Tribunal confirms tax assessments out of time

In Ramasamy Danapal v HMRC [2023] UKUT 00086 (TCC), the Upper Tribunal (UT) held that discovery assessments based on the alleged careless and/or deliberate conduct of a taxpayer's accountants were out of time, as the requisite conduct had not been established.

Background 

Ramasamy Danapal (the appellant) was a doctor.  Until the end of October 2012, he worked full-time as an A&E consultant for the NHS and ran a private clinic in Harley Street.  

In 2013, HMRC opened enquiries into the appellant's self-assessment tax returns for 2010/11 and 2011/12.  During these enquiries he was represented by a firm of accountants (Firm A) who had prepared the returns.  During the course of enquiries into the returns, HMRC enquired into capital allowances claimed in relation to an asset in respect of which capital allowances had first been claimed in the 2007/08 tax year in respect of expenditure of £71,000.  HMRC contended that amounts had been omitted in the calculation of turnover (and therefore net profit).  

In March 2016, HMRC made an assessment for the year 2009/10 increasing the appellant's tax liability for that year by £40,439.42.  In August 2016, HMRC issued assessments for 2006/07 and 2007/08, increasing the appellant's tax liability by £13,345.36 and £23,253.47, respectively.  These assessments were outside the normal time limit for assessment – the extended time periods applicable to discovery assessments were therefore relevant (in relation to 2009/10, the assessment was made more than four but less than six years after the end of the tax year; for 2006/07 and 2007/08, the assessments were made more than six years after the end of the tax year and it was therefore necessary for deliberate conduct occasioning the tax loss to be shown).  At the same time, HMRC also issued closure notices in respect of its enquiries into 2010/11 and 2011/12.

The appellant appealed the assessments and closure notices to the First-tier Tribunal (FTT).  The FTT dismissed the appeals, concluding that although the appellant had not been careless, his accountants, who prepared the returns, had been careless.  It also concluded that turnover (and therefore profits) had been deliberately understated, though it did not specify by whom.  

The appellant appealed to the UT in relation to the discovery assessments for 2006/07, 2007/8 and 2009/10.  He argued that the FTT had erred in law by:

(1) providing insufficient reasons to support a conclusion that the loss of tax was brought about carelessly by a person acting on his behalf; 

(2) concluding that that a loss of tax had been brought about deliberately in relation to 2007/08; 

(3) concluding that a loss of tax had been brought about deliberately by the understated turnover in 2010/11 and earlier years; and 

(4) concluding that section 36, Taxes Management Act 1970 (TMA 1970), provides that a loss of tax brought about deliberately extends the time limit for assessing all other insufficiencies in the same tax year even if those insufficiencies had not been brought about deliberately.

Legislation

Section 29, TMA 1970, provides, so far as relevant, that if an officer of HMRC discovers that any income or chargeable gain that should have been assessed to tax has not been so assessed, that any assessment is or has become insufficient or if any relief is or has become excessive, then they may make an assessment in an amount which should in their opinion make good to the Crown the loss of tax.  Where a relevant return has been made, HMRC's ability to make a discovery assessment is dependent on the insufficiency of tax having been brought about 'carelessly or deliberately by the taxpayer or a person acting on his behalf'.

UT decision

The appeals were allowed.  

In relation to the first ground, the UT's decision was crisp.  It stated: 'We have no doubt in this case that the FTT failed in its duty to give adequate reasons for its finding that Firm A acted carelessly in completing the return in question'.  HMRC had not alleged such carelessness on the part of Firm A (as opposed to the appellant) in its statement of case, and it was the duty of the FTT to explain what evidence it had relied on in making its finding and why this evidence demonstrated that Firm A had been careless.  Firm A had given no evidence itself and it was therefore unsurprising that none of the relevant matters had been addressed by the FTT in the decision.

In relation to the second ground, the UT was equally unequivocal: 'We have no doubt that the FTT was not entitled to find that Firm A acted deliberately in completing the relevant return inaccurately in this regard'.  The UT referred to the Supreme Court's decision in HMRC v Tooth [2019] UKSC 0136, noting that 'deliberate behaviour', for the purposes of a discovery assessment, means 'conduct that amounts to fraud or is akin to fraud'.  This had not been alleged in pleadings by HMRC and Firm A had been given no opportunity to address the finding.  

The UT used the same reasoning to allow the appeal on the third ground.  

In light of the decisions on the first three grounds, the UT considered it unnecessary to address the fourth ground relating to the construction of section 36, TMA 1970.  

The UT concluded that the errors of law, disclosed in the FTT's decision in relation to the first three grounds of appeal, were sufficiently material to vitiate it.  The UT remade the FTT's decisions and in so doing concluded that all the relevant assessments were out of time.  

Comment

This is a significant and welcome decision.  The FTT's decision demonstrated a worrying lack of regard for principles of procedural fairness and natural justice, in that a finding of dishonesty had effectively been made against a non-party (Firm A) without it having been given an opportunity to address the relevant allegations.  The UT's decision also demonstrates the continuing importance of ensuring that discovery assessments are well-founded, even in light of decisions such as Tooth, which restrict the scope for challenging them on procedural grounds.

The decision can be viewed here.