Introduction

Atherton v. Revenue and Customs ([2019] UKUT 41 (TCC)) is a landmark decision delivered by the Upper Tribunal (Tax and Chancery Chamber) on February 12, 2019. The case revolves around a discovery assessment issued by HM Revenue and Customs (HMRC) to Richard Atherton for the tax year 2007/08. The primary issues addressed in this appeal were the validity and timing of HMRC's discovery of an insufficiency in Atherton's tax return, and whether the insufficiency was caused by carelessness on the part of Atherton or his representatives. The parties involved included Richard Atherton as the appellant and Commissioners for Her Majesty’s Revenue and Customs as the respondents.

Summary of the Judgment

The Upper Tribunal dismissed Atherton's appeal against HMRC's discovery assessment. The tribunal concluded that HMRC made a valid discovery in 2014, which was not stale, thereby allowing the discovery assessment to proceed. Additionally, the tribunal affirmed that the insufficiency in Atherton’s 2007/08 tax return was brought about through carelessness by either Atherton himself or his representative, Fitzgerald and Law (F&L). Consequently, the appeal was dismissed on both the discovery and carelessness issues.

Analysis

Precedents Cited

The judgment extensively cited several key precedents that shaped the tribunal’s decision:

• Burgess v HMRC [2015] UKUT 578 (TCC) - Emphasized the balance between HMRC and taxpayers and the burden of proof on HMRC in discovery assessments.
• Cotter v Revenue & Customs Commissioners [2013] UKSC 69 - Clarified the distinction between Schedule 1A and Section 9A enquiries, especially concerning whether a tax claim is inline within a return or a standalone claim.
• Charlton [2012] UKUT 770 (TC) - Addressed the threshold for what constitutes a discovery, highlighting that even a subjective realization by an HMRC officer can satisfy the discovery requirement.
• Pattullo v Revenue & Customs Commissioners [2016] STC 2043 - Discussed the necessity for HMRC to act on a discovery while it is still fresh.
• Hankinson v HMRC [2011] EWCA Civ 1566 - Established that a discovery merely requires HMRC to reach a conclusion of insufficiency without needing new factual or legal information.

Legal Reasoning

The tribunal's legal reasoning pivoted around two central issues: the validity of the discovery and the presence of carelessness.

• Discovery Issue: The tribunal examined whether HMRC's realization in 2014 constituted a new discovery or if it merely reflected a correction of an earlier misunderstanding. It concluded that the 2014 discovery was indeed new, as it was triggered by HMRC’s recognition post-Cotter that their initial enquiry was procedurally flawed.
• Carelessness Issue: The tribunal assessed whether Atherton or F&L had exercised reasonable care in submitting the tax return. It found that the use of Box 20 without adequate disclosure was careless, as a diligent taxpayer would not have made such entries without proper explanations, leading to the insufficiency in the tax assessment.

Impact

This judgment has significant implications for future tax assessments and the application of discovery provisions. It clarifies that:

• HMRC can make successive discoveries on the same tax matter as long as they meet the discovery threshold.
• The concept of "staleness" in discovery assessments is supported, allowing HMRC to issue assessments even years after the initial submission if new discoveries are validated.
• Taxpayers and their representatives must exercise heightened care in accurately reporting and disclosing tax information to prevent assessments based on carelessness.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment allows HMRC to reassess a taxpayer's liability when they discover that income was not correctly reported, or reliefs were improperly claimed. This can occur outside the normal time limits if certain conditions, such as carelessness, are met.

Staleness

"Staleness" refers to the idea that a discovery assessment must be made without undue delay after HMRC identifies an insufficiency. If too much time has passed, the assessment may be considered invalid unless justified by circumstances like carelessness.

Section 29 TMA

Section 29 of the Taxes Management Act 1970 empowers HMRC to make discovery assessments. It outlines the conditions under which additional tax can be assessed, especially focusing on whether the taxpayer acted negligently or deliberately to cause an insufficiency.

Conclusion

The decision in Atherton v. Revenue and Customs reinforces the stringent requirements HMRC must meet to conduct discovery assessments, particularly emphasizing the notions of discovery timing and taxpayer carelessness. By affirming the validity of the discovery assessment and the presence of carelessness, the Upper Tribunal underscores the necessity for taxpayers and their advisors to maintain meticulousness in their tax reporting. This judgment serves as a crucial reference point for both HMRC's assessment procedures and taxpayers' obligations, ultimately contributing to a more robust and fair tax administration framework.