Anderson v The Commissioners for HM Revenue and Customs (Tax)

Factual and Procedural Background

This opinion concerns the appeal of the Appellant from the decision of the First-tier Tribunal ("FTT") which dismissed the Appellant's appeal against a discovery assessment issued by the Respondents on 2 May 2012 under section 29 of the Taxes Management Act 1970 ("TMA"). The discovery assessment disallowed losses claimed by the Appellant arising from activities described as a trade involving acquiring stakes in young African footballers through a soccer academy trade operated by an entity referred to as Bafana Soccer Developments Limited ("Bafana"). The Appellant had invested approximately £2.94 million into Bafana and claimed losses of over £3 million in his 2008-09 tax return. Bafana went into administration in 2011, and the Respondents raised the discovery assessment after identifying the scheme as an undisclosed tax avoidance scheme. The Appellant appealed to the Tribunal on 28 May 2012. The FTT dismissed the appeal on 5 August 2016, finding the discovery assessment valid and the losses claimed unavailable under the relevant tax legislation.

Legal Issues Presented

1. Whether the discovery assessment issued under section 29 TMA was valid, specifically the meaning of "discover" and the subjective and objective tests applicable to an officer's belief of an insufficiency of tax.
2. Whether the Appellant was carrying on a trade for the purposes of claiming losses under sections 64 and 72 of the Income Tax Act 2007 ("ITA").
3. Whether the trade, if any, was carried on on a commercial basis and with a view to or reasonable expectation of profit, as required by sections 66 and 74 ITA.
4. Whether the losses claimed were tax-generated losses precluded from relief by section 74B ITA due to the involvement of relevant tax avoidance arrangements and non-active capacity.

Arguments of the Parties

Appellant's Arguments

• The discovery assessment was premature as the officer lacked the necessary subjective belief that there was an insufficiency of tax, having only grounds for suspicion rather than a reasonable belief.
• The Appellant was carrying on a trade, and the FTT erred in law by concluding otherwise, including by relying on irrelevant factors such as the amount of time personally spent and outsourcing of activities.
• The FTT wrongly applied the badges of trade and erred in assessing commerciality and the view or expectation of profit, ignoring clear evidence of the Appellant’s commercial approach and profit motive.
• The FTT erred in concluding the losses arose in connection with relevant tax avoidance arrangements under section 74B ITA.
• The FTT applied an incorrect "wholly and exclusively" test regarding the time requirement under section 74C ITA for active trading involvement.

Respondents' Arguments

• The officer who made the discovery assessment had a reasonable and honest belief that there was an insufficiency of tax based on available evidence, satisfying both subjective and objective tests.
• The Appellant was not carrying on a trade but was more akin to an investor with limited active involvement.
• The trade was not carried on on a commercial basis nor with a view to or reasonable expectation of profit as required by statute.
• The losses arose from relevant tax avoidance arrangements, and the Appellant did not meet the active participation requirements to claim relief under section 74B ITA.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by considering the statutory framework for discovery assessments under section 29 TMA, emphasizing that the power to make such an assessment requires an officer to have a subjective belief that there is an insufficiency of tax, supported by an objective standard that the belief is reasonable and one a reasonable officer could form. The court reviewed extensive case law establishing that "discovery" involves a threshold crossing in the officer's state of mind rather than requiring new facts, and that mere suspicion is insufficient for a discovery assessment.

Applying these principles, the court found that the officer who made the assessment had a reasonable basis to believe there was an insufficiency of tax based on evidence including the Appellant’s involvement in the Bafana Scheme, evidence of orchestration of the scheme, and concerns about the Appellant’s level of active involvement. The court concluded that the officer’s belief went beyond suspicion and was reasonable under the objective test.

The court then turned to the question of whether the Appellant was carrying on a trade for purposes of claiming loss relief. It recognized that the meaning of "trade" is a question of law but its application to facts is a question of fact or mixed fact and law. The court applied established badges of trade as guidance but emphasized that the ultimate conclusion depends on a holistic evaluation of the Appellant’s actual activities.

The court upheld the FTT’s finding that the Appellant’s activities resembled those of an investor with limited active involvement rather than a trader creating value day-to-day. The FTT’s skepticism about the quality and extent of the Appellant’s involvement, including reliance on watching DVDs and limited direct engagement with the academy, was supported by the evidence.

Regarding commerciality and the expectation of profit, the court found no error in the FTT’s application of the binding authority in Wannell v Rothwell. The FTT properly assessed whether the Appellant’s activities were conducted on a commercial basis and with a genuine profit motive. The court agreed with the FTT that the Appellant’s conduct did not demonstrate the seriousness or commercial engagement required, despite his hope for profit and some evidence of planning.

Finally, the court considered the statutory restriction under section 74B ITA precluding relief for losses arising from non-active participation in relevant tax avoidance arrangements. The court found that the FTT was entitled to conclude that the Appellant’s losses arose in connection with such arrangements and that the Appellant failed to demonstrate sufficient active involvement (an average of at least 10 hours per week). The court rejected the Appellant’s argument that the FTT applied an improper exclusivity test, clarifying that the FTT properly assessed the proportion of time genuinely dedicated to the trade.

Holding and Implications

The court DISMISSED the appeal in its entirety.

As a result, the discovery assessment issued on 2 May 2012 under section 29 TMA was upheld as valid. The Appellant was not entitled to claim the losses under sections 64 or 72 ITA because he was not carrying on a trade on a commercial basis and with a view to or reasonable expectation of profit. Furthermore, the losses were precluded from relief by section 74B ITA due to their arising from relevant tax avoidance arrangements and the Appellant’s non-active capacity.

No new precedent was established by this decision; rather, it affirmed the application of established legal principles governing discovery assessments and trade loss relief claims in the context of tax avoidance schemes.