ON APPEAL FROM
THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE WARREN
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LEWISON
SIR MARK WALLER
| DEREK WILLIAM HANKINSON
|- and -
|HM REVENUE AND CUSTOMS
Ingrid Simler QC and Akash Nawbatt (instructed by HM Revenue and Customs Solicitors) for the Respondent
Hearing date : 6 December 2011
Crown Copyright ©
Lord Justice Lewison:
"(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
(b) that an assessment to tax is or has become insufficient, or
(c) that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
(a) the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, and
(b) the situation mentioned in subsection (1) above is attributable to an error or mistake in the return as to the basis on which his liability ought to have been computed,
the taxpayer shall not be assessed under that subsection in respect of the year of assessment there mentioned if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a) in respect of the year of assessment mentioned in that subsection; and
(b) in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—
(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if—
(a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;
(b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or
(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—
(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii) are notified in writing by the taxpayer to an officer of the Board.
(8) An objection to the making of an assessment under this section on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the assessment. …"
"As I have already observed, apart from a closure notice, and the power to correct obvious errors or omissions, the only other method by which the Revenue can impose additional tax liabilities or recover excessive reliefs is under the new s 29. That confers a far more restricted power than that contained in the previous s 29. The power to make an assessment if an inspector discovers that tax which ought to have been assessed has not been assessed or an assessment to tax is insufficient or relief is excessive is now subject to the limitations contained in s 29(2) and (3) (s 29(1)). Section 29(2) prevents the Revenue making an assessment to remedy an error or mistake if the taxpayer has submitted a return in accordance with s 8 or s 8A and the error or mistake is in accordance with the practice generally prevailing when that return was made. Section 29(3) prevents the Revenue making a discovery assessment under s 29(1) unless at least one of two conditions is satisfied (s 29(3)). The prohibition applies unless the undercharge or excessive relief is attributable to fraudulent or negligent conduct (s 29(4)) or having regard to the information made available to him the inspector could not have been reasonably expected to be aware that the taxpayer was being undercharged or given excessive relief (s 29(5)). There are statutory limitations as to the time at which the sufficiency or otherwise of the information must be judged. These provisions underline the finality of the self-assessment, a finality which is underlined by strict statutory control of the circumstances in which the Revenue may impose additional tax liabilities by way of amendment to the taxpayer's return and assessment."
i) Is it sufficient that an officer of the Board discovers that there has been an insufficiency for the year of assessment in question; or
ii) Must he also consider whether either or both of the conditions in section 29 (4) and (5) is or are fulfilled?
"Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay."
"It proceeds upon the assumption that it is the assessment which imposes the liability to tax, whereas in truth that liability can only be imposed by the application of the charging and relieving provisions of the Act."
"I can see no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered. The words are apt to include any case in which for any reason it newly appears that the taxpayer has been undercharged and the context supports rather than detracts from this interpretation."
"Mr. Shelbourne said that "discovery" means finding out something new about the facts. It does not mean a change of mind about the law. He said that everyone is presumed to know the law, even an inspector of taxes. I am afraid I cannot agree with Mr. Shelbourne about this. It is a mistake to say that everyone is presumed to know the law. The true proposition is that no one is to be excused from doing his duty by pleading that he did not know the law. Every lawyer who, in his researches in the books, finds out that he was mistaken about the law, makes a discovery. So also does an inspector of taxes."
"… the first preliminary part of the test is no more than an assertion by the officer of a newly discovered insufficiency."
"… it seems clear to me as a matter of general principle that the burden of proof must rest on the party who asserts that there has been an operative mistake in the return, and that the return was in fact made in accordance with the generally prevailing practice. That party will inevitably be the taxpayer, not HMRC. In other words, the burden lies on the taxpayer to establish that para 45 applies, not on HMRC to establish that it does not apply."
"More particularly, it is plain from the wording of the statutory test in s 29(5) that it is concerned, not with what an Inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of. It speaks of an Inspector's objective awareness, from the information made available to him by the taxpayer, of "the situation" mentioned in s 29(1), namely an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency …"
"By contrast, it seems to me that the burden of establishing that paras 43 or 44 apply must rest on HMRC, because in the absence of any evidence of fraud or negligent conduct (para 43), or of material to satisfy the test of objective non-awareness (para 44), there would be no basis for a conclusion that either of those paragraphs applied, and nothing to displace the general rule that discovery assessments may not be made. I would add, however, that in relation to para 44 the question is unlikely to be of much practical significance, because the nature of the enquiry is an objective one and the return and accompanying documents which have been submitted to HMRC should always be available."
"If, as here, the taxpayer has made an inaccurate self-assessment, but without any fraud or negligence on his part, it seems to me that it would frustrate the scheme's aims of simplicity and early finality of assessment to tax, to interpret s 29(5) so as to introduce an obligation on tax inspectors to conduct an intermediate and possibly time consuming scrutiny, whether or not in the form of an enquiry under s 9A, of self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it." (Emphasis in original)
"The phrase "he shall not be assessed", as it is used in s 29, means "he shall not be validly assessed". Accordingly, if one or both of the conditions is fulfilled, the assessment is valid; if neither of them is fulfilled, the assessment is invalid. The subjective opinions of the assessing officer or the Board about fulfilment of the conditions have no part to play in the operation of s 29. We consider this to be the only conclusion consistent with sub-s (8): the subject matter of an appeal is whether or not either of the conditions is fulfilled, without any form of qualification. If neither is fulfilled, the assessment should not have been made and will be invalid. And that is so whether the officer had formed the view that the conditions were fulfilled (and turns out to be wrong) or whether he has not considered them at all. The protection for the taxpayer in either case is his right of appeal under sub-s (8)."
"We think that the words "the taxpayer shall not be assessed under that sub-section" in s 29(2) and the corresponding words "he shall not be assessed under sub-section (1) above" in s 29(3) do not mean that the officer is precluded from making a discovery assessment in the first instance; the words provide a means of testing whether the safeguards set out in s 29(2) to (5) preclude the assessment from taking effect in the taxpayer's particular circumstances…"
"Suppose, then, that the officer considers that one or both of the conditions is fulfilled: he is, if Mr Mathew is right, under a duty to raise an assessment. But if he, the officer, is wrong, the assessment should not have been raised. Accordingly, he appears to be under a duty to raise an assessment which sub-s (3) provides is not to be made. Similarly, the officer might conclude that there may have been negligence on the part of the taxpayer, but his conclusion is very much on-balance. Is it really the case that he must raise an assessment if he thinks the chance of success is slightly over 50% but is not permitted to do so if he thinks the chance of success is slightly under 50%? We do not think so."
"The situation must be viewed objectively, from the point of view of whether the inspector's agreement to the relevant computation, having regard to the surrounding circumstances including all the material known to be in his possession, was such as to lead a reasonable man to the conclusion that he had decided to admit the claim which had been made."
Sir Mark Waller:
Lord Justice Mummery: