Tribunal considers carelessness test and finds discovery assessments to be invalid

05 May 2016. Published by Alexis Armitage, Senior Associate

In Bubb v HMRC [2016] UKFTT 0216 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeals and concluded that two discovery assessments made by HMRC under section 29, TMA 1970, were not validly made because only part of the tax underpayment resulted from the taxpayer's carelessness.


The taxpayer served over 28 years in the navy followed by 15 years in the civil service. He had been in receipt of both a naval and civil service pension since 1989 and 2003, respectively, and a State pension from 2009.

After leaving the civil service, the taxpayer was engaged from time to time as a consultant, working for the Ministry of Defence. In order to avoid the difficulties he had witnessed other consultants fall into with unexpected tax bills, the taxpayer wished to continue to be paid under the PAYE system. Accordingly, during the relevant periods in question, he was employed by a firm called Parasol, who charged the Ministry of Defence for the taxpayer's services and then paid him via PAYE. However, in error, Parasol operated the standard emergency tax code allocating full personal allowances to the taxpayer. As full allowances had already been allocated to his civil service pension, the code Parasol should have operated for a secondary source of income was the "BR" code, which was the code used for the taxpayer's naval pension. Despite Parasol notifying HMRC that the taxpayer's earnings from his employment with Parasol were a secondary source of income, no tax code was issued by HMRC and Parasol continued to use the emergency code.

Following receipt of notices from HMRC to file returns in relation to tax years 2008–2011, the taxpayer correctly completed his 2008-09 return, showing an underpayment of tax. Although he completed returns for 2009-10 and 2010-11, these returns contained the following errors:

(1)  Both returns omitted details of the State pension. The pension was paid into his wife’s account and he had forgotten to include it. For 2010-11, HMRC’s system identified this oversight and corrected his return, but the system in place for 2009-10 did not.

(2)  The 2009-10 return understated the total for occupational pensions.

(3)  The 2010-11 return understated earnings from Parasol and overstated tax deducted.

The errors in the returns, combined with the fact that HMRC’s system did not pick up the significance of the entries in the "additional information" box in the returns, meant that instead of the underpayments for each year being identified and addressed, HMRC’s system generated tax repayments for each year.

In May 2013, HMRC issued discovery assessments to the taxpayer pursuant to section 29, TMA 1970, in order to make good the under assessments resulting from the errors referred to in (2) and (3) above. HMRC also issued surcharges under section 59C(2) and (3), TMA 1970, in relation to the late payment of income tax in respect of 2008-2009.

The taxpayer appealed the discovery assessments and surcharges. 

FTT's decision

In allowing the appeals, the FTT considered whether the requirements of section 29(1), TMA 1970, had been met in relation to 2009-10 and 2010-11 and if so, whether the condition in section 29(4), TMA 1970, had been satisfied.

The FTT concluded that the requirements of section 29(1) were met in relation to both 2009-10 and 2010-11, stating that "HMRC clearly "discovered" that there was income that had not been assessed for both years in or shortly before April 2013". The FTT commented that section 29(1) is concerned with the inspector’s subjective view and does not require any new facts to emerge (Hankinson v HMRC [2012] STC 485 and Charlton v HMRC [2013] STC 866 applied).

In order for HMRC to succeed in its argument that the assessments were validly made under section 29, it had to demonstrate (the onus of proof being on it) that it was the taxpayer's careless behaviour which brought about the under assessment of tax in respect of 2009-10 and 2010-11, as required by section 29(4).

Whether the taxpayer was careless was a question of fact, to be determined by the FTT having regard to all the circumstances.

Having considered the available evidence, the FTT concluded that the taxpayer was careless in not including his State pension in either his 2009-10 or 2010-11 tax returns, noting that by simply overlooking it on the basis that it was paid into his wife’s account was "clearly careless".

However, the FTT was of the view that the taxpayer had not been careless in relation to the errors contained in his tax returns for 2009-10 and 2010-11, referred to at (2) and (3) above, due to the IT difficulties he had experienced when submitting his tax returns. In addition, the FTT did not consider the taxpayer's use of his last payslip, rather than a more accurate P60, to be careless because a clear disclosure in this regard was made by the taxpayer to HMRC when submitting his tax returns. In particular, the FTT commented that the taxpayer would have no reason to be aware that HMRC’s normal processing systems do not pick up details included in the additional information box, and he would also reasonably have assumed that HMRC had received P60 information from Parasol.

The FTT therefore concluded that as there is no power to raise a valid assessment to make good a loss of tax that is not attributable to careless behaviour, the discovery assessments had not been validly made by HMRC under section 29, TMA 1970.

HMRC had also submitted that the FTT should increase the assessment for 2009-10 under section 50(7), TMA 1970, in order to rectify the fact the taxpayer had failed to include details of his State pension in his 2009-10 return. In relation to this submission, the FTT concluded that as section 29 goes to the validity of the assessment, if no assessment is validly raised, then there is nothing that can be increased.

In relation to the surcharges issued by HMRC under section 59C(2) and (3), TMA 1970, for the late payment of income tax in respect of 2008-2009, HMRC confirmed at the hearing that it would no longer be pursuing payment of the surcharges. It was therefore unnecessary for the FTT to consider whether the taxpayer had a reasonable excuse for not paying the tax due in respect of 2008-2009. 


Although the taxpayer had been careless in omitting details of his State pension when submitting his tax returns, the discovery assessments issued by HMRC were to make good under assessments resulting from other errors the taxpayer had made when submitting his returns, none of which were as a result of careless behaviour on his part.

HMRC regularly invokes its section 29 information powers and this decision is a timely reminder that when it does so, it needs to ensure that the conditions referred to in section 29 are fulfilled. In this instance, it failed to satisfy the FTT that the taxpayer's careless behaviour led to the under assessment of tax.

It is also worth noting the FTT's criticisms of the way in which HMRC dealt with the taxpayer's affairs, which resulted in HMRC accepting that the taxpayer deserved a better service from HMRC than the one he had received.

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