In David Sinclair v HMRC  TC6873 an accountant's claim for post cessation trade relief in defending a negligence claim was partly allowed, his claim to have created a trust in order to fund the compensation potentially due failed on basic principles.
- A former client of an accountancy partnership claimed to have been badly advised and sued for compensation.
- The partnership had ceased trading and Mr Sinclair, the partner who had given the advice took legal advice.
- He sold a property with the intention of using the proceeds to settle part of the compensation claim and claimed that he had created a bare trust with the proceeds which he then invested with disastrous consequences.
- He claimed post cessation trade relief (PCTR) for the cost of his legal fees and the lost trust monies.
- HMRC rejected the claims and said that if there even was a trust it was a relevant tax avoidance arrangement.
The taxpayer appealed to the FTT which found that:
- The legal fees paid in the tax year in question for defending the negligence claim were eligible for PCTR. Whilst they had been paid by Mr Sinclairs company this was on his behalf, the amounts were charged to his company loan account and he therefore bore the cost personally.
- Fees invoiced but not paid in that tax year were not allowed.
In respect of the trust:
- The accountant sent himself an email saying that he had deposited £400,000 in a bare trust for his client. He went on to invest the monies in investments that he knew his client would not approve of. There was no other documentation to support a trust being put in place.
- The tribunal found he had not created a trust as it lacked two of the three certainties needed for a trust, namely certainty of beneficiary and object.
- Certainty of Beneficiary: there were actually two claimants, the client and her company and the email did not specify any split between them and in fact for two claimants two bare trusts would be required anyway.
- Certainty of object: the trust was not absolute; no agreement had been reached with the claimants, Mr Sinclair did not know how much his liability would be except that it was likely to be more than the amount deposited.
- As there was no trust, there was no payment to the trust, and therefore no post-cessation trading relief for such “payment”. Even if there had been a payment the nature of it meant it would not have qualified for PCTR.
- The tribunal concluded there was no tax avoidance as defined by the PCTR rules.
- For this there would need to be a payment in consequence of/in connection with, arrangements, the main purpose of which is to obtain a tax reduction by a claim for PCTR.
- The declaration of trust, had it been valid, was the payment itself. It was not part of, or connected with, any wider transactions which could constitute “relevant tax avoidance arrangements”.
The judge made some useful remarks about when a bare trust is valid, stating that:
- no formalities are needed, if it is in writing and signed, there is no need for a witness
- a trust can be valid even if the beneficiary is unaware of its existence and
- whilst investing in assets which the beneficiary would disapprove of might be a breach of fiduciary duty, it does not, of itself, mean there is not a trust.
This case is a useful reminder of the post-cessation relief rules. In trying to create a trust Mr Sinclair sought to create the necessary payment for relief in a specific tax year (when he was able to utIlise the relief in full) as PCTR cannot be carried back and can only be carried forward against future profits of the trade, which had of course ceased.
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