Tribunal finds HMRC was not entitled to issue a discovery assessment
In Anderson v HMRC [2016] UKFTT 335 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal and held that HMRC was not entitled to issue a discovery assessment pursuant to section 29(1) TMA, as the taxpayer had not been careless.
Background
The taxpayer owned a 50% shareholding in and was a director of Anson Limited (Anson), a company which manufactured and marketed specialist oil and gas field products. The other 50% of the shares in Anson were held by the taxpayer's brother.
The taxpayer had held the shares in Anson since 1981, when his father set up the business. The taxpayer focused on the sales and financial aspects of the business whilst his brother focused on the operational aspects and product development. From the early 2000s the taxpayer took a less active role in the affairs of the business and stepped down as director in 2003 but remained a salaried employee.
On 4 April 2008, the taxpayer and his brother sold their shares in Anson to ANS (1002) Limited, a wholly owned subsidiary of ANS (1001) Limited (Hold Co). The consideration was the issue of shares in Hold Co. On 2 April 2009, the taxpayer and his brother sold their shares in Hold Co to National Oilwell Varco, for some £88 million.
On 4 April 2008, the taxpayer made a disposal of his shares in Anson which triggered a taxable chargeable gain in the tax year 2007/08. It was not disputed that the gain was correctly calculated by reference to the open market value of the shares at the disposal date and that for capital gains purposes the taxpayer acquired the shares in Hold Co, which he received as consideration for the disposal, for an amount equal to that market value. The dispute related to the figure used by the taxpayer as the open market value.
In his tax return for 2007/08, the taxpayer used £36 million as the open market value to be brought into account in the capital gains computation on the disposal. This was based on the shares in Anson having an open market value as at the date of disposal on 4 April 2008 of £72 million. This was the amount of an offer for the purchase of all the shares in Anson made by the Weir Group (a FTSE 100 company with no connection to Anson) in March 2008.
During an enquiry into the taxpayer's 2008/09 return, HMRC queried the figure of £36 million used by the taxpayer as the open market value of the shares. HMRC claimed that it had discovered that the market value at 4 April 2008 was a higher amount, thereby increasing the capital gain on the share sale from that shown in the taxpayer's return and that the taxpayer had been careless in using the lower, and in its view, incorrect open market value figure. Accordingly, it claimed that supplementary capital gains tax was due from the taxpayer.
As HMRC did not have an open enquiry in relation to the tax year 2007/08, on 26 February 2013, it issued a discovery assessment to the taxpayer, pursuant to section 29(1) TMA, in the sum of £830,387, in respect of capital gains tax in relation to the sale of the taxpayer's shares in Anson. The taxpayer appealed the assessment.
FTT's decision
The first question to be determined by the FTT was whether there had been a discovery by HMRC. The FTT found that during an enquiry into the taxpayer's return for 2008/09, HMRC had queried the open market value figure of £36 million provided by the taxpayer in his 2007/08 return. According to HMRC's Shares and Assets Valuation team, the open market value of the shares was higher than that used by the taxpayer. In the view of the FTT this constituted a valid discovery for the purposes of section 29(1) TMA.
The second question to be decided by the FTT was whether the insufficiency of tax had been caused by carelessness on the part of the taxpayer. A loss of tax is brought about carelessly by a person if he "fails to take reasonable care" to avoid bringing about that loss (section 118(5) TMA). In the view of the FTT, the correct approach is to assess what a reasonable hypothetical taxpayer would have done in the circumstances under consideration.
The FTT considered that the taxpayer's actions were the same as those which would be expected of a person acting reasonably and diligently in the circumstances under consideration. He had relied on the advice of his professional advisers which was entirely reasonable in the circumstances. Furthermore, an offer received from the Weir Group of £72 million had been the best evidence available of market value and it had been appropriate to rely on such a contemporary open market offer.
Accordingly, the FTT concluded that HMRC had not been entitled to issue a discovery assessment for the tax year 2007/08, and allowed the taxpayer's appeal.
Comment
Once the time limit for opening an enquiry has expired, or an enquiry is closed, a taxpayer's liability for the relevant tax year is generally regarded as final. In such circumstances, HMRC can only demand a further tax payment by issuing a discovery assessment pursuant to section 29 TMA, in relation to individuals, or paragraph 41, Schedule 18, Finance Act 1998, in relation to companies. It is important to remember that HMRC can only rely upon its discovery assessment powers in specific circumstances.
This case confirms that where HMRC claim that a loss of tax has been brought about by careless conduct on the part of the taxpayer, the taxpayer is entitled to rely on the fact that he sought and followed professional advice to rebut such an allegation. The fact that HMRC may not agree with that advice is irrelevant.
It is also worth noting that a few days before the hearing, HMRC made an application to the FTT for the hearing to be postponed on the ground that the enquiry for the tax year 2008/09 had not been closed and appropriate adjustments might involve adjusting the position as regards the 2007/08 tax year. This application was unsuccessful. Referring to Portland Gas Storage Limited v HMRC [2014] UKUT 270, the FTT confirmed that a closure notice does not need to be in a prescribed form. It found that a letter from HMRC had constituted a closure notice, as it had referred to the completion of its enquiry and set out its conclusions.
A copy of the judgment can be found here.