Revenue and Customs Commissioners v Ritchie and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 March 2019 |
| Neutral Citation | [2019] UKUT 0071 (TCC) |
| Date | 12 March 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 0071 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Nugee, Judge Charles Hellier
Simon Pritchard, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellant
Keith Gordon, instructed by Cleaver Fulton Rankin, Solicitors, appeared for the respondents
Procedure – Capital gains tax – Principal private residence relief – Discovery assessment – TMA 1970, s. 29 and 36 – Whether carelessness of taxpayers' advisers in issue before FTT – Whether FTT entitled to consider issue – Fairness – Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 2, 5 and 25 – Assessments discharged.
The Upper Tribunal (UT) overturned the First-tier Tribunal (FTT) decision on the validity of discovery assessments in Ritchie; Ritchie [2017] TC 05911. The UT rejected the FTT's conclusion that HMRC had adequately pleaded that they intended to argue that the taxpayer's advisers had been careless, and by the FTT raising the issue after the evidence had closed there was no opportunity for the witnesses to offer further evidence, which was unfair. The UT allowed the taxpayers' appeal and discharged the assessments.
The respondents (Mr and Mrs Ritchie) sold their house, other buildings and land in January 2007. Mr Ritchie sought the advice of his accountant, Mr Weir, about the tax consequences of the sale. Mr Weir was aware that the sale might give rise to a CGT liability and as he was not an expert on this type of issue he referred Mr Ritchie to Mr Russell, a former tax inspector. Mr Ritchie went to see Mr Russell and after the consultation Mr Ritchie told Mr Weir that there was no problem about tax on the sale. Mr Weir accepted Mr Ritchie's account of Mr Russell's advice without further research and completed Mr and Mrs Ritchies' tax returns without making reference to the sale and reporting no chargeable gain.
In March 2013 HMRC made discovery assessments under TMA 1970, s. 29 on Mr and Mrs Ritchie on the basis that the gain on the sale of the land was not fully covered by principal private residence (PPR) relief.
Mr and Mrs Ritchie appealed against the assessments. In Ritchie; Ritchie [2017] TC 05911, the FTT found that a larger part of the gain on the sale of the land was exempted under the PPR provisions than had been allowed by HMRC. It also found that the provisions of TMA 1970, s. 29 and 36 (allowing assessments to be raised outside the normal four year time limit) were satisfied by reason of the carelessness of Mr Weir and to a lesser extent Mr Russell. The FTT accordingly reduced the chargeable gain, but upheld the making of the assessments.
Before the FTT hearing and right up until all the evidence had been heard HMRC's case on carelessness was premised on the proposition that Mr and Mrs Ritchie had themselves been careless. But after the evidence of all the witnesses had been heard and the witnesses had left, in an exchange with Mr and Mrs Ritchie's representative (Mr Gordon), Judge Thomas said that he was not fully satisfied on the question of carelessness by persons acting on the taxpayers' behalf. Then in the course of closing submissions HMRC's representative indicated that HMRC were arguing that the loss of tax had been caused by the carelessness of Mr Weir and/or Mr Russell as persons acting on the taxpayers' behalf. Mr Gordon submitted that the question whether Mr Weir or Mr Russell had been careless had not been adequately pleaded. The FTT rejected this as the point had been raised in HMRC's statement of case and their skeleton and TMA 1970, s. 36(1B) had been cited. And what was more it was only in cross examination that the full facts about the actions and omissions of the relevant parties became known to HMRC.
HMRC appealed to the UT against the FTT's findings in relation to the effect of the PPR provisions. Mr and Mrs Ritchie appealed against the FTT's findings that the carelessness condition was satisfied. The UT first heard argument on the carelessness issue and as it concluded that the FTT had erred in law in concluding that the carelessness condition was satisfied it did not hear any argument on the issues in relation to the application of the PPR provisions.
The only issue before the UT on the carelessness aspect of the case was whether or not the FTT erred in law in finding that Mr Weir had been careless.
The UT noted that in determining what arguments the tribunal may permit to affect its decision the guiding principle must be fairness in the circumstances of the case (SI 2009/273, r. 2).
The UT asked itself:
- Whether the material advanced by HMRC before the end of the evidence gave the appellants adequate notice that HMRC intended to argue that Mr Weir's carelessness gave rise to the loss of tax to justify and permit the discovery assessment, such that the appellants had a fair opportunity to rebut the point.
- If the issue was first raised by the tribunal, whether the tribunal afforded such an opportunity to the appellants.
In the UT's judgment a fair reading of HMRC's statement of case and skeleton argument did not clearly indicate that HMRC were intending to argue that the assessment could be justified by the carelessness of the advisers. The repetition and emphasis on the appellants' carelessness eclipsed the reference to TMA 1970, s. 36(1B) and even the single reference to “advisor” in HMRC's statement of case and skeleton argument made no unequivocal suggestion that they were persons acting on behalf of the taxpayers whose action could trigger the operation of s. 36(1B). Nor was there anything in the prior correspondence between the parties which could cast these statements in a wider light.
In the UT's view the FTT's conclusion that the issue had been adequately pleaded was one not reasonably open to it on the material before it (and Mr Gordon's understanding that HMRC's case on carelessness was premised on the Ritchies themselves having been careless was a reasonable one). The UTR therefore found that the FTT erred in law in this respect.
The UT also concluded that it was not fair for the FTT to take the point into consideration because it was raised after the close of the evidence without any consideration of the question whether an opportunity should and reasonably could be offered to adduce further evidence. In the UT's judgment there were three reasons why a suggestion that a witness had been careless should generally be made clear to the witness during his or her examination:
- Alert the other party to the argument.
- Unless it was clear to the witness that his or her conduct was at issue the witness might fail to mention issues relevant to it; and
- Out of fairness to the witness him or herself (and perhaps especially so where the witness is a professional and his professional competence is questioned).
Given the above, the UT decided to allow Mr and Mrs Ritchie's appeal against the decision of the FTT, and set aside the finding that the loss of tax was caused by careless conduct by Mr Weir.
The UT also decided that it was not in the public interest to remit the case back to the FTT. The matters in question dated back many years and the hearing before the FTT was the opportunity for the parties to call their evidence and put their case. In the circumstances, it did not think that the question of the carelessness of the advisers was squarely before the tribunal, and it thought it was now too late, and would be unfair, for that question to be revived.
The UT accordingly allowed the appeal and discharged the assessments without remitting to the FTT.
Having decided that the assessments could not stand, the UT decided not to remit the case back to the FTT. Finding that while there was a public interest in the correct tax being collected (as quoted in R & C Commrs v Tower MCashback LLP 1 [2011] BTC 294 [15]), there was also a public interest in litigation being concluded. And weighing up these competing interests in the circumstances of this case it concluded that it was not appropriate to remit the case to the FTT for further evidence.
[1] In January 2007 Mr and Mrs Ritchie sold a plot of land of about 0.7 hectare on which was the house they had built, together with other buildings including a very large shed. Their tax returns for the year of disposal contained no reference to the sale and reported no chargeable gain. The returns were prepared by their accountant, Mr Weir.
[2] On 12 March 2013 and 27 March 2013 HMRC made “discovery” assessments under section 29 Taxes Management Act 1970 (“TMA”) on Mr and Mrs Ritchie. These assessed each of them to CGT on a chargeable gain from the sale of the land. The assessments were made on the basis that the gain which arose on the sale of the land was not wholly exempt under the principal private residence provisions of section 222ff TCGA 1992 (the “PPR provisions”)1.
[3] Mr and Mrs Ritchie appealed against the assessments and the appeals were heard by the FTT in March 2017. There were two issues before the FTT: the first related to the extent to which the gain on the sale of the land was exempt from CGT under the PPR provisions; the second was whether the conditions in section 29 TMA for the making of a discovery assessment and the time limit provisions in section 36 TMA were satisfied. One of those conditions is that the loss of tax counteracted by the assessment must be due to the carelessness of the taxpayer or a person acting on his or her behalf.
[4] In a clear and comprehensive decision the FTT found that a larger part of the gain on the sale of the land was exempted under the PPR provisions than had been allowed by HMRC, and that the provisions of section 29 and 36 TMA were satisfied by reason of the carelessness, not of Mr and Mrs Ritchie, but of their advisers. It reduced the...
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