Introduction

Hicks v. Revenue and Customs ([2018] UKFTT 22 (TC)) is a pivotal case adjudicated by the First-tier Tribunal (Tax Chamber) in the United Kingdom. The appellant, John Hicks, contested discovery assessments issued by HM Revenue and Customs (HMRC) for the tax years 2009-10 and 2010-11. These assessments were predicated on trading losses claimed by Hicks, which originated from arrangements implemented by Montpelier Tax Consultants. The core of the dispute revolved around the validity of these discovery assessments under section 29 of the Taxes Management Act 1970 (TMA), specifically focusing on whether HMRC had satisfied the necessary conditions to issue such assessments.

Summary of the Judgment

The tribunal meticulously examined four primary issues:

• Whether HMRC made a discovery of insufficiency of tax.
• Whether HMRC was precluded by their statutory review from relying on insufficiency of disclosure for discovery assessments.
• If not, whether discovery assessments were permissible based on insufficiency of disclosure.
• Whether Hicks or his representatives exhibited carelessness, thereby justifying the discovery assessments.

The tribunal concluded that HMRC did indeed make a discovery regarding the insufficiency of tax. However, HMRC failed to satisfy the stringent requirements of section 29(5) related to the sufficiency of disclosure, and they did not establish carelessness under section 29(4). Consequently, the discovery assessments for both tax years were deemed invalid, leading to the allowance of Hicks' appeal.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents that influenced the tribunal's decision:

• Burgess v HMRC [2015] UKUT 578 (TCC): Emphasized the low threshold for what constitutes a discovery under section 29(1).
• Tower McCashback LLP 1 v HMRC [2010] EWCA Civ 32: Highlighted the restrictive nature of HMRC's powers under the new section 29.
• Clavis Liberty 1 LP v HMRC [2016] UKFTT 253 (TC): Demonstrated HMRC's inability to rely solely on section 29(5) without satisfying section 29(4).
• Sanderson v HMRC [2016] EWCA Civ 19: Clarified the requirements for HMRC to establish insufficiency under section 29(5).
• Pattullo v HMRC [2016] UKUT 270 (TCC): Asserted that staleness can invalidate a discovery, reinforcing the importance of timely assessments.
• Trustees of the Bessie Taube Trust v Revenue & Customs [2010] UKFTT 473 (TC): Offered contrasting views on whether third-party advisers act on behalf of taxpayers.
• Alan Anderson v HMRC [2016] UKFTT 335 (TC): Provided guidance on interpreting "carelessness" under section 29(4).

These cases collectively underscored the necessity for HMRC to meet high evidential standards when issuing discovery assessments, ensuring that taxpayers are adequately protected against retrospective tax claims unless clear evidence of carelessness or insufficient disclosure is presented.

Legal Reasoning

The tribunal's legal reasoning hinged on a rigorous interpretation of section 29 of the TMA. Under this provision, HMRC may issue discovery assessments if they discover:

• An insufficiency of tax that was either caused deliberately or carelessly by the taxpayer or their representatives (section 29(4)).
• A situation where the taxpayer failed to sufficiently disclose relevant information (section 29(5)).

For the discovery assessments to be valid, HMRC needed to demonstrate that one of these conditions was satisfied. Specifically:

• Discovery of Insufficiency: The tribunal affirmed that HMRC had indeed discovered an insufficiency of tax.
• Section 29(5) - Insufficiency of Disclosure: HMRC failed to prove that the taxpayer had not sufficiently disclosed information, as required under this subsection.
• Section 29(4) - Carelessness: HMRC did not establish that Hicks or his representative acted carelessly in a manner that brought about the insufficiency.

The tribunal emphasized the objective standard of "reasonable care," assessing what a prudent taxpayer and accountant would have done under similar circumstances. Given Hicks' reliance on professional advice and the assurances provided by both his accountant and Montpelier, the tribunal found no evidence of carelessness that directly resulted in the tax insufficiency.

Impact

This judgment has profound implications for both taxpayers and HMRC. By underscoring the stringent requirements that HMRC must meet to issue discovery assessments, it reinforces taxpayer protections against retrospective tax claims. Taxpayers can be more confident in relying on professional advice without fear of undue scrutiny, provided they act within the bounds of reasonable care.

For HMRC, the decision serves as a reminder of the high evidential standards required to justify discovery assessments. It may necessitate more thorough and timely investigations before issuing such assessments, potentially reducing the volume of retrospective claims.

Complex Concepts Simplified

Section 29 of the Taxes Management Act 1970 (TMA)

This section empowers HMRC to make additional tax assessments under specific circumstances:

• Section 29(1): Allows HMRC to assess additional tax if they discover that income was not previously assessed, an assessment was insufficient, or relief was excessive.
• Section 29(4): Requires that the insufficiency was caused deliberately or carelessly by the taxpayer or someone acting on their behalf.
• Section 29(5): Provides an alternative condition where, even if disclosing efforts were made, HMRC could not have reasonably expected to discover the insufficiency based on the information provided.

Discovery Assessment

A discovery assessment is an additional tax charge imposed by HMRC when they discover an insufficiency of tax that was not previously assessed. This can occur if HMRC finds that income was not fully declared or deductions/exemptions were improperly claimed.

Insufficiency of Disclosure

This refers to situations where the taxpayer has not provided HMRC with all the necessary information required to accurately assess their tax liability. Under section 29(5), if HMRC cannot reasonably expect to have identified the insufficiency based on the disclosed information, they may issue a discovery assessment.

Carelessness

Under section 29(4), carelessness is defined as a failure to take reasonable care to avoid bringing about a tax insufficiency. The standard is objective, assessing what a reasonable and prudent taxpayer and their accountant would have done in similar circumstances.

Conclusion

The Hicks v. Revenue and Customs decision marks a significant affirmation of taxpayer protections against HMRC's retrospective tax assessments. By requiring HMRC to meet high standards in demonstrating either insufficiency of disclosure or carelessness, the tribunal has curtailed potential overreach in discovery assessments. This case reinforces the necessity for HMRC to conduct diligent and timely investigations, ensuring that discovery assessments are warranted only under clear and substantiated circumstances. For taxpayers, it underscores the importance of maintaining accurate records and relying on competent professional advice while also showcasing the judiciary's role in balancing HMRC's enforcement capabilities with individual taxpayer rights.