Hegarty and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 December 2018 |
| Neutral Citation | [2018] UKFTT 774 (TC) |
| Date | 27 December 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0774 (TC)
Judge Richard Thomas, Patricia Gordon
Mr Keith Gordon (instructed by Rodgers Weir & Co) appeared for the appellant
Mr Paul Marks, litigator, Solicitor's Office and Legal Services, HMRC, appeared for the respondents
Capital gains tax – Disposals of (a) a piece of land with dwelling to connected person and (b) another contiguous piece to developer – Code of Practice 9 investigation into returns for 2006–07 and 2007–08 on basis that (a) land disposal not returned and (b) that business assets taper relief may have been wrongly claimed – FA 2008, Sch. 36 notice issued and reissued – HMRC withdrawing case before appeal hearing – Further notice with fewer requirements issued three months after withdrawal – Whether res judicata applies – Whether abuse of process – Whether Condition B in FA 2008, Sch. 36, para. 21 (officer had reason to suspect loss of tax) met where no evidence from officer – Whether decisions about TMA 1970, s. 20 that there must be a sensible or reasonable prospect of HMRC making a valid discovery assessment applicable to Sch. 36 notices.
The First-tier Tribunal (FTT) found that information notices had not been validly issued, because HMRC had not provided evidence of their reason to suspect an insufficiency of capital gains tax.
HMRC suspected Mr and Mrs Hegarty (the appellants) of tax fraud and opened a Code of Practice 9 investigation into their 2006–07 and 2007–08 tax returns. HMRC were concerned about:
- the date a property, which had been used as the appellants' principle private residence (PPR), was transferred to the appellant' son based on a submission to Land Registry and the value of that transfer; and
- a claim to business asset taper relief (BATR) on land which the taxpayers described as a car yard but which HMRC considered to be a green field site based on aerial photographs of the land which showed no cars.
After an informal request for information was refused by the appellants, HMRC issued each of the appellants with an information notice under FA 2008, Sch. 36, para. 1. The appellants appealed against the notices.
Almost a year after the appellants' appeals were submitted, HMRC wrote to the appellants' advising them that they would no longer be defending the appeals and were withdrawing from the case and withdrawing the information notices. A tribunal clerk also wrote to say that the tribunal had been informed by HMRC that they were no longer defending the decision and that the tribunal therefore allowed the appeal.
Less than three months later HMRC issued another pair of Sch. 36 notices seeking some of the same information as the earlier notices.
The appellants appealed against the new notices.
The issues for the FTT's decision were:
- Whether HMRC were estopped from issuing or enforcing the notices on the grounds of res judicata or because of abuse of process by HMRC.
- Whether Condition B in FA 2008, Sch. 36, para. 21(6) was met.
- Whether the Tribunal was permitted to determine if there was no sensible or reasonable possibility of HMRC being able to raise a discovery assessment, given that they needed to prove deliberate conduct, and if it was permissible, whether there was such a possibility.
- If necessary, whether the information and document sought by the notice were reasonably required to check the appellants' tax position.
The FTT held that the principle taken from Caffoor (Trustees of Abdul Caffoor Trust) v Commissioner of Income Tax, Colombo [1961] AC 584, which provided that estoppel on grounds of res judicata could not arise from one tax year to the next, even where the factual situation was identical, did not apply in this case. That was because a Sch. 36 notice did not determine the amount of tax payable by a person, and in any event this was not a case where HMRC were seeking to argue in respect of one period a point which had been determined against them in an earlier one.
However, the FTT also held that contrary to the appellants' submission, the tribunal clerk's letter did not represent a determination of the dispute between the parties so that HMRC were estopped by the Cenlon principle (i.e. that matters determined by a decision of a tribunal or by a deemed decision of a Tribunal arising as a result of an agreement between the parties under TMA 1970, s. 54 could not be relitigated by HMRC in another form).
The FTT therefore found that the question of whether the new information notices were valid did not depend on the application of the doctrine of res judicata.
On the issue of abuse of process, the FTT adopted the approach of Judge Berner in Hackett [2016] TC 05508 and took into account all the facts and circumstances of the case. The FTT did not consider that there was an abuse of process when HMRC issued the further information notices. The FTT did however note that in its view HMRC's letter was insufficient and that it was not in the least surprising that the appellants took the letters as signalling that their ordeal, as they saw it, was over. While the letter did say that withdrawal of the notices did not affect HMRC's right to issue further notices, in the FTT's view it would have been right and proper for HMRC to explain why HMRC were withdrawing the notices and to say clearly that they were at that time or in the very near future to be reissued.
In the circumstances of these appeals Condition B in FA 2008, Sch. 36, para. 21(6) provided that a Sch. 36 notice could be given if an officer of Revenue and Customs had reason to suspect that an amount that ought to have been assessed to capital gains tax for the relevant tax years may not have been assessed.
Miss McKinney, the relevant officer of HMRC, did not give evidence, either by a witness statement or orally because in HMRC's view the facts spoke for themselves.
The FTT noted that it might well have been able to agree that Miss McKinney's suspicions were genuine and objectively justified had it heard from her telling it exactly what they were and why she held them. However it did not have that opportunity and therefore held that the notices did not meet Condition B and it therefore upheld the appeals.
While the FTT did not need to consider the appellants' discovery assessment point, decided to set out its case as doing so could be of assistance in future cases.
The FTT considered that the test in Johnson v Gore Wood & Co (a firm)[2002] 2 AC 1 was part of Sch. 36. This meant that the FTT would have needed to consider whether, in this case, TMA 1970, s. 29(4) would permit HMRC to make discovery assessments.
HMRC had to show that each of the appellants knew that they were making false or falsely inflated claims in their returns to private residence relief (PRR) and BATR. But as HMRC had not provided any evidence from Miss McKinney to show that there was deliberate, knowing conduct by the appellants or on their behalf nor do the undisputed facts suggest that there was. It may be that the BATR claim would not if investigated stand up to scrutiny or would only justify a smaller amount of relief, but that was by no means the same as saying that any loss of tax caused by an incorrect claim was brought about knowingly. Thus, there was no sensible or reasonable possibility of HMRC being able to raise a discovery assessment.
Given the above, the FTT did not consider whether the information and document sought by the notices were reasonably required to check the appellants' tax position.
The information notices were set aside.
The FTT usefully pointed out to the appellants that nothing in its decision prevented HMRC from issuing other information notices, although in its view HMRC were estopped from so doing or it would be an abuse of process.
The FTT also noted that nothing prevented HMRC from issuing discovery assessments, but it suggested to HMRC that on the capital gains questions it had “missed the boat and should move on”.
[1] This was the hearing of appeals by Mr Michael and Mrs Flora Hegarty (“the appellants”) against the issue of notices for information and documents under paragraph 1 Schedule 36 Finance Act (“FA”) 2008. The information and document relate to the disposal in two tranches by the appellants of land at 22 Station Rd, Moneymore, Co Londonderry.
[2] Assiduous readers with good memories of published decisions of this Tribunal might have a bell rung in their heads by this address. That is because there is a decision published in May 2017 Ritchie [2017] TC 05911 (“Ritchie”) which relates to land at 28 Station Rd, Moneymore which is contiguous with the land at 22, and which involved, among others who are involved in this case, Judge Richard Thomas (though then sitting with a different member), Keith Gordon (as counsel for the appellants in both cases), Seamus O'Neill, Clifford Rodgers (for the appellants in both cases) and Suzanne McIvor (an officer of HMRC involved in both cases). It also seems from the evidence in this case that Mr Hegarty provided a statement in support of the Ritchies in ADR proceedings, and that a reference in Ritchie to the landlords of the Ritchies while their house at 28 Station Road was being built was in fact to the appellants.
[3] Judge Thomas disclosed this similar line up of people to Mr Marks, who was not the HMRC litigator in Ritchie, as well as the fact that he had produced the decision in Ritchie and was familiar with the maps and layout of the land from Ritchie and was also aware that the purchaser of the land in this case, Thompson Lennox Ltd, was also the purchaser at about the same time of adjoining land in Ritchie. In coming to this decision we have not taken into account any knowledge that Judge Thomas possesses about the Ritchie case, save where it was mentioned in evidence in this case, and it is clear to us that Mr Gordon did not seek to take advantage of his knowledge of the facts in Ritchie. Mr...
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