Hicks: Discover the limits
In J Hicks v HMRC  UKFTT 22, the First-tier Tribunal (FTT), in allowing the taxpayer's appeal, has held that discovery assessments issued by HMRC were invalid as the condition contained in section 29(5), TMA 1970, was not satisfied.
This blog is based on an article first published in Tax Journal on 23 March 2018. A copy of that article can be viewed here.
In 2009, Mr Hicks entered into a tax avoidance scheme devised by Montpelier, which had been disclosed to HMRC under the DOTAS rules. The scheme generated a loss for Mr Hicks of some £1.2m. On 27 January 2010, Mr Hicks submitted his tax return for 2008/09, which showed the loss of £1.2m as available to be carried forward and the scheme reference number (SRN), which had been allocated to the scheme by HMRC. On 3 December 2010, HMRC opened an enquiry into the return.
On 8 January 2011, Mr Hicks submitted his return for 2009/10 and his return for 2010/11, on 31 January 2012. Both of these returns showed a carried forward loss from 2008/09 that eliminated all taxable profit. HMRC did not open an enquiry into either of these two returns.
In March 2015, HMRC issued discovery assessments, under section 29, TMA 1970, in relation to Mr Hicks' 2009/10 and 2010/11 returns. The assessments were upheld by HMRC following an internal statutory review. Mr Hicks appealed the assessments to the FTT.
The appeal raised four issues:
1. whether HMRC had made a 'discovery', within the meaning of section 29, TMA 1970;
2. whether HMRC was prevented by the conclusions of its statutory review from relying on an insufficiency of disclosure to permit the discovery assessment which had been issued in relation to the 2010/11 year;
3. if the answer to (2) was no, whether a discovery assessment was permitted for 2010/11, on the basis of an insufficiency of disclosure; and
4. whether Mr Hicks was careless, for the purposes of section 29(4), so as to permit a discovery assessment to be made for either or both of 2009/10 and 2010/11.
The appeal was allowed.
The FTT began by setting out the genesis of present day section 29. It stressed, by reference to the Court of Appeal's dicta in Tower McCashback LLP 1 v HMRC  EWCA Civ 32, that the current section 29 was far more restrictive than its predecessor, which was enacted before the introduction of the self-assessment regime in 1996.
The FTT was required to determine two questions: first, did the officer “cross a threshold”, as discussed below and second, was the issue of the assessments sufficiently proximate to the discovery.
HMRC presented witness evidence from Mr Boote, the officer who authorised the issue of the discovery assessments. The FTT, in considering his evidence, commented that Mr Boote had been somewhat opaque in describing the process. Mr Boote's evidence was that the decision to issue the discovery assessments, which were issued a few days before the expiry of the statutory time limits, was not informed by the impending deadline. However, the FTT concluded that it would have been 'extraordinarily unlikely' that the process was not so informed.
Mr Hicks contended that the discovery had become 'stale' by the time the assessments were issued. The concept of assessments becoming 'stale' was discussed in Pattullo v HMRC  UKUT 270 (TCC), where it was held that an officer could not assess for tax sometime after he had made the relevant discovery without first acting on the discovery in some way. HMRC presented evidence of the fact finding exercise it claimed to have carried out over several years, culminating in its decision to issue the discovery assessments at the end of 2014. The FTT confirmed that the threshold for HMRC to demonstrate that a discovery had been made was low (HMRC v Charlton  UKUT 770 (TC)) and that, on the facts of this case, it was likely that it had made a discovery around the summer of 2014.
Mr Hicks argued that HMRC was shut out from running any argument in respect of section 29(5). His argument was that, since sections 49F and 54, TMA 1970, treat the decision of the HMRC reviewer as final, except “to the extent that the appellant notifies the appeal to the tribunal”, HMRC could not subsequently seek to rely on section 29(5) as the reviewer’s decision had determined that issue against HMRC.
HMRC argued that this analysis was misconceived and that the review 'decision' was to uphold HMRC's decision to issue the discovery assessments. The validity of HMRC's reasons for doing so was not part of the deemed settlement. The FTT decided this issue in favour of HMRC.
The condition in section 29(5) requires that, at the time when the enquiry window closed, a hypothetical HMRC officer could not reasonably have been expected, on the information made available to him before that time, to be aware of the insufficiency of tax. The frequently cited cases of Langham v Veltema  EWCA Civ 193, Charlton, Patullo and Sanderson v HMRC  EWCA Civ 19, were considered by the FTT.
The FTT indicated that the previous authorities presented it with some difficulties in terms of application and said at paragraph :
"… how certain does the hypothetical officer have to be for it to be unreasonable for him not to be “aware” of the insufficiency? Is it enough if the hypothetical officer could have concluded on the basis of the information then available that HMRC would have a good case in proving an insufficiency? Does awareness mean that HMRC would be more likely than not to succeed if the matter were contested, or some other level of certainty? Further, is awareness of an insufficiency different from the real HMRC officer crossing the threshold in a discovery and if so how?
I confess that I do not find the Court of Appeal’s analysis of these issues in Sanderson, which is of course binding on me, entirely easy to understand or apply in practice. In particular, I do not find the phrase “actual insufficiency” helpful as a measure of awareness, because the natural reading of those words in my view is that awareness of an actual insufficiency would (save perhaps for a glaring error or omission) be established only when a matter had been tested or settled."
The FTT concluded that the practical effect of Sanderson is to require the exercise to focus on the level of disclosure in any particular case, and the extent to which that disclosure arms the hypothetical officer with sufficient information to justify the making of an assessment. At paragraph , the FTT commented:
"Subsection (5) is all about disclosure by the taxpayer (as defined by section 29(6)). The more extensive the taxpayer’s disclosure by the closure of the enquiry window, the more difficult it would be for HMRC to establish that the hypothetical officer could not reasonably have been expected to be aware of the insufficiency. The taxpayer is incentivised by the legislation to place HMRC in a position where he can put them to proof at the close of the enquiry window with the question “what more need I have disclosed to have placed the officer in a position to be justified in raising an assessment?”".
Mr Hicks' return had included his participation in the scheme referred to by the SRN. His return had also showed a significant tax loss and a matching non-taxable receipt. The information made available to HMRC before the closure of the enquiry window had included details of the dividend trades claimed to give rise to the loss; ‘reasonably extensive’ information in relation to the transactions implemented under the scheme arrangements; and information regarding the trading activities undertaken before the scheme trades by Mr Hicks in his regular financial trade.
Perhaps not surprisingly, the FTT concluded that the hypothetical officer had sufficient information, at the time the enquiry window had closed, to establish an insufficiency of tax. This was particularly so as the central issues, which related to section 730, ICTA 1988, and trading, were not matters of great complexity. The FTT said at paragraph :
"… I do not consider that subsection (5) allows or is intended to allow HMRC to issue assessments which ignore the normal time limits while they spend further time in polishing a justifiable assessment as at the closure of the enquiry window into a knockout case.
… Mr Nawbatt is correct to state that HMRC’s process of gathering information in relation to the Scheme was continuing when the enquiry window closed. However, that is not carte blanche for HMRC to omit to open an enquiry—whether intentionally or by omission—and then simply rely on subsection (5) in every case to issue assessments which would otherwise be out of time. The statutory time limits for assessments are a critically important safeguard for the taxpayer, just as the onus of disclosure on the taxpayer, and the duty not to act carelessly or deliberately, are a protection for HMRC where those limits are not met."
With regard to issue 4, the FTT noted that the authorities on this issue "are in conflict". In Atherton v HMRC  UKFTT 831 (TC), the FTT recently reached a different conclusion to that reached by the FTT in Bessie Taube Trust v Revenue & Customs  UKFTT 473 (TC). In Atherton, the FTT concluded that it could not have been Parliament's intention for a taxpayer to avoid any liability on the basis that he had derogated certain obligations to a third party. In the current appeal, the FTT noted at paragraph :
"In my respectful opinion, the tribunal in Atherton misinterprets the quoted passage in Bessie Taube. It appears to consider the consequence of Judge Berner’s approach to be that a taxpayer can escape his statutory duties and avoid the consequences of being careless by “ passing on” his statutory liabilities to a third party who, the taxpayer alleges, is not acting on his behalf. I do not read anything in section 29, or the passage from Bessie Taube, as having this effect … The consequence for the taxpayer of carelessly submitting a return with an insufficiency is not narrowed by these words but potentially widened, to (in effect) treat the carelessness of the person acting on the taxpayer’s behalf as the taxpayer’s carelessness. Where a taxpayer seeks to rely as a defence on the advice of a third party who did not act on his behalf, the issue then is the taxpayer’s carelessness."
In terms of defining 'carelessness' for the purposes of section 29(4), the FTT relied on the reasoning of the FTT in Alan Anderson v HMRC  UKFTT 335 (TC), where it was stated at paragraph :
"Our view is that the correct approach in this context also is to follow that adopted in Collis and Hanson of assessing what a reasonable hypothetical taxpayer would do in all the applicable circumstances of the actual taxpayer."
In the view of the FTT, the issue was not whether Mr Hicks or Mr Bevis (his agent) was careless in general, or in the abstract, but whether their failure to take reasonable care brought about the insufficiency in the 2008/09 return, or the two subsequent returns.
In the view the FTT, it is not necessarily careless (for the purposes of section 29(4)) to enter into a tax avoidance scheme, even in the knowledge that HMRC might challenge the taxpayer's interpretation of the legislation. The FTT also rejected HMRC’s argument that Mr Hicks had been careless to claim a loss in his 2010/11 return, when his 2009/10 return was under enquiry in relation to the same scheme. In the view of the FTT, at that time, the enquiry into Mr Hick's 2009/10 return was still a typical HMRC enquiry. The FTT therefore concluded that Mr Hicks had not been careless for the purposes of section 29(4).
This is an important decision as it contains a detailed analysis of section 29(5) and the conditions which must be satisfied in order for HMRC to be able to issue a valid discovery assessment.
On the facts of this case, the disclosure which had been made to HMRC, and the inclusion of the SRN in Mr Hicks' tax return, was sufficient to prevent HMRC from successfully arguing that the condition in section 29(5) had been satisfied.
The FTT postulated what many taxpayers would consider to be the key question to ask when considering whether sufficient information has been provided to HMRC, namely: 'what more need I have disclosed to have placed the officer in a position to be justified in raising an assessment?'. If the answer to that question is 'virtually nothing', then it is likely that HMRC will be prevented by section 29(5) from raising an assessment.
Consistent with Charlton, the inclusion by Mr Hicks of the SRN in his tax return was considered by the FTT to be sufficient disclosure. We are aware that HMRC regularly argue that inclusion of an SRN in a taxpayer's return is insufficient disclosure for the purposes of section 29(5). It is to be hoped that the approach adopted by the FTT in this case will be followed by future tribunals.
Interestingly, the HMRC reviewing officer had advised HMRC against relying on section 29(5), because no further information became available to HMRC between closure of the enquiry period and the date on which the assessments were issued. In this instance, HMRC would have done well to have followed the advice of the reviewing officer.
A copy of the decision can be viewed here.