Hicks
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 January 2018 |
| Neutral Citation | [2018] UKFTT 22 (TC) |
| Date | 12 January 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0022 (TC)
Judge Thomas Scott
Keith Gordon of Counsel appeared for the appellant
Akash Nawbatt QC of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Discovery assessments – Whether HMRC made a discovery – Yes – Whether jurisdiction to consider TMA 1970, s. 29(5) following HMRC review – Yes – Whether condition in s. 29(5) satisfied – No – Meaning of person acting on behalf of taxpayer within s. 29(4) – Test of carelessness – Whether taxpayer or person acting on his behalf careless within s. 29(4) – No – Appeal allowed.
The First-tier Tribunal (FTT) allowed a taxpayer's appeal against discovery assessments. While the FTT found that HMRC had made a discovery in relation to the taxpayer's use of a tax scheme, as there was no insufficiency of disclosure and the insufficiency of tax was not brought about carelessly by either the taxpayer or his accountant, the discovery assessments had not been validly raised.
The appellant (Mr Hicks) participated in tax arrangements devised by Montpelier tax consultants for self-employed derivatives traders (the scheme). The scheme purported to use ICTA 1988, s. 730 as it then stood to create trading losses in 2008–09 which Mr Hicks carried forward to 2009–10 and 2010–11. A variation of the scheme was held to be ineffective in Clavis Liberty 1 LP [2016] TC 05028 and on appeal in [2017] BTC 534. Following an enquiry into Mr Hicks' 2008–09 tax return HMRC raised an assessment denying the losses, which Mr Hicks had not appealed. On 30 March 2015 HMRC raised discovery assessments in respect of 2009–10 and 2010–11. Mr Hicks appealed against the assessments.
The appeal raised 4 questions:
- Had HMRC made a discovery pursuant to TMA 1970, s. 29(1)?
- Were HMRC prevented from relying on an insufficiency of disclosure in 2010–11 pursuant to s. 29(5) to enable them to make a discovery assessment given the conclusions in their statutory review?
- If the answer to (2) was no, was a discovery assessment permitted for 2010–11 on the basis of an insufficiency of disclosure?
- Was Mr Hicks or a person acting on his behalf careless pursuant to s. 29(4) so as to allow a discovery assessment to be made for 2009–10 and/or 2010–11.
It was for HMRC to prove on the balance of probabilities that the discovery assessments were validly made. As HMRC had not issued the assessments within the normal time limits, HMRC had to establish that (a): a discovery was made; and (b) as the discovery assessments were not issued until 30 March 2015, for 2009–10 there had been carelessness under s. 29(4) (because the assessment was raised between 4 and 6 years after the end of the tax year), and for 2010–11 there had either been carelessness under s. 29(4) or there had been an insufficiency of disclosure such as to permit assessment under s. 29(5) (because the assessment was raised within 4 years after the end of the tax year).
Counsel for Mr Hicks (Mr Gordon) submitted that any discovery made by the HMRC officer (Officer Boote) had lost its essential “newness”, and had become stale by the time the discovery assessments were issued.
The FTT found that Officer Boote had “crossed a threshold” of discovery before he issued the discovery assessments. Judge Scott noted that as detailed in R & C Commrs v Charlton [2013] BTC 1,634 the threshold at which a discovery arises for the purposes of TMA 1970, s. 29 was low and that as the Court of Appeal stated in Hankinson v R & C Commrs [2012] BTC 1 it simply meant that the officer came to a conclusion, or satisfied himself, as to an insufficiency of tax, including a case where an officer (not acting unreasonably) changes his mind.
On the facts the FTT concluded that Officer Boote discovered the insufficiency in summer 2014 and a delay of 9 months before issuing the assessment was not the sort of delay that would cause the discovery to have become stale.
The FTT therefore concluded that there was clearly a discovery for the purposes of s. 29(1).
Mr Gordon argued that HMRC were prevented from seeking to rely on s. 29(5) because in HMRC's statutory review decision it said: “Having considered the position, I do not consider that HMRC should continue to rely on subsection 5 in this case …”
The FTT concluded that, even if the language in the review letter bore the weight placed on it by Mr Gordon, as to which the FTT was not wholly convinced, the tribunal clearly had jurisdiction to consider the s. 29(5) issue. The matter resolved by the review, the matter under appeal, was the decision to issue the discovery assessments, not the reasons for that decision and that was what s. 54(1) referred to as “the assessment or decision under appeal”.
For HMRC to succeed on this point they would have had to have shown that at the time when the enquiry window closed, a hypothetical HMRC officer could not reasonably have been expected, on the information made available to him before that time, to be aware of the insufficiency of tax.
The FTT noted that the disclosure issue had been the subject of a number of important, and not always readily reconcilable, decisions. Judge Scott was guided in particular by the summary of Patten LJ in the Court of Appeal in Sanderson v R & C Commrs [2016] BTC 3.
On the facts in this case, the FTT found that the hypothetical officer had sufficient information available (taking into account that under s. 29(6) and (7), Mr Hicks' 2008–09 tax return which included the SRN for the scheme and the form AAG 1 filed by Montpellier in respect of the scheme were “information made available”) at closure of the enquiry window to make it reasonable for him to have been justified in raising an assessment for the insufficiency. The central issues, relating to ICTA 1988, s. 730 and trading, were not matters of such complexity that the disclosure did not achieve this result. The FTT concluded that HMRC had not established on the balance of probabilities that the condition in s. 29(5) was satisfied.
For HMRC to succeed on this point they would have had to have shown that the insufficiency of tax in the returns were was brought about carelessly by either Mr Hicks or a person acting on his behalf.
The FTT rejected HMRC's submission that the scheme promoter Montpelier had acted on Mr Hicks' behalf. Therefore it was only Mr Hicks' own carelessness or that of his accountant that mattered.185.
The FTT considered what a reasonable and prudent taxpayer in the position of Mr Hicks would have done, and what a reasonable and prudent accountant in the position of Mr Hicks' accountant would have done in acting on behalf of Mr Hicks. The issue was not whether Mr Hicks or his accountant was careless in general or in the abstract, but whether their failure to take reasonable care brought about the insufficiency in the return for 2008–09 or the two subsequent returns. In the FTT's view, bringing about the insufficiency in this case encompassed: Mr Hicks' decision to participate in the scheme; the decision to claim the loss in the 2008–09 return; and the decisions to carry forward the loss in the 2 subsequent returns. In each case the FTT found that neither Mr Hicks nor his accountant had failed to take reasonable care.
The FTT accordingly allowed Mr Hicks' appeal.
The taxpayer had participated in a tax scheme which purported to create losses which the taxpayer carried forward to the following 2 years. HMRC opened an enquiry into the year of the losses, but not into either of the following 2 years. HMRC instead issued discovery assessments for those years. However given that the discovery assessments were not issued within the normal statutory time limits, the assessments could only validly be raised if the taxpayer had either failed to adequately disclose the scheme or the insufficiency of tax had been caused by either him or someone acting on his behalf acting carelessly or deliberately.
[1] This appeal concerns the ability of HMRC to make discovery assessments against Mr Hicks for the years 2009–10 and 2010–11.
[2] Those assessments relate to trading losses claimed to arise in 2008–9 from certain arrangements devised by Montpelier tax consultants and carried forward to the following two tax years.
[3] The substantive issue of the effectiveness of the arrangements to generate the trading losses is not in issue in this appeal. Mr Hicks has not sought to appeal against the assessment raised by HMRC for 2008–09 to deny those losses. The only issue in this appeal is the validity of the discovery assessments for 2009–10 and 2010–11.
[4] The appeal raises four issues, namely:
- Whether HMRC made a discovery;
- Whether HMRC are prevented by the conclusions of their statutory review from relying for 2010–11 on an insufficiency of disclosure to permit the discovery assessment;
- If the answer to (2) is no, whether a discovery assessment is permitted for 2010–11 on the basis of an insufficiency of disclosure, and
- Whether Mr Hicks or a person acting on his behalf was careless so as to permit a discovery assessment to be made for either or both of 2009–10 and 2010–11.
[5] HMRC do not allege that the insufficiency of tax for the years in question was brought about deliberately by Mr Hicks or a person acting on his behalf.
[6] In addition to a considerable volume of documentation and correspondence, I heard evidence from four witnesses, namely:
- Mr Hicks;
- Mr Boote of HMRC, the officer who issued the discovery assessments;
- Mr Bevis, Mr Hicks' accountant, and
- Mr Callen, a work colleague of Mr Hicks.
[7] Since the evidence of each witness has relevance for some but not all of the issues in this appeal, it is helpful to consider their evidence and my...
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