Revenue and Customs v Ritchie & Anor (CAPITAL GAINS TAX � principal private residence relief � fairness)

Factual and Procedural Background

In January 2007, the Respondents sold a plot of land of approximately 0.7 hectares, including a house they had built and other buildings such as a large shed. Their tax returns for the year of disposal did not disclose the sale or any chargeable gain. These returns were prepared by their accountant, referred to as Adviser A.

In March 2013, the Appellants issued discovery assessments under section 29 of the Taxes Management Act 1970 ("TMA"), assessing capital gains tax (CGT) on the Respondents for gains from the sale. The assessments were based on the view that the gain was not fully exempt under the principal private residence ("PPR") relief provisions.

The Respondents appealed these assessments. The First-tier Tribunal ("FTT") heard the appeals in March 2017, addressing two main issues: the extent of CGT exemption under the PPR provisions and whether the statutory conditions for discovery assessments and time limits were met, including whether the loss of tax was due to carelessness by the taxpayers or persons acting on their behalf.

The FTT found that a larger portion of the gain was exempt under the PPR provisions than HMRC had allowed and that the conditions for the assessments were met due to carelessness by the Respondents' advisers, not the Respondents themselves. The chargeable gain was reduced, but the assessments were upheld.

Both parties appealed: the Appellants challenged the FTT's findings on the PPR provisions, and the Respondents challenged the finding that carelessness conditions were satisfied. The Upper Tribunal heard argument solely on the carelessness issue and gave an oral decision that the FTT erred in law in concluding that carelessness was established, with written reasons provided in this opinion.

Legal Issues Presented

1. Whether the First-tier Tribunal was entitled to consider and find that the loss of tax was brought about by the carelessness of persons acting on behalf of the Respondents, specifically their advisers, under section 29(4) and section 36(1B) TMA.
2. Whether the carelessness condition was adequately pleaded by the Appellants so as to give the Respondents a fair opportunity to respond.
3. Whether it was fair and lawful for the FTT to consider the carelessness of the advisers when that issue was raised late in the proceedings and after the close of evidence.

Arguments of the Parties

Appellants' Arguments

• The FTT's conclusion that the carelessness of the Respondents' advisers justified the assessments had been adequately pleaded in the statement of case and skeleton arguments.
• HMRC was not required to anticipate all possible defences in its statement of case, such as a defence that any carelessness was not that of the Respondents themselves.
• The FTT was entitled to consider new arguments arising from evidence during the hearing, and the Respondents had not sought an adjournment or additional evidence.
• Fairness and procedural rules allow the tribunal to regulate its own procedure and consider arguments not initially pleaded, provided parties have a fair opportunity to respond.

Respondents' Arguments

• The FTT erred in law by concluding that the carelessness condition was satisfied due to the advisers' conduct.
• The issue of advisers' carelessness was not adequately pleaded, resulting in unfairness and lack of proper notice to the Respondents.
• The Respondents had sought expert advice from a former tax inspector, which they believed negated any carelessness on their part.
• The late raising of the advisers' carelessness issue after the close of evidence deprived the Respondents of a fair opportunity to address it, including by calling further evidence.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by setting out the relevant statutory framework under sections 29 and 36 of the Taxes Management Act 1970, which govern discovery assessments and their time limits. Section 29 allows assessments where tax loss is discovered, subject to conditions including carelessness by the taxpayer or persons acting on their behalf. Section 36 extends the time limit for assessments in cases of carelessness or deliberate conduct.

The FTT had found that the Respondents were not careless but that their advisers (Adviser A and Adviser B) were careless, thus justifying the assessments. However, the Upper Tribunal examined whether the issue of advisers’ carelessness had been properly pleaded and whether it was fair to consider it late in the proceedings.

The Tribunal found that the Appellants’ pleadings and skeleton arguments emphasized carelessness by the Respondents themselves and did not clearly or unequivocally raise carelessness by the advisers as a separate issue. The references to "advisors" were ambiguous and appeared to be part of the argument that the Respondents were careless, not their agents.

Further, the Tribunal noted that the issue of advisers’ carelessness was only clearly raised by the FTT itself after the close of evidence, without giving the Respondents an opportunity to respond or call further evidence. This was deemed unfair and contrary to procedural fairness principles, particularly given the professional nature of the advisers and the significance of such a finding.

The Tribunal emphasized the importance of fairness under the FTT procedural rules, including the need to avoid unnecessary formality but also to ensure parties can participate fully and respond to new issues. It concluded that the FTT erred in law by considering the advisers’ carelessness without proper pleading or fair opportunity for the Respondents to address it.

Regarding whether to remit the matter back to the FTT for further evidence, the Tribunal exercised its discretion and declined to do so. It reasoned that the matters dated back many years, the hearing had already been an opportunity to present evidence, and it would be unfair and untimely to reopen the issue now.

Holding and Implications

The appeal is allowed and the discovery assessments are discharged.

The court set aside the FTT’s finding that the carelessness condition under section 29(4) TMA was satisfied due to the advisers’ conduct, on grounds of procedural unfairness and inadequate pleading. The assessments, made outside the ordinary time limits, were therefore invalid. The decision directly affects the parties by removing the tax assessments. No new precedent was established beyond clarifying the requirements of fairness and pleading in discovery assessments involving carelessness by agents.