Clarifying Section 29 TMA: Corbally-Stourton v. Revenue & Customs and the Use of Discovery Assessments

Introduction

Corbally-Stourton v. Revenue & Customs ([2008] STC 907) is a significant case adjudicated by the United Kingdom Special Commissioners of Income Tax on June 16, 2008. The appellant, Mrs. Lavinia Frances Corbally-Stourton, contested an assessment made by Her Majesty's Revenue and Customs (HMRC) under the discovery assessment provisions of Section 29(1) of the Taxes Management Act 1970 (TMA). The core issue revolved around whether HMRC's assessment, which disallowed a claimed capital loss from participation in the Castle Trust Scheme, was permissible under both TMA provisions and the Human Rights Act 1998 (HRA).

The case examines the boundaries of HMRC's authority to reassess tax returns post the self-assessment enquiry window and explores the compatibility of such actions with the appellant's Convention rights under the HRA.

Summary of the Judgment

The Special Commissioner, Charles Hellier, dismissed Mrs. Corbally-Stourton's appeal against the assessment made under Section 29(1) TMA. The assessment sought to disallow an approximately £1 million capital loss claimed by the appellant from the Castle Trust Scheme, a scheme that HMRC identified as potentially manipulative for tax avoidance purposes.

The court held that HMRC had appropriately applied Section 29(1) TMA, determining that the appellant had not met the burden of proving the legitimacy of the claimed loss. Furthermore, the court found no violation of the appellant's Convention rights under the HRA, as the legislation was interpreted in a manner consistent with maintaining a fair balance between individual rights and the state's interest in tax collection.

Analysis

Precedents Cited

The judgment extensively references several key cases that influenced the interpretation of Section 29 TMA:

R v Kensington Income Tax Commissioners ex parte Aramago (1913) - Interpreted the term "discover" in the context of tax insufficiency.
R v Commissioners of Taxes for ST Giles and St George Bloomsbury, ex parte Hooper (1915) - Further elucidated the discovery of insufficiencies in tax assessments.
Veltema v Langham (2004) - Clarified the scope of information available to inspectors under Section 29(6) TMA.
HMRC v Household Estate Agency (2007) - Applied the Court of Appeal's stance on the interpretation of discovery assessments.
Avedey J's rulings in various cases - Provided foundational perspectives on tax assessment and discovery under TMA.

These precedents collectively shaped the court's understanding of HMRC's authority and the limitations imposed by the legislation.

Legal Reasoning

The court's legal reasoning centered on two primary areas: the interpretation of Section 29(1) and (5) TMA, and the compatibility of HMRC's actions with the HRA.

Interpretation of Section 29 TMA
- **Discovery of Insufficiency**: The court interpreted "discover" to mean that an inspector must conclude, based on available information, that an insufficiency is probable. Mere suspicion is insufficient.

- **Section 29(5) Restrictions**: The assessment under Section 29(1) is precluded if, at the relevant time, an officer could reasonably have been expected to detect the insufficiency based on the information available under Section 29(6).

- **Objective Test**: The test applied was objective, assessing what a reasonable officer with standard knowledge and skills could infer from the taxpayer's disclosures.
Human Rights Act Compatibility
- **Proportionality and Non-Discrimination**: The court evaluated whether HMRC's actions under Section 29 infringed upon the appellant's rights under Articles 1 and 14 of the First Protocol of the European Convention on Human Rights.

- **Outcome**: The court found that the legislation struck a fair balance between individual rights and the state's interest in tax collection, deeming the actions compatible with the HRA.

Impact

The decision in Corbally-Stourton v. Revenue & Customs has several implications for future tax assessments and HMRC's use of discovery assessments:

Clarification of Section 29 TMA:
The judgment provides clarity on the application of Section 29(1) and (5), emphasizing that discovery assessments are contingent upon the unreasonable ability to detect insufficiencies during the standard enquiry window.
Burden of Proof:
Taxpayers bear the burden of proving the legitimacy of claimed losses, reinforcing the importance of thorough documentation and compliance in tax declarations.
Human Rights Considerations:
The case underscores that tax legislation and HMRC's enforcement actions must align with human rights standards, particularly regarding proportionality and non-discrimination.
Administrative Procedures:
The judgment highlights the necessity for HMRC to adhere strictly to procedural requirements, such as timely enquiries and fair assessment practices, to maintain legal compliance and avoid potential rights infringements.

Complex Concepts Simplified

Discovery Assessment under Section 29 TMA

A discovery assessment allows HMRC to reassess a taxpayer's previous returns if they identify that the declared tax was insufficient. However, this is only permissible if the insufficiency could not have been detected during the initial enquiry period.

Enquiry Window

The enquiry window is a specific period (typically 12 months from the filing date) during which HMRC can initiate an investigation into a taxpayer's return. Once this period closes, HMRC's ability to reassess is limited unless exceptional conditions, outlined in Section 29, are met.

Human Rights Act 1998 (HRA) and Taxation

The HRA incorporates the European Convention on Human Rights into UK law. Tax assessments and HMRC's actions must comply with Convention rights, ensuring that individuals are not unfairly treated or subjected to disproportionate penalties.

Burden of Proof

In legal disputes, the burden of proof determines which party must prove their assertions. In this case, Mrs. Corbally-Stourton was required to prove that the claimed tax loss was legitimate and allowable.

Proportionality in Tax Law

Proportionality ensures that the measures taken by the state (e.g., tax assessments) are balanced and not excessive compared to the intended outcome, which is to secure due taxes without unduly infringing on individual rights.

Conclusion

The Corbally-Stourton v. Revenue & Customs judgment offers a comprehensive analysis of HMRC's authority under Section 29 TMA for discovery assessments, especially in the context of complex tax avoidance schemes. By meticulously interpreting both statutory provisions and human rights considerations, the court reinforced the necessity for HMRC to act within clearly defined legal boundaries while ensuring fair treatment of taxpayers.

This case serves as a precedent for future tax assessments, emphasizing the importance of accurate taxpayer disclosures and the limitations of HMRC's reassessments post the enquiry window. Moreover, it underscores the judiciary's role in safeguarding individual rights against potential overreach by tax authorities, ensuring that the enforcement of tax laws remains both effective and just.