G C Field & Sons Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 August 2021 |
| Neutral Citation | [2021] UKFTT 297 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 297 (TC)
Judge Marilyn McKeever
Mr Thomas Chacko, counsel, instructed by Spector Constant and Williams Ltd., appeared for the appellants
Mr Steve Goulding, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Stamp duty land tax (SDLT) – Former sub-sale relief avoidance scheme – Discovery assessment – Did HMRC make a valid discovery – Finance Act 2003 (FA 2003), Sch. 10, para. 28 – Yes – Was there negligent conduct by taxpayers or persons acting on their behalf – Finance Act 2003 (FA 2003), Sch. 10, para. 30(2) – On balance of probabilities – No – Appeal upheld.
The First-Tier Tribunal (FTT) found that, although HMRC had made a valid discovery in relation to an avoidance scheme used by the appellants, the ensuing discovery assessment was invalid, as HMRC had failed on the balance of probabilities to establish that the appellants or their agents had acted negligently.
The two sets of appellants (“the Field appellants” and “the Shaw appellants”) had both used the same avoidance scheme marketed by the same promoters purporting to make use of the subsale relief under the former FA 2003, s. 45 so as greatly to reduce the SDLT liability on their property purchases, which both took place in February 2013. On the same day as filing the respective land-transaction returns, the promoters wrote to HMRC on behalf of both sets of appellants setting out the details of the scheme.
HMRC did not open an enquiry into either set of returns within the enquiry window. In July 2013, FA 2003, s. 45 was amended by FA 2013, s. 194 retroactively in such a way as to render the scheme ineffective. In September 2013, HMRC wrote to one of the Shaw appellants to draw his attention to the change in law and advise him to amend his return accordingly. No such letter was sent to any of the Field appellants or to the promoters (ELS). None of the appellants amended their returns, although they eventually accepted that the scheme had been ineffective.
After the FTT issued its decision in the Project Blue Ltd case ([2013] TC 02777), HMRC reviewed a number of schemes, including the one used by the appellants. As a result, HMRC wrote to ELS in September 2014, stating that it had made a “discovery” in relation to the non-disclosure of the application of the anti-avoidance rule of FA 2003, s. 75A and issued discovery assessments to both sets of appellants charging SDLT on the full purchase price, on the basis that the scheme had been ineffective as against the former s. 45. ELS appealed against the discovery assessments on behalf of both sets of appellants.
In the course of correspondence on the case, HMRC changed the basis of its discovery from s. 75A to a discovery that tax had been understated owing to the introduction of FA 2014, s. 194 and the failure to amend their returns accordingly and pay the correct amount of tax.
The issues before the Tribunal were twofold. First, did HMRC make a valid discovery within the terms of FA 2003, Sch. 10, para. 28? Second, if so, were the discovery assessments validly issued, which meant here was the understatement of tax attributable to the negligent conduct of the appellants or of someone acting on their behalf, as required under FA 2003, Sch. 10, para. 30(2)? The onus of proof in both cases lay on HMRC.
As noted, initially HMRC's discovery was based on a new view of the law following the FTT decision in Project Blue and a lack of disclosure, as prescribed by FA 2003, Sch. 10, para. 30(3)). However, it decided not to pursue this point and subsequently came to rely on understatement by virtue of the effect of FA 2014, s. 194 and the appellants' failure to submit amended returns, constituting negligent conduct by themselves and/or by ELS acting on their behalf (FA 2003, Sch. 10, para. 30(2)).
On behalf of the appellants, it was argued that HMRC had not made a valid discovery as it related to the notional transaction under s. 75A and not to the actual transactions. In contrast to the situation with respect to direct taxes, it mattered that the legal basis of the discovery had changed. The discovery for SDLT purposes in FA 2003, Sch. 10, para. 28 had to be in relation to a chargeable transaction. The understatement of tax arose from the actual chargeable transactions undertaken by the appellants, whereas HMRC's discovery was in relation to the notional transaction posited by s. 75A. This was the wrong transaction and HMRC had not shown what discovery it had made in relation to the actual transactions nor when that discovery had been made.
The Tribunal judge based her decision on this point on the approach of the Court of Appeal in Fidex Ltd v R & C Commrs [2016] BTC 16, confirmed in Clark v R & C Commrs [2020] BTC 4. What was clear from those cases was that what was important were the conclusions reached by HMRC and not the process of reasoning by which it arrived at those conclusions. Looking at the terms of the discovery assessment in context, it seemed to the Tribunal judge that the scope of the discovery was that there had been an underpayment of SDLT as a result of a scheme that was ineffective. This was wide enough to encompass a change in reasoning as to the cause of the underpayment. HMRC had not made a discovery in relation to the “wrong transaction” but rather that insufficient tax had been paid on the purchases by the appellants of their respective properties. For these reasons, the discovery was a valid one.
That HMRC's discovery was valid was not in itself sufficient to dismiss the appeal. HMRC had also to prove on the balance of probabilities that the appellants and/or persons acting on their behalf had been negligent in order for the discovery assessments to stand.
It was HMRC's assertion that the failure by both sets of appellants to amend their respective returns constituted negligence within FA 2003, Sch. 10, para. 30(2). Furthermore, HMRC asserted that ELS had been acting on the appellants' behalf and their negligence lay in not informing the appellants that FA 2004, s. 194 rendered the scheme ineffective and that they should therefore amend their returns.
It was accepted that “negligence” was equivalent to “carelessness”, which, in Atherton v R & C Commrs [2019] BTC 507 had been defined as failure to take reasonable care to avoid bringing about the loss or situation in question. One had therefore to take into account the knowledge and experience of the taxpayer or person acting on the taxpayer's behalf into consideration. Furthermore, one of the principles arising from the case was that if the taxpayer received advice from an “external adviser”, i.e. someone not acting on the taxpayer's behalf, the taxpayer was likely to have taken reasonable care to avoid the insufficiency (in this case) if the taxpayer reasonably relied on that advice. Where, on the other hand, the taxpayer acted on the advice of a person acting on the taxpayer's behalf and that person was careless, then there had been negligence. Reference was also made to the UT case of R & C Commrs v Bella Figura Ltd [2020] BTC 544 and Neal v C & E Commrs [1988] 3 BVC 143.
As regards the Field appellants, they had received no correspondence from HMRC about the effect of FA 2014, s. 194, nor had ELS told them about it. They had taken advice in relation to the scheme transactions and once the transactions were completed, they were under no obligation to make further enquiries as to any changes in the law. This was not a case of basic ignorance; the possibility that retroactive legislation might require one to revisit a transaction that had been the subject of a return under advice and had been disclosed was not something of which a reasonable lay taxpayer would reasonably have been expected to be aware.
As regards the Shaw appellants, they were in a different position. HMRC had written to them to advise that they were affected by the retroactive legislation and should submit amended returns. However, they had been advised by ELS that the legislation did not apply to them. They had had no reason to doubt that advice and had acted reasonably in following it. ELS had informed HMRC of its advice and HMRC had not responded.
For these reasons, HMRC had not discharged the burden of proving that either the Field appellants or the Shaw appellants had been negligent in failing to amend their returns.
Before turning to the question of whether ELS had been negligent, the first question to answer was this – had ELS been acting on the appellants' behalf?
The distinction had been drawn in R & C Commrs v Hicks [2020] BTC 536 between a pure adviser and a person both advising and preparing and submitting returns or other correspondence with HMRC on the taxpayer's behalf. Only the latter was a person acting on the taxpayer's behalf.
In the instant case, although ELS had been acting on the appellants' behalf in relation to the scheme up to and including submission of the returns and sending of the disclosure letter, there had been no ongoing retainer. The Tribunal judge therefore concluded that ELS was not advising the appellants or acting on their behalf when the retroactive legislation was introduced.
However, ELS had later advised the Shaw appellants on whether or not to submit amended returns and had corresponded with HMRC on their behalf, describing them as “clients”. It had therefore been acting on their behalf in that instance and it was therefore necessary to ask had they been negligent?
The question was not whether ELS's advice had been wrong but whether, in October 2013, that was a view that a reasonable tax adviser could have taken. HMRC had not provided any evidence as to what a reasonably competent tax adviser would have done or whether a reasonably competent tax adviser would have taken the view at that time that...
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