Introduction

Hargreaves v. Revenue & Customs ([2019] UKFTT 244 (TC)) is a pivotal judgment delivered by the First-tier Tribunal (Tax) addressing the validity of a discovery assessment under Section 29 of the Taxes Management Act 1970 (TMA). The case revolves around whether HM Revenue and Customs (HMRC) made a discovery regarding Mr. John Hargreaves's tax affairs and whether this discovery was deemed 'stale' at the time of assessment.

The appellant, Mr. John Hargreaves, contested the discovery assessment issued by HMRC, which imposed a tax liability of £84 million related to capital gains on the disposal of Matalan plc shares and his foreign income for the tax year 2000-01. The key issues centered on the timing and validity of the discovery, as well as allegations of negligence in Mr. Hargreaves's tax return filings.

Summary of the Judgment

The Tribunal upheld Mr. Hargreaves's appeal against the discovery assessment. The central finding was that HMRC's discovery was stale by the time the assessment was made, rendering the assessment invalid. Additionally, the Tribunal found that HMRC failed to establish negligent conduct on the part of Mr. Hargreaves or his agent, PricewaterhouseCoopers (PwC), in submitting inaccurate tax returns.

Analysis

Precedents Cited

The Tribunal extensively referenced prior cases to underpin its decision:

• HMRC v Charlton Corfield & Corfield [2013]: Defined the nature of a 'discovery' under s 29(1) TMA, emphasizing that newness pertains to the conclusion rather than new factual information.
• Pattullo v HMRC [2016]: Introduced the concept of 'staleness' in discoveries, setting a typical delay period of 18 months after which a discovery could be considered stale.
• HMRC v Tooth [2018]: Further clarified the criteria for newness and staleness, highlighting the two-stage process of discovery and assessment.
• Beagles v HMRC [2018]: Affirmed the Upper Tribunal's stance in Pattullo, reinforcing the applicability of staleness in discovery assessments.
• Moore v HMRC [2011]: Provided a framework for assessing negligent conduct, focusing on whether a reasonable taxpayer would have acted with due diligence.
• Hankinson v HMRC [2012]: Established that taxpayers bear the burden of proving the validity of their tax returns, especially concerning generally prevailing practices.

Legal Reasoning

The Tribunal's reasoning was multifaceted:

• Discovery vs. Staleness: The Tribunal assessed when HMRC made the discovery of the tax insufficiency. It concluded that the discovery likely occurred before November 2004 and was thus stale by January 2007, the date of the assessment.
• Negligent Conduct: The Tribunal examined whether Mr. Hargreaves or PwC negligently submitted inaccurate tax returns. It concluded that there was a prima facie case of negligence due to a failure to seek further advice and ensure the accuracy of the return, especially in light of HMRC’s published guidelines and contemporaneous documents.
• Condition in s 29(5) TMA: The Tribunal found that HMRC could not have reasonably expected the hypothetical officer to be aware of the tax insufficiency based on the information available at the time of the original tax return.
• Practice Generally Prevailing: The Tribunal determined that Mr. Hargreaves's return was not in accordance with the generally prevailing practices at the time, which required a distinct break from UK residence and a multi-factorial evaluation of the taxpayer's circumstances.

Impact

This judgment has significant implications for future tax disputes involving discovery assessments:

• Timeliness of Assessments: Reinforces the importance of HMRC acting promptly upon discovery to avoid assessments being deemed stale.
• Burden of Proof: Emphasizes that HMRC bears the burden of proving the validity of discovery assessments, particularly concerning negligence in tax return filings.
• Clarity in Practice: Highlights the necessity for clear and consistent practices within HMRC to prevent confusion and ensure tax assessments are fair and timely.
• Taxpayer Protections: Strengthens protections for taxpayers against prolonged delays in assessments that could render HMRC’s discoveries stale.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment occurs when HMRC identifies that a taxpayer has underpaid their taxes. This can be due to unreported income, discrepancies in calculations, or other factors leading to a loss of tax revenue.

Staleness of Discovery

Staleness refers to the period after which a discovery by HMRC is no longer considered 'new' and therefore cannot be used as a basis for imposing additional tax liabilities. In this case, discoveries made more than three years prior to the assessment were deemed stale.

Section 29 of TMA 1970

This section empowers HMRC to make assessments when it discovers that a taxpayer has underpaid taxes. It sets out conditions under which such assessments are valid, including the necessity of demonstrating negligence or fraudulent conduct by the taxpayer.

Negligent Conduct

Negligence in this context refers to the taxpayer’s failure to take reasonable steps to ensure the accuracy of their tax returns. This includes not seeking professional advice when necessary or not properly reporting income and gains.

Conclusion

The Hargreaves v. Revenue & Customs judgment underscores the critical importance of HMRC acting within a reasonable timeframe upon discovering discrepancies in tax returns to prevent assessments from becoming stale. It also reinforces the taxpayer’s responsibility to ensure accuracy in their filings and the high standard expected from tax advisors. By invalidating the assessment based on staleness and lack of established negligence, the Tribunal provides a clear precedent that protects taxpayers from prolonged HMRC investigations and emphasizes the need for timely responses in tax assessments.