Langham v Veltema
| Jurisdiction | England & Wales |
| Judge | Lord Justice Auld,Lord Justice Chadwick,Lady Justice Arden |
| Judgment Date | 26 February 2004 |
| Neutral Citation | [2004] EWCA Civ 193 |
| Docket Number | Case No: A3/2002/2759 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 February 2004 |
[2004] EWCA Civ 193
Lord Justice Auld
Lord Justice Chadwick and
Lady Justice Arden
Case No: A3/2002/2759
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand,
London, WC2A 2LL
Ms Ingrid Simler (instructed by the Solicitor of Inland Revenue) for the Appellant
Mr. Michael Sherry and Ms Louise Rippon (instructed by M & S Solicitors) for the Respondent
The appeal is by Simon Langham, an Inspector of Taxes at Kings Lynn, from a decision of Park J, upholding, on an appeal by way of case stated, a decision of the General Commissioners that on or before 31 st January 2000 he could have been reasonably expected, on the basis of information made available to him, to be aware that Mr. Veltema's assessment to tax was insufficient so as to cause a loss of tax for the purpose of section 29 of the Taxes Management Act 1970 ("the TMA") . In consequence of his ruling, he disallowed an additional assessment to tax made by the Inspector under section 29(1) of the TMA.
The appeal raises an important point of principle concerning the scheme of self-assessment for tax in sections 8 and 9 of the TMA and of later "re"-assessment by the Inland Revenue under section 29 of the TMA where loss of tax is "discovered", a relatively new scheme introduced by section 178 of the Finance Act 1994 and operated with effect from the income tax year 1996/97.
The statutory scheme
Before self-assessment was introduced by these provisions, the scheme was that a personal return made under section 8 of the TMA was assessed for tax by the Inland Revenue, which the taxpayer could challenge by appeal, such appeal often being settled by agreement. There were often issues as to the scope of such an agreement, which the House of Lords, in Scorer v. Olin Energy (1985) 58 TC 592, held, in the context of corporation tax, had to be viewed objectively, having regard to the surrounding circumstances, including all the material known to be in the Inspector's possession.
The present scheme is that, by section 9 of the TMA, a taxpayer must include in his return a self-assessment, which, by section 8(1A) (a), he must make and normally deliver by 31 st January of the year following the year of assessment ("the filing date") . His return should disclose all the relevant information and correctly assess, on the basis of it, the tax due. The Inland Revenue may then enquire into the return by issuing a formal notice within 12 months after the filing date ( section 9A(2) TMA). At the end of any such enquiry the Inland Revenue may amend the return ( section 28A(2) TMA) and issue a closure notice (section 28A(1) and (3) TMA). If the Inland Revenue make no enquiry and the taxpayer has not amended his return, the self-assessment return becomes final on the expiry of that 12 months enquiry period, subject only to the possibility of making a "discovery" assessment under section 29 TMA.
The discovery procedure in section 29 has its origin in earlier tax statutes and may apply where, after normal finality of an assessment, some new fact comes to light or incorrect application of the law (subject to section 29(2)) or where, for any reason, it newly appears that the taxpayer has been undercharged; see Cenlon Finance Co. Ltd. v. Ellwood (1961) TC 176, per Viscount Simonds at 203–204. Section 29 enables the Inland Revenue, where it discovers an insufficient assessment, subject to one or other of two conditions, to make an assessment in the amount or further amount necessary to make good the loss of tax (section 29(1) and (3) TMA).
The first condition ("culpable mistake") is fraud or negligence on the part of the taxpayer in failing or failing properly to assess his liability to tax or in claiming relief ( section 29(4) TMA – to which a further time limit of 20 years applies) . However, nothing in the appeal turns on this condition because the Inspector did not allege fraud and the General Commissioners' finding of no negligence is not challenged by the Inspector.
The second condition ("innocent mistake"), which applies when an Inland Revenue officer is out of time to make an enquiry under section 9A(2) of the TMA into the taxpayer's return, is that the Inland Revenue officer "could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of" such failure or excessive claim for relief ( section 29(5) TMA – to which a further time limit of 5 years from the filing date applies) .
Section 29(6) sets out circumstances in which, for the purpose of section 29(5), "information is made available to an [Inland Revenue officer] …". Broadly speaking, that information includes the information in the return and accompanying documents and in any other documents provided by the taxpayer for the purpose of any enquiry into the return under sections 9A and 19A of the TMA, and any information the existence or relevance of which to any insufficiency in the self-assessment could reasonably be expected to be inferred by the officer from any of those documents. I had better set out the subsection in full. It provides:
"(6) For the purposes of subsection 9(5) above, information is made available to an officer of the Board if-.
(a) it is contained in the taxpayer's return under section 8, 8A or 11 of this Act in respect of the relevant chargeable period (the return), or in any accounts, statements or documents accompanying the return;
(b) it is contained in any claim made as regards the relevant chargeable period by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or
(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above –
(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii) are notified in writing by the taxpayer to an officer of the Board."
Inland Revenue Manuals give instructions to officers responsible for checking self-assessment returns to check the information against, among other information, the taxpayer's P11D Form showing his remuneration and benefits; see: 1/05/01 "Returns", para. 1.1; 2/05/01, "Action on receipt of form P11D", para 3558; and 30/04/01, SE8001 "Emolument: transfer of real property to employees and directors – general", which states that where land is shown as transferred to the taxpayer by his employer "an Inspector must consider whether the transfer is at full value and, if not, whether the undervalue is a profit from the directorship or employment"; and that, where the transfer "appears to be at less than full market value", reference should be made to the Valuation Office. This material cannot, of course, be an aid to construction of the TMA. Its only possible relevance—and then only on Mr. Veltema's case on the construction of the Act—is as to what the General Commissioners could reasonably have expected the Inspector to do in the light of the material made available to him by the taxpayer.
Miss Ingrid Simler, on behalf of the Inland Revenue, informed the Court that, whatever the Manuals say, the reality is that Inland Revenue staff in the main simply data-process the information on the returns, largely as a consistency check, and scrutinise only a very small number of them on a random basis or where there is thought to be high risk. She also noted—whilst maintaining its irrelevance to the issue of the Inspector's knowledge of the insufficiency of Mr. Veltema's assessment—that the General Commissioners, in their decision, made no finding as to what the Inspector should have done in the circumstances or as to general practice. She acknowledged that what happened in practice by way of scrutiny of returns is no aid to construction of the Act, any more than that which, according to the Manuals, should have happened.
The issues
There are two main issues in the appeal:
1) whether, as the Inspector contends, only awareness or an inference by him of an actual insufficiency in the self-assessment, though not necessarily its precise extent, would have disentitled him from making a discovery assessment under section 29(5), or whether, as Mr. Veltema contends, an awareness or inference by the Inspector of circumstances suggesting a possible insufficiency and the need for some basic check did so; and
2) in considering the appropriate state of mind of the Inspector under section 29(5), whether, as the Inspector maintains, it could only be derived from the information provided by the taxpayer as defined in section 29(6), or whether, as Mr. Veltema maintains, section 29(6) does not constitute an exhaustive definition of "information made available to an officer of the Board" for the purpose of section 29(5) and that, on all the information before the Inspector, including, for example, the P11D Form, he could not, on the agreed facts, have been unaware that the assessment was or might be insufficient within section 29(5) .
The facts
The agreed material facts are as follows. Mr. Veltema, who is ordinarily resident in the United Kingdom for tax...
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