[2009] UKFTT (TC)

                                                                                                            TC00206

Appeal number SC/3015/2009

Income tax – discovery assessment – whether HMRC officer could have been reasonably expected to be aware (s29(5)TMA) – negligent conduct (s29(4))

FIRST-TIER TRIBUNAL

TAX

                              MISS M M ANDERSON (DECEASED)             Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                       REVENUE AND CUSTOMS (Income tax)    Respondents

                                                TRIBUNAL: JUDGE ROGER BERNER

Sitting in public in London on 14 September 2009

David Shetley, accountant, James Todd & Co and Stephen Rodway for the Appellant

Colin Williams, HMRC, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     This is an appeal of Miss M M Anderson (deceased) (“the Appellant”) against an assessment dated 2 September 2005 for the tax year ended 5 April 2002, made under the provisions of section 29 of the Taxes Management Act 1970.  Miss Anderson died after making this appeal, which is therefore now pursued by her personal representatives.

2.     There is no dispute on the substance of the assessment.  The sole issue for determination is whether the assessment was properly made under section 29 TMA so as to be a valid assessment.

3.     The Appellant’s estate was represented by David Shetley, accountant, of James Todd & Co and I also heard submissions from Stephen Rodway, the son of Dr Rodway, one of the personal representatives of the Appellant’s estate.  Colin Williams of HMRC appeared for the Respondents.

The Facts

4.     There was an agreed statement of facts as follows:

(1)  Miss Anderson took out investment bonds both with Clerical, Medical & General and with Scottish Provident in March 1998.  She invested £100,000 and £50,000 respectively in these bonds.

(2)  Shortly afterwards, Miss Anderson became seriously ill and decided to retire to Scotland.  She decided to acquire a property, which necessitated the encashment of the bonds.

(3)  On 26 February 2002 the Clerical, Medical & General bond was encashed at a value of £124,588.02, thereby realising a gain of £24,588.02.

(4)  On 1 March 2002 the Scottish Provident bond was encashed at a value of £58,619.40, thereby realising a gain of £8,619.40.

(5)  The total gains of £33,207.42 were included on Miss Anderson’s tax return for the year ended 5 April 2002.

(6)  On the same return, and in respect of these bonds, the sum of £7,306 was included as ‘tax treated as paid’.

(7)  It was subsequently established that the Clerical, Medical & General bond was an overseas bond, so that no amount fell to be included as ‘tax treated as paid’ in respect of it.  The Scottish Provident bond was a UK bond that did attract a tax credit of the sort claimed.

(8)  An assessment under Section 29 Taxes Management Act 1970 was issued on 2 September 2005.  Miss Anderson appealed on 13 October 2005.

(9)  Miss Anderson died on 17 February 2006.

5.     The tax return of the Appellant for the relevant period and the notice of assessment dated 2 September 2005 were produced in evidence, along with certain correspondence between the Appellant’s representatives and the Respondents.

6.     I was also informed, and it was not disputed, that Clerical, Medical & General sent a chargeable event certificate in respect of the gain on the bond issued by them to the Respondents in July 2002.

The Law

7.     Section 29 TMA, so far as is material to this appeal, and as applicable to the assessment dated 2 September 2005, provides as follows:

29 Assessment where loss of tax discovered

(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.

…

 (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.

(7) In subsection (6) above—

   (a)     any reference to the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—

(i)     a reference to any return of his under that section for either of the two immediately preceding chargeable periods; and

            …

(b)     any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.

…

 (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.

(9) Any reference in this section to the relevant year of assessment is a reference to—

   (a)     in the case of the situation mentioned in paragraph (a) or (b) of subsection (1) above, the year of assessment mentioned in that subsection; and

   (b)     in the case of the situation mentioned in paragraph (c) of that subsection, the year of assessment in respect of which the claim was made.

Discussion

8.     In this appeal I am to determine whether the assessment dated 2 September 2009 is valid as a discovery assessment in relation to the tax credit that was claimed in respect of the bond issued by Clerical, Medical & General (“the CMG bond”).

9.     Under s 29(3) TMA, an assessment under s 29(1) can only be made if one of the two conditions set out in subsections (4) and (5) is fulfilled.  The Respondents argued their case firstly on the basis of s 29(5), but also on the basis of s 29(4).  Mr Shetley, for the Appellant, raised an argument that the Respondents’ case ought to be based on s 29(4) alone on the footing that the notice of assessment implied that the discovery assessment was made on the basis of negligence only, and that the correspondence leading up to that assessment had referred only to negligence.

10.  I have read the notice of assessment carefully, but I cannot see any merit in Mr Shetley’s submission.  The only relevant part of the notice is the passage headed “Notes on the Assessment”, which reads simply “This assessment covers an additional liability omitted from your tax return and discovered, or disclosed, following the expiry of the enquiry period.”  There is nothing in that to suggest that the Respondents’ contentions are limited in the way Mr Shetley suggests.  I must therefore consider each of the conditions to establish whether the assessment has been validly made under section 29.

Section 29(5)

11.  In Langham v Veltema 76 TC 259; [2004] STC 544 (CA), Mr Veltema conducted a farming business through a company controlled by himself and his wife.  He was the sole director.  The company transferred to Mr Veltema, for no consideration, the house in which he lived.  An estimated value of £100,000 was obtained from chartered surveyors.  Mr Veltema made a tax return in which he entered “£100,000” in respect of “assets transferred/payments made for you”.  An accompanying schedule, dealing with employment income from the company, stated “asset placed at disposal of employee - £100,000” in respect of “other benefits in kind and expenses allowances”.  Separately a return was made, by form P11D, of benefits in kind provided by the employer company.  That return recorded the transfer of the house from the company to Mr Veltema, valued at £100,000.  The Inspector of Taxes notified Mr Veltema’s accountants that Mr Veltema’s return had “been processed without any need for correction”.  Subsequently, following receipt of the company’s own corporation tax return, another Inspector of Taxes notified the company that the District Valuer would be consulted about the earlier valuation.  Later a revised valuation was agreed at £145,000.  Mr Veltema’s Inspector then raised a further assessment and Mr Veltema appealed on the ground that the assessment was made out of time.

12.  The General Commissioners allowed Mr Veltema’s appeal, holding that neither of the conditions in s 29(4) or s 29(5) had been met.  The Crown appealed the finding on s 29(5) alone, first in the High Court, and then in the Court of Appeal where its appeal was allowed.  It was held that it was 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 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.  The key to the self assessment scheme is that the Inspector is to be shut out from making a discovery assessment under s 29 only where the taxpayer or his representatives, in making an honest and accurate return, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question.

13.  For the Appellant, Mr Shetley’s arguments were principally directed to the question of negligence under s 29(4).  I shall return to that shortly, but Mr Shetley also sought in relation to s 29(5) to distinguish Langham v Veltema on the basis that it related to a need to obtain a valuation, which was different from the receipt of a chargeable event certificate from Clerical, Medical & General.

14.  The Appellant’s principal submissions in relation to s 29(5) were made by Mr Rodway.  He too sought to distinguish Langham v Veltema on the facts.  He said that, in contrast to Langham v Veltema, in this case the Respondents were not being asked to “search high and low” for any documentation or information.  Here, the Respondents received the chargeable event certificate in good time to open an enquiry before the enquiry window closed on 31 January 2004.  The certificate itself evidenced an actual insufficiency in the return (and was not, unlike a valuation, something that the Respondents would have to do anything to ascertain); its purpose was to put the Respondents on notice of the actual position.  He submitted that I should adopt a purposive approach to s 29(5) and read it in the light of what it is intended to achieve.  All the information was available in 2002 and there had been no explanation of why it had not been acted upon in a timely fashion.  The chargeable event certificate ought reasonably to have been inferred from the information made available to the Respondents.

15.  With respect to Mr Rodway’s arguments, I do not consider it is appropriate for me to stray outside the literal meaning of the words in section 29 in search of a purposive interpretation that could support the Appellant.  In any event, in my view, such an approach would not avail him.  In Langham v Veltema Auld LJ considered the underlying purpose of the self assessment scheme, namely (at [31]) “to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer”, and, in relation to the interpretation of s 29(5), said (at [32]):

“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, or self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it. I should emphasise that I say that, not in reliance on Miss Simler's information to the Court that the Inland Revenue do not customarily make much of an initial check of self-assessment returns and accompanying documents. Such practice, if it is general, cannot affect the proper interpretation of the statutory provisions, though it would appear to me to be inconsistent with the aims of simplicity and speed of the new statutory scheme as I read it, namely that there is nothing in the Act that obliges an Inland Revenue officer to enquire into a return, for example in a case such as this, to obtain expert valuation evidence for the purpose of checking the accuracy of a valuation indicated in a return.”

16.  It is clear from Langham v Veltema that the condition in s 29(5) will only fail to have been met where the taxpayer or his representatives, in making an honest and accurate return or (which is not relevant here) in responding to an enquiry, have already alerted HMRC to the insufficiency of the assessment.  Section 29(6) contains an exhaustive list of the information that is treated as made available, and on the basis of which the awareness of the HMRC officer must objectively be tested, and this includes only information that has been made available by the taxpayer or by someone acting on the taxpayer’s behalf.  The chargeable event certificate, although available to HMRC in 2002 (and thus before the latest time for commencing an enquiry had elapsed) was not produced or furnished by the Appellant or her representatives, nor notified by the Appellant or her representatives, and in my judgement could not possibly have been inferred from the Appellant’s return.

17.  In Langham v Veltema both Chadwick L J and Arden LJ delivered concurring judgments.  In one respect Arden L J differed from Chadwick LJ in that Chadwick LJ had expressed (at [48]) the view that the Inspector could reasonably have been expected to have been aware of what he could have discovered if he had called for information as to the value of the asset.  Lady Justice Arden disagreed with that, holding (at [51]) that s 29(6)(d)(i) did not attribute to the Inspector information which is not reasonably to be inferred from information within s 29(6)(a) to (c), which matters are all categories of information actually supplied by the taxpayer (or his representatives).  In Revenue and Customs Commissioners v Household Estate Agents Ltd [2008] STC 2045 Henderson J considered this difference and said this (at [33]):

“On this point I respectfully prefer the approach of Arden LJ, which seems to me to be more in accord with the wording of the subsection and the restrictive approach to its interpretation favoured by all three members of the Court of Appeal.”

That is the approach which I therefore consider should be adopted for the purpose of this appeal.

18.  Could the HMRC officer have been reasonably expected, on the basis of the information made available to him by the Appellant or her representatives, actual or by inference from that information, to have been aware that the tax credit in relation to the CMG bond had been wrongly claimed?  In my judgement the answer is plainly No.  There was nothing on the face of the information in the return to suggest that the CMG bond was an offshore bond and not an onshore bond.  It was included in the return in the section clearly related to onshore bonds, alongside a bond that was itself an onshore bond, and a tax credit was claimed in respect of it, which would have been applicable to an onshore bond but was not in the case of an offshore bond.  The chargeable event certificate was provided to the Respondents by Clerical, Medical & General, and not by the Appellant or her representatives, and so must fall to be disregarded for this purpose.

Section 29(4)

19.  There is no allegation of fraud, but the Respondents say that the relief for excessive tax credit was attributable to the negligent conduct on the part of the Appellant or a person acting on her behalf.  Mr Williams argued that where a taxpayer seeks to claim a tax credit, then the taxpayer should take reasonable care to ensure that a claim is correctly made.

20.  Mr Shetley argued that negligence was a “severe” term, meaning, according to dictionary definition, a “dereliction of duty”.  I infer from this an argument that to be negligent the taxpayer’s conduct must involve culpability beyond a mere mistake.  There was, Mr Shetley said, an innocent error, and this in his submission could not be characterised as reckless or careless.  The Appellant was a professional lady, mindful of her obligations, but not perhaps the best at keeping records.  The mistake, he argued, was in including a gain on an offshore bond in the wrong section of the tax return.  Mr Rodway supported Mr Shetley’s contentions, and added that the Appellant had been diagnosed with the onset of Parkinson’s disease.  He also argued that, in accepting that no penalty should be applied, the Respondents ought also to be taken to have agreed that the negligence argument had fallen away.

21.  Dealing with that final point first, the Respondents wrote to the Appellant’s accountants on 11 July 2005 to say that, in view of the amounts involved and in consideration of the ill-health of the Appellant, they would not be pursuing the question of a penalty any further.  However, the letter expressly states that the Respondents were not prepared to accept that there was no negligence in the submission of the return.  There is therefore nothing in this submission on behalf of the Appellant.

22.  The making of an innocent error, and negligent conduct, are not mutually exclusive.  There was clearly an error in the return, and this is accepted on behalf of the Appellant.  I do not accept Mr Shetley’s argument that the error merely consisted of an item being included in the wrong section of the return; the gain on the CMG bond was wrongly included in the section referable to onshore bonds, but in addition a tax credit was wrongly claimed in respect of that gain.  There was no allegation of fraud, so it can be concluded that the error was an innocent one.  But the question is whether that innocent error has been brought about as a result of negligent conduct on the part of the Appellant or a person acting on her behalf.  The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.  In my judgement, viewed objectively, such a taxpayer would have been aware of the nature of the bonds that had been issued to him, from the policy documentation or from other information received from the insurance company, for example on the occurrence of a chargeable event, or would have taken reasonable steps to obtain such information.  I was informed by Mr Shetley that the tax credit calculation had been merely an arithmetical exercise based on the chargeable gain on the bond.  In my view a reasonable taxpayer would have taken care to ensure that a tax credit claim was capable of being made in principle before simply doing the numbers.  For these reasons, although I accept, and the Respondents did not argue otherwise, that the error in the return was indeed an innocent one, I find that it was attributable to negligent conduct on the part of the Appellant or a person acting on her behalf.

23.  I do not consider that this conclusion can be affected by the ill-health which the Appellant sadly suffered.  In other respects the tax return was properly completed, including in relation to business income, so there is no reason to believe that, with reasonable care, a proper return could not have been made in relation to the CMG bond.

Decision

24.  For these reasons I dismiss this appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 22 September 2009