Beagles
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 June 2017 |
| Neutral Citation | [2017] UKFTT 462 (TC) |
| Date | 05 June 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Brooks
Michael Firth, Counsel, instructed by KPMG LLP, appeared for the appellant
James Henderson, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Failed avoidance scheme – No in-time enquiry made by HMRC – Discovery assessment – Whether discovery “stale” – Taxes Management Act 1970 (“TMA 1970”), s. 29(1) – No – Whether the condition in TMA 1970, s. 29(5) fulfilled – Yes – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed a taxpayer's appeal against a discovery assessment issued following the taxpayer's participation in a failed tax avoidance scheme. The FTT found that the assessment had not become stale, and based on the disclosure in the return and other information available, an HMRC officer could not have been reasonably expected to have been aware of the insufficiency of tax when the enquiry window closed.
The appellant (Mr Beagles) claimed a loss on the sale of a relevant discounted security (RDS) in his 2001–02 tax return as a result of his participation in a KPMG promoted RDS scheme. Mr Beagles, along with the other participants in the scheme, included a note in the additional information box of his return referring to an appendix, which in a single page detailed the transaction which resulted in the claimed loss. HMRC failed to spot that Mr Beagles had taken part in the scheme in time to open an enquiry under TMA 1970, s. 9A. Instead after the scheme had been defeated by the Special Commissioners in Astall v R & C Commrs SCD(2007) Sp C 628 HMRC issued a discovery assessment on 15 January 2008. The Astall decision was subsequently upheld by the High Court ([2008] BTC 713) and the Court of Appeal ([2009] BTC 631).
The appellant appealed against the discovery assessment on the grounds that it was not valid because:
1) the discovery was stale when the assessment was made; and
2) as Mr Beagles had made a full disclosure on his return, from which an HMRC officer could be reasonably expected to have been aware of an insufficiency to tax, the condition in TMA 1970, s. 29(5) had not been fulfilled.
HMRC contended that there was no basis for introducing a test of staleness into TMA 1970, s. 29(1) and, even if there was, such a test would have no application in this case. They also submitted that the TMA 1970, s. 29(5) condition had been satisfied and therefore the officer was entitled to make the assessment.
In respect of whether a discovery could become stale the FTT agreed with the FTT in Atherton TAX[2017] TC 05556, that what was said in the Upper Tribunal case of Pattullo v R & C Commrs TAX[2016] BTC 510 was binding and that it was therefore possible for an assessment to lose its “newness” or become “stale”.
Even though the HMRC officer had considered the possibility of raising a discovery assessment as early as July 2004, the FTT judged, that it was clear, from both the officer's oral evidence and also contemporaneous documentary evidence, that the officer did not reach his conclusion that the KPMG RDS scheme did not work until it was confirmed by the decision of the Special Commissioner in Astall on 14 August 2007. Therefore the FTT found that as the discovery assessment was issued on 15 January 2008 it could not have become stale.
However the FTT found that, even if the insufficiency had “newly appeared” to the officer sometime earlier, as in R & C Commrs v Charlton TAX[2013] BTC 1,634, where the Inspector had waited for a relevant decision of the Court of Appeal before making the discovery assessment, the assessment would still not have become stale. As the Upper Tribunal in Charlton observed, an assessment would not lose its “essential newness” in:
a case, such as this, where the delay was merely to accommodate the final determination of another appeal which was material to the liability question.
The FTT finally considered whether the condition in TMA 1970, s. 29(5), that the hypothetical officer could not have been reasonably expected, on the basis of the information made available to him, to have been aware of the insufficiency had been fulfilled. Using the summary of principles relevant to the application of s. 29(5) set out in Sanderson v R & C Commrs TAX[2016] BTC 3, the FTT was unable to conclude that the information contained in the appendix to Mr Beagles' return in itself provided sufficient information to enable a hypothetical officer to be aware of any insufficiency to tax. The FTT therefore went on to consider whether there was information the existence and/or relevance of which could be reasonably expected to have inferred by the officer in accordance with TMA 1970, s. 29(6)(d)(i), and found that there was not.
HMRC were therefore allowed to make a discovery assessment and the appeal was dismissed.
HMRC's process of analysing and examining submitted tax returns failed to identify that the taxpayer in this case had participated in a particular tax avoidance scheme. This resulted in them failing to open an enquiry into the taxpayer's return within the enquiry window and instead had to rely on the discovery assessment provisions. While HMRC were successful in this case, with the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) provisions in FA 2004. it is now far easier for HMRC to identify scheme users and raise timely enquiries.
[1] Mr Clive Beagles appeals against a “discovery assessment”, in the sum of £437,389.60, to disallow a loss claimed on the sale of a relevant discounted security (“RDS”) in his 2001–02 self-assessment tax return. The assessment was issued by HM Revenue and Customs (“HMRC”), under s 29 of the Taxes Management Act 1970 (“TMA”), on 15 January 2008 and was upheld on 26 September 2014 following a review.
[2] Mr Michael Firth, who appears for Mr Beagles, contends that the discovery was stale when the assessment was made and, as Mr Beagles had made a full disclosure on his return, from which a HMRC officer could be reasonably expected to have been aware of an insufficiency to tax, the condition in s 29(5) TMA has not been fulfilled. Accordingly, he says, the assessment cannot be valid.
[3] For HMRC, Mr James Henderson contends that there is no basis for introducing a test of staleness into s 29(1) TMA and, even if there was, such a test would have no application on the facts of the present case. He also submits that the s 29(5) TMA condition has been satisfied and therefore the officer was entitled to make the assessment.
[4] There are therefore, three issues before the Tribunal:
1) Whether a discovery can become stale;
2) If so, whether the discovery in the present case was stale at the time the assessment was made; and
3) Whether the condition in s 29(5) TMA has been satisfied.
[5] Before addressing these issues it is first convenient to set out the factual background to the case and the relevant legislative provisions, s 29 TMA and paragraph 3 of Schedule 13 to the Finance Act 1996. Also, although throughout this decision I have referred to HMRC, this should be read where appropriate as a reference to the Inland Revenue.
[6] In addition to several bundles of documentary evidence, which included correspondence between the parties and a copy of the 2001–02 self-assessment tax return filed by Mr Beagles, I heard from Mr Brian Manning, the HMRC officer on whose instruction the discovery assessment was issued.
[7] Although I found Mr Manning to be a credible witness there were times during his cross-examination by Mr Firth when he was reluctant to answer a question directly. He also appeared to be generally defensive in his answers. However, to be fair to Mr Manning, the events on which he gave evidence occurred more than ten years ago and it is perhaps not surprising that his recollection was not as clear as might have been the case had they been more recent.
[8] With that in mind, and on the basis if this evidence, I make the following findings of fact.
[9] In 2001–02 Mr Beagles utilised a tax avoidance scheme designed to produce a tax deduction with no corresponding taxable amount. The scheme, which had been promoted by KPMG, was the same as that considered by the Special Commissioner (Dr John Avery-Jones CBE) in Astall v R & C Commrs SCD(2007) Sp C 628 (“Astall”).
[10] At [2] of his decision the Special Commissioner outlined the scheme as consisting:
… of the appellants settling a small sum in a trust under which he has a life interest. The settlor lends money to the trust in return for a security issued by one of the trustees, a company. The terms of the security are that it is redeemable in 15 years at 118% of the issue price but the appellant can redeem the security at 100.1% of the issue price between one and two months after issue. If a condition relating to the dollar-pound exchange rate, which is designed to have an 85% chance of being satisfied, is satisfied within one month and a notice to transfer the security is given, the term of the security becomes 65 years (with the same redemption price) but the purchaser can redeem it at 5% of the redemption price (about 6% of the issue price) on seven days' notice. The redemption terms are designed to satisfy the definition of a relevant discounted security within Sch 13 to the Finance Act 1996. The object is that the appellant claims the difference between the issue price and 6% of the issue price (less a turn for the purchasing bank) as a loss on a relevant discounted security, while the difference remains in the trust for the benefit of the appellant. The same scheme was entered into by 64 people having an income of at least £1m, with total losses claimed of about £156m.
[11] In essence, the issue in Astall was whether the security was an RDS as defined by paragraph 3 of Schedule 13 to the Finance Act 1996. In his decision, which was upheld by the High Court (reported at [2008] BTC 713) and the Court of Appeal (reported at [2009] BTC 631)...
To continue reading
Request your trial
-
Beagles v Revenue and Customs Commissioners
...– Appeal allowed. The Upper Tribunal (UT) overturned the First-tier Tribunal (FTT) decision concerning a discovery assessment in Beagles [2017] TC 05925, ruling that a discovery must retain its newness when an assessment is made and in this case it had not. Summary The appellant (Mr Beagles......
-
Hicks
...[46] The decision in Pattullo is binding on this Tribunal, and I agree with the conclusion of Judge Brooks to that effect in Beagles [2017] TC 05925, at [49]. [47] Was the discovery in this case stale? That is clearly dependent on the facts, although in Pattullo Lord Glennie agreed ( at [53......