Relief for Revenue as the taxman has his day in court

The Inland Revenue emitted a huge sigh of relief last week after winning a High Court case that could have given millions of taxpayers a way of reducing their liability. However the decision emphasises that those faced with questionable demands - from banks, credit card companies and other businesses, as well as the Revenue - may be able to reduce liability by paying only part of what is claimed.

The Revenue was suing Barbara Fry, who despite major losses as a Lloyds' name had still got a tax bill for more than ?113,000. Her husband, described as "a wealthy businessman", negotiated with the Revenue on her behalf.

Although he didn't dispute the ?113,000 assessment, he pointed out that she had no assets and couldn't actually pay anything. The Revenue could make her bankrupt, but that wouldn't get it any money.

He offered to pay ?5,000, and then ?7,000 to avoid the bankruptcy which he said would cause Mrs Fry "some aggravation". When these offers were rejected, he sent a cheque for ?10,000 with an accompanying letter saying it was offered in full and final settlement, and that accepting the cheque would amount to an acceptance of that offer.

The cheque was banked immediately, but four days later a Revenue official rang Mr Fry. She explained that all cheques received were sent to the bank immediately from the post room. Now she had seen his letter he could either have his money back or let the Revenue retain it as part payment. Mr Fry though was adamant that the payment had extinguished his wife's entire liability.

Part payment will not normally cancel a debt unless there is a dispute about the amount owing. However where the payment is made by someone other than the debtor it can have that effect, and here it was Mrs Fry's husband who had paid.

The rule was established in 1911 when a young army officer, called Temple, got into debt. His father sent a cheque to the money-lenders involved for a fraction of what was owing. The moneylenders cashed the cheque but still claimed the balance.

The Court of Appeal decided that as they had taken the money after seeing the letter and hadn't offered to return it, that amounted to acceptance on the terms it was sent. The father, like Mr Fry, had been under no obligation to pay anything, so could dictate the terms on which he did pay, which the debtors themselves cannot do.

Where there is a genuine dispute about the amount owed, a person's own cheque accompanied by a letter saying it is sent in full settlement can also cancel the balance of the debt as it amounts to a legally binding compromise.

Had Mrs Fry succeeded the consequences would have been disastrous for the Revenue. Anyone would have been able to reduce their tax bill by having their spouse send a cheque for a lesser sum. It would mean that the Revenue would have to stop its practice of presenting cheques until letters had been read.

Mr Justice Jacob decided for the Revenue on the particular facts of this case, but the basis on which he did so will provide hope for many who are in dispute with the Revenue and banks. The crucial factor was that the Revenue had made its position clear within a few days.

If, for instance, a credit card bill which contains incorrect items is settled by a cheque for the correct amount, said to be in full settlement, there is an assumption that it has precisely that effect. This decision emphasises that the card company which does nothing but accept the money and ignores the letter altogether will have little chance of recovering the balance.

Richard Colbey is a barrister