Barristers would be “well advised” to make proper provision for tax liabilities given the “episodic” nature of their income, a tribunal has cautioned.
The Upper Tribunal (UT) was ruling in the case of a senior QC who argued that cuts in legal aid that heavily affected him were a reasonable excuse for late payment of income tax.
Timothy Raggatt QC, head of 4 King’s Bench Walk, was appealing against a fine of £13,435 for late payments in two tax years.
The UT recorded: “Mr Raggatt had been in professional practice as a barrister for 40 years, during which time there had never been any suggestion of his not attempting to pay his tax liabilities but he had encountered exceptional financial circumstances in 2012 to 2014 for a number of reasons, in particular because of the government’s cuts to criminal legal aid which had severely affected his professional practice, resulting in cash flow problems.”
The First-tier Tribunal (FTT) was not satisfied that the barrister had shown reasonable foresight, or due diligence and a proper regard to the fact that the tax liabilities concerned would become due on particular dates.
Mr Raggatt described events as a “perfect storm”, because he also faced a divorce settlement which required him to make a substantial lump sum payment, along with his bank failing to extend his overdraft. This all led to temporary difficulties in meeting his obligations, “which has now been corrected”.
While noting the episodic nature of payments to counsel, the UT said: “Although there is no legal requirement on the part of a self-employed professional person to reserve for his or her tax liabilities, in our view, a person with such an episodic life would be well advised to take reasonable steps to make some provision for tax liabilities or to ensure that he or she has appropriate bank facilities available to meet his or her expected tax liabilities if he or she subsequently wishes to rely on a reasonable excuse defence.
“Taking such reasonable steps might not in the event prevent the taxpayer being able to deal with unforeseen events, but if it appears that the taxpayer did all that could be reasonably expected of someone in his or her position then the tribunal may well take a sympathetic view if nevertheless the taxpayer could not meet his or her liabilities when due.”
The UT recognised that a 40% cut in real terms in criminal legal aid payments between 2008 and 2012 was “an exceptional circumstance, and not one that has been faced by very many taxpayers even during a period of austerity where many have seen their real incomes decline”.
But it ruled that Mr Raggatt might still have been able to pay his tax “had he made prudent reserves out of the years in which he was still receiving high levels of income”.
His highest income in the surrounding years was £310,776 in 2010/11, and lowest was £123,308 in 2011/2012.
“By not making any provisions, which (as the FTT found) was consistent with his practice in the years before the legal aid cuts began to bite Mr Raggatt was taking a commercial risk that he would not have sums available to meet his tax liabilities when they fell due.”
It also questioned him buying a house for himself following his divorce in 2011, “at a time when his income appears to have dropped considerably but he would have been aware at that time of significant tax liabilities to come”.
The UT said: “In those circumstances, he might have made a different choice and provided accommodation for himself by renting a property or purchasing a property subject to a mortgage, at least until his financial position improved.”
The judges said they had “considerable sympathy for the predicament that Mr Raggatt found himself in”, and that a differently constituted FTT might have placed more weight on the effect of the legal aid cuts.
But it found no error of law on the part of the FTT and dismissed his appeal.