Beagles v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 November 2018 |
| Neutral Citation | [2018] UKUT 380 (TCC) |
| Date | 20 November 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0380 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Birss, Judge Ashley Greenbank
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 – Discovery assessment – Whether discovery stale – TMA 1970, s. 29(1) – Whether conditions in TMA 1970, s. 29(5) fulfilled – 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.
The appellant (Mr Beagles) claimed a loss in his 2001–02 tax return as a result of his participation in tax avoidance arrangements promoted by KPMG. Mr Beagles 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. By 30 June 2004 HMRC realised that they had failed to spot that Mr Beagles had taken part in the scheme in time to open an enquiry under TMA 1970, s. 9A (which would have been required by 31 January 2004). On 11 March 2005 HMRC wrote to KPMG suggesting that the scheme might be challenged. On 1 August 2005 HMRC wrote to KPMG to say that leading counsel had advised that the scheme did not work and that they intended to challenge the scheme before the courts and suggested that they might issue Mr Beagle with a discovery assessment if the scheme was found not to be successful. On 15 January 2008, after the scheme had been defeated by the Special Commissioners in Astall v R & C Commrs (2007) Sp C 628 in August 2007, HMRC issued a discovery assessment on Mr Beagles.
Mr Beagles appealed against the discovery assessment on the grounds that it was not valid because:
- The discovery was stale when the assessment was made.
- He had made a full disclosure on his return, from which the HMRC officer could be reasonably expected to have been aware of an insufficiency to tax prior to the date the officer could have opened an enquiry into the return and therefore the condition in TMA 1970, s. 29(5) had not been fulfilled.
The FTT decided that
- A discovery could become stale before the expiry of the statutory time limit for a discovery assessment in TMA 1970, s. 34 (Pattullo v R & C Commrs [2016] BTC 510).
- On the facts of the case, the discovery of the insufficiency in the self-assessment return had not become stale. This was on the basis that the HMRC officer did not reach a firm conclusion that the scheme did not work until it was confirmed by the decision of the Special Commissioners in Astall in August 2007. On that basis, the discovery of the insufficiency was not stale when the assessment was issued in January 2008.
- Even if the discovery had been made earlier, the assessment would not have become stale whilst the HMRC officer awaited the outcome of the litigation in Astall.
- The condition in TMA 1970, s. 29(5) was fulfilled. A hypothetical HMRC officer would not have been aware of the insufficiency of tax in Mr Beagles' self-assessment return from the information provided in the return and the appendix to that return. The information treated as available to the officer by virtue of TMA 1970, s. 29(6) would not be extended by s. 29(6)(d)(i) to the reasons for the inclusion of the market exchange condition in the terms of the security.
Mr Beagles was granted permission to appeal against the FTT's decision on the grounds that:
- Ground 1: The FTT's conclusion that the date of discovery was August 2007 was perverse, contrary to the evidence, and based on a misunderstanding of the law;
- Ground 2: The FTT's view that even if the discovery was made some time earlier, it was not stale was insufficiently reasoned, failed to deal with Mr Beagles' submissions, perverse and wrong in law;
- Ground 3: The FTT erred in its approach to TMA 1970, s. 29(5), in particular with regards to what the hypothetical officer would have been aware of; and
- Ground 4: the FTT erred in its approach to TMA 1970, s. 29(6), in particular, whether the existence and relevance of a reason for the market change condition could reasonably be inferred.
HMRC challenged the FTT's conclusion that it was possible for a discovery assessment to be invalid on the basis that the relevant discovery was sufficiently before the date of assessment.
The UT referred to the cases of Corbally-Stourton v R & C Commrs (2008) Sp C 692, R & C Commrs v Charlton [2013] BTC 1,634, Pattullo and R & C Commrs v Tooth [2018] BTC 505 where the concept of “staleness” of discovery had been considered. The UT found that the decision in Pattullo that any discovery under TMA 1970, s. 29(1) had to be acted upon while it remained fresh (or before it became stale) was not obiter. As it was not convinced that Pattullo was wrong, particularly given the existence of the other similar (obiter) statements in Charlton and Tooth, it decided to follow it. It seemed to the UT that, given the state of the authorities at the UT level, the question of whether a discovery can become “stale” was a matter best reviewed by the higher courts. It recognised both sides of the argument, particularly, on the one side, the point that it seemed wrong not to require HMRC to make an assessment promptly once a discovery had been made, and, on the other, the simple point that the legislation did not make any express provision for any kind of limitation period except that specified by TMA 1970, s. 34. On that basis, The UT rejected HMRC's submission that there was no concept of “staleness” involved in a discovery.
On Ground 1, the UT decided that on the findings of fact made by the FTT, it was clear that the HMRC officer had made a discovery of the insufficiency in Mr Beagle's return at the very latest by August 2005 and possibly earlier. The UT therefore found that the FTT made an error of law in concluding that the discovery was made following the decision of the Special Commissioners in Astall.
On Ground 2, the UT found that the delay of two and a half years between the date the discovery was made and the issue of the assessment was material. If the discovery was to retain its quality of “newness” notwithstanding that delay, HMRC had to take further steps in order to preserve that quality in the period between the making of the discovery and the issue of the assessment in January 2008. In the UT's view, the discovery had lost its quality of newness by the time of the issue of the assessment and so the assessment was not valid. The UT therefore disagreed with the FTT's alternative conclusion.
This point decided the appeal in favour of Mr Beagles but the UT went on to conclude on the other two grounds of appeal.
On Ground 3, the UT applied the principles set out by Lord Justice Patten in Sanderson v R & C Commrs [2016] BTC 3. The UT found that the question was whether from the information in and accompanying the return, a hypothetical officer could not reasonably have been expected to be aware of the insufficiency. In the UT's view, this was a complex case and the disclosure was not such as would have made the hypothetical officer aware of the insufficiency in the return. Although the UT's reasons were rather different, it agreed with the conclusion of the FTT and dismissed this ground of appeal.
On Ground 4, the reasons for the insertion of the market change condition was too vague for the relevance of those reasons to be reasonably inferred from the presence of the market change condition in the terms of the security. Even if the UT was wrong on that point, and the reasons for the market change condition were to be treated as made available to the hypothetical officer for the purposes of TMA 1970, s. 29(5) together with the return and accompanying documents, the hypothetical officer would still not have been aware of the insufficiency such as to justify an assessment as at 31 January 2004.
The UT accordingly allowed the appeal in respect of Grounds 1 and 2 and dismissed the appeal on Grounds 3 and 4.
HMRC failed to identify that the taxpayer had participated in a particular tax avoidance scheme in time for them to open an enquiry into the taxpayer's return within the enquiry window. HMRC instead issued a discovery assessment, but because the assessment was not issued until at least two and a half years after the HMRC officer had made the discovery that the taxpayer had participated in the tax avoidance scheme which they believed did not work as intended the discovery had not retained its newness and the assessment was accordingly invalid.
[1] This is an appeal by Mr Clive Beagles from a decision (the “FTT Decision”) of the First-tier Tribunal (Judge John Brooks) (the “FTT”) dated 5 June 2017. The respondents are the Commissioners for Her Majesty's Revenue & Customs (“HMRC”).
[2] The appeal relates to an assessment issued by HMRC to Mr Beagles on 15 January 2008 in relation to the 2001–02 tax year. The assessment was in the sum of £437,389.60.
[3] The matter giving rise to the assessment related to certain tax avoidance arrangements which Mr Beagles had entered into and which were designed to create a tax loss without a corresponding taxable amount. The arrangements were essentially the same as those considered by the courts and tribunals in Astall v R & C Commrs (“Astall”)1 and found to be unsuccessful.
[4] Mr Beagles was the only participant in those arrangements for the tax year 2001–02 for whom HMRC did not raise an enquiry within the statutory time limit. After the completion of the litigation in Astall, HMRC made the assessment on Mr Beagles under s29 of the Taxes Management Act 1970 (“TMA”) (referred to as a “discovery assessment”).
[5] Mr Beagles appealed to the FTT on the grounds that the issue of the...
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