Pattullo v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 June 2016 |
| Neutral Citation | [2016] UKUT 270 (TCC) |
| Date | 14 June 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Lord Glennie
Keith Gordon, barrister, instructed by AVN Venus Tax LLP, Leeds, for the Appellant (Neil Pattullo, the taxpayer)
Ross Anderson, advocate, instructed by the Office of the Advocate General for Scotland, for the Respondents (HMRC)
Capital gains tax – Discovery assessment – Tax avoidance scheme involving capital redemption policies – When HMRC officer discovered that assessment was insufficient – Whether there can be a series of discoveries – Whether the discovery became stale – Taxes Management Act 1970 (TMA 1970), s. 29(1) – Whether officer could not have been reasonably expected to be aware of the insufficiency at earlier date – Attributes of the hypothetical officer – What constitutes such awareness – Tests to be applied – TMA 1970, s. 29(5) – Appeal dismissed.
The Upper Tribunal (UT) has dismissed Mr Pattullo's appeal against the decision of the First-tier Tribunal (FTT) in Pattullo TAX[2014] TC 03958 finding that the FTT had not erred in applying the Taxes Management Act 1970 (TMA 1970), s. 29(1) in the context of when the discovery justifying the discovery assessment had been made by the particular HMRC officer concerned, or in applying TMA 1970, s. 29(5) and finding that the hypothetical HMRC officer, on the closure of the enquiry window, could not reasonably have been expected, from the information available, to be aware that a tax avoidance scheme was being used and also that it was a tax avoidance scheme which did not work, with the result that the assessment to tax in the return was insufficient.
Mr Pattullo entered into a tax avoidance arrangement in relation to the 2003–04 tax year. The scheme attempted to create a large capital loss by using a capital redemption contract (CRC) and taking advantage of the wording of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 37. In Pattullo TAX[2014] TC 03958 the FTT had dismissed the Mr Pattullo's appeal against a discovery assessment raised by HMRC in January 2010 that denied the claim to set off against capital gains the capital loss created by the scheme. Mr Pattullo appealed the UT on three grounds:
1) That the FTT erred in proceeding on the basis that a discovery could compromise a series of discoveries;
2) That the FTT erred in proceeding on the basis that the staleness of discovery was determined by statutory time limits;
(3) That the FTT erred in concluding that the test in TMA 1970, s. 29(5) was satisfied; in considering whether the hypothetical HMRC officer, on ceasing to be entitled to give notice of intention to enquire into the taxpayer's return, could not reasonably be expected, on the information made available to him before that time, to be aware of the insufficiency, the FTT had de-skilled the hypothetical officer to the extent that s. 29(5) would provide very little or no safeguard to the taxpayer against a late assessment and secondly, had applied a test more akin to knowledge or certainty rather than awareness.
On the first issue, it was argued for Mr Pattullo that a discovery involved the crossing of a threshold and there could be only one moment at which that occurred. Either HMRC had reason to believe there was an insufficiency or it did not and the FTT was wrong when it referred to a series of discoveries which may have been made in consequence of the decision of the Special Commissioners and the High Court in Drummond v R & C Commrs TAX[2008] BTC 473 before the critical decision in the judgement of the Court of Appeal in June 2009 in Drummond v R & C Commrs TAX[2009] BTC 312 and the refusal of permission to appeal to the Supreme Court in November 2009. The UT concluded that the FTT had not erred and that if the metaphor of crossing a threshold was to be used, while that point may occur at the end of the process of consideration, there may be many points along the way to that threshold when discoveries were made, points became clearer or thoughts refined. The FTT had made it clear that in their view the threshold was crossed in the period June to November 2009 when the Drummond case was decided emphatically and finally by the judgment of the Court of Appeal and the refusal of leave to take it further. The reference to the series of discoveries at an earlier stage was plainly a reference to the earlier stages of the legal process in Drummond and the associated and developing thinking within HMRC about that case and this. The UT detected no error of law in this passage.
On the second issue, it was argued for Mr Pattullo that once the discovery was made then HMRC must act with reasonable diligence if it was to make an assessment; otherwise the discovery becomes stale and the right to make an assessment lost. The FTT, however, had addressed the wrong question in this respect in considering whether the assessment was made within the statutory period instead of whether the assessment was made while the discovery which triggered it was still fresh. The UT agreed, finding that the FTT had erred in law by failing to deal with the question of staleness, as opposed to time bar or by eliding the two quite separate issues and did not direct itself properly to the question. However, the FTT had found that the discovery was made between June and November 2009 and assuming those findings of fact were allowed to stand, that destroyed the contention that the discovery was stale by the time the assessment was made in January 2010.
A further part of Mr Pattullo's challenge on TMA 1970, s. 29(1) related to the FTT's finding of fact that the discovery was not made until sometime between July and November 2009 and that the discovery had in fact took place either in October 2006 (when the HMRC officer examined the return), or July 2007 (when the decision of the Special Commissioners was issued in Drummond), or, at the latest, in June 2008 (when the High Court issued its decision in Drummond), after which some 18 months of silence followed, rendering the discovery stale long before the assessment was made. On this point, the UT concluded that there was no reason to question the FTT's judgement. The FTT had been concerned, correctly, with the state of mind of the particular HMRC officer (not that of some reasonable inspector), had heard evidence from him and had formed the view that although at earlier times he had suspicions, until the Court of Appeal gave its decision in Drummond in June 2009, those suspicions were not yet sufficient in his mind to lead him to form the view that there was an insufficiency in the tax declared in the assessment. His view that there was such an insufficiency newly appeared to him between June and November 2009.
The UT dismissed the appeal on the first two grounds relating to TMA 1970, s. 29(1).
On the third ground of appeal, the UT were not persuaded that the FTT had erred, although they had clearly found difficulty with the hypothetical officer and the level of knowledge and expertise expected of him. Despite the FTT's criticisms of the approach laid down by the UT in R & C Commrs v Charlton TAX[2013] BTC 1,634, the FTT had applied the test of the hypothetical officer imbued with the characteristics of knowledge and expertise to be expected of someone receiving and considering the type of information contained in the return. The UT agreed with the observations of the FTT that the hypothetical officer could not have been expected as early as 31 January 2006 (the expiry of the enquiry window) to have any real understanding of the arcane world of CRCs. Even in 2006, there was considerable uncertainty within HMRC as to whether CRC's worked and whilst the first decision came in July 2007, the litigation rumbled on until the decision of the Court of Appeal in 2009. The UT did not consider that the hypothetical officer ought to have been aware not only that a tax avoidance scheme was being used but also that it was a tax avoidance scheme which did not work, with the result that the assessment to tax in the return was insufficient.
The appeal on the point relating to TMA 1970, s. 29(5), therefore, also failed.
The UT has dismissed the taxpayer's appeal that the decision of the FTT in Pattullo TAX[2014] TC 03958 was wrong on three counts relating to the validity of a discovery assessment raised in respect of a capital gains tax avoidance scheme. On the two grounds raised in respect of TMA 1970, s. 29(1), the UT found that there was no error in the FTT's decision as to when the discovery was made and although they had erred in considering whether the discovery had become stale by reference to the statutory time limits rather than whether the assessment had been made whilst the discovery was still fresh, their findings that the discovery had not been made until a short time before the assessment destroyed the argument that the discovery had become stale. On the third ground of appeal relating to TMA 1970, s. 29(5), the UT found that whilst the FTT had found difficulty with the hypothetical officer and skills to be attributed to him, they were correct in their observation that the hypothetical officer could not have been expected, on the closure of the enquiry window, to have been aware of the insufficiency of tax contained in the return.
[1] This case raises, once again, issues as to the construction and application of s 29 Taxes Management Act 1970 (TMA). In its present form, introduced by the Finance Act 1994 with effect from 1996–97, that section has been considered in a number of cases including Langham (HMIT) v Veltema TAX[2004] BTC 156, Corbally-Stourton v R & C Commrs SCD(2008) Sp C 692, R & C Commrs v Tower MCashback LLP 1 TAX[2011] BTC 294, R & C Commrs v Lansdowne Partners Limited Partnership TAX[2012] BTC 12, R & C Commrs v Charlton TAX[2013] BTC 1,634, Sanderson v R & C Commrs...
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