Another voyage of discovery by HMRC - hypothetical ignorance?
This month saw the release of yet another discovery assessment case: Sanderson v HMRC  UKFTT 207 (TC).
Mr Sanderson appealed against a 'discovery assessment' issued under section 29 of the Taxes Management Act 1970 ('TMA') in relation to capital gains tax that had arisen in 1998-99 as the result of his participation in a widely marketed scheme (the 'Scheme') which sought to create capital losses, and which had proved to be ineffective.
Between 1999 to 2007 a specialist HMRC team consisting of Special Compliance Office ('SCO') and Specialist Investigation Services ('SIS') officers carried out an investigation of the Scheme. Attempts to identify Scheme participants were made carrying out a manual review of all tax returns submitted for the years concerned in which more than £200,000 had been claimed as a capital loss.
In July 1999 SCO received, from the Office of Supervision of Solicitors ('OSS'), a list of names and addresses of individuals who had paid to purchase losses through the Scheme. These were recorded on an HMRC database of individuals who were part of investigation cases being carried out by SCO.
As the list included Mr Sanderson’s full name, address, the Scheme fees paid and the amount of the loss 'acquired', SCO obtained the file from Mr Sanderson’s district tax office. Following a review, the file was returned to the office and SCO noted that Mr Sanderson’s 1997-98 and 1998-99 tax returns had not been submitted to HMRC. SCO requested that these be sent to them when received by the district tax office, but there was no further communication from that office.
Mr Sanderson’s 1998-99 return, although due by 31 January 2000, was only received by HMRC on 24 February 2003. This gave HMRC until 30 April 2004 to open an enquiry if they wished. In that return, in the additional information 'white space' section of the return, Mr Sanderson gave the clearest indication possible that he had used the Scheme. This wording was agreed by leading tax counsel and supplied to Mr Sanderson by the promoter of the Scheme.
Neither the original SCO officer, nor anyone else at SCO, was aware that Mr Sanderson’s 1998-99 return had been filed, although it was admitted that if searches had been carried out in 2003 after Mr Sanderson had submitted his return it would have been called for and an enquiry commenced within the 'enquiry window' provided for under section 9A TMA.
Following negotiations between HMRC and the trustees of the Scheme a closure notice was issued on 27 November 2003 reducing the loss claim by the trustees from £1,000,000,000 to nil. SCO wrote to all of the taxpayers concerned on 4 January 2004 to notify them of this and setting out the terms of a settlement on offer.
In 2004 the Scheme promoter wrote to Mr Sanderson in the following terms:
'As you are aware, the Inland Revenue challenged the Castle Trust losses on the basis firstly that the transaction leading to the loss was in law, a sham and, secondly, that it lacked commercial purpose. The Castle trustee took advice from Leading Tax Counsel and he expressed the view that there was insufficient evidence and witnesses to show that the payments underlying the transaction were actually effected. He was, therefore, unable to advise the Trustee to continue with its challenge of the Inland Revenue. The Trustee (and the steering committee) has reluctantly accepted that advice.'
Mr Sanderson did not contact HMRC or make any amendment to his 1998-99 return following receipt of this letter, but he did contact his accountants who advised him to do nothing at this stage until he heard further from HMRC.
The key issues in this case were:
- Whether HMRC had made a discovery (section 29(1) TMA).
- If so, as Mr Sanderson had made and delivered a return, whether:
- the insufficiency of tax was attributable to negligent conduct on the part of Mr Sanderson or anyone acting on his behalf (section 29(4) TMA); or
- at the conclusion of the enquiry window for Mr Sanderson’s 1998-99 return, an officer could not reasonably have been expected on the information made available to him (as defined in section 29(6) TMA) to have been aware of the insufficiency of tax (section 29(5) TMA).
The Tribunal, relying on Hankinson v HMRC  EWCA Civ 1566, rejected the taxpayer's argument that a discovery cannot be made if an officer reaches a view that could and should have been reached by an officer at an earlier stage, and held that a discovery can occur despite there being no new facts or a changed view of the law. A new inspector simply taking a different view from his predecessor is sufficient.
The fact that the SCO officer may have had sufficient evidence to reach a conclusion that there was an insufficiency of tax sooner than he did, did not preclude him from reaching that conclusion and making a discovery at a later date.
Section 29(4) TMA
The Tribunal, applying AB (a firm) v HMRC  STC (SCD) 99 held, given the nature of the Scheme, that Mr Sanderson took proper and appropriate advice in relation to the preparation and the disclosure on his return. Also following receipt of the Scheme promoter's letter he sought the advice of his accountant who advised that he 'do nothing on this matter until you hear from the Revenue'. Mr Sanderson was therefore not negligent.
With regard to the late submission of the tax return, even if this did amount to negligent conduct by Mr Sanderson, given that the insufficiency of tax was attributable to the failure of the Scheme and not the lateness of the return it could not satisfy the condition contained in section 29(4) TMA.
Section 29(5) TMA
For this condition to be fulfilled the officer, at the time the enquiry window has closed or an enquiry completed, could not have been reasonably expected, 'on the basis of the information made available to him,' to be aware of the insufficiency of tax. The statutory reference is to an officer of the Board rather than any particular officer, in other words a hypothetical officer with some knowledge of tax law – see HMRC v Lansdowne Limited Partnership  EWCA Civ 1578.
The taxpayers argued that by 30 April 2004 when the enquiry window closed, such a hypothetical officer clearly had the requisite knowledge to justify raising an assessment. He had this knowledge because of the entry in the white space by Mr Sanderson, coupled with the ongoing investigation by SCO into to the Scheme. HMRC had simply made a mistake, not opened the enquiry in time, and were now precluded from making a discovery.
Mr Sanderson argued, relying on Charlton v HMRC  UK FTT 467 (TC),that SCO's knowledge should be attributed to the hypothetical officer who should, by 30 April 2004, have had every reason to open an enquiry into his return. The Tribunal, however, did not agree. The reasoning of the Tribunal is somewhat opaque but essentially the Tribunal considered that it should not treat a non-existent telephone call from a hypothetical officer to a specialist in SCO as sufficient basis for the attribution of the knowledge of the relevant specialist to that officer.
Taxpayers will be disappointed by the Tribunal's decision in this case. The purpose of the statutory provisions relating to discovery is to provide some certainty and finality for taxpayers. Mr Sanderson could have done little more to flag up his participation in the Scheme to HMRC and one is left wonders whether the protection offered by section 29(5) TMA has any substance if HMRC are able to make a discovery assessment in the circumstances of this case.
On a more positive note, it is interesting to note that in this case HMRC sought to argue that the burden of proof was on the taxpayer to demonstrate that the conditions that must be satisfied in order to permit a discovery assessment to be made, were not met. This was given fairly short shrift by the Tribunal, who followed obiter comments made in HMRC v Household Estate Agents  STC 2045 and held that it is for HMRC to establish that either section 29(4) or (5) applied, as without evidence of fraud or negligent conduct, or of information to fulfil the test of non-awareness, there would be no basis to conclude that either subsection applied.