A Voyage of Discovery: two recent Court of Appeal decisions
In December of last year, two differently constituted panels of the Court of Appeal handed down important judgments on the discovery provisions contained in sections 29 and 30B Taxes Management Act 1970 ('TMA 1970').
Hankinson v Revenue & Customs Commissioners  EWCA Civ 1566
Mr Hankinson submitted a tax return stating he was "employed under a full time contract of employment abroad", notwithstanding that he had in fact spent less than half the year overseas. After the enquiry window had closed, HMRC issued an assessment for additional tax, under the discovery provisions found in section 29, on the basis that Mr Hankinson had in fact been resident and ordinarily resident in the UK. Both the First-tier Tribunal and the Upper Tribunal agreed with HMRC (1) that Mr Hankinson had been resident and ordinarily resident in the UK (2) that the discovery assessment had been validly issued and (3) that the original undercharge was attributable to Mr Hankinson's negligence.
Under section 29, in order for a discovery assessment to be valid:
- there must be a "discovery" of an under assessment within the meaning of sub-section (1); and
- one of two conditions contained in sub-sections (4) and (5) must be satisfied, namely, the under assessment must have been brought about carelessly or deliberately by the taxpayer or, at the time the enquiry window closed, the officer, based on the information available at the time, could not reasonably have been expected to be aware of the underassessment.
Before the Court of Appeal, Mr Hankinson argued that the discovery assessment was invalid because the officer making the assessment had not addressed at the time the question of whether the conditions referred to in sub-sections (4) and (5) were satisfied.
The Court of Appeal rejected this argument. Whilst sub-section (1) contained a subjective test, requiring the officer himself to make a genuine discovery, the tests in sub-sections (4) and (5) were objective. In other words, it is sufficient that one of the conditions is satisfied and the officer need not turn his mind to whether this is the case at the time.
The Court also reviewed the authorities on the meaning of "discovers", commenting that the introduction of self-assessment had not changed its meaning and it remained equivalent to "finds" or "satisfies himself".
Revenue & Customs Commissioners v Lansdowne Partners LP  EWCA Civ 1578
In 2004/2005 Lansdowne received around £92m in fees, £4.6m of which it rebated to third parties including its partners, their families and trusts. The rebates were treated as deductible expenses and were not reported in Lansdowne's taxable income or profit. Despite meetings and correspondence between Lansdowne's accountants and HMRC during the enquiry window, no enquiry was opened. Some 15 months after the enquiry window had closed, HMRC finally concluded, as a result of the decision in MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co  2 A.C. 239, that the sums rebated had been incorrectly deducted and sought to amend Lansdowne's partnership return on the basis of a discovery under section 30B.
The General Commissioners decided that the rebates were properly deductible and that HMRC's discovery amendments were invalid. The High Court allowed HMRC's appeal on the deductibility point, but dismissed their appeal on the validity of the discovery amendments.
The Court of Appeal upheld the decision of the High Court. Applying the condition contained in sub-section 30B(6) TMA 1970 (which relates to partners and which is equivalent to section 29(5) TMA 1970), the Court concluded that at the time the enquiry closed the HMRC officer could reasonably have been expected to have been aware of the underassessment. A reasonably competent HMRC officer would have been aware of the Arthur Young decision, and this should have led him, applying that decision to the facts in this case, to conclude there had been an under assessment.
Notably, HMRC sought once again to rely, unsuccessfully, on subsection 29(6) (as incorporated into section 30B by reference), which determines the information the HMRC officer is deemed to have seen for the purposes of determining whether they ought reasonably to have been aware of the underassessment. HMRC tried, unsuccessfully, to use this sub-section to get out of jail in the Charlton case (see my previous blog here).
Taxpayers who carelessly submit misleading returns cannot complain when HMRC consequently benefit from an extended period in which to assess them for additional tax, and the result in Hankinson is in my view correct. However, whilst it is clearly right that the legislation does not require officers to turn their minds to the conditions contained in subsection 29(4) and (5), when raising a discovery assessment in order for it to be valid, one would hope that, as a matter of best practice, officers do check the conditions to ensure the assessment they propose to make is valid before proceeding to raise a discovery assessment.
Lansdowne, like Charlton, is good news for taxpayers. Discovery provisions were not introduced to spare HMRC's blushes in circumstances where the absence of an in-time enquiry results from the officer lacking the requisite knowledge or training, or failing to exercise sufficient care. The fact that the Courts are ensuring that the statutory tests are satisfied in such cases is to be welcomed.