HMRC v J Mazurkiewicz [2011]

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19 January 2012

In the recent case of HMRC v J Mazurkiewicz, the First-tier tribunal held that "utterly fictitious" receipts of interest were not taxable.

Facts

The Appellant, Mr Mazurkiewicz (the "Appellant"), had life savings of approximately £140,000.  He was persuaded to invest these savings by making a series of short-term loans to a company (the "Company") which traded in firearms.  The Company issued the Appellant with documents indicating that he had been credited with interest totalling £304,505 over three years, all of which had been reinvested. HMRC issued assessments charging tax on this interest and the Appellant appealed.  

Judgement

The First-tier Tribunal reviewed the evidence and held that in reality the advance of money to a firearms company for fixed periods constituted, in reality, a single fluctuating loan because the Appellant would extract nothing from the arrangements unless the loans could be repaid.  It was also observed that the tax liability on the interest element of the loan received by the individual would not be eliminated merely because the interest is reinvested and subsequently lost.  

It was judged however, that the position might be different if the transactions were part of a scam, because the Company's director knew that the Company was heading for a collapse in which the investors, including the Appellant, would never receive any return and probably lose everything.  

The Tribunal also held that, on the facts, the Appellant was not trading. Therefore, the loss suffered was not a trading loss that the Appellant could set against earlier profits of the trade.  

On the evidence, it was judged that the Company had deliberately misrepresented the potential tax liability to the Appellant and had proceeded on the basis of "improper concealment". The judge concluded that "utterly fictitious receipts of interest" were not relevant receipts of interest for tax purposes.

The appeal was therefore allowed.

Analysis

Recent tax cases have emphasised that tax laws must be viewed purposively in light of the facts viewed realistically.  Usually this favours HMRC.  This case is a rare example of the First-tier Tribunal adopting this approach in favour of the taxpayer.  The Tribunal took a realistic approach that since at no time in the cycle of loans and further loans did the Appellant ever in net terms get his £140,000 back and since, at the end of the day, he lost everything, it was concluded that no interest was received.

If you have any queries, please contact John Barnett john.barnett@burges-salmon.com, Nigel Popplewell nigel.popplewell@burges-salmon.com or Natalie Stoter in the Corporate tax team on natalie.stoter@burges-salmon.com.

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