Ranga Nelson v The Commissioners for HMRC concerned discovery assessments and penalties for the years 2007/08 to 2012/13. HMRC had issued assessments based on the Appellant’s ‘deliberate’ behaviour in relation to the reporting of trading profit and the apparent shortfall of income compared with expenditure.
Originally allocated a one-day hearing in the First-tier tribunal, but errors by HMRC meant this proved insufficient and a further day was allocated 6 weeks later. The Judge issued Directions and was assured by the parties they could meet the time limits set by the Directions.
In order to issue an assessment under the Taxes Management Act 1970, S29, an HMRC Officer must ‘discover’ that income or gains have not been assessed; or that a tax assessment has become insufficient; or that excessive relief has been given.
HMRC’s powers to raise a discovery assessment are limited to cases where one of two conditions are met. The first is that the loss of tax was brought about carelessly or deliberately. The second states that when the enquiry window is closed or an enquiry into the taxpayer’s return was completed, the HMRC officer could not have been reasonably expected, from information made available to him before that time, to be aware of the relevant loss of tax.
The full facts and law in this case were considered and several notable issues were highlighted, as follows:
At the first hearing, Judge Anne Redston noted that a closure notice had been issued by HMRC Officer Mr Patel for 2011/12, but it was issued outside the statutory time limit permitted by the Taxes Management Act 1970, section 9A.
HMRC tried to justify this by explaining the enquiry was not opened under S 9A and the closure notice had been issued by mistake, to be later replaced with an assessment for that year; the replacement assessment had not been submitted to the tribunal and the Direction issued at the end of the first day asked HMRC to provide a submission to explain why the closure notice had been replaced by the assessment and show how the conditions were met to make such an assessment.
HMRC’s submission on the second day was that the wrongly issued closure notice had been replaced by an assessment on the grounds that Mr Nelson had acted deliberately.
The judge’s analysis of this was that the closure notice was invalid and further, the discovery of a loss of tax could arguably be considered as stale given the 8-month gap between the issuance of the closure notice and the replacement assessment.
Unfortunately, this argument was not considered further, as the judge had heard the substantive issues and decided in the appellant’s favour.
However, we have seen several cases involving the notion of staleness, including Charlton, Tooth and Beagles; the latter involved a detailed discussion as to the relevance of an assessment when it has been perceived to have gone stale. One of the conclusions was that the discovery must retain its ‘newness’ when an assessment is made. It was certainly implied that Judge Anne Redston would be likely to agree with this position.
The Judge next considered whether HMRC had sought to mislead the Tribunal, given the omission of the 2011/12 assessment in the documents provided. She pointed out that the burden of proof in discovery assessments lies with HMRC and had she not noticed the error in the closure notice, the hearing would have taken place based on the burden of proof lying with the taxpayer instead.
She concluded that HMRC had made an error and had not attempted to deliberately mislead the Tribunal. However, her criticism of HMRC is clear in referring to the information provided regarding the 2011/12 as ‘brief and somewhat opaque’.
The Judge passed down further criticism of HMRC when considering whether Mr Nelson’s behaviour was deliberate. She asserted that the burden of proof was unlikely to be satisfied as HMRC offered only vague and general conclusions; after a thorough inspection of the facts, she stated “it is abundantly clear that Mr Nelson did not deliberately understate his tax liabilities for any of the years”. She highlighted that, as in the case of Tooth, the Upper Tribunal held that “an allegation of deliberately bringing about a tax loss is a serious one, tantamount to an allegation of fraud.”
HMRC were also clearly unprepared, as the Judge found fault with much of the evidence presented on the second day; for example, they had not carried out a detailed analysis of the income to support their figures. They had made “fundamentally flawed” assumptions, which were not supported by evidence.
The Judge was distinctly unimpressed that no further work had been done on the case by HMRC, despite having over six weeks between the hearings and having confirmed to the Tribunal they could respond to the Directions given.
This was shown to be in direct contrast to the time the Nelson family had spent preparing for the case. She made a particular note of the fact that over the course of four years, HMRC had caused the Nelson family considerable stress and anxiety and had threatened Mr Nelson with bankruptcy.
HMRC had made the assessments for other years based on the presumption of continuity in relation to 2011/12 and the Judge again underlined their errors and decided there was no basis for the application of that presumption.
All assessments and penalties were cancelled and Mr Nelson’s appeal was upheld.
The discovery assessment legislation is hugely contentious and we welcome this decision in favour of the taxpayer, which focuses on HMRC’s failings.
This case highlights HMRC’s arrogance in their powers of discovery. They showed disregard for this case and for the Tribunal in not undertaking full and thorough evidencing of their facts, even when the Judge had spotted their litany of errors and directed them to do so.
WTT will always carefully consider whether a discovery assessment can be challenged and we are closely following future Tribunal decisions regarding discovery. If you have any questions about Discovery or wish to discuss challenging yourself please feel free to contact us directly here.