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Atherton v Revenue and Customs (INCOME TAX - discovery assessment)
Factual and Procedural Background
This appeal concerns a discovery assessment issued by HM Revenue and Customs (“HMRC”) to the Appellant for the 2007/08 tax year. The Appellant was a partner in a hedge fund and engaged accountants (Company A) to prepare his tax returns. Through Company A, the Appellant was introduced to Company B, which marketed a tax avoidance scheme called Romangate, designed to generate artificial employment losses arising in 2008/09. The Appellant chose to claim the resultant loss relief in his 2007/08 self-assessment tax return, completed and submitted by Company A, which reduced his tax liability from over £2 million to nil. The tax return included entries in Box 3 (Additional Information pages) and Box 20 (Partnership pages) for the loss, with a detailed white space disclosure relating to Box 3 but not explicitly to Box 20.
HMRC opened an enquiry in 2009 under Schedule 1A, treating the claim as a standalone claim outside the return. Following a 2013 Supreme Court decision in a related case, HMRC realized that the claim was included “in” the tax return and that their enquiry should have been under section 9A, but they were out of time to open such an enquiry. Consequently, in 2014 HMRC issued a discovery assessment for unpaid tax. The Appellant appealed the validity of this assessment.
Legal Issues Presented
- Whether HMRC made a valid discovery under section 29 of the Taxes Management Act (“TMA”) in 2014, or whether the discovery made in 2009 was the only discovery and by 2014 had become stale, rendering the discovery assessment invalid.
- Whether the insufficiency in the 2007/08 tax return was brought about by the carelessness of the Appellant or a person acting on his behalf, thereby extending the time limit for HMRC to issue the discovery assessment.
Arguments of the Parties
Appellant's Arguments
- The only discovery occurred in 2009, and the 2014 discovery assessment was stale due to undue delay.
- The 2014 event was merely HMRC realizing it had pursued the wrong procedural route, not a new discovery of insufficiency.
- HMRC had knowledge of the relevant legal position by late 2009, undermining the claim of a new discovery in 2014.
- The Appellant’s case is analogous to a prior case where the tribunal did not find HMRC’s understanding of a legal point to constitute a discovery.
Respondents' Arguments
- Supported the First-tier Tribunal’s (“FTT”) conclusion that a valid discovery was made in 2014 following the Supreme Court decision clarifying the nature of the claim within the tax return.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Burgess v HMRC [2015] UKUT 578 (TCC) | Balance between HMRC and taxpayer; burden on HMRC to prove valid discovery assessment. | Confirmed that HMRC must prove on balance of probabilities that conditions for discovery assessment are met. |
| Tower MCashback LLP 1 v HMRC [2010] EWCA Civ 32 | Discovery assessment powers are more restrictive post-1996 self-assessment regime. | Supported interpretation of section 29 as conferring limited powers on HMRC. |
| HMRC v Charlton [2012] UKUT 770 (TC) | Meaning of “discovery” includes crossing a threshold of knowledge, not necessarily new facts. | Clarified that discovery may result from a change in opinion or “eureka” moment. |
| Hankinson v HMRC [2011] EWCA Civ 1566 | Discovery includes honest and reasonable change of mind by HMRC officer; no new information required. | Supported that discovery can arise from reassessment of known facts. |
| Pattullo v Revenue & Customs Commissioners [2016] STC 2043 | Concept of “staleness” in discovery assessments; HMRC must act promptly after discovery. | The court followed this decision, holding that delay may invalidate a discovery assessment unless a new discovery is made. |
| Cotter v Revenue & Customs Commissioners [2013] UKSC 69 | Distinction between standalone claims and claims included in tax returns for enquiry purposes. | Critical in establishing that the Romangate loss was included “in” the tax return, affecting the enquiry route and time limits. |
| Revenue & Customs Commissioners v Tooth [2018] UKUT 38 (TCC) | Facts on disclosure and carelessness in tax returns involving the Romangate scheme. | Distinguished on facts; did not support Appellant’s argument regarding discovery in 2014. |
Court's Reasoning and Analysis
The court carefully examined the timing and nature of HMRC’s discovery under section 29 TMA. It accepted the FTT’s factual findings that HMRC initially believed the claim was a standalone claim outside the tax return and opened a Schedule 1A enquiry in 2009 accordingly. The 2013 Supreme Court decision in Cotter clarified that the loss claim was included “in” the tax return, meaning the enquiry should have been under section 9A, for which HMRC was time-barred by 2014. The court held that HMRC’s realization in 2014 constituted a new discovery because it crossed a legal threshold: HMRC’s understanding of the law changed, revealing that the self-assessment was insufficient in law.
The court rejected the Appellant’s argument that the 2014 event was merely a procedural correction and not a new discovery. It found no error in the FTT’s findings of fact or law on this point, emphasizing that successive different discoveries can be made under section 29.
Regarding carelessness, the court analyzed whether the insufficiency in the tax return was caused by the carelessness of the Appellant or persons acting on his behalf (Company A). The FTT found that the use of Box 20 to “force” a year 2 loss into the 2007/08 return without adequate explanation was careless. The white space disclosure related only to Box 3 and did not explain the use of Box 20. The court agreed that a reasonably diligent taxpayer would not have used Box 20 in that way without disclosure.
The court further considered whether the insufficiency was brought about by such carelessness. It concluded that although the insufficiency resulted from the numerical entry in Box 20, the failure to take reasonable care to avoid creating the insufficiency satisfied the statutory test of carelessness under section 29(4) and section 118(5) TMA. The Appellant’s reliance on advice from Company B was rejected because the advice to use Box 20 came from Company A, who were acting on his behalf and therefore responsible for carelessness.
Although the FTT did not explicitly apply the statutory test of reasonable care in causation, the court held that the ultimate conclusion of carelessness causing the insufficiency was correct. The court affirmed the FTT’s decision but on a different reasoning basis, focusing on the statutory duty to take reasonable care to avoid tax insufficiency.
Holding and Implications
The court DISMISSED the appeal on both the Discovery Issue and the Carelessness Issue.
The discovery assessment issued by HMRC in 2014 was valid because a new discovery occurred when HMRC’s legal understanding changed following the Supreme Court decision. The insufficiency in the tax return was brought about by the carelessness of the Appellant or persons acting on his behalf, extending the time limit for issuing the assessment. The direct effect is that the Appellant remains liable for the assessed tax. No new legal precedent was established beyond affirming existing principles on discovery assessments and carelessness under the TMA.
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