Tribunal allows appeals against discovery assessments

In Charles Collier and CB Collier Partnership v HMRC [2023] UKFTT 00993 (TC), the First-tier Tribunal (FTT) allowed the taxpayers' appeals as the assessed loss of tax was not brought about deliberately (it had occurred due to carelessness). The 6-year time limit therefore applied for HMRC to issue assessments and make amendments and HMRC were out of time to do so.

Background

Mr Collier and CB Collier Partnership (together Collier) appealed against decisions by HMRC to issue: 

(i) discovery assessments to Mr Collier for tax years 2006/07 to 2010/11, inclusive, under section 29, Taxes Management Act 1970 (TMA 1970), and penalty determinations and assessments relating to those years under section 95(1)(a), TMA 1970 and Schedule 24 Finance Act 2007 (FA 2007); and 

(ii) amendments to CB Collier Partnership's tax returns for the accounting periods ended 31 October 2006, 2007, 2009 and 2010 (under section 30B(1), TMA 1970) and penalty determinations and assessments for the tax years ended 2006/07, 2007/08 and 2010/11 (under section 95A(2), TMA 1970 and Schedule 24, Finance Act 2007, as relevant). 

Mr Collier had been involved in property development for over 40 years and had multiple income sources. This included his role as partner in CB Collier Partnership, employment income, dividends, rental income and interest. His income in the relevant years was regularly in six figures and sometimes in the millions. During the appeal period, Mr Collier relied upon a chartered accountant and chartered tax advisor, referred to in the FTT's decision as PC. PC had been involved with Colliers' tax affairs since the late 1980's and had prepared and submitted the relevant tax returns on behalf of Collier. 

However, following a family tragedy in 2006, when he lost his son, PC suffered a decline in the standards of his professional work, including regular absences from the office. In the circumstances and due to Colliers' long-standing relationship with PC, Collier was reluctant to terminate the relationship. However, the decision was made to gradually move work away from PC. By 2011, a new advisor (Young & Co accountants) had taken over from PC. 

In December 2012, HMRC issued Mr Collier with a Code of Practice 9 letter as it suspected tax fraud. By May 2017, HMRC had issued Collier with various assessments and penalty determinations as summarised above.

Collier accepted that certain amounts should have been included in the Collier's returns. However, they appealed HMRC's discovery assessments and penalty determinations and argued that the 6-year time limit applied because the omitted amounts occurred from negligent conduct and/or were brought about carelessly. Under the 6-year time limit, HMRC were out of time to issue the discovery assessments and amendments and they were therefore invalid as were the related penalty assessments. Alternatively, HMRC could not make a discovery because no new knowledge had come to its attention and the same discovery could not be used to make further assessments or amendments. 

FTT decision

The appeals were allowed.

Burden of proof 

HMRC accepted that the burden of proof rested with it to demonstrate that the statutory conditions for making the assessments and amendments were met and that the penalty determinations and assessments were correct and appropriate. In the circumstances of the present case, this meant that HMRC had to show that: (1) the loss of tax was brought about deliberately (to meet the condition regarding time limits); (2) it discovered a loss of tax (to meet the condition regarding discovery); and (3) it was entitled to impose penalties based on its assessments and amendments. HMRC made no submissions on fraud and the FTT confirmed that the relevant standard of proof was the ordinary civil standard of balance of probabilities.

Evidence 

The FTT heard evidence from Mr Collier, Ms Topham (a qualified solicitor who had worked for Collier since 2004, Mr King (a partner at Young & Co accountants), and Mr Baines (an HMRC Officer in HMRC's Fraud Investigation Service).

The FTT accepted Mr Collier's evidence and found him to be a credible witness. Similarly, the FTT accepted the evidence of Ms Topham and Mr King. However, the FTT considered HMRC's evidence to be of limited value as Mr Baines was not involved with HMRC's initial enquiries and was not present at the meetings to which he referred. He could not therefore give direct evidence regarding those matters.   

After considering the evidence, the FTT made the following relevant findings of fact:

(1) Mr Collier is dyslexic and has a reading age of 12 years.

(2) Mr Collier relies upon the services of a small group of trusted professionals for business purposes, including the preparation and submission of his personal tax returns and the partnership's tax returns.

(3) PC is a Chartered Accountant and Chartered Tax Adviser who had been involved with the Colliers' tax affairs since the late 1980s.

(4) PC prepared and submitted the relevant tax returns and accounts on behalf of Collier.

(5) PC and Mr Collier held regular meetings at which PC was provided with the documentation necessary for him to prepare tax returns and accounts.

(6) Following the death of his son in 2006, PC suffered a decline in the standards of his professional work.

(7) Mr Collier was not aware of the omissions in the tax returns submitted by PC on behalf of Collier.

Analysis

The FTT considered that the fundamental issue before it was whether the assessed loss of tax was brought about deliberately. The word "deliberate" is not defined within the statute and it therefore considered relevant case law on the meaning of "deliberate inaccuracy". 

The FTT considered that the correct test was whether a taxpayer knowingly provided HMRC with a document that contained an error with the intention that HMRC should rely upon it as an accurate document (relying on Auxilium Project Management Ltd v HMRC [2016] UKFTT 0249 (TC)). This was a subjective test which did not focus on the reasonable taxpayer but concerned the knowledge and intention of the particular taxpayer at the time. The FTT also considered the concepts of 'blind-eye knowledge' and 'recklessness' (discussed in CPR Commercials Ltd v HMRC [2023] UKUT 61).

In the view of the FTT, Mr Collier had not knowingly brought about the loss of tax and the test in Auxilium had not therefore been met. 

Further, in response to HMRC's arguments, the FTT held that: 

(1) The email exchanges between Ms Topham and PC did not establish what Mr Collier knew or did not now, or what actions he did or did not take. 

(2) Mr Collier did not suspect that the returns in question contained omissions and he did not take the deliberate decision to avoid obtaining confirmation of facts regarding those omissions; he did not therefore have 'blind-eye knowledge'.  

(3) Recklessness was not a sufficient basis for determining that an inaccuracy is deliberate and even if it was, Mr Collier had not been reckless as to whether a loss of tax was brought about. 

The FTT concluded that HMRC had failed to discharge the burden which was on it to show that the assessments and amendments were brought about deliberately. The assessments and amendments were therefore out of time and accordingly invalid. It followed that the related penalty assessments and determinations were also invalid. 

Given its conclusions, the FTT did not consider it necessary to determine Collier's alternative argument on the discovery point.  

Comment 

This decision provides helpful analysis on the test the FTT is likely to apply when determining whether a tax loss has been brought about deliberately. In this case Mr Collier was successful in showing that the omission to include figures in the relevant tax returns was simply due to carelessness and was not deliberate.  

The decision can be viewed here.