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Webster: the devil’s case law?

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The Devil’s Law Case is a play written by the Jacobean dramatist John Webster. He wasn’t, of course, thinking of Income Tax Act 2007 s 426 of which his twenty-first century namesake recently fell foul (in Re Webster [2020] EWHC 2275 (Ch)), but he might just as well have been.

It’s difficult to say who is the villain of the piece (the case, not the play). Parliament? HMRC? Master Kaye (who is in fact female; but we imagine that styling a High Court judge ‘Mistress’ could cause all sorts of unfortunate misunderstandings)? Not Mr Webster, at any rate: he was definitely the victim and has a right to feel hard done by.

Mr Webster sold his business in 2016/17 and made a large capital gain. Sadly, his wife died in the same year and he established a charitable fund in her memory. On the first anniversary of her death he made a very substantial donation to the fund. A gift aid declaration was made, and the charity recovered the £200,000 tax attributable to the donation.

Mr Webster paid little or no tax in the year in which he made the donation. In those circumstances it is possible to elect to treat the payment for gift aid purposes as if it were made in the previous year (when, owing to the sale, Mr Webster had paid ample tax to cover the gift aid relief). That is what he intended to do. Unfortunately, he made a mistake in doing so: instead of including on his 2016/17 tax return a gift aid payment in the correct sum of £800,000, he included only £400,000 (which was the amount he had originally been thinking of donating and which he had included in an earlier draft of the return and had not overwritten).

When he realised his error, he notified HMRC. No problem in correcting his obvious simple mistake, surely?

Er, yes there was, actually.

The legislation requires an election to be made on or before the date on which the tax return is filed (or another date not relevant in the present case). And, once made, there is no provision under which the election may be amended. Further, the election must be for the whole amount of the gift. So, Mr Webster’s flawed election was not effective even to carry back £400,000 of the gift. He had to treat the gift as made in 2017/18 and pay over the £200,000 of tax attributable to the gift-aided donation.

First brickbat, therefore, to Parliament for having enacted such an arbitrarily and unnecessarily restricted piece of legislation in the first place.

In fact, the situation has been before the courts before. In a case heard by the First-tier Tribunal in 2010 (Cameron v HMRC [2010] UKFTT 104 (TC)), a Scottish farmer called John Cameron was caught out in almost exactly the same way: having made a large donation in 2006/07 he was precluded from carrying it back because by the time he made it, he had already filed his 2005/06 tax return. In that case, the tribunal found with great reluctance against Mr Cameron: ‘I would like to have held in Mr Cameron’s favour but on the words of the statute, I am unable to do so’. 

Again and again, when legislation is shown by the courts to misfire to HMRC’s detriment, time is found to amend it, often in the very next Finance Act, so as to charge ‘the right amount of tax’. Inexplicably, despite the manifest unfairness which came to light in Cameron, HMRC has been quietly content to leave the trap in place for others to fall into rather than amend half a dozen words of legislation. Second dishonourable mention, then, to HMRC.

Never fear: where a mistake has been made in a document, there is a process, called rectification, whereby the court is able to rule that, broadly, the mistake is to be treated as never having been made and the document as always having existed in its corrected form. A number of conditions must be fulfilled, and the remedy is discretionary.

The court summarised Mr Webster’s reasons for arguing that that discretion should be exercised: the claimant was seeking to use tax reliefs expressly provided by statute and to do so for the very substantial benefit of charity, rather than himself. Mr Webster’s counsel submitted that ‘it is difficult to posit a more striking example of exemplary citizenship or more illogical and capricious statutory provision’. Quite so: surely rectification could not be refused?

Oh yes it could. Step forward Master Kaye in guise of Atropos to Parliament’s Clotho and HMRC’s Lachesis: if the claimant completed his tax return in a way that does not reflect the relief, he intended to claim that was his error. To my mind, an error arising from carelessness in circumstances where the claimant signed a declaration saying that the tax return was to the best of his knowledge correct and complete is not one that ought to engage the court’s sympathy nor the exercise of its discretion.

The moral? If you need to carry back gift aid to an earlier year, there are hoops to jump through. They may be arbitrary, counterintuitive and illogical, but you had better make sure you jump through them anyway. And don’t expect any help if you make an honest mistake. 

Issue: 1502
Categories: In brief