Revenue and Customs Commissioners v Wilkes
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 150 (TCC) |
| Year | 2021 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 150 (TCC)
Mrs Justice Falk, Judge Timothy Herrington
Upper Tribunal (Tax and Chancery Chamber)
Income tax – High income child benefit charge (HICBC) – Taxpayer failed to complete a tax return – Discovery assessment – Whether TMA 1970, s. 29(1)(a) could be construed as extending to discovery that respondent should have been assessed to income tax in respect of the HICBC – Held no – Appeal dismissed.
The Upper Tribunal (UT) upheld a First-tier Tribunal (FTT) decision on discovery assessments in Wilkes [2020] TC 07740, concluding that where a taxpayer had not submitted self-assessment tax returns, discovery assessments could not be used to assess the taxpayer's liability to the high income child benefit charge (HICBC).
Mr Wilkes had income (which had been subject to PAYE) in excess of £50,000 and his wife was the recipient of child benefit for the years in question. The HICBC was therefore applicable to those years. Mr Wilkes did not submit a self-assessment tax return or notify HMRC that he was chargeable to tax under the HICBC until he received a letter from HMRC, at which point he telephoned HMRC and made a full disclosure. HMRC accepted that he had a reasonable excuse for not notifying them of his chargeability under TMA 1970, s. 7 and so no penalty was issued for the failure to notify. HMRC did however raise income tax assessments for the tax years in question under the discovery provisions in TMA 1970, s. 29. Mr Wilkes appealed against the assessments. The relevant legislation in TMA 1970, s. 29(1) provides that if an officer of the Board discovers:
- that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
- that an assessment to tax is or has become insufficient, or
- that any relief that has been given is or has become excessive,
the officer or, as the case may be, the Board may … make an assessment in the amount, or further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
In this case, neither (b) nor (c) was in question, since there had been no assessment (Mr Wilkes had not completed a tax return) and no relief had been given. The case therefore hinged entirely on the meaning of s. 29(1)(a).
The FTT found that Mr Wilkes was liable to the HICBC for the years in question. However, it concluded that the assessments were not validly raised because the officer in question had not discovered any “income which ought to have been assessed to income tax” pursuant to TMA 1970, s. 29(1)(a).
HMRC appealed to the UT, which dismissed their appeal. The UT ruled that:
- It could not be inferred from the wording of s. 29(1)(a) a broad intention to cover any shortfall in income tax. TMA 1970, s. 29(1)(a) was not inextricably linked to the self-assessment regime. There were also other powers available to HMRC to ensure that the HICBC was assessed, such as by issuing a notice to file a return under s. 8 or to make a simple assessment under s. 28H. The fact that in relation to some of those powers the relevant time limit might be shorter than that available in respect of a discovery assessment was not sufficient to conclude that the absence of the power to raise a discovery assessment in these circumstances made the situation unworkable or absurd. Therefore, there was no basis on which to adopt a strained interpretation of the meaning of s. 29(1)(a).
- There was no power to assess under s. 29(1)(a) on the basis that all of Mr Wilkes's income ought to have been assessed to income tax and, because no return was submitted, that income had not been assessed to the HICBC as a further charge to income tax. To do so would have meant adopting an overly strained interpretation of s. 29(1)(a). The officer could not fairly be described as having discovered that there was income that had not been assessed. Rather, he discovered that Mr Wilkes should have paid the HICBC, with the assessment made to make good that loss of tax.
- The principles in Inco Europe Ltd v First Choice Distribution (a firm) [2000] 1 WLR 586 could not be used in this case to read in words that would have allowed HMRC to use s. 29(1)(a) to assess the HICBC, because it was not satisfied that this was the sort of drafting mistake that fell within the principle in that case to allow the Tribunal to correct an obvious drafting error.
There have been competing FTT decisions concerning the use of discovery assessments in respect of a taxpayer's liability to the HICBC. This case therefore provides useful clarity and confirms an anomaly in the legislation preventing HMRC from using the discovery provisions to assess the HICBC where no return has been submitted.
While there are other methods that HMRC can use to assess the HICBC, such as issuing a s. 8 requirement to file a tax return, or from 2016-17 issuing simple assessments under s. 28H, it is also possible that we could see a legislative change to remove the anomaly highlighted here.
The same issue as dealt with in this case applies to unauthorised member payments under the pension legislation, which are specifically precluded from being “income” for the purposes of the Tax Acts. This matter is expected to be addressed by the UT on an appeal against the FTT's decision in Monaghan [2018] TC 06408.
Laura Poots, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Richard Vallat QC, Counsel, and Marika Lemos, Counsel, instructed by Collyer Bristow LLP, appeared for the respondent
[1] This appeal raises a short point of statutory construction in respect of which there have been conflicting decisions of the First-tier Tribunal. Although the amounts involved are relatively small, the issues raised are of wider significance.
[2] The Commissioners for Her Majesty's Revenue & Customs (“HMRC”) appeal against a decision by the First-tier Tribunal (“FTT”) (Judge Citron and Ms Jane Shillaker) released on 15 June 2020 (“the Decision”). The FTT allowed Mr Wilkes' appeal against income tax assessments issued by HMRC under s 29 Taxes Management Act 1970 (“TMA”) for the tax years 2014–15, 2015–16 and 2016–17. The assessments related to the high income child benefit charge (the “HICBC”) introduced by s 8 and Schedule 1 Finance Act 2012 (“FA 2012”). They were in the following amounts:
- 2014–15: £1,770;
- 2015–16: £1,398; and
- 2016–17: £1,076.
[3] The FTT found that Mr Wilkes was liable to the HICBC for the three years in question, in the amounts assessed by HMRC. However, it concluded that the assessments were not validly raised because the officer in question had not discovered any “income which ought to have been assessed to income tax” within s 29(1)(a) TMA.
[4] The FTT granted HMRC permission to appeal against the Decision on 3 September 2020. In their grounds of appeal HMRC contend that on the basis that no return was submitted by Mr Wilkes, his income had not been assessed to a further charge of income tax: the HICBC. Accordingly, HMRC made a discovery that there was income that ought to have been assessed and had not been assessed, and s 29(1)(a) TMA applied. Alternatively, HMRC contend that on a proper purposive construction of s 29(1)(a) TMA, the word “income” is to be read as including any amount liable to income tax. Failing that, there was an obvious drafting error which the FTT failed to correct.
[5] We are grateful for the assistance provided by Counsel in this case, and particularly wish to thank Mr Wilkes' legal team, who are acting pro bono.
[6] References to numbered paragraphs in square parentheses are, unless otherwise indicated, references to paragraphs in the Decision.
[7] The FTT made its findings of fact at [2] and [7] to [11]. They can be summarised as follows.
[8] During the relevant years, Mr and Mrs Wilkes were married, and Mrs Wilkes was entitled to, and did, receive child benefit. Mr Wilkes' adjusted net income for tax purposes exceeded £50,000 and was greater than that of Mrs Wilkes. Mr Wilkes did not submit a tax return, and HMRC did not issue him a notice to file.
[9] Following a letter received from HMRC asking him to check if he was liable for the HICBC, Mr Wilkes had two telephone conversations with Officer Pickett of HMRC on 3 and 18 December 2018. After the second of those conversations, Officer Pickett formed the view that Mr Wilkes was liable to the HICBC for the tax years in question that had not been assessed.
[10] Mr Wilkes was not charged a “failure to notify” penalty, as HMRC considered that he had a reasonable excuse for his failure to notify them of his income tax chargeability under s 7 TMA.
[11] However, on 20 December 2018 HMRC issued discovery assessments under s 29(1)(a) TMA for the HICBC in respect of which Mr Wilkes was liable for the years in question.
[12] The taxpayer's liability for the HICBC arises under ss 681B to 681H Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), the relevant provisions having been introduced by Schedule 1 to FA 2012.
[13] Section 681B ITEPA provides for the HICBC, and sets out the conditions that must be met before a taxpayer is liable for it, relevantly as follows:
(1) A person (“P”) is liable to a charge to income tax for a tax year if–
- P's adjusted net income for the year exceeds £50,000, and
- one or both of conditions A and B are met.
[…]
(4) Condition B is that–
- a person (Q) other than P is entitled to an amount in respect of child benefit for a week in the tax year,
- Q is a partner of P throughout the week, and
- P has an adjusted net income for the year which exceeds that of Q.
[14] Section 681C ITEPA sets out how the amount of the HICBC is determined, relevantly as follows:
(1) The amount of the high income child benefit charge to which a person (“P”) is liable for a tax year is the...
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