Appeal against discovery assessment allowed as SATR was filed by unauthorised agent

In Shaun McCumiskey v HMRC [2022] UKFTT 128 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal against a discovery assessment as his self-assessment tax return (SATR), which unknown to the taxpayer included a fabricated claim for Seed Enterprise Investment Scheme (SEIS) relief, had been filed by an unauthorised agent.

Background

In 2015/16, Mr McCumiskey was experiencing a period of great personal difficulty. He had lost his job, separated from his wife and was experiencing financial difficulties. He had also attempted suicide.  In 2016, having carried out work as a self-employed electrician for a fee of £2,500, he was advised by a friend to submit a SATR to HMRC.  

Mr McCumiskey knew Mr Stefan Brown (Mr Brown) a director of Alpha Tax Consultants Ltd (Alpha) and he engaged Alpha to complete and file his SATR. He provided the necessary information concerning his affairs to Mr Brown.

Unbeknown to Mr McCumiskey, a company called Capital Allowance Consultants Ltd (Capital) filed a purported tax return ostensibly on his behalf. That returns set out an income of precisely £30,000 without any deductions and contained a fraudulent claim for SEIS relief in respect of an alleged investment of £15,000 (SEIS relief is available for high- risk investments and such investments are usually made by high earners).

Mr Brown assured Mr McCumiskey that his tax affairs had been dealt with. 

HMRC subsequently paid £7,500 into a bank account of a nominee of Capital without, as HMRC conceded, checking the validity of the claim. 

Mr McCumiskey had not signed a 64-8 form or the SATR which Capital had filed on his behalf. Nor had he made an investment of £15,000. As Mr McCumiskey had no permanent home for a period during 2015/16, he did not receive a letter that HMRC had sent to him confirming that it had approved the claim for SEIS relief and made the appropriate payment.

HMRC considered there had been a loss of tax because of the  claim for SEIS relief and issued a discovery assessment to Mr McCuiskey under section 29, Taxes Management Act 1970 (TMA). Mr McCumiskey appealed to the FTT.

FTT decision

The appeal was allowed.

In the view of the FTT, the purported SATR had not been filed by or on behalf of Mr McCumiskey and accordingly no SEIS relief was in fact given to Mr McCumiskey.  He had appointed Alpha as his agent and given no authority to Alpha to appoint Capital as a sub-agent. Accordingly, Capital could not be regarded as acting on his behalf and he had not therefore caused the loss, either deliberately or carelessly. He had engaged Alpha, a professional tax agent, to prepare his SATR. Given his mental health issues at the relevant time and lack of tax knowledge, it was understandable that he did not follow-up with his advisor after Mr Brown had assured him everything was in hand. In the circumstances, there was nothing he could have done to prevent the loss sustained by HMRC.

The FTT added that it was unlikely that an electrician in the first year of trade would have satisfied the usual profile of a SEIS investor, so it considered there probably was sufficient  information in the SATR for an HMRC officer to doubt the validity of a claim for relief on a £15,000 EIS investment.

Comment

Given that Mr McCumiskey was an innocent party and did not receive the original rebate, the outcome of this appeal is not surprising. What is surprising is the fact that HMRC sought to recover the loss from Mr McCumiskey and considered it appropriate to issue a discovery assessment to achieve that aim. It should have been apparent to HMRC that the loss of tax was not brought about by any careless or deliberate conduct on the part of Mr McCumiskey. The FTT also confirmed that there was sufficient information available to the HMRC officer to doubt the validity of the SEIS claim for relief. A SEIS investment is usually made by higher-rate taxpayers and the amount of income declared in Mr McCumiskey's SATR was exactly £30,000. Accordingly, the conditions which have to be met in section 29(4) and (5), TMA, in order for a discovery assessment to be valid, were not satisfied and that should have been apparent to HMRC.

The decision can be viewed here.