certain. Hence the taxable profit is in the region of £11m, and corporation tax around £2.5m. In parenthesis, a £1m penalty on this level of tax is plausible; perhaps coloured (increased) by the use of a scheme, but also of course my figures are estimated. (By coincidence, another case I have been reading, Romie Tager, HMRC successfully levied a £1m penalty on an 'irresponsible' taxpayer. Penalties aren't just £100 but can be very serious nowadays)

 

KPMG had promoted a capital loss scheme to both Terrace Hill and their JV partners. The judgment said that HMRC eventually conceded that the scheme was effective, if the profit was a capital gain.

 

The key question therefore was “was Terence Hill's profit arising from a trade, or from realising an investment” (para 113).

 

Discussion

 

The Terrace Hill group was at the time substantially held by family trusts connected to a Mr Robert Adair. The group had both developed and invested in property, so was a 'mixed beast' like, in my experience, many property groups. Mr Adair is a qualified accountant, and a chartered tax advisor, and the tribunal found him to be an impressive, honest and knowledgeable witness”. One of his CEOs during the relevant period, Nigel Turnbull, also an accountant, was also held to be an 'honest and knowledgeable' witness. The third taxpayer's witness, Philip Leech, a highly experienced property man, was similarly found to be “an honest and very impressive witness, and a man of considerable integrity”.

 

My reading is that the strength of these three witnesses was decisive in this case.

 

HMRC sought to discredit Mr Turnbull who had told Bank of Scotland in July 2004 that they intended to realise their investment as quickly as possible (para 36). In his oral evidence, Mr Turnbull said that in fact they had never intended to do this, and that he had written to the Bank in this way as part of the game playing with lending bankers. HMRC's Barrister sought to put weight on this, either to show true intention, or to discredit Mr Turnbull.

 

Fortunately for the taxpayer, there was much contrary evidence, pointing to the investment motives. I won't paraphrase them, since they are lengthy, but there was consistency in other facts, such as evidence from the auditors, and the oral evidence of all three witnesses. Ultimately, one blot didn't spoil the copybook. For those professionals and others who act for property cases, or on other cases regarding trade or investment, the whole case is worth a read. In my reading of the case there was also one more weakness of the taxpayers' contention, but Counsel for HMRC didn't take it, and nor did the Tribunal judges, which I choose not to relay.

 

The judgment is well written. At para 118, they say that the critical question is weighing up the respective cases in relation to factual intention. In general, there was consistency from the witnesses and evidence; a major weakness for the taxpayer was 'fibbing to the bank' but, weighing matters up, they say their judgement was finely balanced, but to decide against the taxpayer would involve accepting that the witnesses had been lying in relation to all the critical evidence (para 126), which they couldn't do.

 

So, on the balance of probabilities, the taxpayer had done sufficient to establish their case. Accordingly, the profit was chargeable to corporation tax and thus, but not a matter for the judgment, the capital losses were available for offset.

 

Conclusion

 

The case won't be a leading precedent in future cases; it was decided on its facts. A different tribunal might have decided against the taxpayer due to the mis-leading of the bank (or, the evidence that the letter to the bank gave) so in part the taxpayer was lucky, and HMRC unlucky. But the case should be of interest to tax practitioners as being a typical examination of tax borderlines. As said, it is clear, well set out, and well written and argued.

 

Oh, and The Social Network is well worth watching too. It doesn't contain anything else about tax (and maybe Marilyn wasn't thinking about tax when she advised Mark) and not much about the other love of my life (though the Facemash algorithm, which got Mark into trouble/notoriety at the start of the film, is based on the ELO rankings).