Hegarty & Anor v Revenue & Customs (CAPITAL GAINS TAX/TAXATION OF CHARGEABLE GAINS : Other)

Factual and Procedural Background

This opinion concerns appeals by the Appellants against the issuance of information and document notices under paragraph 1 Schedule 36 Finance Act 2008, relating to disposals of land at 22 Station Road, Moneymore, County Londonderry. The Appellants disposed of the land in two tranches, including a transfer of a dwelling to a connected person and a subsequent sale of contiguous land to a developer. HMRC initiated a Code of Practice 9 investigation into the Appellants' tax returns for 2006-07 and 2007-08, suspecting that the land disposal was not properly returned and that business asset taper relief (BATR) may have been wrongly claimed.

The investigation involved the issuance of Schedule 36 notices requesting information and documents. HMRC initially withdrew the case before the appeal hearing but later reissued notices with fewer requirements. The Appellants challenged the validity of the notices, raising issues including whether the doctrine of res judicata applied, whether there was abuse of process by HMRC, and whether the statutory Condition B (reason to suspect loss of tax) was met. The Tribunal conducted a hearing with evidence from the Appellants and their accountant but no evidence from HMRC officers. The case was heard in the First-tier Tribunal, Tax Chamber, at the Royal Courts of Justice, Belfast, on 28 August 2018.

Legal Issues Presented

1. Whether HMRC are estopped from issuing or enforcing the Schedule 36 notices on the grounds of res judicata or abuse of process.
2. Whether Condition B in paragraph 21(6) Schedule 36 is satisfied, i.e., whether an officer of Revenue and Customs had reason to suspect that an amount of capital gains tax may not have been assessed.
3. Whether the Tribunal is permitted to assess if there is no sensible or reasonable possibility of HMRC being able to raise a discovery assessment, particularly given the requirement to prove deliberate conduct, and if so, whether such a possibility exists.
4. Whether the information and documents sought by the notices were reasonably required to check the Appellants' tax position.
5. Whether the notices were inherently uncertain and unenforceable.
6. Whether the officer issuing the notices had proper authorization for requesting old documents.

Arguments of the Parties

Appellants' Arguments

• The doctrine of res judicata should prevent HMRC from reissuing notices because the matter had been effectively determined by the Tribunal’s earlier decision when HMRC withdrew their case.
• HMRC's withdrawal and subsequent reissuance of notices constituted an abuse of process, causing emotional distress and unfairness to the Appellants.
• The notices were not valid because HMRC did not have reason to suspect any under-assessment, thus Condition B was not met.
• There was no sensible or reasonable possibility of HMRC raising a discovery assessment due to the need to prove deliberate conduct which was not evidenced.
• The information requested by the notices was not reasonably required for checking the Appellants’ tax returns.
• The notices were inherently uncertain and unenforceable.
• HMRC failed to show that the officer who issued the notices had proper authorization to request documents older than six years.

Respondents' Arguments (HMRC)

• The doctrine of res judicata generally does not apply in tax matters across different tax years and no tribunal had adjudicated on the issues raised by the second notices.
• HMRC withdrew the original notices due to their insufficiency but reserved the right to issue further notices; thus, no abuse of process occurred.
• Condition B was met based on evidence such as discrepancies in land valuations and the use of the land contrary to claimed business use, supporting a reason to suspect under-assessment.
• The cases cited by the Appellants relating to section 20 TMA do not apply to Schedule 36 notices, as Schedule 36 removed the requirement for a sensible or reasonable possibility of a discovery assessment.
• HMRC’s powers under Schedule 36 are broader and do not require the same safeguards as section 20 TMA notices.
• The information requested was reasonably required to check the Appellants’ tax position.
• HMRC did obtain authorization for requesting old documents under paragraph 20 Schedule 36.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by addressing the estoppel and abuse of process arguments. It acknowledged that res judicata generally does not apply across different tax years in tax matters, citing the Caffoor principle and relevant case law. The Tribunal found that no prior adjudication on the exact issues had occurred because HMRC had withdrawn their case without a judicial determination. Therefore, res judicata did not bar HMRC from reissuing notices.

Regarding abuse of process, the Tribunal applied established legal principles requiring a high threshold to prove manifest unfairness or misuse of court procedure. Although HMRC’s withdrawal and later reissuance of notices caused the Appellants distress, the Tribunal concluded that HMRC’s conduct did not amount to abuse of process. The Tribunal noted that HMRC should have communicated more clearly about the withdrawal and reissue, but such procedural shortcomings do not justify striking out the notices.

On the substantive issue of whether Condition B (reason to suspect) was met, the Tribunal emphasized that this condition requires an officer issuing the notice to have a genuine and objectively reasonable suspicion based on evidence. The Appellants put HMRC to strict proof, but HMRC did not call the relevant officer to give evidence. The Tribunal found that the facts presented did not speak for themselves sufficiently to establish that Condition B was met regarding the transfer of land to the connected person or the BATR claim for 2007-08. Specifically, the Tribunal held that the notices relating to the 2007-08 BATR claim did not meet Condition B and upheld the appeal on that point. It also found that Condition B was not met in relation to the transfer to the connected person due to insufficient evidence of the officer’s reasoning.

The Tribunal further considered whether the “sensible or reasonable possibility” test from cases dealing with section 20 TMA notices applied to Schedule 36 notices. After comparing the statutory frameworks, the Tribunal concluded that this test is implicitly part of Schedule 36 to avoid futile inquiries. It reasoned that information requests must be reasonably required for checking the taxpayer’s position, which excludes unreasonable or futile demands.

Applying this test, the Tribunal found that HMRC had not demonstrated a reasonable prospect of making a discovery assessment based on deliberate conduct, especially given the absence of evidence from HMRC officers. The Tribunal noted that any assessments based on negligence would be time-barred and that allegations tantamount to fraud require specific proof, which was lacking here.

Consequently, the Tribunal set aside both Schedule 36 notices under paragraph 33(3)(c) of Schedule 36 Finance Act 2008.

Holding and Implications

The Tribunal’s final ruling was to SET ASIDE BOTH SCHEDULE 36 NOTICES.

This decision means that the Appellants are not required to comply with the challenged information and document notices issued by HMRC. The Tribunal found that HMRC failed to demonstrate the necessary legal conditions for issuing the notices, particularly the requirement that the issuing officer had reason to suspect under-assessment and that there was a reasonable prospect of a valid discovery assessment.

No broader precedent was established beyond the facts of this case. The Tribunal noted that HMRC retains the right to issue further Schedule 36 notices if they can satisfy the legal requirements, but the current notices are invalid. The decision also does not prevent HMRC from pursuing discovery assessments or other investigations on separate grounds.

The Tribunal expressed concern about the prolonged uncertainty faced by the Appellants and suggested that HMRC should provide clarity or finality regarding ongoing investigations, particularly given the Appellants’ advanced age and the length of the inquiry.