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Selected Cases and Summaries of Completed Investigations - April to September 2000
Volume 3 - 3rd REPORT - SESSION 2000-2001
Chapter 1
INLAND REVENUE
7. Case No. C.61/00
Mishandling of a company valuation for capital gains tax purposes Summary
Mr A complained that the Inland Revenue and their Valuation Office Agency unnecessarily prolonged negotiations over the valuation of his former company for the purposes of determining his capital gains tax liability. When they admitted their errors he complained that their ex gratia payments to cover his direct costs and the amount of a consolatory payment were inadequate. Following the Ombudsman's intervention the Revenue agreed to look again at whether Mr A's 'own time' might be compensated and to consider a claim for interest charges on money borrowed to meet the costs the Revenue subsequently reimbursed. They agreed to pay £9,000 for these along with a consolatory payment of £500.
Full text
1. Mr A complained that the Inland Revenue and their Valuation Office Agency unnecessarily prolonged negotiations over the valuation of his former company (the company) for the purpose of determining his liability for capital gains tax. He contended that their payment of his costs and the making of a consolatory payment of £250, although later raised to £500, did not compensate him for seven years of frustration, anguish and interference in his private and business life, and more particularly for the four years for which the Revenue had accepted they had prolonged the negotiations. He said that he should receive interest on money which the Revenue had paid him to reimburse his costs and compensation for loss of earnings.
2. My investigation into Mr A's complaint began once comments had been obtained from the Chairman of the Board of Inland Revenue following the Member's referral of the complaint. I have not included in this report every detail investigated by the Ombudsman's staff but I am satisfied that no matter of significance has been overlooked.
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Background
3. Capital gains tax was introduced in 1965 and is charged in respect of chargeable gains accruing to a person on the disposal of certain assets. In 1988 a change in the legislation provided (broadly) that the base cost of an asset for capital gains tax purposes should be its market value at 31 March 1982 (where it had been held at that date) rather than an earlier acquisition cost or market value. Assets potentially liable to capital gains tax comprise all forms of property, wherever situated, including incorporeal property such as goodwill. Goodwill is the advantage arising from the reputation and trade connections of a business, in particular the likelihood that existing customers will continue to patronise it.
4. The Revenue's Code of Practice 1 (the Code), entitled 'Mistakes by the Inland Revenue', was introduced in February 1993. The Code makes various provisions to compensate for Revenue mistakes and delays. Although the Revenue do not, as a rule, reimburse the costs a taxpayer has incurred in establishing his or her tax obligations, they do consider reimbursement where those costs arise directly from a serious or persistent Revenue error. Such costs may include: professional fees, incidental personal expenses, or wages or fees which would have been earned but which have been lost through having to sort things out as a direct result of the Revenue's serious error. By serious error is meant something which no responsible person, acting in good faith and with proper care, could reasonably have done. It includes matters where the original action was based on a pardonable error or even an innocent misunderstanding, but which then became more serious because it was persisted in. The Revenue's Redress Handbook (the Handbook) gives Revenue staff detailed guidance on the application of those principles. It says that any payment other than a consolatory payment (see paragraph 7.7) should only reimburse the taxpayer for the actual net loss or cost suffered as a direct result of the Revenue's mistake or delay, and should not put the person in a better position than he would have been in had things not gone wrong.
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5. The Handbook says that the Revenue will reimburse a taxpayer for lost earnings where there is clear evidence that those were lost as a direct result of him having to spend time in dealing with the Revenue's serious or persistent errors. Where the structure of a director-owned company is such that the director's earnings are directly linked to the time the director spends on the company's business, the Handbook says the Revenue will accept that the time which the director has spent dealing with the Revenue's mistakes on the handling of the company's tax affairs has directly resulted in a loss of earnings. The Handbook goes on to say that only the net loss suffered by the taxpayer should be reimbursed and that the hourly rate payable should be judged using available information, including that contained in tax returns and relevant trading accounts. The Handbook says that where a taxpayer has expended his 'own time' in dealing with the Revenue's errors, but that has not resulted in a loss of earnings, only a loss of leisure time, then reimbursement of the notional cost of that time is not due but the intrusion into the taxpayer's personal time might be taken into account in considering the amount of a consolatory payment.
6. The Revenue say they aim to reply to all enquiries or letters within 28 days. Where there is no good reason for a delay, and they took more than six months in total - over and above the 28-day target for replying to correspondence they have set themselves - they say they will, for amounts unpaid, or not repaid because of their delay, pay the taxpayer interest and pay any reasonable costs directly incurred. The Handbook states; "You may receive claims for the reimbursement of interest on money borrowed to pay professional costs. Such loan interest is not regarded as a reasonable, direct cost of the Department's mistakes since it rests on the taxpayer's choice of personal financial arrangements. That said, there may be some exceptional cases where the taxpayer's financial position is such that there was no alternative but to run up interest charges, which it is therefore right to treat as a direct cost."
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7. Before March 1996 the Code made no provision for compensating taxpayers for distress or other non-pecuniary loss. Since then, however, in exceptional cases where the Revenue have made a serious or persistent error which has resulted in a significant and unwarranted intrusion into a taxpayer's personal life they will consider making a consolatory payment for any worry and distress suffered as a direct result of their error. Also, the March 1996 edition of the Code says that where their unreasonable delay has extended over more than two years, the Revenue will consider making a payment as consolation for that delay, considering each case on its merits. The Code says that typically consolatory payments are likely to be in the range of £50 to £250, but higher amounts up to £1,000 may be made in appropriate circumstances. In extreme cases a still higher payment will be considered but it is unlikely to exceed £2,000. The Code also says that where the Revenue mishandle a complaint, or delay dealing with it for no good reason, they will make a further consolatory payment (sometimes called a 'botheration' payment) in addition to any other payment that may be due.
8. A person unhappy with the way in which the Revenue have handled a complaint can ask the Adjudicator to look into it and to make a recommendation. The Adjudicator will not ask the Revenue to make payments that fall outside the terms of the Code.
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Jurisdiction
9. The Ombudsman is precluded under section 12(3) of the Parliamentary Commissioner Act 1967 from questioning the merits of a discretionary decision of a department where that decision is taken without maladministration. The actions of the Adjudicator are within the Ombudsman's jurisdiction. This investigation has been confined to the departmental administrative handling of the matters complained about. The firms of accountants and surveyors mentioned are not within the Ombudsman's jurisdiction and I mention them only to put into context the administrative actions of the Revenue and of the Adjudicator.
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Investigation
10. In his comments to the Ombudsman on the complaint, the Chairman of the Board of Inland Revenue gave a detailed account of the lengthy chain of events leading up to the complaint. That account was subsequently agreed by Mr A and by a firm of accountants acting for him (the accountants). The main events are summarised below.
11. In July 1986 Mr A sold the company. In 1988 discussions began between Mr A and the Revenue's Shares Valuation Division to agree the value of the company's shares as at 31 March 1982. The Shares Valuation Division instructed the mineral valuer - an officer of the Valuation Office Agency - to give expert assistance in determining the correct valuation. On 25 April 1991 Mr A told the mineral valuer that goodwill, based on the company's location in an Enterprise Zone and the cost advantages that gave, should be included in the valuation of the company's assets. On 12 September the mineral valuer wrote to Mr A to say that his instructions from the Shares Valuation Division were to provide an agreed valuation of the whole company to include mineral and tipping rights held. On 25 November the mineral valuer told Mr A that it was his intention to value the assets of the company solely on the basis of its minerals and air space, while matters such as equipment and goodwill would be dealt with between the accountants and the Shares Valuation Division. On 26 November the mineral valuer wrote to Mr A confirming that he intended to confine his valuations to the various properties owned and leased at the date of valuation, ie 31 March 1982. On 18 November 1992 the accountants told the Shares Valuation Division they believed that additionally there was a value to be placed on goodwill in the company. On 13 January 1993 the accountants wrote to the Shares Valuation Division with their valuation of the company including goodwill. On 14 January 1994 the accountants wrote to the Shares Valuation Division expressing concern about their approach to the valuation and saying that from the outset of the negotiations it had been firmly established that the mineral valuer's valuation would be related to the minerals and air space only, and that goodwill was not included in his valuation. They added that a firm of chartered surveyors (the surveyors) had been instructed to negotiate with the mineral valuer on the basis that goodwill was not included, as they understood that that element would be a matter of negotiation with the Shares Valuation Division. On 20 June 1994 the Shares Valuation Division met Mr A and his advisers who agreed to prepare projections and calculations to support their valuation of goodwill. Over a year later, on 6 September 1995, Mr A wrote to the Shares Valuation Division enclosing calculations of the company's projected profit to support a valuation of £1.8 million at 31 March 1982.
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12. There then ensued a lengthy exchange of correspondence between Mr A and the Revenue about the valuation which eventually resulted in the Shares Valuation Division referring the matter back to the mineral valuer. On 23 September 1996 the Shares Valuation Division told the accountants that the mineral valuer was prepared to recommend a valuation of £1.5 million in order to close the case. On 20 January 1997 Mr A complained to the Revenue about the length of time they had taken to settle the valuation. On 3 March the Revenue apologised for the time it had taken. They accepted that it should have been possible to agree sooner if the mineral valuer and the Shares Valuation Division had taken a consistent view of the goodwill question and of their respective responsibilities.
13. On 7 May 1997, after discussion of his compensation claim, the Revenue told Mr A that they were unable to reimburse him for his own time as they said he could not demonstrate that he had lost earnings as a direct result of their error. They said that consolatory payments for worry and distress were appropriate only where a serious or persistent error had resulted in a significant and unwarranted intrusion into a taxpayer's personal life. They added that it might well be appropriate for them to make reimbursement of professional fees and direct costs and they asked him to provide details. On 30 June the Revenue asked Mr A to provide evidence that he had lost income as a direct result of their mistakes. They also said that he might have a case for them to make him a consolatory payment on the grounds of their delay. After further representations from Mr A and his accountants, the Revenue agreed to pay his professional costs for the period November 1991 to May 1996. On 6 November 1997 Mr A sent the Revenue details of his professional costs and on 11 November claimed interest on those costs. On 25 November the Revenue rejected Mr A's claim for loss of earnings, but made him a consolatory payment of £250 for worry and distress. They also paid his professional costs of £15,254.27 and agreed to consider a claim for his personal expenses. They refused to pay interest, explaining that they did not regard that as a 'direct cost' resulting from their mistakes, saying that such costs depended upon the taxpayer's personal choice of financial arrangements.
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14. On 15 January 1998 Mr A provided further details of his costs and his claim for interest. He renewed his claim to be reimbursed for loss of earnings (at a rate of £100 an hour), and asked the Revenue to reconsider the amount of their proposed consolatory payment. On 5 February the Revenue agreed to pay Mr A a further £4,714 for professional fees, and £1,482.90 for out of pocket expenses. They declined to make a payment in respect of loss of earnings in what they saw as the absence of clear evidence of direct loss, or to increase the amount of the proposed consolatory payment. On 3 March 1998 Mr A complained to the director of the Revenue's Capital Taxes Office and said he intended to complain to the Adjudicator. On 1 April the director of the Capital Taxes Office increased the offered consolatory payment to £500 but said that the other amounts which had been paid to Mr A were reasonable, having regard to the Code (paragraph 7.7). On 8 June Mr A complained to the Adjudicator. On 17 December the then Adjudicator produced her report. She found that the Revenue in proposing a consolatory payment of £500 had properly considered all the facts. She said that that amount was in line with payments made to other taxpayers in similar circumstances and was not unreasonable. She also found that the Revenue's decision not to pay interest or loss of earnings to Mr A was in line with the Code. At Mr A's request, the then Adjudicator reviewed the decision - but did not recommend additional compensation.
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The Inland Revenue's comments on the complaint
15. When he gave his comments to the Ombudsman, the Chairman of the Board of Inland Revenue made clear at the outset that there was no material disagreement on the facts of the case - the Revenue accepted that they had made serious and persistent errors arising from confusion over the calculation of the company's goodwill. The only issue seemed to be whether they had offered sufficient redress for their mistakes. The Chairman said that the Revenue's Capital Taxes Office had thoroughly investigated Mr A's complaint, had apologised to him and had offered to reimburse all his costs for the period from November 1991 to May 1996. Those costs, including Mr A's out of pocket expenses, plus the additional costs of his dealing with the claim for costs, were paid in two sums (£15,254.27 and £6,196.90). The Chairman said that had taken time to settle, partly because the Capital Taxes Office had had to wait until Mr A had given details of his professional fee costs and out of pocket expenses.
16. The Chairman said that as well as offering reimbursement of costs, the Capital Taxes Office had consulted head office specialists about Mr A's claim for a consolatory payment. The Capital Taxes Office had accepted the specialists' view that £250 might be an appropriate sum in recognition of the intrusion into Mr A's personal life arising from the Revenue's errors. As for Mr A's claim to be paid interest on his reimbursed costs, the Chairman said that, under the Code, the Revenue would offer to remit an appropriate amount of interest charged on overdue tax where they had been guilty of delay. However, in Mr A's case no interest remission was possible, as no overdue interest on tax had been due.
17. The Chairman said that Mr A had also been dissatisfied because the Revenue had not compensated him for his 'own time' and loss of earnings. However, the Chairman said that Mr A had not shown any actual loss of earnings. The Chairman went on to say that the Revenue had reviewed their policy but had not concluded that financial redress should be given for the imputed cost of 'own time' as such - that, he said, was consistent with the practice of the courts. The Chairman went on to explain that where 'own time' had resulted in a loss of earnings, payment in respect of those lost earnings might be appropriate, otherwise the extent of a consolatory payment could have regard to the Revenue's errors intruding into a taxpayer's own time (paragraph 7.5). (The Chairman said that the Capital Taxes Office had proposed the initial £250 consolatory payment on that basis.)
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18. The Chairman said that Mr A had raised the issue again when telling the director of the Capital Taxes Office that he felt the consolatory payment of £250 was 'derisory'. The Chairman said the director had been satisfied that, in paying Mr A's costs while rejecting his claims for interest and loss of earnings, the Capital Taxes Office had acted in accordance with departmental guidance. However, even though £250 was at the top end of the normal scale for such payments, the point had again been discussed with the head office specialists and the Capital Taxes Office had proposed an increase to £500, to reflect the seriousness of their errors, which they then made.
19. The Chairman said that the then Adjudicator had not recommended that the Revenue pay any additional compensation; that the Capital Taxes Office and the Valuation Office Agency had throughout taken Mr A's complaint very seriously; two members of the Capital Taxes Office (including an assistant director) had met him to discuss his complaint. The Chairman believed the Revenue had responded fully, and treated Mr A fairly, within the terms of the Code. The Chairman added that procedures in the Shares Valuation Division had been changed as a result of the errors in this case; all mineral valuation work was now handled by a specialist valuer within the Shares Valuation Division who had regular contact with the mineral valuer.
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Later developments
20. Mr A and the accountants provided further information to the Ombudsman's staff. The accountants said that they had no reason to doubt the basic factual accuracy of the summary which the Revenue had produced. They were used to protracted negotiations on valuations to establish a 31 March 1982 base value but for matters to have taken eight years, four of them wasted, was beyond reason. They had embarked upon a valuation exercise where the ground rules had been clearly agreed at the outset but the Shares Valuation Division had then apparently reneged on the agreed basis of valuation. Mr A's health had not been robust and the added aggravation and distress of dealing with the matter over an extended period had been unhelpful. They said that the Revenue had been generous with their apologies but not with their compensation, repaying costs but not interest on those costs. They saw that as unfair as use of the money had been lost to Mr A through the Revenue's fault; they saw the situation as analogous to that involving tax repayments where the Revenue were prepared to pay interest in appropriate cases. On lost time, the accountants said, while citizens had a duty to commit proper time to dealing with their tax affairs, that time did have a value which should be recognised when it was wasted needlessly by the Revenue. They said that Mr A had suffered 'botheration', distress, frustration, annoyance and ultimately bewilderment at the Revenue's behaviour.
21. Mr A commented along similar lines to the Ombudsman's staff, adding that if he had not stood against the Revenue his tax bill could have increased by between £50,000 and £100,000. The consolatory payment, first of £250 then £500, was totally inadequate in view of the worry, hassle and botheration that the Revenue's errors had created over four years. (He looked for a payment of the order of £2,500 for each of those four years.) He had paid his professional costs from bank borrowings or from his own private funds and though those had been reimbursed he could not understand why the Revenue would not pay interest on those costs as the Revenue would itself pay - or require payment of - interest on tax under or over paid. Mr A said he had lost considerable working time, which he had very conservatively estimated at 50 hours, and which he valued at some £5,000. He sought compensation for that also. He added that even after agreeing to the principle of compensation, the Revenue had taken from January 1997 until May 1998 to settle.
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Findings
22. There is no material disagreement about the facts as they were set out by the Capital Taxes Office. The Revenue have already accepted they have made serious and persistent errors and have reimbursed Mr A the cost of professional fees and personal expenses incurred by him for the period November 1991 to May 1996, totalling £21,701.17. I welcome that acceptance of fault and consequential payment by the Revenue. The outstanding issues are whether that payment of costs plus a consolatory payment of £500 represent adequate redress. Mr A and the accountants contend that they do not. They seek interest on the reimbursed costs, a payment for 'own time' and a much greater consolatory payment.
23. I turn first to the question of whether the professional costs reimbursed by the Revenue should have attracted interest. The Handbook gives clear guidance that, other than in exceptional cases, payment of interest on reimbursed costs is not itself regarded as a reasonable direct cost of the Revenue's error and should not be paid (paragraph 7.6). I see no fault by Revenue staff and by the Adjudicator's Office (who are constrained by the Code and its amplification in the Handbook) in applying that guidance to Mr A's case. The question for the Ombudsman is whether in Mr A's case the guidance itself provides an adequate basis for what he sees as the overriding principle of redress - that wherever possible an individual who has suffered maladministration should be put back in the position where he or she would have been had that maladministration not occurred. Some of the professional costs the Revenue have reimbursed to Mr A were incurred (and it appears paid) several years ago. It follows that Mr A (or the company) have, in addition to having had to pay costs that would have been unnecessary but for the Revenue's errors, either had to incur greater charges to interest than they otherwise might or have lost the use of money which might otherwise have attracted interest. I took note of the accountant's point that the Revenue have (subject to conditions) for some time paid interest on over-charged tax and accordingly I asked the Chairman if he would look again at Mr A's case. In reply he said that Mr A wrote to the Revenue in January 1998 explaining that at the time he incurred the additional accountancy costs he was both borrowing money and investing funds in interest bearing accounts. Normally the Revenue would seek evidence to show that interest was actually incurred or lost as a direct result of paying the extra costs but the Chairman appreciated that, given the passage of time, this might prove difficult for Mr A. Because he did not wish to put Mr A to any further trouble or expense he was happy to make a payment of £9,000 to him which covered both the interest charges claimed and the reimbursement for his 'own time'. The Chairman said he hoped these proposals would enable a line to be drawn under the events of the past and that Mr A's dealings with the Revenue would run more smoothly in future.
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24. Finally I turn to the matter of the adequacy of the consolatory payment. The Chairman has explained that the Capital Taxes Office had consulted head office specialists before first arriving at a sum of £250 and then, on reconsideration, deciding that £500 better reflected the circumstances of the case. I do not see that revised offer as out of line with the principles of the Code (paragraph 7.7). The Ombudsman has broadly accepted those but it would still be open to him to ask the Chairman to consider Mr A's consolatory payment on some other basis if he saw the redress as inadequate to the circumstances of the case. I do not accept as justified Mr A's request for payment of some £10,000 (paragraph 7.21). It follows that I did not make such a request of the Chairman.
Conclusion
25. The Revenue agreed to make a payment of £9,000 to recompense Mr A's 'own time' and for the actual cost of interest charged in addition to a consolatory payment of £500. I see that as an appropriate outcome to a partly justified complaint.
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