Yet another 'discovery' by HMRC

Introduction

The facts

(“HMRC”) issued a “discovery” assessment to the Appellant Mr Harrison assessing him to income tax for the tax year 2007/08 in respect of his share of the proceeds of sale of a property. The First-tier Tribunal (“FTT”) dismissed Mr Harrison’s appeal. Mr Harrison took his appeal to the Upper Tribunal (‘the UT’).

The key facts found by the First-tier Tax Tribunal (“FTT”) were as follows:

‘6 The FTT set out its findings of fact at [9], which, in summary, were as follows:

Mr Harrison was in partnership with his wife from the 1980s. The partnership initially traded as forensic accountants and later, from 1990, as property developers.
By 2006 Mr Harrison and his wife expected to receive funds in settlement of litigation in which the partnership had become involved. They had agreed to purchase a property called Bearsted from the settlement monies, but the settlement did not materialise. Mr Harrison’s son and daughter-in-law bought the property instead and sold it in November 2007 at a profit.
It was agreed between Mr Harrison and his wife and their son and daughter-in-law that the partnership would receive £200,000 from the proceeds of sale of This was recorded in two emails (the “2008 emails”).
Mr Harrison took the view that he and his wife had losses and expenses which they could set against this £200,000, and so no tax would be due from He did not notify HMRC of his chargeability to tax on the amount or file a self-assessment return for that year.
HMRC became interested in the tax affairs of Mr Harrison’s son, who had not submitted a tax return for 2007/08, and in 2012 searched his In 2013 he pleaded guilty to fraud and was convicted and sentenced.
Court experts were appointed to investigate the financial affairs of Mr Harrison’s son, and in the course of that investigation Mr Harrison informed HMRC of the sums received by him and his wife in respect of Bearsted.

On 25 September 2015, Officer Raven of HMRC raised a discovery assessment on Mr Harrison in respect of what was described as a £200,000 “finder’s fee” on the sale of
Mr Harrison appealed against the assessment on 20 October 2015, accepting that £200,000 had been received but stating that it was received by the partnership and that there were partnership trading losses and expenses to be set against it.
Mr Harrison considered that HMRC had come into possession of the 2008 emails when they had searched his son’s premises in 2012. He asked HMRC to confirm his understanding that “HMRC may only raise an assessment on a person in respect of VAT, Income tax or CGT within 12 months of becoming aware of or notified of such a taxable liability”.
Officer Raven confirmed that this was the That was incorrect. Officer Raven also said that the emails were insufficient in themselves to satisfy him that Mr Harrison was liable to tax.
Mr Harrison formed the view that HMRC were out of time to have issued the assessment on him, because they must have had the 2008 emails and so made their discovery of an insufficiency of tax by, at the latest, November HMRC disagreed, and discussions continued.
HMRC revised its assessment on Mr Harrison to reflect that the £200,000 was received by the partnership and not by him alone, and assessed him on a profit figure of £100,000.’

There was a case management hearing (the “CMH”) in relation to Mr Harrison’s appeal against HMRC’s discovery assessment before a differently constituted FTT (Judge McNall) on 21 September 2017. One of the Mr. Harrison’s points was that that HMRC had sufficient information as long ago as November 2012 to assess him, and the assessment was “massively out of time”, whereas HMRC argued that because Mr Harrison had brought about the loss of tax deliberately, the extended 20 year time limit1 for raising the assessment applied. The FTT agreed with HMRC, concluding that in the absence of any notification to chargeability within the statutory notification period, it made no difference whether HMRC made a discovery in 2014 or 2012. Nor did the FTT agree Mr Harrison’s assertion that there had been no loss of tax.

The appeal to the Upper Tribunal (“UT”)

The UT granted leave to appeal on two grounds namely:

Ground 1: The FTT erred in law in concluding that HMRC had discharged their burden of proving that they made a “discovery” for the purposes of section 29(1) TMA 1970 and/or that any such discovery had not become “stale”.
Ground 2: The FTT erred in law in concluding that Mr Harrison was liable to tax by reference to a 50% share of a “receipt” of £200,000 and not by reference to a lower

In the UT

In the UT the taxpayer argued that the burden of making a ‘discovery’ under s.20 TMA 1970 rests on HMRC who also bear the burden of establishing deliberate behaviour. In this respect, the taxpayer argued that HMRC had in fact done nothing to discharge the burden of proof, because they provided no evidence of a discovery and there was no finding of one in the FTT below.

The UT did not agree.

18 ‘The assertion that the FTT made no mention of the burden of proving a discovery being on HMRC is wrong. In discussing what was determined at the CMH, the FTT stated, at [21], (emphasis added to original):

There are a number of aspects which the Respondents must establish when they raise an assessment under Section 29 TMA 1970. In this case it has been accepted by the Appellant that the partnership received £200,000 (not all of it in cash) and that the Respondents made a discovery (although, as outlined above, there was dispute about when that discovery was made.) As we set out above, in the decision of 3 October 2017 the Tribunal determined that in September 2015 the Respondents were within time to raise a Section 29 assessment for 2007/08 upon the Appellant, and that the Appellant had failed to fulfil his obligation to notify chargeability under Section 7 TMA 1970.

19 It is clear from this that the FTT was well aware of the burden on HMRC to prove a discovery.

20 The second assertion is that there is no finding of fact whether or not HMRC made a discovery. This is not made out. In its discussion of the evidence which had been before the FTT at the CMH, at [25], the Decision contains the following footnote (emphasis added to original):

Officer Raven’s evidence before us, which we accept, was that he made a discovery when he received the statement of 28 November 2014, and that he was in negotiation with the Court appointed experts in the period from receipt of this statement until September 2015.

21 This is a clear finding of fact by the FTT. There is nothing odd about it being contained in a footnote rather than the body of the decision in light of the FTT’s finding at [21] that it had been accepted by Mr Harrison that HMRC made a discovery, although there was a dispute about when it had been made.’

The UT did not accept that HMRC had ‘advanced no positive case before the FTT that they had made a discovery.’ Argument to this effect had in fact appeared in both HMRC’s Statement of Case and their skeleton argument. The UT concluded:-

24 ‘We consider that HMRC did advance a positive case that a discovery had been made. This clearly distinguishes the position from that in Burgess. In Burgess, it was found that HMRC had advanced no positive case as to either the competence issue (namely, the existence of a discovery) or the time limit issue. It was determined that in those circumstances, where those issues had not been conceded by the taxpayers, HMRC had not discharged its burden of proof. In this case, HMRC advanced a positive case that it had made a discovery in its Statement of Case and in its skeleton argument, and the FTT accepted the evidence of Officer Raven that a discovery had been made, in November 2014.’

The Appellant fared no better with the staleness issue. The UT said:

36…… ‘Following a number of decisions by the FTT and Upper Tribunal, the question of whether a discovery could cease to be a discovery because it had become stale was one of the issues considered by the Court of Appeal in HMRC v Tooth [2019] EWCA Civ 826 (“Tooth CA”)……

Floyd LJ stated as follows, at [60]-[61] of the decision:

Both parties accepted that the legal approach to whether there is a “discovery” is correctly set out in this first passage from the decision of the UT in Charlton & others v RCC [2012] UKUT 770 (TCC); [2013] STC 866 at [37], where the tribunal said:

“37. In our judgment, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight.”

The UT continued in a second passage:

“The requirement for newness does not relate to the reason for the conclusion reached by the officer but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment.”

However, the UT recorded that in the Supreme Court, their Lordships had rejected the concept that a discovery assessment could become ‘stale’.

‘However, relevantly to this appeal, Lord Briggs and Lord Sales, delivering the unanimous decision of the Supreme Court, dealt with the issue of staleness at length. The Supreme Court decisively rejected the existence and application of such a concept, concluding that:

…there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time.’

The taxpayer, however, argued that, because the statements in the Supreme Court were obiter dicta (the main reason having been that there had been no deliberate inaccuracy in Mr. Tooth’s return), the UT had no option but to follow the binding ratio of Tooth that the concept of staleness does relate to discovery assessments. The UT was no prepared to go this far. It said:

47 ‘However, we do not accept that it follows inexorably from this that this Tribunal must simply close its mind to the pronouncements on staleness in Tooth SC. We would be failing in our duty if we were to do so. We therefore begin by considering what was said on that issue by the Supreme Court, and the terms on which those statements were expressed.

48 In Tooth CA, the Court of Appeal did not set out or refer to any of the competing arguments relating to what is described as “newness”. Rather, the judgment recorded paragraph 37 of Charlton, and stated the Court’s agreement with Charlton that the requirement for newness is implicit in the word “discover”.

49 In Tooth SC, by contrast, the Supreme Court devoted as much of its judgment to a discussion of staleness as it did to the deliberate inaccuracy issues…..

50 The Supreme Court’s decision was clearly given in order to provide general guidance on the “important question” of staleness…..’

Conclusion

This case is confirmation that the doctrine of ‘staleness’ which formed a key part of the Court of Appeal’s decision in ‘Tooth’ is effectively no longer good law. It widens yet further HMRC’s already very wide powers of making a discovery assessment; once an Officer of HMRC had made a discovery (which need not be anything new, just a change of opinion) he can ‘sit’ on the discovery for what appears to be an indeterminate length of time without it becoming stale in any way.