Precedents Cited

The judgment references several key legal precedents that inform the interpretation of the TMA 1970, particularly regarding the conditions for discovery assessments:

• MCashback LLP v HMRC [2011] UKSC 19: This Supreme Court case emphasized the importance of fairness in tribunal proceedings, allowing the tribunal to consider legal arguments not initially presented by the parties, provided it does not compromise fairness.
• Atherton: The FTT invoked paragraph 30 of Atherton to support its reasoning, although the specific context within Atherton isn't detailed in the judgment.
• Ingenious Games LLP and ors v HMRC [2015] UKUT 105 (TCC): This case was distinguished by Henderson J, differentiating between dishonesty, which must be expressly pleaded, and less severe forms of misconduct such as carelessness.

These precedents collectively underscore the necessity for HMRC to clearly articulate its case, especially when attributing tax loss to the conduct of advisers rather than the taxpayers themselves.

Legal Reasoning

The core legal issue centered on whether HMRC had met the requirements under sections 29(4) and 36(1) of the TMA 1970 by demonstrating that the loss of tax was due to the carelessness of the Ritchies' advisers.

1. Section 29(4) TMA 1970: Requires that the loss of tax must have been brought about carelessly or deliberately by the taxpayer or someone acting on their behalf.
2. Section 36(1) TMA 1970: Extends the assessment period to six years for losses caused by carelessness.

The Upper Tribunal concluded that HMRC had failed to adequately plead that the advisers' (Mr. Weir and Mr. Russell) carelessness met these statutory conditions. The references to advisers in HMRC's submissions were deemed insufficient and did not clearly establish that the advisers were acting on behalf of the taxpayers in a manner that would trigger the extended assessment period.

Additionally, the Tribunal highlighted that HMRC introduced arguments regarding the advisers' carelessness only during cross-examination, without prior clear articulation in their statement of case or skeleton arguments. This procedural lapse violated the fairness standards required by tribunal rules, particularly Rule 2, which emphasizes just and fair handling of cases.

Impact

The Upper Tribunal's decision has significant implications for future tax disputes, particularly concerning discovery assessments based on third-party conduct:

• Enhanced Clarity on Pleading Requirements: HMRC must ensure that any attribution of tax loss to advisers is explicitly and clearly pleaded in their submissions to tribunals. Vague or implicit references are insufficient.
• Procedural Fairness Reinforced: Tribunals must adhere to fairness principles by ensuring that all arguments affecting the outcome are clearly presented and that parties have adequate opportunity to respond.
• Limitations on HMRC's Discretion: The decision curtails HMRC's ability to introduce new arguments post-evidence without clear prior indication, safeguarding taxpayers against unforeseen assessments.
• Encouragement for Tax Adviser Accountability: While HMRC cannot readily attribute losses to advisers without clear evidence, tax advisers may face increased scrutiny to ensure meticulous and compliant tax advice.

Overall, the judgment promotes a more rigorous standard for HMRC in substantiating claims of carelessness by third parties, thereby balancing HMRC's enforcement powers with taxpayers' rights to fair treatment.

Sections 29 and 36 of the Taxes Management Act 1970 (TMA 1970)

Section 29 TMA 1970: Empowers HMRC to make additional tax assessments if it discovers that tax liabilities were underreported. However, when a taxpayer has already filed a return, HMRC can only reassess if the underreporting was due to the taxpayer’s or their agent’s carelessness or deliberate actions.

Section 36 TMA 1970: Extends the time limit for HMRC to make such discovery assessments from the standard four years to six years if the loss of tax is attributed to carelessness or deliberate actions by the taxpayer or someone acting on their behalf.

Principal Private Residence (PPR) Provisions

The PPR provisions under sections 222ff TCGA 1992 provide relief from CGT on the sale of a taxpayer's primary residence. However, not all gains from the sale may be exempt. Factors such as periods when the property was not the primary residence, usage of parts of the property for business, or construction of additional buildings (like sheds) can influence the extent of the exemption.

In this case, HMRC initially limited the PPR relief based on the period before the house was built and the inclusion of other structures in the property evaluation. The FTT subsequently expanded the relief granted to the Ritchies.

Discovery Assessment

A discovery assessment is an HMRC mechanism to retrospectively assess and collect taxes that were not initially reported or were underreported. It is contingent upon demonstrating that the tax loss was due to the taxpayer’s or their agent’s carelessness or deliberate actions. The process is governed by strict procedural and substantive requirements to protect taxpayers from arbitrary or unfounded claims.