McMillan v Revenue & Customs (PAYE - Self Assessment)

Factual and Procedural Background

The Appellant appealed against eight assessments and related penalties issued by the tax authority pursuant to section 29 of the Taxes Management Act 1970, covering tax years 2006-07 to 2013-14, totaling approximately £290,928.56 in tax and £132,193.25 in penalties. The Appellant had not filed tax returns for these years nor received notices to file. The appeal followed an adverse review decision and was heard after a delay not attributable to either party.

The tax authority contended that a discovery assessment was justified based on bank statements indicating taxable income, suggesting trading activity. The Appellant denied this, asserting that the funds were gambling winnings and that no taxable income existed. The appeal primarily concerned the validity of the assessments and penalties issued for failure to notify taxable income.

Legal Issues Presented

1. Whether the discovery assessments issued under section 29 TMA for the years 2006-07 to 2013-14 were valid in the absence of filed returns or notices to file.
2. Whether the Appellant’s bank deposits constituted taxable income derived from trade or were legitimate gambling winnings exempt from tax.
3. Whether the penalties for failure to notify taxable income were correctly imposed given the absence of a taxable income source.
4. The applicability of the four-year time limit under section 34 TMA and whether the tax authority demonstrated a loss of tax permitting assessments outside this period.

Arguments of the Parties

Respondents' Arguments

• A tax officer made a discovery under section 29 TMA based on bank statements showing frequent, regular deposits indicative of trading income.
• The Appellant failed to provide a reasonable explanation or evidence to support his claim of gambling winnings.
• The tax authority calculated the Appellant’s net income considering living expenses and asserted the tax loss arose from negligent conduct, though no concealment was alleged.
• The penalties for failure to notify were properly calculated and justified by the Appellant’s failure to disclose chargeability.

Appellant's Arguments

• The assessments were invalid as the tax authority failed to demonstrate a loss of tax to justify assessments beyond the four-year limit under section 34 TMA.
• The alleged source of funds was inadequately pleaded, referencing Fairford Group plc v HMRC [2014] UKUT 329 (TCC).
• The Appellant provided a truthful explanation that the funds were gambling winnings, supported by evidence and witnesses.
• The tax authority’s inadvertent disclosure of an internal review letter suggested cancellation of assessments, undermining the case.
• The Appellant contended he had no income tax liability and thus no liability for penalties, with the tax authority failing to discharge the burden to establish a taxable income source.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal focused primarily on factual findings. It acknowledged the tax authority’s discovery under section 29 TMA but found no evidence that the Appellant engaged in trade or had taxable income beyond potential bank interest. The Appellant’s gambling winnings, supported by credible witness testimony and consistent explanations, were accepted as the true source of funds. The Tribunal noted the absence of records was not determinative as statutory record-keeping obligations had ceased before the enquiry began, and no concealment was alleged.

The Tribunal found the tax authority’s primary contention—that the Appellant carried on a trade—unsupported by evidence. The Appellant’s cooperation and consistency throughout the enquiry further supported his case. Although some elements of the Appellant’s lifestyle and banking patterns raised suspicion, these did not outweigh the credible evidence of gambling winnings.

Consequently, the Tribunal concluded that the discovery assessments and penalties were invalid as the tax authority failed to prove a taxable income source. The Tribunal noted that any assessment relating to bank interest might still be pursued separately by the tax authority.

Holding and Implications

The Tribunal ALLOWED the appeal, setting aside all discovery assessments and related penalties for the tax years 2006-07 to 2013-14.

The direct effect is that the Appellant is not liable for the disputed tax or penalties as no taxable income source was established. No new legal precedent was set; the decision rests on application of established principles to the facts. The tax authority may conduct a further assessment if bank interest is material.