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Parliamentary Commissioner for Administration

Selected Cases and Summaries of Completed Investigations - April to September 2000

Volume 3 - 3rd REPORT - SESSION 2000-2001

Chapter 1

INLAND REVENUE

8. Case No. C.951/99

Unnecessarily protracted enquiries

Summary

Mr X complained that the Inland Revenue (the Revenue) delayed and mishandled enquiries into the disposal of his company's business; that the then Adjudicator's investigation of his complaint had been deficient and that substantial costs had been incurred which had not been reimbursed. While not upholding every matter complained about, the Ombudsman found that aspects of the Revenue's handling had been very bad; there had been significant delay; that the then Adjudicator's investigation had been delayed and partially flawed and that the Revenue's enquiries should have been concluded much earlier than they were. The Ombudsman welcomed the Revenue's apology, offer of a consolatory payment, decision to review a statement of practice, and invitation to consider a claim for costs on the basis of the findings of his report.

Full text

1. Mr X complained of delay, confusion and incompetence by the Inland Revenue in determining the liability of his company to corporation tax after the sale of the company's business. Following an investigation by the then Adjudicator, Mr X further complained of excessive delay by her office in dealing with the case and her failure to consider the issues fully, properly and impartially. He also complained that the findings of her investigation failed to support the conclusions she had reached; and that those delays and associated problems had caused both he and the company to incur substantial costs which had not been reimbursed.

2. My investigation of Mr X's complaint began after the Ombudsman had received comments from the Chairman of the Board of Inland Revenue. I have not put into this report every detail investigated by the Ombudsman's staff; but I am satisfied that no matter of significance has been overlooked.

Background

3. Corporation tax is charged on the profits of companies. Those profits, as well as assessable income, include gains which on an individual would be chargeable to capital gains tax. The capital gains tax rules are applied to a company's gains to determine what gains will be chargeable to corporation tax. The trading income of a company is computed under the rules of case I of schedule D of the Taxes Management Act 1970. Those rules require that in arriving at a figure of case I income no expense should be deducted unless it has been incurred 'wholly and exclusively' for the purposes of the trade.

4. Capital expenditure is not allowable as a deduction in arriving at case I income, but certain expenditure may attract relief given by means of allowances. Among the allowances available at the time of the events in question were capital allowances in respect of certain expenditure on plant and machinery.

5. Broadly, when an asset for which capital allowances has been given is disposed of, the sale price is compared to the written-down value for capital allowance purposes. When the sale price exceeds that written down value a balancing charge arises which is added to a company's profit for corporation tax purposes. Where the reverse applies a balancing allowance is given which is offset against profits chargeable to corporation tax. Special provisions within section 343 of the Income and Corporation Taxes Act 1988 may apply where an asset which has been the subject of a claim to capital allowances passes into new hands on such an occasion as a company reconstruction or the transfer of a business as a going concern. Those provisions might have the effect of transferring the assets at their written-down value without triggering a balancing allowance or charge.

6. Section 29A of the Capital Gains Tax Act 1979 (now section 17(1) of the Taxation of Chargeable Gains Act 1992) provides that a person's acquisition or disposal of an asset shall be deemed to be for a consideration equal to the market value of the asset where the asset had been transferred otherwise than by a bargain made "at arm's length". (For convenience I refer to section 29A CGTA 1979 throughout.) Also sections 25 and 26 of the Capital Gains Tax Act 1979 (now sections 29 and 30 of the Taxation of Chargeable Gains Act 1992) provided for certain adjustments to be made where a scheme had been effected to achieve a tax advantage through 'value shifting' in transactions potentially liable to create a chargeable gain. An inspector may (and in some circumstances should) seek the opinion of the District Valuer (an official of the Valuation Office Agency - which is an agency of the Revenue) regarding the market value of an asset including land. The inspector may approach the District Valuer for what the Revenue term a 'non-negotiated valuation'. That will be a valuation by the District Valuer based on his view of the asset concerned having regard to local conditions but without negotiation with the taxpayer or his appointees. The inspector will refer this valuation back to the taxpayer. If no agreement can be reached the inspector will request the District Valuer to endeavour to reach an agreed negotiated valuation with the taxpayer or his appointees. In those circumstances the District Valuer should calculate a valuation which would be 'defendable on appeal' before the General or Special Commissioners of Income Tax (the appeal commissioners) or, where land or property are involved, before the Lands Tribunal.

7. The Revenue's practice on reimbursement of a taxpayer's expenses in the event of official error was first published in 1979 as statement of practice A31 and is now incorporated in their Code of Practice on Mistakes, first issued in February 1993. That says that the Revenue may reimburse a taxpayer's costs in cases of serious error. By 'serious error' is meant not just a mere error of judgement, but something which no reasonable person, acting in good faith, could reasonably have done. It includes cases where the Revenue's original action was based on a pardonable error or even an innocent misunderstanding but became more serious because it was persisted in or because it had serious consequences for the taxpayer. Persistent error may also include cases where several unconnected mistakes have been made within the same year or relating to the same period of assessment. Since March 1995 the Revenue have, in line with Government policy, been prepared to consider whether, in exceptional cases, it might be appropriate to make a consolatory payment to compensate a taxpayer for worry and distress caused by their serious error or unreasonable delay extending over more than two years, or because a complaint has been handled badly.

8. The Revenue do not, as a general rule, reimburse a person for costs incurred in establishing and subsequently meeting tax obligations. The rules of case I of schedule D (paragraph 8.3), as illustrated by case law, preclude the deduction of the cost of agreeing tax liabilities in arriving at a figure of case I income. However, the Revenue's statement of practice 16/91 (which replaced an earlier version statement of practice A28) explains that it is their practice (by way of concession) to allow a deduction for the normal accountancy expenses incurred in preparing trading accounts and in agreeing taxation liabilities. The statement of practice says that additional accountancy expenses arising out of an investigation of a particular year's accounts will not be allowed where the investigation reveals discrepancies and additional liabilities for earlier years, or where a settlement involving only one year includes interest or interest and penalties. Where, however, the investigation results in no addition to profits, or an adjustment to profits for the year of review only (without a charge to interest or interest and penalties), the additional accountancy expenses will normally be allowed.

9. The Revenue created the Adjudicator's Office in 1993 (it was then known as the Office of the Revenue Adjudicator). The Adjudicator's Office produce a booklet which says that the Adjudicator is not part of the Revenue's line management structure and that the Adjudicator makes independent recommendations on complaints which are put to her office. The booklet says that if the Adjudicator decides that a complaint is one that she can look at she will ask the Revenue for their views, obtain relevant papers and, once the facts of the case have been assembled, see if there is any scope for the Revenue and the complainant to come to an agreement between themselves. If either she thinks that seeking agreement is inappropriate or if agreement cannot be reached she will make a recommendation to the Revenue on how she thinks the complaint should be resolved. The booklet says that the Adjudicator tries to resolve complaints as quickly as possible; that complaints involving complex issues may take longer to deal with than others; and that the Adjudicator's Office will keep complainants informed of progress.

Jurisdiction

10. It is not for the Ombudsman to assess a taxpayer's liability. That is the responsibility in the first instance of an Inspector of Taxes and a taxpayer who is dissatisfied with the inspector's decision can appeal to the appeal commissioners. Under section 5(2)(a) of the Parliamentary Commissioner Act 1967 the Ombudsman is normally debarred from investigating any matter in respect of which an aggrieved person has or had a right of appeal to an independent tribunal. The actions of the accountants and of valuers and others advising the company are not within the Ombudsman's jurisdiction. I mention their actions only to put events into context. The administrative actions of the Adjudicator and her office are within the Ombudsman's jurisdiction. My investigation has been confined to the administrative handling of the company's tax affairs by bodies within the Ombudsman's jurisdiction.

Summary of the events

11. Annex to this report may be read to give more detail of the events leading to Mr X's complaint. In outline, in December 1988 the company sold their steel casting business to a competitor (the purchaser) in what the Revenue saw as a way designed legally to avoid a substantial corporation tax liability. The company transferred the ownership of their plant and machinery (the plant) to a subsidiary company (the subsidiary) which the purchaser then acquired by way of a purchase of shares. (The Revenue say that that is a well known tax avoidance arrangement to avoid a balancing charge - paragraph 8.5 - arising on the disposal of the plant.) The purchaser bought the company's freehold property (which I refer to as the property) directly in a separate cash transaction. In August 1990 the local Inspector of Taxes (the Inspector) questioned the company's return of the transactions in their 1989 accounts which were under appeal and so began a lengthy round of correspondence. In the course of that the Inspector told the company's accountants (the accountants) that they disputed the respective values (I refer to them as the transaction values) put upon the plant (£2.98 million) and the property (£1.5 million) by the company in the sale arrangements. The Inspector believed that the property was really worth £3.3 million and the plant only £1.12 million. In April 1992 responsibility for the Revenue's investigation was passed to their Special Investigation Section. There were essentially two elements to the Revenue's case. They believed that the valuation of the component parts of the overall transaction had been arranged so that the disposal of the property, which attracted tax to the company, had been under-valued, while the disposal of the plant, which (in the company's view) did not attract tax to the company, had been inflated, while the total sale price remained approximately constant. Both the Inspector and the Special Investigation Section sought to argue that the sale had not been "at arm's length" and that the legislation entitled them to use a (notional) open market valuation for the purposes of calculating the company's chargeable gain and thus corporation tax liability. The District Valuer initially considered that the open market value of the property alone was £3.3 million (account was taken of a valuation of the property commissioned by the purchaser of £2.75 million) and noted that the purchaser had quickly re-sold just over half the property for £1.85 million. (The District Valuer subsequently revised the value to £2.75 million and then to £2.5 million.) For their part the accountants argued strenuously that the selling prices of the property and the plant reflected their true market values, and that the legislation the Revenue sought to apply to require open market values to be used for the elements of the overall transaction was irrelevant since the transaction overall was demonstrably commercial and at arm's length. The second element of the Revenue's case was that there had been no proper transfer of trade to the subsidiary. Had that argument prevailed then the transfer of the plant to the subsidiary would not have been at written down value and a balancing change and consequently a change to tax might have arisen. The Revenue eventually abandoned that contention in January 1994.

12. Meanwhile both the Special Investigation Section and the accountants continued, in effect, to run their own arguments, with the accountants resistant to a number of proposals for meetings with the Revenue. Much of the correspondence was taken up by discussions about the valuation of the plant, first raised by the Inspector in September 1991. In May 1994 the Special Investigation Section told the accountants that they "relied on" a valuation of plant commissioned by the purchaser (the purchaser's valuation of the plant) in March 1989, a copy of which had been held by the Revenue since before February 1992. It then took the Revenue six months to supply a copy of that valuation report, after which the accountants argued that the report did not fully refer to all the plant which had been sold. When the Special Investigation Section were unable to agree with the accountants' analysis of the position, the accountants in February 1995 asked for a hearing before the appeal commissioners. After the appeal commissioners held a preliminary hearing to agree some procedural matters (which included the question of whether the purchaser should be joined to the appeal), the Special Investigation Section met the accountants in May 1995. The Special Investigation Section suggested that the matter of valuation of the property might be agreed between the company and the purchaser. Later that month the Special Investigation Section indicated that they would be most unlikely to disturb a figure agreed between the company and the purchaser. Meanwhile the substantive hearing before the appeal commissioners was arranged for 11-13 September 1995. On 8 September the accountants said that the sum of £1.85 million had been agreed between the company and the purchaser as the value for tax purposes at which the property had passed from one to the other. The Revenue accepted that transfer value, making a hearing unnecessary. (The accountants indicated that they did not accept that £1.85 million represented the true open market value of the property - they saw that as £1.5 million - but they said that they had reached a settlement purely to save escalating professional costs.)

13. The accountants subsequently complained about the Revenue's handling of the company's case which they said had caused them to incur costs unnecessarily. While the Revenue saw themselves as having become diverted into examining the value of the plant (which they said was not directly relevant to the value of the property) they saw no grounds for compensating the company for the professional costs they had incurred. The accountants complained on behalf of the company to the Adjudicator's Office in May 1996, and they also complained that the Revenue had unfairly disallowed a claimed deduction by the company of their professional costs under statement of practice 16/91 (paragraph 8.8) in arriving at the company's trading profits assessable to tax. The then Adjudicator issued her report in February 1998. That criticised aspects of the Revenue's performance - particularly delay. She recommended the Revenue to pay £1,000, estimated to reflect costs unnecessarily incurred by the company, and £200 for the cost of duplicating documents which the Revenue had lost. She did not find evidence that the Revenue had applied statement of practice 16/91 inconsistently. Mr X accepted the Revenue's subsequent payment of £1,200 only on the basis that it was grossly inadequate and did not reflect his own time or the professional costs incurred through the Revenue's mishandling of the company's tax affairs.

The then Adjudicator's comments on the complaint

14. The then Adjudicator acknowledged that there had been a thirteen month delay between June 1996 and July 1997 before a caseworker had been able to start the investigation which had been concluded in February 1998. She regretted the delay in taking up the case but said that the complainant had been kept informed of developments and the time taken to conclude the investigation itself had not been unreasonable given the complexity of the case. The then Adjudicator said she had conducted a fair and impartial investigation in which she had access to all relevant files and had taken account of representations from all the parties. She did not accept that her conclusions had been reached arbitrarily and considered that the evidence available supported them.

The Revenue's reply to the complaint

15. The Chairman said that the Revenue had relied upon the Adjudicator's record of early events as provided by the accountants because some of their own papers from the Inspector were missing. He accepted that there had been shortcomings in the Revenue's handling of the company's case for which he apologised. He thought that the reimbursement of costs provided a suitable remedy but was disinclined to comment on the detail of the Adjudicator's report. The Revenue continued to believe that the components of the transaction had not been at arm's length but had constituted a tax avoidance scheme in which the property had been deliberately under-valued. That, in the Special Investigation Section's view, meant (since the overall transaction was accepted as commercial) that the plant had been over-valued by a like amount. So the valuation of the plant had become of interest but only insofar as that provided potential support for the contended undervaluation of the property. The Chairman said, with hindsight, it might have been better had the Revenue not been drawn into what had turned out to be a confusing debate on the value of the plant. He said that regardless of the length of the dispute the company could have taken the matter to the appeal commissioners but Mr X had not helped the situation by refusing initially to let the Special Investigation Section disclose details of a provisional valuation to the purchaser. The Chairman said Mr X had not wanted the purchaser to be present for most of the proposed hearing and when the appeal commissioners decided that the purchaser should be joined to the appeal, Mr X had concluded the matter privately. As for statement of practice 16/91 (paragraph 8.8), the Chairman said that made no provision for the allowance of accountancy fees where they did not relate to the agreement of Case I liabilities - other accountancy fees must be disallowed in the Case I computation. The Chairman concluded by saying he did consider that the Revenue should increase the level of compensation recommended by the then Adjudicator. The Chairman said, however, that he agreed to reimburse, beyond the £200 already paid, any further costs arising from the provision of copies of missing correspondence, should those too be substantiated.

Later developments

16. Mr X confirmed to me that he had been quite unaware of the purchaser's valuation of the plant until that had been revealed by the Special Investigation Section's letter to the accountants in May 1994. He did not accept any suggestion that the company or its representatives had acted unreasonably in declining to attend an interview with the Revenue in the earlier stages of the investigation - when he had attended a meeting with the Special Investigation Section he had been aggrieved by the way it had been conducted, as he had by what he saw as the Special Investigation Section's delaying tactics before the appeal commissioners.

17. The Ombudsman's staff asked the Adjudicator's Office what evidence the then Adjudicator had had before her to reach the conclusion that the Revenue had not applied their statement of practice 16/91 inconsistently. The Adjudicator's Office said it appeared that the then Adjudicator had received advice from a Revenue specialist. They added that the then Adjudicator had asked the accountants if they had evidence of Revenue inconsistency in the application of the statement of practice to other cases. The accountants had provided brief anonymised information on seven cases. The then Adjudicator had then asked the regional controller responsible for the Inspector for his comments on that information. The controller had contacted the accountants who had declined to identify the cases. The regional controller had been unable to take that aspect of matters any further forward.

18. The Ombudsman's staff asked the Revenue about the application of statement of practice 16/91 and its history. They said that issues concerning the concession contained within the statement of practice had hardly ever arisen with their specialists - they could not point to a portfolio of cases similar to that involving the company. Nevertheless they were clear that the interpretation applied to the company's case was the one which the Revenue intended should have applied to all relevant cases. Had some other practice, including that suggested by the accountants, been applied by inspectors locally it would have been in error. As for the history of the concession, the Revenue said they had traced the existence of the preceding statement (statement of practice A28) back to at least 1959. The papers of origin had been routinely destroyed but since the preceding statement had been in existence since before the introduction of both capital gains tax and corporation tax the papers of origin would, in any event, have shed no light on how the statement inter-related with those taxes. However, the Revenue said that the statement had been reviewed over the years and no need had been seen to incorporate a reference to capital gains tax within its scope. They saw that as an indication of their intention that it should only permit the deduction of expenses incurred in the agreement of case I (and case II) liabilities on the basis specified. They added that there might have been a basis for the company to have claimed their chargeable gain computation for accountancy costs arising from the agreement of the gain.

Findings

19. It is not specifically put as part of Mr X's complaint but for the avoidance of doubt I see no basis to criticise the Inspector for raising queries when the accountants sent them the company's accounts for the 1989 year. The Inspector's enquiries rapidly focussed on the tax implications of the company's disposal of assets to the purchaser. Again, I see no fault in that; and insofar as there was delay in the early exchanges that appears to derive from the time taken to provide the Inspector with the factual information they had requested about the disposal arrangements.

20. By October 1991 the Inspector had been in contact with Sheffield who dealt with the purchaser's tax affairs and with the District Valuer who had given them a valuation for the property considerably in excess of the transaction value which had been placed on it in the company's sale agreement with the purchaser. The District Valuer's initial valuation was £3.3 million, though I see the Inspector as making it less than clear at that time to the accountants whether the Revenue proposed to contend for that valuation or for the purchaser's valuation of the property of £2.75 million. That apart I see the Inspector as clearly setting out (along with some matters that subsequently were disposed of) the key elements of the Revenue's ultimate contentions. Those were that section 29A of CGTA 1979 (paragraph 8.6) applied to the company's disposal of the property; that the market value of the property required to be imputed by that section was considerably in excess of the transaction value of the disposal of the property; and that any re-apportionment of the transaction values of the property and the plant along market value lines needed to be consistently applied to both the company and the purchaser.

21. The accountants did not accept that section 29A of CGTA 1979 applied. They contended vigorously that, because the overall transaction disposing of the plant and the property was commercial and at arm's length (a proposition the Revenue have never disputed), the Revenue could not seek to apply the section on the basis that the components of the transaction were other than at arm's length. They also contended that in any event the value of the property had not been 'reduced' at the time of its sale. They went on (in early 1992) to provide the company's valuation of the plant which had been sold to the purchaser to support the contention that the transaction value of the plant had not been over-estimated and therefore (given the commerciality of the overall transaction) the transaction value of the property could not have been under-estimated even if section 29A of CGTA 1979 was held to apply. In March 1992 they provided the Inspector with the company's valuation of the property and it is evident that, by that time, as well as having the purchaser's valuation of the property, the Inspector had received (and had passed to the District Valuer) the purchaser's valuation of the plant which gave a much lower total value than the company's valuation of the plant. Thus, some three and a half years before the substantive issues were resolved in September 1995 I see the primary factual information being in the hands of the Revenue and the respective main contention of the Revenue and the accountants at least outlined. Is it the fault of the Revenue that matters then took so long to resolve?

22. In considering that it is expressly not for the Ombudsman to decide the taxation or valuation issues involved arising from the company's appeal against their 1989 assessment. Those are for the appeal commissioners and (regarding the valuation of the property) the Lands Tribunal. It is not for me to express a view on what might have been decided had matters gone to a formal hearing before one or both of those bodies. However, what I can say is that I see no evidence in this case that the Revenue (even when they subsequently abandoned a line of argument - as they did on the section 343 Income and Corporation Taxes Act 1988 point) were proceeding on a wholly unreasonable view of the law. Although I do not see them always making their arguments as clearly as they might, they were entitled to contend that section 29A of CGTA 1979 applied just as the accountants were entitled to counter that it did not.

23. What though of the delay, confusion and incompetence of which Mr X has complained? I see several instances of avoidable delay. I mention the Special Investigation Section's delay in responding substantially to letters from the accountants of 24 November 1992 (some four months) and 1 July 1994 (some three and a half months), and in taking from March (when the case had first been referred to them) to October 1992 to decide and then notify the accountants that they would be dealing with the case. The Inspector too contributed to the delay - they apparently took some three months up to September 1993 to send the Special Investigation Section a valuation from the District Valuer while the District Valuer took no apparent action on a request by the Inspector of 18 February 1992 concerning the value of the plant until pressed by the Special Investigation Section in May 1993. Those, and other delays, I see as poor handling. I recognise that the Special Investigation Section had on occasions offered meetings with the company and the accountants to resolve matters. I commend them for that. Those offers were not taken up until 1995. I do not imply any criticism of the accountants for that was a decision entirely at their and the company's discretion but had the Revenue's offers been taken up earlier matters might have been concluded sooner than they were.

24. I do not though see specific delays as the most regrettable element in the Revenue's handling of this case. One issue which has drawn strong criticism from the accountants and Mr X is the Revenue's failure to disclose to them the purchaser's valuation of the plant for some two years. It is not clear to me exactly when the Inspector obtained the purchaser's valuation of the plant but it seems evident that it was before 18 February 1992. The existence of the valuation was not disclosed until May 1994 and the valuation itself not provided until November 1994. I have no reason to doubt what Mr X has told me - that he was quite unaware of the existence of the purchaser's valuation of the plant until May 1994. The Revenue have sought to suggest that their delay in disclosing the valuation had no great effect on the case because the valuation of the plant was a 'red herring' or a 'distraction' to the central issue of the case. They may well have thought that at the eventual conclusion of the case, but there is evidence that that was not always their view. (The Special Investigation Section sought to chase up the District Valuer to take a view on the plant in May 1993. They engaged in lengthy correspondence with the accountants about the plant, and other head office specialists went so far as to say - in May 1994 - that the contention that the plant had been over-valued was a "crucial" part of the Revenue's case.) Furthermore whatever the Revenue thought of the centrality of the valuation of the plant to the determination of the company's appeal it should have been quite plain to them that, were matters to go to an appeal hearing, those representing the company would argue that what they saw as the accuracy of the transaction value of the plant was highly relevant to both the accuracy of the transaction value of the property and to the prior question of whether or not section 29A CGTA 1979 was in point at all. As soon as the accountants received the purchaser's valuation of the plant they made - in December 1994 - those points and sought to reconcile the purchaser's valuation of the plant with that of the company to show that the latter was not over-estimated. What I take from all that is, whether or not they chose to see the issue of the plant as "crucial" to their arguments, the Special Investigation Section were remiss in not recognising the importance of the purchaser's valuation of the plant to other's contentions and hence to the resolution of the case. I see it as an error that they did not ensure that the purchaser's valuation of the plant was on the table much earlier than it was. I see that error as making a significant contribution to the time taken to bring the case to a conclusion.

25. There is another matter. When the case was eventually concluded it was on the basis of an agreement between the company and the purchaser about what would be taken as the value for tax purposes of the property which passed from one to the other. As far back as October 1991 the Inspector had recognised (albeit it would seem on a different technical basis to that applied by the Special Investigation Section in 1995) that the same values for assets passing needed to be applied to both the company and the purchaser. For a very long time (until January 1994 it would seem to me) the Revenue appear to have lost sight of that, suggesting at one stage that the apportionment of the overall sale considerations between property and plant components had no effect on the purchaser. Eventually, though, the Special Investigation Section went so far in the other direction to suggest that they were merely acting as the 'piggy in the middle' between the company and the purchaser and that they regarded the whole matter as a dispute between the two parties to the transaction. Indeed they said they could not conceive of them not accepting any valuation figure for the property that the company and the purchaser might choose to agree between themselves. Coming some four and a half years after the Inspector had first queried the sale arrangements, during the greater part of which there had been no attempt by the Revenue to initiate or even suggest a tripartite discussion, I find that an extraordinary statement. Had the Revenue taken that view at the outset I do not presume that matters would have been concluded immediately (or necessarily without recourse to the appeal commissioners and the Land Tribunal), but I have no doubt that they would have been concluded very much quicker than they were. I see the Revenue's failure in this regard as again a significant one.

26. Other matters have been complained of in the Revenue's poor handling of the case - some of which were mentioned by the then Adjudicator in her report. I too see the Inspector's handling of the case as capable of giving the impression that account was not being taken of the accountants' views, that they might have given better explanations in regard to requests for payments on account and that there was sometimes a lack of clarity about the Revenue's explanation of their contentions. I do not criticise the Revenue for not accepting the accountants' contention that the market values of the components of the overall transaction were irrelevant to whether or not section 29A CGTA 1979 applied, but on occasion the Revenue seemed close to arguing by assertion that section 29A CGTA 1979 applied simply because of the claimed disparity of transaction and market values. If that were so I would see it as a muddling of two separate points - the application of section 29A CGT 1979 and the valuation of the property and plant.

27. Mr X has complained of the Special Investigation Section's handling of the interview he attended. I do not see evidence to allow me to find that that interview was inappropriately conducted. Insofar as an aspect of the complaint is that the Revenue's enquiries impugned the company's integrity I see nothing to substantiate that. The Revenue clearly believed that the company had entered into arrangements designed to minimise their liability to tax. That does not amount to an accusation of dishonesty. If there is a criticism to be made of the Revenue in this area it is that they did not make their view that they were challenging a tax avoidance scheme sufficiently visible at an early stage of their investigation. Again, matters might have crystallised that much sooner had they done so. Mr X has also complained about what he saw as the Revenue's delaying tactics before the appeal commissioners. I can understand at the end of what I have found to have been an unnecessarily protracted investigation that Mr X would have felt aggrieved by the Special Investigation Section seeking to have the appeal commissioners grant an adjournment at their meeting on 22 March 1995. However, I do not see fault by the Revenue: that an adjournment was granted was a matter for the appeal commissioners; that the Revenue was represented by the district inspector of taxes rather than by the Special Investigation Section caseworker was a matter for them; and I see the Special Investigation Section's letter of 7 March as giving the accountants clear and sufficient notice of the Revenue's intentions.

28. I turn to a secondary aspect of the complaint - the Revenue's treatment of the company's accountancy costs. It is common ground between the Revenue and the accountants that there is no basis in statute or case law for the costs of agreeing a tax liability to be a deduction in arriving at a figure of case I income (paragraph 8.8). However, a long standing concession contained within the Revenue's statement of practice 16/91 permits a deduction for certain accountancy costs. It is for the Revenue and not the Ombudsman to decide the scope and terms of the Revenue's published concessions and statements of practice. However, the complaint is that the Revenue have applied the terms of 16/91 unfairly to the company - specifically that they have limited the deduction of accountancy expenses to the costs of agreeing the case I liabilities, excluding the (considerable) costs of agreeing the chargeable gain that became part of the company's corporation tax liability for their 1989 year.

29. Statement of practice 16/91 does not specifically say that the concession within it applies only to the cost of agreeing case I liabilities. It refers simply to 'taxation liabilities'. The Revenue say however that their intention has always been that the concession should only be given in respect of the cost of agreeing case I liabilities. The accountants have said that that intention has not, in their experience, been evident in how inspectors have applied the concession in practice. That may be so but if inspectors have acted more generously than the Revenue intended them to that does not of itself provide a basis for me to suggest to the Chairman that the same error should be repeated upon the company. That said it seems evident to me that the intention of the concession has not been made sufficiently clear. Accordingly I asked the Chairman if he would consider looking again at the terms of statement of practice 16/91, the guidance to inspectors and advice to tax professionals so as to ensure that the Revenue's intention is clearly evident and consistently applied. In reply he said that the Inspector had been correct to disallow the expenses claimed. However, he acknowledged that as the statement of practice 16/91 did not specifically refer to cases I and II of schedule D or to capital gains tax that its current application might be viewed as somewhat inconsistent. Accordingly he had asked Revenue specialists to review the statement and consider whether, for the future, any changes or clarification were necessary. I welcome that review.

30. I turn to the handling of Mr X's complaint by the Adjudicator's Office. The then Adjudicator has apologised for the lengthy delay in her office taking up the complaint. That delay was excessive and contributed to Mr X having to wait until February 1998 before he got the then Adjudicator's report. The present Adjudicator has asked me to add her apologies for the delay and to say that cases - even ones as complex as Mr X's - are now taken up much more promptly. As for those aspects of the complaint that the then Adjudicator failed to consider the issues of the case fully or impartially, I see no evidence of that. Her report was extensive and detailed and I see no evidence of bias in arriving at the findings reached. However, I see it as a flaw that she did not identify the Revenue's protracted failure to include the purchaser in the negotiations as a serious shortcoming in their handling of the case. Also I do not readily see how she arrived at £1,200 as a measure of the costs incurred which should be reimbursed given that she saw (as I do) that the Revenue had handled the company's affairs very badly indeed.

31. What then of redress? While I have no doubt that the Revenue were fully entitled to commence their investigation I see, along with lesser errors, significant flaws running through its continuance. I am sure that had those flaws not been present the opportunity would have existed for the case to have been settled very much earlier than it was. I have found that many of the key factors and the contentions were on the table by March 1992. I do not suggest that the case was then capable of immediate settlement. However, had the Special Investigation Section moved quicker than they did to take up the case, had they not allowed the District Valuer to sit for so long on the plant valuations, had they made the purchaser's valuation of the plant visible to the company, had they made it plain that the purchaser was necessarily part of matters, and, perhaps, had they made it overt that they suspected (and sought to challenge) a tax avoidance device then matters would have been very much more focussed. Had they at the outset of their involvement taken the line they took at the end (that it was for the company and the purchaser to agree something between themselves) then a clear direction of resolution (though not the only one) would have been visible too. Even if matters had had to go to a hearing I see that as something which could and should have been achieved by early 1993 rather than late 1995. I conclude that the company incurred unnecessary costs through the Revenue's delay and bad handling. Accordingly I asked the Chairman if he would look again at the company's claim for reimbursement of costs (and any which might relate to Mr X personally). In reply he said he was sorry that matters had taken as long as they had and he acknowledged the faults highlighted by the report. He said the Revenue would be happy to consider a claim from the company for additional costs (and from Mr X too) based on the findings of this report (i.e. that the investigation should have been concluded by early 1993). He said that the Revenue would be writing to the company shortly to invite the claim.

32. As for the claim that the company should be reimbursed (with interest) the tax of some £23,699 (by my reckoning) related to the uplifted chargeable gain agreed between them and the Special Investigation Section, I see no merit in that. The company chose to determine their appeal by agreement with the Revenue. They did not have to do that. They could have allowed the appeal process already underway to go its course. It is not for the Ombudsman to find that tax validly determined should be stayed.

33. The accountants in putting Mr X's complaint to the Member made plain (as Mr X made to me) that his personal feelings about the Revenue's bad handling of his case have in no way diminished with the passage of time. The Revenue's Code of Practice on Mistakes provides a basis for them to consider making a consolatory payment where their serious error and unreasonable delay have led to worry and distress. That Mr X is a director of a substantial company, professionally represented, does not obviate the need for that consideration to be given as it should to any taxpayer whose corporate affairs have been so seriously mishandled. Accordingly I asked the Chairman if the Revenue would be prepared to consider a consolatory payment. The Chairman accepted that the delays and poor handling in the Revenue's investigation would have been frustrating and distressing for Mr X. He would like to make a consolatory payment of £250 to acknowledge that.

Conclusion

34. While the Revenue were entitled to initiate their enquiries they handled some matters very badly, with significant delay. The Chairman has apologised for the shortcomings identified by the report; has offered a consolatory payment; and has agreed to consider a claim for additional costs based on the report's findings. While I have not upheld every aspect of the complaint, I regard that as an appropriate outcome to a largely justified complaint.

Annex – CHRONOLOGY OF THE MAIN EVENTS

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Last updated: 4 April 2005