Hargreaves v Revenue And Customs

Factual and Procedural Background

This appeal arises from a decision of the First-tier Tribunal (FTT) dismissing an application by the Appellant to have a preliminary issue heard separately concerning the competence of HM Revenue and Customs ("HMRC") to make a discovery assessment under section 29 of the Taxes Management Act 1970 ("TMA 1970"). The Appellant, a former UK resident and businessman who sold shares in a major UK company, contended that he was non-resident during the relevant tax year and that HMRC lacked competence to issue the discovery assessment. The substantive question concerns whether the Appellant effected a distinct break in his UK residence pattern, as required by case law, to establish non-residence for tax purposes.

The procedural history includes the Appellant’s initial self-assessment tax return declaring non-residence, HMRC’s issuance of a large assessment based on residency, and subsequent appeals and judicial review proceedings which were discontinued after relevant Supreme Court authority was issued. The present appeal concerns whether the question of HMRC's competence to make the discovery assessment should be heard as a preliminary issue or together with the substantive residence issue.

Legal Issues Presented

1. Whether the competence of HMRC to make a discovery assessment under section 29 TMA 1970 should be heard as a preliminary issue separate from the substantive issue of the taxpayer’s residence status.
2. The interpretation and application of section 29 TMA 1970 regarding the conditions under which HMRC may make a discovery assessment, including the burden of proof for negligence or innocent mistake.
3. The procedural fairness and convenience considerations in deciding whether to bifurcate the hearing into preliminary and substantive issues.

Arguments of the Parties

Appellant's Arguments

• The burden of proof on the competence issue under section 29(4) and (5) lies on HMRC, entitling the Appellant to have HMRC open their case first and thereby preserve the right to decide whether to call evidence after hearing HMRC’s case.
• Hearing the competence issue as a preliminary matter would serve justice by protecting the procedural advantage of the Appellant’s right to elect not to call evidence.
• There are practical convenience reasons favoring a preliminary hearing, including avoiding unnecessary evidence and focusing the case efficiently.
• The competence issue and substantive residence issue are distinct and should be treated as separate appeals or hearings.
• The facts relevant to the competence issue (negligence or innocent mistake) differ from those relevant to the substantive residence issue.
• It would be unjust to require the Appellant to give evidence on residence facts which HMRC might rely upon to prove competence, effectively forcing him to assist HMRC’s case.
• In cases where fraud is alleged under section 29(4), separate hearings are the norm; the same should apply for negligence.

Respondents' Arguments (HMRC)

• The competence issue and substantive residence issue are intertwined, sharing a "substratum of facts," particularly since negligence under section 29(4) depends on the actual residence facts.
• The burden of proof on negligence and innocent mistake lies on HMRC, but this does not entitle the Appellant to a separate preliminary hearing as a matter of right.
• The procedural decision whether to hear issues separately is discretionary and governed by the overriding objective of fairness and case management.
• The Appellant’s desire for two separate hearings to have two opportunities to challenge the assessment amounts to a procedural manoeuvre not entitled as of right.
• There is no established practice requiring separate hearings where negligence is alleged, unlike the more serious allegation of fraud.
• HMRC do not rely on the Appellant’s oral evidence to prove negligence, having sufficient documentary evidence.
• Separate hearings would cause delay, duplication of effort, and potential disputes over the binding effect of preliminary findings.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by outlining the statutory framework of section 29 TMA 1970, emphasising the conditions under which HMRC may make a discovery assessment and the allocation of burden of proof. It noted that the competence issue (whether HMRC had power to make the assessment) and the substantive residence issue (whether the taxpayer was resident) arise in the same appeal and share overlapping factual elements, particularly since negligence under s. 29(4) depends on the actual facts of residence.

The court accepted the Appellant's argument that if the competence issue alone were in dispute, he could insist that HMRC open the case and thereby decide whether to call evidence after hearing HMRC’s evidence, preserving a procedural advantage. However, because the Appellant also challenges the substantive residence issue, on which he bears the burden, the practical effect is that he must call evidence on residence facts. This diminishes the procedural advantage of a separate preliminary hearing.

The court rejected the notion that the procedural right to a preliminary hearing on the competence issue is absolute, holding instead that such decisions are discretionary and governed by the overriding objective of fairness and efficiency. It found that the FTT had acted within its discretion in refusing the preliminary issue application, particularly given the significant factual overlap and the risk of duplication and delay if two hearings were held.

The court also addressed concerns about evidential burden, clarifying that the FTT’s comments did not impose on the taxpayer a legal obligation to prove the negative but reflected practical realities of litigation. The court dismissed the argument that the Appellant would be unfairly compelled to assist HMRC by giving evidence, noting that cross-examination is a normal feature of litigation when a party chooses to give evidence.

Finally, the court noted that the Appellant’s attempt to have two separate hearings to challenge the assessment twice was a procedural manoeuvre not supported by law or practice. It cited prior cases where similar applications were refused and affirmed that the competence of a discovery assessment is a ground of appeal within a single appeal rather than a separate appeal.

Holding and Implications

The court DISMISSED THE APPEAL, upholding the FTT’s decision not to direct a preliminary hearing on the competence issue.

The direct effect is that the competence of HMRC to make the discovery assessment will be determined together with the substantive residence issue in a single hearing. This avoids duplication of evidence and potential delays. The decision confirms that the competence issue is a ground within the appeal process rather than a separate appeal and that procedural discretion governs the management of preliminary issues where factual overlap exists. No new precedent was established beyond reaffirming the discretionary nature of such case management decisions.