Burgess; Brimheath Developments Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 October 2015 |
| Neutral Citation | [2015] UKUT 578 (TCC) |
| Date | 27 October 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Judge Roger Berner, Judge Tom Scott
Conrad McDonnell, instructed by Devonshires LLP, appeared for the Appellants
Laura Poots, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax/corporation tax – Discovery assessments – Competence issues – Taxes Management Act 1970 (“TMA 1970”), s. 29 and Finance Act 1998 (“FA 1998”), Sch. 18, para. 41–43 – Time limit issues – TMA 1970, s. 36(1A) and FA 1998, Sch. 18, para. 46(2A) – Whether failure by FTT to consider competence and time limit issues was an error of law – Whether issues were required to be raised by HMRC or appellants – Burden of proof – Appeal allowed – Whether to remit to FTT – Case not remitted.
The Upper Tribunal (UT) overturned the First-tier Tribunal (FTT) decision on discovery assessments in Brimheath Developments Ltd; Burgess (t/a M J Bradleys) TAX[2014] TC 03438. The UT found that the FTT had made an error of law. As HMRC had not put a positive case forward as to whether the relevant conditions for the issue of discovery assessments had been met and whether the assessments were in time, HMRC had failed to discharge the burden of proof in those respects, and therefore the FTT should have allowed the appeals.
HMRC issued various discovery assessments to the appellants, Mr Burgess and Brimheath Developments Ltd (“Brimheath”), under the Taxes Management Act 1970 (“TMA 1970”), s. 29 and Finance Act 1998 (“FA 1998”), Sch. 18, para. 41–43, respectively.
The FTT found that the appellants had seriously understated their taxable income over an extended period and confirmed, with one exception, the assessments made on the appellants. There was no appeal from these conclusions of the FTT, nor from the findings which led to those conclusions.
However appeals were raised on the question of the underlying validity of assessments, which the appellants argued was not properly considered by the FTT. This argument was divided into two:
1) whether the relevant conditions for the issue of a discovery assessment under TMA 1970, s. 29 (in the case of Mr Burgess) and FA 1998, Sch. 18, para. 41–43 (for Brimheath) had been met (“the competence issue”); and
2) whether the assessments were in time, by reference to TMA 1970, s. 36 (for Mr Burgess) and FA 1998, Sch. 18, para. 46 (for Brimheath) (“the time limit issue”).
The appellants' representative argued that either the FTT did not deal at all with the competence and time limit issues, or if it could be inferred that it had done so the conclusions reached were made on the basis of applying the burden of proof wrongly. In either case, it was submitted, the FTT made an error of law.
The UT found that the FTT: made no express findings on the competence issue; made no express finding that the conduct of either Mr Burgess or Brimheath was deliberate or careless; and did not address the time limit issue at all. The UT therefore found that it had to decide whether, by the FTT failing to address the competence and time limits issues, the FTT erred in law.
HMRC submitted that it was their understanding that there was no challenge on competence or time limits, but that the challenge was limited to the substantive issue of whether, and to what extent, there had been an under-declaration of profits by Mr Burgess and Brimheath. Based on the UT decision in Hargreaves v R & C Commrs TAX[2014] BTC 526 HMRC argued that the scope of the appeal had to be determined solely by reference to the case put by the appellant i.e. on the substantive issue. However, the appellants argued that it was clear that the appellants had made such a challenge, which had not been waived or conceded; that being the case then it was for HMRC, on whom the burden of proof lay, to make their case to the FTT on the competence and time limit issues. The UT found that Hargreaves could not be relied upon for a general proposition that the scope of an appeal must be conclusively determined by reference to the case put by an appellant. The scope of an appeal, and the issues that fall to be determined by the FTT, must be established by reference to all the circumstances.
For HMRC to succeed before the FTT, either the competence and time limit issues had to be determined in their favour, or those issues had to have been conceded by the appellants. There was no such express concession and, in the UT's judgment, none could be inferred. HMRC were wrong to assume that the absence of reference by the appellants to the competence and time limit issues in their grounds of appeal, meant that those issues, on which HMRC's case depended, did not have to be determined in their favour. Those issues formed an essential element of HMRC's case, on which HMRC bore the burden of proof, and which if not proved would fail to displace the general rule that the assessments could not validly have been made. The UT also found that HMRC were wrong, once the appellants' first skeleton argument had been received, not to have appreciated that, far short of there being any concession on matters relevant to the competence and time limit issues, those matters were clearly the subject of dispute.
The UT found that the FTT made an error of law. The error was not that the FTT failed to address a relevant issue. It was that in the absence of a positive case put by HMRC in relation to the competence and time limit issues, the FTT erred in law in not finding that HMRC had failed to discharge the burden of proof in those respects such that the assessments could not be regarded as having been validly made and the appeals should accordingly have been allowed.
The UT set aside the FTT's decision and reduced the assessments to zero. The UT concluded that the case could not be remitted to the FTT as to do so would have given HMRC a second bite of the cherry and that would not be in the interest of justice and fairness.
The UT recognised that its decision may appear unsatisfactory, as each appellant had been found by the FTT to have seriously understated their taxable income, and as a result of this decision that taxable income would remain untaxed. However it had to be recognised that the assessment system is designed to provide a balance between HMRC and the taxpayer, with part of that balance being that HMRC have to satisfy the FTT that the relevant conditions for discovery assessments to be validly made have been met. In this case HMRC failed to do this and therefore the taxpayer escaped tax.
[1] These are appeals from the decision of the First-tier Tribunal (“FTT”) (Judge Brooks and Ms Redston) released on 25 March 2014 by which the FTT confirmed, with one exception, assessments made on each of the appellants, Mr Burgess and Brimheath Developments Limited (“Brimheath”).
[2] The assessments in question were in every case discovery assessments made, in relation to Mr Burgess, under s 29 of the Taxes Management Act 1970 (“TMA”) and in relation to Brimheath under paragraphs 41 to 43 of Schedule 18 to the Finance Act 1998 (“FA 1998”). In the case of Mr Burgess, the assessments were made on 7 November 2011, and were for income tax in relation to alleged failures to return profits of his business as a sole trader for the tax years 1996–97 to 1999–2000. In the case of Brimheath the assessments were made on 22 November 2011 and related to corporation tax on alleged under-declarations of profits of Brimheath for the accounting periods ended on 30 November in each of the years 1999 to 2008, apart from the year 2000.
[3] The FTT decided that there were for the years in question undeclared profits of each of Mr Burgess and Brimheath and, with one exception, upheld the assessments. The exception arose because it was accepted by HMRC that if the FTT were to uphold the assessment on Mr Burgess for 1999–2000, the relevant amounts could not also be attributed to Brimheath for its accounting period ended 30 November 1999. Brimheath's appeal was therefore allowed in respect of the assessment on it for that period.
[4] There is no appeal from these conclusions of the FTT, nor from the findings which led to those conclusions. The focus of these appeals is on the question of the underlying validity of the assessments which, so the appellants submit, was not properly considered by the FTT, such that the FTT made errors of law.
[5] There are two strands to this argument. The first is what has been described as a “competence” issue, namely whether the relevant conditions for the issue of a discovery assessment under s 29 TMA (in the case of Mr Burgess) and FA 1998, Sch 18, paras 41–43 (for Brimheath) had been met. The second, the “time limit” issue, is whether the assessments were in time, by reference to s 36 TMA (Mr Burgess) and FA 1998, Sch 18, para 46 (Brimheath). The terms “competence issue” and “time limit issue” distinguish those issues from the “substantive issue” of whether Mr Burgess and Brimheath had under-declared their profits for the relevant periods.
[6] The FTT made no reference to the time limit issue. It did, however, refer to s 29 TMA and the corresponding FA 1998 provisions, setting out, at [4], the material parts of s 29. In doing so it included the text of s 29(4), which provides for one of the conditions which may be satisfied for a valid discovery assessment in a case where a return had been made, namely that the loss of tax was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf. It omitted s 29(5), which provides an alternative condition based on what a hypothetical HMRC officer might reasonably have been expected to have been aware of from certain information supplied, remarking simply that s 29(5) was not applicable to the appeals.
[7] The FTT did not set out the provisions of paras 41–43, Sch 18, FA 1998. But by referring to para 43...
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