Introduction

In the landmark case Anderson v. The Commissioners for HM Revenue and Customs (Tax) ([2018] UKUT 159 (TCC)), Mr. Jerome Anderson appealed against a discovery assessment issued by HMRC under Section 29 of the Taxes Management Act 1970 (TMA). The crux of the dispute revolved around HMRC's disallowance of Mr. Anderson's claimed losses amounting to £3,002,772, which he asserted arose from his involvement in the Bafana Soccer Developments Limited scheme. This commentary delves into the comprehensive decision rendered by the Upper Tribunal (Tax and Chancery Chamber), shedding light on the newly articulated legal principles pertaining to "discovery" under s 29 TMA and the stringent criteria for claiming loss relief under the Income Tax Act 2007 (ITA).

Summary of the Judgment

The Upper Tribunal dismissed Mr. Anderson's appeal, upholding the First-tier Tribunal's (FTT) decision that HMRC's discovery assessment was valid. The key findings were:

• HMRC had a reasonable belief that there was an insufficiency of tax in Mr. Anderson's self-assessment.
• Mr. Anderson's claimed losses did not qualify for relief under Sections 64 or 72 of the ITA, primarily because his activities did not constitute a trade carried on on a commercial basis with a realistic expectation of profit.

The Tribunal concluded that Mr. Anderson was not conducting a trade but was rather an investor without substantial active involvement, thereby negating the eligibility for loss relief.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases that have shaped the interpretation of "discovery" under s 29 TMA:

• Charlton v Revenue and Customs Commissioners [2013] STC 1033: Clarified the subjective and objective tests for "discovery".
• Kensington Income Tax Commissioners [1913] 3 KB 870: Early interpretation of "discovery".
• Bloomsbury Income Tax Commissioners [1915] 3 KB 768: Explored the court's intervention on surveyor's honest beliefs.
• Cenlon Finance Co Ltd v Ellwood [1962] AC 782: Rejected the notion that "discovery" necessitates new facts.
• Sanderson v Revenue and Customs Commissioners [2014] STC 915: Applied Charlton's principles to modern self-assessment scenarios.
• Wannell v Rothwell [1996] STC 450: Addressed the commerciality aspect of conducting trade.
• Eclipse Film Partners No 35 LLP v Revenue and Customs Commissioners [2015] STC 1429: Emphasized the holistic evaluation of trade activities.

Legal Reasoning

The Tribunal meticulously dissected the legal framework governing discovery assessments and loss relief claims:

• Discovery Assessment under s 29 TMA:

  The Tribunal reaffirmed that a "discovery" entails both a subjective and an objective test. The subjective test examines whether the HMRC officer genuinely believed there was an insufficiency of tax based on available information. The objective test assesses whether this belief is reasonable.

• Criteria for Sideways Loss Relief under s 64 and s 72 ITA:

  To qualify for loss relief, an individual must be engaged in a trade carried on on a commercial basis with a realistic expectation of profit. The Tribunal scrutinized Mr. Anderson's activities, finding them more akin to passive investment rather than active trading, thus failing to meet the necessary criteria for loss relief.

The analysis underscored that mere participation in investment schemes without active management and profit-driven motives does not constitute a trade eligible for loss relief.

Impact

This judgment has significant implications for both taxpayers and HMRC:

• Clarification of "Discovery": Establishes a clear dual-test (subjective and objective) for determining discovery assessments, providing a more structured approach for HMRC officers.
• Stringent Criteria for Loss Relief: Reinforces the necessity for taxpayers to demonstrate active and commercial engagement in a trade to qualify for loss relief, potentially limiting claims based on passive investments.
• Guidance for Future Cases: Offers a benchmark for tribunals and courts in assessing similar disputes, promoting consistency in tax law interpretations.

Taxpayers engaging in investment schemes must now ensure active participation and clear profit motives to safeguard their eligibility for loss relief.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment is a mechanism allowing HMRC to reassess a taxpayer's liabilities if they uncover an insufficiency of tax in previously submitted returns. Under s 29 TMA, HMRC must satisfy both a subjective belief and an objective reasonableness criterion to issue such an assessment.

Sideways Loss Relief

Sideways loss relief permits taxpayers to offset losses from one trade against profits from another, thereby reducing overall taxable income. This relief is contingent upon the trade being conducted on a commercial basis with an expectation of profit.

Commercial Basis and Expectation of Profit

For a trade to be considered commercial, it must be carried out with a genuine intent to generate profits and be conducted in a manner typical of professional trading activities. This encompasses factors like business organization, active management, and strategic profit-seeking endeavors.

Conclusion

The Anderson v. The Commissioners for HM Revenue and Customs (Tax) [2018] UKUT 159 (TCC) judgment is a pivotal reference point in tax law, particularly concerning the interpretation of "discovery" under s 29 TMA and the strict conditions for claiming sideways loss relief. The Tribunal's comprehensive analysis underscores the necessity for HMRC to establish both a genuine belief and a reasonable basis for discovery assessments. Furthermore, it emphasizes that only actively managed trades with clear profit motives qualify for loss relief, thereby deterring passive investment claims.

For taxpayers, this decision serves as a cautionary tale to maintain active involvement and transparent profit-driven strategies in their business endeavors. For tax authorities, it delineates a robust framework for executing discovery assessments, ensuring fairness and legal consistency. Overall, the case fortifies the legal landscape, promoting diligent tax practices and safeguarding against unwarranted tax liabilities.