Defining 'Discovery' and 'Staleness' in Tax Assessments: Insights from Pattullo v Revenue and Customs [2016] UKUT 270 (TCC)

Introduction

The case of Pattullo v. Revenue and Customs ([2016] UKUT 270 (TCC)) is a landmark decision by the Upper Tribunal (Tax and Chancery Chamber) that delves deeply into the interpretation and application of Section 29 of the Tax Management Act 1970 ("TMA 1970"). The appellant, Neil Pattullo, contested an assessment made by HM Revenue and Customs (HMRC) regarding insufficient Capital Gains Tax (CGT) under a tax avoidance scheme involving Capital Redemption Contracts (CRCs). The central issues revolved around the definition of a "discovery" under TMA 1970 s29(1), the concept of "staleness" related to such discoveries, and the attributes of the so-called "hypothetical officer" as contemplated by s29(5).

Summary of the Judgment

The Upper Tribunal upheld the decision of the First-tier Tribunal (FTT), dismissing Pattullo's appeal. The crux of the judgment centered on whether HMRC had validly made a "discovery" of the insufficiency in Pattullo's tax assessment and whether such a discovery had become "stale" by the time the assessment was made. The Tribunal concluded that HMRC had indeed made a valid discovery within the stipulated time frame and that the discovery had not grown stale. Furthermore, the Tribunal found that the hypothetical officer, as envisioned by s29(5), did not possess the requisite awareness to challenge the assessment based on the information available before the enquiring window closed.

Analysis

Precedents Cited

The judgment extensively referenced previous cases to elucidate the interpretation of s29 of TMA 1970. Notable among these were:

• Langham v Veltema [2004] EWCA Civ 193: Established foundational principles regarding the concept of "discovery" in tax assessments.
• Corbally-Stourton v HMRC [2008] STC (SCD) 907: Discussed the attributes of the hypothetical officer under s29(5).
• Tower MCashback LLP v HMRC [2010] EWCA Civ 32: Clarified the restricted powers conferred by s29 in its current form post-1996-97 Finance Act amendments.
• HMRC v Lansdowne Partners Ltd [2012] STC 544: Explored the responsibilities and expectations placed upon HMRC officers in assessing tax returns.
• Charlton v HMRC [2013] STC 866 and Sanderson v HMRC [2013] UKUT 0623 (TCC): Addressed the nuances of "discovery" and the characteristics of the hypothetical officer.
• Alistair Norman v HMRC [2015] UKFTT 0303 (TC): Reinforced the principles established in Charlton concerning discovery and staleness.

These precedents collectively shaped the Tribunal's understanding of the statutory provisions and guided their application in Pattullo's case.

Legal Reasoning

The Tribunal's legal reasoning can be dissected into two primary issues:

1. Discovery of Tax Insufficiency (s29(1)): The Tribunal analyzed whether HMRC had made a valid discovery that Pattullo's CGT assessment was insufficient. They evaluated the timing of the discovery, concluding that HMRC's realization of the insufficiency occurred between June and November 2009, well within the statutory deadlines.
2. Staleness of Discovery (s29(5)): The key contention was whether the discovery had become stale by the time the assessment was made in January 2010. The Tribunal scrutinized the nature of "staleness," differentiating it from mere statutory time limits. They held that staleness pertains to the "freshness" of the discovery's applicability at the time of assessment, not just the adherence to statutory deadlines.

Additionally, the Tribunal examined the attributes of the hypothetical officer required under s29(5). They determined that such an officer, equipped with reasonable knowledge and understanding, would not have been aware of the insufficiency based solely on the information provided in Pattullo's return.

Impact

This judgment has significant implications for future tax assessments and challenges. By clarifying the notions of "discovery" and "staleness," the Tribunal has provided a more definitive framework for HMRC and taxpayers alike. It underscores the importance of timely and accurate disclosures in tax returns and delineates the boundaries within which HMRC can exercise its powers to make subsequent assessments.

Moreover, the detailed exploration of the hypothetical officer's attributes serves as a benchmark for determining reasonable awareness in similar cases. Tax professionals will need to meticulously consider these standards when advising clients on structuring tax affairs to avoid potential discovery assessments.

Complex Concepts Simplified

Discovery Assessment (s29(1))

Under Section 29(1) of TMA 1970, HMRC has the authority to make additional tax assessments if they discover that past assessments were insufficient. This "discovery" refers to HMRC realizing that more tax was due than was originally assessed.

Staleness of Discovery (s29(5))

A discovery becomes "stale" if too much time has passed since HMRC realized there was an insufficiency in the assessment, making the assessment invalid. This concept prevents HMRC from reopening old tax issues without timely justification.

Hypothetical Officer

The "hypothetical officer" is a legal fiction used to determine what a reasonable HMRC officer, equipped with standard knowledge and understanding, would have realized from the information provided in a tax return. This concept ensures that HMRC's assessments are based on what an average competent officer would discern, not on specialized or exceptional insights.

Capital Redemption Contracts (CRCs)

CRCs are complex financial instruments used within tax planning schemes. In the context of this case, they were utilized in an attempt to artificially create capital losses to reduce CGT liabilities. However, such schemes were deemed ineffective and ultimately invalidated in related cases.

Conclusion