Simon Hackett & Anor v The Commissioners for HMRC

In an income-tax appeal concerning compensation for mis-sold interest-rate hedging products, basic redress is characterised by identifying what the payment compensates, not by the economic concept of opportunity cost or solely by the method used to calculate quantum. Where the payment compensates a liability to make deductible business expenditure, it is an income receipt and is chargeable to income tax. An alternative product considered under a redress scheme may affect the amount of compensation without changing its character. An appeal alleging that a tribunal’s conclusions are logically invalid is, in substance, an Edwards v Bairstow or insufficiency-of-reasons challenge. The appellate tribunal must read the decision as a whole and intervene only where no reasonable tribunal could have reached the decision or the reasons are insufficient.

The appellants appealed to the Upper Tribunal against the First-tier Tribunal’s dismissal of their appeals concerning closure notices amending their income-tax returns for 2014–2015. They had received basic redress and interest from HSBC under the Financial Conduct Authority’s review of mis-sold interest-rate hedging products. The basic redress was calculated by reference to payments made under the mis-sold products, with deductions for payments that would have been made under alternative products.

The appellants argued that the redress compensated a non-taxable lost opportunity and that the First-tier Tribunal’s decision was logically invalid and addressed the wrong question. The issues were whether the compensation was taxable income, whether the First-tier Tribunal had made an error of law, and whether the appellants could raise a new argument based on ESC D33 at the hearing.

1. Late amendment. The application to introduce an ESC D33 argument was refused. It was made at the end of the hearing without notice, had not been raised before the First-tier Tribunal, and would prejudice HMRC and potentially delay the proceedings. The issue was not a pure point of law or statutory interpretation, and the application of the extra-statutory concession lay within HMRC’s discretion.
2. Nature of the appeal. The alleged logical invalidity was not a new category of appellate error. It amounted either to an Edwards v Bairstow challenge or an insufficiency-of-reasons challenge. The First-tier Tribunal’s decision had to be read as a whole, without selective textual analysis or isolated examination of findings. The First-tier Tribunal was entitled to draw conclusions after considering the evidence, statutory provisions and authorities.
3. Character of the redress. Applying London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772, the first question was what the compensation was paid for. The basic redress compensated the appellants for their liability to make payments under the mis-sold products which, because of the mis-selling, they would not otherwise have incurred. The alternative products affected quantum only. They did not convert the payment into compensation for a lost opportunity to purchase those products.
4. Tax treatment. Under the second stage of the Attwooll analysis, the relevant payments would have been deductible revenue expenditure of the appellants’ property business. Applying the principle in Deeny v Gooda Walker Ltd [1996] 1 STC 299, compensation for liability to pay such an amount was chargeable as an income receipt. The First-tier Tribunal therefore applied the statutory provisions correctly.
5. Ground 4. The First-tier Tribunal correctly identified the issue under sections 31 and 50 of the Taxes Management Act 1970. An assertion that a closure notice was invalid did not alter the statutory task of deciding whether the appellants were overcharged. The appeal was dismissed because the First-tier Tribunal had made no error of law.

• Upper Tribunal (Tax and Chancery Chamber): The appeal against the First-tier Tribunal’s decision released on 15 August 2024 was dismissed. The First-tier Tribunal had dismissed the appeals against HMRC’s closure notices.