Smith
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 June 2013 |
| Neutral Citation | [2013] UKFTT 368 (TC) |
| Date | 27 June 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 368 (TC)
Judge Peter Kempster, Mrs Maryvonne Hands.
Mr Gary Bell QC, instructed by Salhan Accountants Limited, appeared for the Appellant
Mr Oliver Conolly of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - discovery assessment - Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 29s. 29 - validity of assessment - appeal dismissed.
The First-tier Tribunal dismissed the taxpayer's appeal against HMRC's discovery assessment under TMA 1970, Taxes Management Act 1970 section 29s. 29, imposing capital gains tax in relation to his participation in a marketed tax avoidance scheme. HMRC made a discovery within TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1), even if the discovery hurdle covered a mere of change of mind. On the closing date of normal enquiry window under TMA 1970, Taxes Management Act 1970 section 9As. 9A, HMRC were still ruminating on whether the version of the scheme the taxpayer entered into really worked. Thus, HMRC's notional officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the insufficiency. The second condition in TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 3s. 29(3), as stated in Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5), was therefore satisfied and, accordingly, HMRC's discovery assessment was validly raised.
In 2000-01, the taxpayer participated in a marketed tax avoidance scheme designed to create a tax deductible capital loss. As a result of the decision in Drummond v R & C CommrsTAX[2009] BTC 312 ("Drummond"), the scheme, which involved the acquisition and disposal of second-hand insurance bonds, did not achieve its purpose.
On 22 January 2002, the taxpayer submitted his self-assessment tax return for the tax year 2000-01. The return gave two "white space" disclosures which described the acquisition and redemption of the bond. The disclosures cross-referred between the income pages and the capital gain pages. They showed the calculation of nil income and a capital loss on redemption, and gave a short description of how those results were obtained.
The normal enquiry window provided by TMA 1970, Taxes Management Act 1970 section 9As. 9A closed on 31 January 2003. However, HMRC did not open any Taxes Management Act 1970 section 9As. 9A enquiry. On 29 November 2006, HMRC raised a discovery assessment imposing capital gains tax on the taxpayer. On 26 January 2011, HMRC confirmed that the assessment had been raised validly under TMA 1970, Taxes Management Act 1970 section 29s. 29.
The taxpayer contended that he acted on the advice of his accountants to participate in what he understood was some uncontroversial tax planning. He filed his tax return and the deadline for enquiry passed on 31 January 2003 without event. The first time he learned of any problem was when HMRC wrote to him in March 2006. The disputed assessment was not raised until November 2006. During the document discovery exercise, it became apparent that HMRC had spotted the issue back in 2002. The only reason why an enquiry was not opened was the extended sick leave of the local inspector, with no one apparently watching his mail during that absence. The failure to open an enquiry in time was HMRC's mistake. Nothing new had come to light and there had been no concealment. Thus, the discovery assessment was not valid within TMA 1970, Taxes Management Act 1970 section 29s. 29.
HMRC contended that they made a "discovery" under TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1)(a) that "chargeable gains which ought to have been assessed to capital gains tax had not been assessed". The discovery hurdle was an exceptionally low one; it covered a mere change of mind as to either facts or law. For the purposes of TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5)(a), the date in the current case was 31 January 2003. The test was whether at that date, "the officer could not have been reasonably expected, on the basis of the information made available to [him or her] before that time, to be aware of the situation mentioned in TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1)". The officer referred to in TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5) was not a real or actual officer, but a notional officer. The Tribunal should consider what the notional officer could have been reasonably expected to be aware of on the basis only of the information listed in TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 6s. 29(6).
The Tribunal held that there was a low hurdle to establish a discovery within TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1). A discovery assessment could be made merely where the original officer of HMRC changed his or her mind or where a different officer took a different view (R & C Commrs v CharltonTAX[2013] BTC 1634 ("Charlton"), considered). Thus, in the current case, HMRC made a discovery within TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1).
For the purposes of TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5), the test was whether the notional officer could not have been reasonably expected, on the basis of the information made available to him or her before 31 January 2003, to be aware of the TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1) situation. For purposes of TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 6 section 29 subsec-or-para 7ss. 29(6) and (7), the relevant information in the current case was the contents of the taxpayer's 2000-01 tax return, including the white space disclosures.
In Charlton, the Upper Tribunal rejected the validity of HMRC's TMA 1970, Taxes Management Act 1970 section 29s. 29 assessment. It held that the hypothetical officer could not be regarded as the embodiment of HMRC as a whole. He or she could not be treated as possessing information relevant to his or her awareness that was held elsewhere within HMRC or was known to any particular officer, including the officer dealing with the case.
Charlton had two important factual distinctions from the current case. First, in Charlton, the taxpayers' returns included the scheme reference number that had been allocated by the special commissioners when the tax avoidance scheme had been registered by the scheme promoters. Here, the relevant legislation post-dated the 2000-01 tax year. Second, in Charlton, the special commissioners had already decided in Drummond that the scheme failed before the taxpayers submitted their returns. Furthermore, the High Court had affirmed the decision of the special commissioners on 23 July 2008, which was before the expiry of the relevant enquiry window on 31 January 2009. HMRC accepted that by 31 January 2009, their technical specialists had formed a view as to the efficacy of the scheme. Here, Drummond was still several years away when the enquiry window closed on 31 January 2003. On that date, HMRC were ruminating on whether the version of the scheme the taxpayer entered into really worked. That came almost a year later with special compliance office's registration application, and even then, no firm view had been reached above a need to establish how that variant worked. Accordingly, even if the hypothetical officer could or should have accessed the minds of HMRC's technical specialists, he could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the insufficiency. Thus, the second condition in TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 3s. 29(3), as stated in Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5), was satisfied. The discovery assessment was therefore validly raised.
This decision discusses several case laws setting out principles in relation to the validity of a discovery assessment under TMA 1970, Taxes Management Act 1970 section 29s. 29. An important case law to be considered by both the taxpayer and HMRC is the Upper Tribunal's decision in Charlton, where the position and characteristics of a notional officer were clarified. For commentary on when discovery assessments may be issued, see CCH Tax Reporter at 184-300.
[1]The Appellant ("Mr Smith") appeals against a discovery assessment issued by the Respondents ("HMRC") on 29 November 2006 in respect of the tax year 2000-01, on the grounds that the assessment was not validly made.
[2]In 2000-01 Mr Smith participated in a marketed tax avoidance scheme designed to create a tax deductible capital loss of £532,695. Mr Smith accepts that, as a result of the Court of Appeal decision in Drummond v R & C CommrsTAX[2009] BTC 312, the scheme, which involved the acquisition and disposal of second-hand insurance bonds, did not achieve its purpose.
[3]Mr Smith's self-assessment tax return for the tax year 2000-01 ("the Return") was submitted on 22 January 2002. It is accepted that some details on the Return were incorrect - for example, the date of disposal of the bonds - but that is not material to the appeal. The Return gave two "white space" disclosures as follows.
During the period Mr Smith acquired a non-qualifying second hand insurance bond for £532,695. This bond was subsequently redeemed in full, on 6 March 2001 for an amount of £483,228.93.
For tax purposes the surrender proceeds fall to be taxed under both Income and Corporation Taxes Act 1988 section 541s.541 TA 1988 (income) and Taxation of Chargeable Gains Act 1992 section 22s.22 TCGA 1992 (capital gains).
For income purposes a charge arises equal to the excess of surrender proceeds over premiums paid into the policy. In the case of Mr Smith the income arising is:
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