Charlton and Others v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 July 2011 |
| Neutral Citation | [2011] UKFTT 467 (TC) |
| Date | 13 July 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 467 (TC)
Howard M Nowlan (Tribunal Judge) (Chairman), Ruth Watts Davies
Keith M Gordon, counsel, instructed by Premier Strategies Limited, on behalf of the Appellants
Akash Nawbatt, counsel, on behalf of the Respondents
Capital gains tax - tax avoidance scheme - SHIPs - HMRC mistakenly failing to open enquiries - whether discovery assessments valid - whether discovery assessment required new facts to emerge - notional HMRC officer could reasonably have been expected when enquiry window closed to make immediate assessment - taxpayers protected from discovery assessments - taxpayers' appeals allowed - Taxes Management Act 1970, Taxes Management Act 1970 section 29 subsec-or-para 1 section 29 subsec-or-para 5ss. 29(1), (5)
The First-tier Tribunal held that, although the validity of a discovery assessment did not depend on the emergence of any new fact, the taxpayers were protected from discovery assessments by s. 29(5) of the Taxes Management Act 1970 since the notional inspector of taxes, at the point when the enquiry window closed, could in the circumstances reasonably have been expected to be aware that there was some insufficiency in the tax that ought to have been assessed.
The three taxpayers participated in the tax year 2006/07 in a marketed tax scheme promoted by Tenon Limited. The scheme was a SHIPs scheme involving second-hand insurance policies and was intended to create a large allowable loss for capital gains tax purposes by the use of a large partial surrender, which was transiently treated as generating income for income tax purposes.
Tenon had disclosed the scheme to HMRC and it had been given a reference number. The returns of the taxpayers and other scheme participants disclosed the details of the insurance policy transactions and the reference number of the scheme. HMRC opened enquiries into the returns of other participants, but by administrative oversight failed to open enquiries into the taxpayers' returns.
When the returns were submitted HMRC had challenged a similar scheme in the courts and the Special Commissioner had held that that scheme failed to achieve its object and that the losses were not allowable (Drummond(2007) Sp C 617). That decision was upheld by the Court of Appeal ([2009] BTC 312).
After the time for enquiring into the taxpayers' returns had expired, HMRC made discovery assessments denying the capital losses claimed.
The taxpayers appealed contending that discovery assessments could not properly be made in the absence of any new facts or interpretation of the law and that the information given in the return meant that the assessments could and should have been made at the point when the enquiry window closed so that the test in s. 29(5) was not satisfied.
HMRC contended that the test in s. 29(5) required the taxpayer to have made it clear to the notional inspector that there was an actual insufficiency in the self-assessments made in the returns, not that there simply might be an insufficiency.
Whether a discovery assessment required some new fact to have emerged; and whether the test in the Taxes Management Act 1970, s. 29(5) was not satisfied in this case.
The First-tier Tribunal (Judge Howard M Nowlan and Ruth Watts Davies) allowed the taxpayers' appeals.
The property interpretation of "discovery" in s. 29(1) did not require a new fact to emerge. It was only where there was conflict with some final determination of the First-tier Tribunal, or the higher courts, or where there has been a s. 54 agreement that the inspector's liberty to make discovery assessments was cut down. Absent such conflict, it was clearly the case that the same inspector could make a discovery assessment on simply changing his mind, or that a successor inspector could do likewise. That was the effect of the decisions in Cenlon Finance Co Ltd v Ellwood (HMIT)[1962] AC 782; 40 TC 176 and Scorer (HMIT) v Olin Energy Systems Ltd[1985] BTC 181; [1985] AC 645. The authority of those cases on that issue was not affected by dicta in subsequent cases which the taxpayers suggested indicated that something new was required to justify a discovery assessment.
The question under s. 29(5), was whether a notional inspector, of average competence, could have been reasonably expected, on the basis of the information provided in the returns, and any other permissible information under s. 29(6), to have been aware at the time the enquiry windows closed of the situation mentioned in s. 29(1).
The question was not whether at the relevant time the notional inspector should have concluded that he should open an enquiry into the return. It was perfectly obvious that he should have done that in this case, and HMRC had effectively conceded that it was only through various administrative slip-ups that no such enquiries were in fact opened. Rather, the test was geared to some level of clarity that a discovery assessment would have been justified at the closure of the enquiry window.
The reference in s. 29(5) to "the situation mentioned in sub-section (1) above" could not mean that the notional officer had to be reasonably expected to be aware that there was a definite under-assessment. Section 29(1) did not deal with situations where under-assessments were certain as a legal matter. It was perfectly possible for an inspector's discovery assessment to be rejected on an appeal on the substantive points.
It had been held that the notional officer would have concluded that an under-assessment was "more likely than not" (Corbally-Stourton v R & C Commrs(2008) Sp C 692). The correct test provided for a slightly lower threshold, bearing in mind that the burden of proof under s. 29(5) was on HMRC (R & C Commrs v Household Estate Agents Ltd[2008] BTC 502 considered).
HMRC had to show that the notional officer, relying on all of, but no more than, the s. 29(6) information would not have arrived at the belief, at the end of the enquiry window, that there had been an under-assessment, and that in order to rectify matters a new assessment was justified, and that that assessment had a reasonable chance of being sustained (Hankinson v R & C Commrs [2009] UKFTT 384 (TC); [2010] TC 00319 considered).
In this case adequate facts had been disclosed and no officer could have missed the point that an artificial tax avoidance scheme had been implemented (Household Estate Agents and Langham (HMIT) v Veltema[2004] BTC 156 considered). In the circumstances the notional officer would either have considered the law himself or, in the light of seeing the scheme reference number, would have sought guidance from specialist colleagues. In either case he would have concluded that immediate assessments should be raised. It would be surprising if in the circumstances the protection of s. 29(5) was not available.
If that was wrong and the notional officer would not have acted in either of those ways, in the circumstances at the end of the enquiry window he could and should have raised discovery assessments because he had adequate genuine grounds for disallowing the losses. On that alternative basis, HMRC would still be shut out from making the discovery assessments. Accordingly, the taxpayers were in this case protected from the making of discovery assessments by s. 29(5).
1.This case related to whether HMRC had made valid discovery assessments on the three Appellants, thereby denying artificial capital losses that the three Appellants had hoped to secure by participating in the tax year 2006/2007 in a marketed tax scheme promoted by Tenon Limited ("Tenon"). The majority of the material facts were not in dispute.
2.The case thus involved a dispute in relation to the legal provisions concerning discovery assessments, first as regards the meaning of the word "discovery" in Taxes Management Act 1970 section 29 subsec-or-para 1subsection 29(1)Taxes Management Act 1970 ("TMA"), and secondly as regards the meaning and the proper application of the provision in Taxes Management Act 1970 section 29 subsec-or-para 5subsection 29(5) TMA.
3.Subsection 29(5) precludes a discovery assessment from being made unless it can be said, at the end of the one-year period in which HMRC can open enquiries in relation to a taxpayer's self-assessment return, or on the notification to the taxpayer that such enquiries have been completed, that an average HMRC officer "could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware [that the taxpayer's return failed to assess income or capital gains that ought to have been assessed, or that the return claimed excessive reliefs]".
4.41 taxpayers had effected the scheme promoted by Tenon in the two tax years, 2005/2006 and 2006/2007, the three Appellants all in the later year
5.It was not material for us to understand how the scheme was meant to operate, and accordingly we never enquired into the detail of the scheme. Briefly, however, it appears that in order to generate an artificial loss, each taxpayer purchased an existing life assurance policy for a considerable sum; then effected a very substantial partial surrender; and finally sold or surrendered the small balance of the policy.
6.Whilst a small overall economic loss was made, comparing the purchase price with the amounts received on the partial and total surrenders, the amount received on the partial surrender was said to be excluded from the consideration amount for capital gains purposes on the grounds that "it had been taken into account for income tax purposes".
7.Whilst this was the purported basis for excluding the proceeds on the substantial partial surrender from the capital gains calculation (so occasioning the enormous loss), no income was actually assessed. We imagine that this resulted from the way in which there is a chargeable event on partial surrenders of policies in which the...
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