First-tier Tribunal (Tax)

[2010] UKFTT 554 (TC)

 

 

 

 

 

 

TC00807

 

Appeal number:  TC/2009/11902

 

 

 

Corporation Tax – Assessment to recover excess group relief – Paragraph 76 Sch 18 FA 1998 – Whether a discovery assessment – No – Whether assessment subject to paragraphs 42-45 Sch 18 FA 1998 – No – Whether agreement under s.54 TMA 1970 – No – Appeal dismissed

 

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

                  MORRITT PROPERTIES (INTERNATIONAL) LTD             Appellant

 

 

                                                                      - and -

 

 

                                THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS                             Respondents

 

 

 

                                                TRIBUNAL:  DR K KHAN (Judge)

                                                                         MR RICHARD THOMAS

                                                                       

 

Sitting in public in London on 10 September 2010

 

David Southern, Counsel, for the Appellant

 

Sarabjit Singh, Counsel, for the Respondents

 

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

1.         This is an appeal against an assessment to corporation tax on the Appellant in the sum of £299,818.20 issued on 4 September 2007.  It relates to a claim for group relief in the company tax return of Morritt Properties (International) Ltd (“the Company”) for the accounting period 1^st January to 31^st December 2001.

 

2.         On 24 December 2003 the Appellant filed a CT 600 form, accompanied by a copy of its accounts for the period ended 31^st December 2001.  The Appellant’s accountants, Nunn Hayward, also filed a CT600 return for Morritt Homes Inc showing a trading loss of £1,016,989 for the accounting period ending 31^st December 2001.  On the same day, it claimed (as part of a claim for the group of companies of which it was a member) group relief of £999,394 for that accounting period in respect of losses arising to, and surrendered by, Morritt Homes Inc., its US resident fellow subsidiary.  The claim included a copy of the US tax return (Form 1120F) of Morritt Homes Inc. 

 

3.         The issue relates to the claim by the Company of what was eventually agreed to be an excessive amount of group relief, and to the validity of an assessment made to recover an additional amount of corporation tax of £299,818.20 due as a result of the withdrawal of the group relief claim. .

 

 

 

Background

4.         The Appellant is part of a group of companies called Morritt Homes Group which carries on business as residential and commercial property developers. Their address is The Moritz, Poplar Close, Hatch End, Middlesex, HA5 3PZ. 

 

5.         On 24^th December 2003 the Appellant submitted its group relief claim for the year ended 31^st December 2001 stating that the claim was a protective claim.  The claim related to losses incurred by its US subsidiary and surrendered to the Appellant. In a covering letter Nunn Hayward said that normally a group relief in respect of losses of a non-UK group company is not provided for in the UK legislation. However, “in the light of the case of Marks and Spencer plc v Halsey, which is to be heard by the European Court of Justice 2004, we consider that it is prudent to make a claim in the circumstances”.

 

6.         The Inspector of Taxes wrote to Nunn Hayward on 8^th March 2004 stating that since the group relief claim related to a company which was not part of the UK group, the Inland Revenue was not clear as to the basis of the claim.  Nunn Hayward replied directing the Inspector to the letter accompanying the group relief claim and inviting further enquiries.

 

7.         The Inspector wrote again to Nunn Hayward on 22^nd August 2005 stating that on the basis of the Advocate-General’s opinion in Marks and Spencer plc v Halsey, that case would not decide the validity of group relief claims.  The Inspector said that he would close the enquiry into the group relief claim to enable Morritt Homes Group to decide whether it wished to pursue the group relief claim by appealing a Revenue amendment.

 

8.         Further correspondence ensued as follows:

On 22^nd August 2005 the Commissioners issued a notice of completion of an enquiry denying the group relief claim. 

On 9^th September 2005 Nunn Hayward filed a notice of an amendment to a return reinstating the group relief claim.

On 13^th September 2005 the Inspector notified his disagreement and said that a Revenue amendment would be issued against which the Appellant could appeal.

On 28^th September 2005 Nunn Hayward appealed against the Revenue amendment. 

On 16^th November 2005 the Inspector wrote to Nunn Hayward stating that the “protective” claim to group relief was not valid and asking the company to withdraw the claim.

On 21^st November 2005 Nunn Hayward asked the Inspector to respond on the penultimate paragraph of their letter of 4 November which they said questioned the validity of the Inspector’s amendment of the return denying the group relief claim.

On 23^rd November the Inspector pointed out that the letter of 4 November contained no such point, but argued that there was a valid enquiry opened.  He asked for a withdrawal of the group relief claim contained in the appeal against his amendment of the return.

On 30^th March 2006 Nunn Hayward wrote to the Inspector arguing that on the basis of the decision of the European Court of Justice in Marks & Spencer plc v Halsey the company wished to maintain its appeal and reiterated that the Inspector’s amendment to its CTSA return was invalid.

 

9.         The next substantive piece of correspondence was on 8^th August 2007 when the Inspector addressed the validity point.  He appeared to concede that there was not a valid enquiry but mentioned, for the first time, the power in paragraph 76 of Schedule 18 to the Finance Act 1998 (“paragraph 76”) to raise an assessment to recover excessive group relief.

 

10.       On 4^th September 2007 HMRC made an assessment on the Appellant under paragraph 76 in the sum of £299,818.20 which is the corporation tax due on the profits of £999,394 which in turn is the sum of the Appellant’s profits before the purported group relief claim.  The Appellant appealed against this assessment on 27 September 2007 on grounds which are essentially those put forward by the Appellant in this case.

 

11.       On 19 June 2008, Nunn Hayward writing to HMRC accepted the group relief claim was not sustainable in the light of develoments in litigation.  However, Nunn Hayward claimed that the paragraph 76 assessment to recover excessive group relief of 4^th September 2007 was out of time as the extended time limit set out in paragraph 76(3) did not apply where the surrendering company was overseas. They said that “as assessment under para. 76 is out of time in that case, the Revenue would have to fall back on the general discovery provisions under paragraph 41, but here there has been no discovery”. 

 

12.       On 3^rd October 2008 the Inspector addressed this argument and pointed out that the general 6 year time limit for assessments in paragraph 46 of Schedule 18 to the Finance Act 1998 (“Schedule 18”) applied, that paragraph 76(3) was an extension of the paragraph 46 limit in specific cases and that the paragraph 76 assessment was within the normal paragraph 46 limits.

 

13.       Further correspondence ensued and then Nunn Hayward requested a review under section 49B Taxes Management Act 1970 (“TMA”) on 12^th May 2009.  The review concluded that the assessment under paragraph 76 is not subject to the conditions in paragraphs 43 to 45 of Schedule 18 and was valid.

 

14.       As the Appellant did not accept the conclusion of the review, the appeal against the paragraph 76 assessment was maintained and is now before the Tribunal.

 

The law

15.       The material paragraphs of Schedule 18 to the FA 1998 provide that:

“Assessment where loss of tax discovered or determination of amount discovered to be incorrect

 

41(1)    If an officer of Revenue and Customs discovers as regards an accounting period of a company that –

 

(a)        an amount which ought to have been assessed to tax has not been assessed, or

(b)        an assessment to tax is or has become insufficient, or

(c)        relief has been given which is or has become excessive;

 

the officer may make an assessment (a “discovery assessment”) in the amount or further amount which ought in the officer’s opinion to be charged in order to make good to the Crown the loss of tax.

 

.           (2)        If an officer of Revenue and Customs discovers that a company tax return delivered by a company for an accounting period incorrectly states –

 

(a)        an amount that affects, or may affect, the tax payable by that company for another accounting period, or

(b)        an amount that affects, or may affect, the tax liability of another company,

 

the officer may make a determination (a “discovery determination”) of the amount which in the officer’s opinion ought to have been stated in the return.

 

Restrictions on power to make discovery assessment or determination

 

42(1)    The power to make –

 

(a)        a discovery assessment for an accounting period for which the company has delivered a company tax return, or

(b)        a discovery determination,

 

is only exercisable in the circumstances specified in paragraph 43 or 44 and subject to paragraph 45 below.

 

(2)        Those restrictions do not apply to an assessment or determination which only gives effect to a discovery determination duly made with respect to an amount stated in another company’s company tax return.

 

…

 

(3)        Any objection to a discovery assessment or determination on the ground that those paragraphs have not been complied with can only be made on an appeal against the assessment or determination.

 

Fraudulent or negligent conduct

 

43.       A discovery assessment for an accounting period for which the company has delivered a company tax return, or a discovery determination, may be made if the situation mentioned in paragraph 41(1) or (2) is attributable to fraudulent or negligent conduct on the part of –

 

(a)        the company, or

(b)        a person acting on behalf of the company, or

(c)        a person who was a partner of the company at the relevant time.

 

Situation not disclosed by return or related documents etc.

 

44(1)    A discovery assessment for an accounting period for which the company has delivered a company tax return, or a discovery determination, may be made if at the time when an officer of Revenue and Customs –

 

(a)        ceased to be entitled to give a notice of enquiry into the return, or

(b)        completed their enquiries into the return,

 

they could not have been reasonably expected, on the basis of the information made available to them before that time, to be aware of the situation mentioned in paragraph 41(1) or (2).

 

Return made in accordance with prevailing practice

 

45.       No discovery assessment for an accounting period for which the company has delivered a company tax return, r discovery determination, may be made if –

 

(a)        the situation mentioned in paragraph 41(1) or (2) is attributable to a mistake in the return as to the basis on which the company’s liability ought to have been computed, and

(b)        the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.

 

General time limits for assessments

 

46(1)    Subject to any provision of the Taxes Acts allowing a longer period in any particular class of case no assessment may be made more than six years after the end of the accounting period to which it relates.

 

(2)        Ina case involving fraud or negligence on the part of –

 

(a)        the company, or

(b)        a person acting on behalf of the company, or

(c)        a person who was a partner of the company at the relevant time.

 

An assessment may be made up to 21 years after the end of the accounting period to which it relates.

 

(3)        Any objection to the making of an assessment on the ground that the time limit for making it has expired can only be made on an appeal against the assessment.

 

 

 

 

 

Assessment to recover excessive group relief

 

76(1)    If an officer of Revenue and Customs discovers that any group relief which has been given is or has become excessive, they may make an assessment to tax in the amount which in their opinion ought to be charged.

 

(2)        This power is without prejudice to –

 

(a)        the power to make a discovery assessment under paragraph 41(1):

(b)        the making of all such adjustments by way of discharge or repayment of tax or otherwise as may be required where a claimant company has obtained too much relief, or a surrendering company has forgone relief in respect of a corresponding amount.

 

(3)        if an assessment under this paragraph is made because a claimant company fails, or is unable, to amend its company tax return under paragraph 75(6), the assessment is not out of time if it is made within one year from –

 

(a)        the date on which the surrendering company gives notice of the withdrawal of consent, or (if later) sends a copy of a new notice of consent, to the claimant company under paragraph 75(3), or

(b)        the date on which an officer of Revenue and Customs sends the claimant company a copy of a notice containing their directions under paragraph 75(4).”

 

 

In the remainder of this decision a reference to a numbered paragraph without more is a reference to that paragraph of Schedule 18 to the Finance Act 1998.

 

Appellant’s arguments

16.       In summary, the Appellant says that—

(a)        a paragraph 76 assessment is subject to the restrictions in paragraphs 43 and 44 in the same way as an assessment under paragraph 41(1) of that Schedule, and HMRC have accepted that they cannot make a paragraph 41(1) assessment because of those restrictions.

(b)        the time limit for opening an enquiry into a corporation tax assessment (“CTSA”) passed without the opening of a valid enquiry under paragraph 24.  The company’s return containing the claim to group relief therefore stands and was agreed under section 54 TMA.  Once a section 54 agreement has been reached on an issue there can be no discovery assessment of any sort on the same point.

 

17.       The issues for the Tribunal’s determination therefore are:

(a)        Is the power of assessment in paragraph 76 a subspecies of a paragraph 41(1) discovery assessment and so subject to paragraphs 42 to 45, or does the powers of assessment in paragraph 76 operate independently of paragraphs 41 to 45?

 

(b)        Given that the appeal against the amendment to the CTSA of 14 September 2005 was determined in a nil amount under section 54 TMA 1970 on the basis that the CTSA return stands as amended by the Company on 23 December 2003, can there be a subsequent assessment which is identical to the original assessment?

 

 

 

The Appellant’s submissions: issue (a)          

18.       The Appellant, through Mr. David Southern, says that after the time limit for an enquiry is passed without a (valid) enquiry being made under paragraph 24 or after the closure of an enquiry, the return can only be reopened by means of a discovery assessment.  Such an assessment is provided for by paragraph 41(1), which opens with the words “If the Inland Revenue discover” and expressly designates such an assessment a “discovery assessment”.  The same five words that start paragraph 41(1) also start paragraph 76(1).  Schedule 18 was enacted to provide a new and comprehensive code for the administration of corporation tax, bringing the group relief assessment rule which was previously outside TMA into the new code.  Thus the provisions have to be considered together.  As the identical words are used, it follows that paragraph 76 is a “discovery assessment” within the meaning that term has in paragraph 41, and is, in Mr. Southern’s phrase, a “subspecies” of paragraph 41 assessment which must of necessity be subject to the same restrictions (those in paragraphs 43 and 44) as a paragraph 41(1) assessment.  It is not an independent assessment or “independently operating sub-code”

           

19.       The Appellant further says that the expression “without prejudice” used in paragraph 76(2) means “without detriment to any existing right or claim, without damage to one’s right or claim”.  Paragraph 76 allows the recovery of excessive group relief but is without prejudice to the issue a discovery assessment on other grounds.

 

20.       In response to the Respondent’s argument that importing the paragraph 43 and 44 restrictions into paragraph 76 would make paragraph 76 otiose, the Appellant says that paragraph 76 is different from other discovery provisions because in the case of a discovery of excessive group relief in relation to a company “this will have a knock-on effect as regards the surrendering company, and the Revenue need to be able to take its position into account”. Paragraph 76 is therefore needed in addition to other discovery provisions.

 

The Appellant’s submissions: issue (b)

21.       The second submission of the Appellant concerns the Respondent’s actions in relation to the September 2005 amendment of the Appellant’s CTSA return in respect of the group relief claim.  This was appealed against and subsequently the assessment was determined under section 54 TMA in a nil amount.  This means that it has been finally and conclusively determined.  Case law shows that there is no scope for a matter determined by agreement under section 54 TMA to be reopened by the making of a subsequent identical assessment.  It follows that in this case it is not open to the Revenue, having agreed that a self-assessment has become final, to make an alternative assessment under paragraph 76 in respect of the same matter.

 

22.       The Appellant says it is not open to HMRC to make a new assessment since they have “missed the boat” and they cannot take “successive bites of the cherry”.

 

Appellant’s overall submission

23.       The Appellant says that the Tribunal should determine the assessment under appeal in a nil amount because (in the alternative)—

(1)        it is a discovery assessment subject to the paragraph 43 and 44 restrictions which do not permit the assessment (as agreed by the Respondent),

(2)        an earlier amendment to the CTSA denying group relief but which has become final at an amount of nil is identical with the paragraph 76 assessment which cannot therefore stand.

The Respondents’ submissions: issue (a)

24.       The Respondents, through Mr. Singh, make the following submissions:

(1)        Paragraph 41 of Schedule 18 gives a power to raise an assessment if the Commissioners discover that an amount of tax has not been assessed, an assessment to tax is or has become insufficient, or has become excessive, and such an assessment is described in paragraph 41(1) as a discovery assessment.

 

(2)        Paragraph 41(2) allows the Commissioners, where a company’s tax returns for an accounting period incorrectly states an amount of tax which is payable or incorrectly states an amount that may affect the liability of another company, to make a “discovery determination” (as it is called in the paragraph) of the amount which in their opinion ought to have been stated in the company’s tax return.

 

(3)        The making of a discovery assessment or discovery determination is restricted by paragraph 42 which says that the Commissioners’ powers can only be exercised in the circumstances specified in paragraph 43 and 44.  Paragraph 43 allows a discovery assessment to be made where there is fraudulent or negligent conduct on the part of the company or person acting on their behalf and in this case there was no such conduct.  Therefore the circumstances specified in paragraph 43 did not apply.

 

(4)        Paragraph 44 allows a discovery assessment or determination to be made if, at the relevant time, the Commissioners could not have been expected to be aware of the situation contemplated by paragraph 41 i.e. relief had been given which is or has become excessive.  The circumstances contemplated by paragraph 44 did not apply.

           

25.       This means that the Commissioners had no power to make a discovery assessment against the Appellant under paragraph 41(1) as the circumstances specified in paragraph 43 and 44 did not apply.  But this did not mean that they had no power to raise an assessment to recover excessive group relief at all: such a specific power was in paragraph 76. 

 

26.       The Respondents made an assessment under paragraph 76 and on this assessment the Respondents makes the following points :

(a)        They had a power to make an assessment under paragraph 76

(b)        It was not a “discovery assessment” within the meaning of paragraph 41(1) and the restrictions in paragraphs 43 and 44 do not apply.  It is not, as the Appellant puts it, a subspecies of a “discovery assessment” within paragraph 41(1).

(c)        The power to raise an assessment under paragraph 76 arose when HMRC discovered that the group relief claim was excessive. There is a free standing power to assess in such circumstances.

(d)        The assessment was made within 6 years of the end of the accounting period to which it relates, as required by paragraph 46(1)

 

 

The Respondents’ submissions: issue (b)

27.       In relation to the purported section 54 agreement, the position was that the purported enquiry was not valid and so the purported amendment by the Inspector of the company’s CTSA return was not valid.  In the light of the Respondents’ recognition of this it is necessary to see exactly what the “agreement” was.  It was no more than an agreement that the purported amendment had to be discharged and that this had the consequence that the original return stood.  There was no agreement about the group relief claim so there was nothing to prevent the paragraph 76 assessment being made.  In any event the paragraph 76 assessment was not “subsequent” to any section 54 agreement – it was made two years before it.

 

Appellant’s overall submission

28.       The appeal against the paragraph 76 assessment should be dismissed.

 

Conclusions

Issue (a)

29.       An assessment under paragraph 76 is not subject to the restrictions in paragraphs 43 and 44.  The main ground for this conclusion is that paragraph 76 does not mention those, or any other, restrictions on its use.

 

30.       In Schedule 18 a “discovery assessment” is an assessment made under paragraph 41(1).  An assessment made under paragraph 76 is not such a discovery assessment but rather, as the heading states, an “Assessment to recover excess group relief”.

 

31.       Assessments under paragraph 41(1) and paragraph 76 are both free standing charges which arise in addition to the liability shown in a self-assessment or agreed following an enquiry.

 

“Without prejudice”

32.       Paragraph 76 provides:

“(1)      If the Inland Revenue discover that any group relief which has been given is or has become excessive, they may make an assessment to tax in the amount which in their opinion ought to be charged.

 

(2)        This power is without prejudice to –

 

(a)        the power to make a discovery assessment under paragraph 41(1) and

 

(b)        the making of all such adjustments by way of discharge or repayment of tax or otherwise as may be required where a claiming company has obtained too much relief, or a surrendering company has forgone relief in respect of a corresponding amount and they may have …”

 

 

33.       Mr Singh argued that the wording of paragraph 76(2)(a) supports his submission that paragraph 76 is a freestanding charge, separate from paragraph 41(1).  Mr Southern explains the existence of paragraph 76(2)(a) by stating that it applies to allow a paragraph 41(1) discovery assessment on other grounds.  The Tribunal prefers Mr. Singh’s view.       Paragraph 76(2), in stating that the making of an assessment to recover excess group relief under paragraph 76(1) is “without prejudice” to the power to make a discovery assessment under paragraph 41(1), is clearly contemplating that they can be alternative ways of recovering excessive group relief.  It therefore follows that they are independent provisions.

 

34.       As to Mr. Southern’s explanation of paragraph 76(2) the tribunal does not agree.  There is no need to interpret paragraph 76 as reserving to the Revenue a power to raise discovery assessments on other grounds [Tribunal’s underlining].  Such an interpretation would be wholly redundant.  A much more obvious interpretation of paragraph 76(2)(a) is that paragraph 76 is without prejudice to the raising of a paragraph 41(1) assessment on the same grounds as a paragraph 76 assessment – to recover excessive group relief.  That there is an ability to raise both a paragraph 76 and a paragraph 41 assessment in relation to group relief can be seen more clearly from the statutory predecessors of paragraph 76.  They are all without prejudice only to the specific power in the discovery assessment provisions to recover tax as a result of an incorrect claim such as would be the case where group relief is concerned. For example, section 412(3) and (4) of the Income and Corporation Taxes Act (“ICTA”) 1988 as it stood before 1999 states—

“(3) If the inspector discovers that any group relief which has been given is or has become excessive he may make an assessment to corporation tax under Case VI of Schedule D in the amount which ought in his opinion to be charged.

(4) Subsection (3) above is without prejudice to the making of an assessment under section 29(3)(c) of the Management Act and to the making of all such adjustments by way of discharge or repayment of tax or otherwise as may be required where a claimant company has obtained too much relief, or a surrendering company has forgone relief in respect of a corresponding amount.”

            Section 29(3) of TMA then read—

“(3) If an inspector or the Board discover-

(a) that any profits which ought to have been assessed to 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 inspector or, as the case may be, the Board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged.”

It seems to the tribunal that the group relief recovery provisions have always acknowledged that a discovery assessment is possible on the same grounds, not “other” grounds as Mr. Southern maintains – see below for further material on the history of the provisions.

 

“Discovery assessment” and paragraph 76  

35.       It is correct to say that paragraph 76 and paragraph 41 do use identical words to start: “If the Inland Revenue discover ....”.  The Appellant takes from this use of five identical words in both paragraph 41(1) and paragraph 76(1) that an assessment under paragraph 76 is a subspecies of a discovery assessment, the term expressly used in paragraph 41(1).  The Appellant further says that it follows from this that the restrictions in paragraphs 42, 43 and 44 must be applicable to the provisions of paragraphs 76.  Paragraphs 43 and 44 lay down the conditions for making a discovery assessment and limit the power to do so to cases of either fraudulent or negligent conduct (paragraph 43) or inadequate disclosure (paragraph 44), neither of which the Appellant argues is present here (and the Respondents seem to agree). 

 

36.       The Tribunal does not believe it is correct to consider paragraph 76 as a subspecies of paragraph 41(1) assessment, nor does it consider that the use of five identical words justifies treating paragraph 76(1) as providing for a “discovery assessment”.  In paragraph 41(1) the expression “discovery assessment” is merely a label used to describe an assessment made under any of the lettered paragraphs of that sub-paragraph.  It is a common drafting device used by Parliamentary Counsel which obviates the need to spell out all of the circumstances listed in paragraphs (a) to (c) every time that an assessment under paragraph 41(1) is referred to.  This label is then used in paragraphs 42(1)(a) and (3), 43, 44(1), 45, 51E, 61 and, indeed, in paragraph 76(2)(a).  The label “discovery assessment” is a defined expression in Schedule 18. Paragraph 98 of the Schedule defines it to mean a paragraph 41(1) assessment.  It is clear that that expression is not defined to include an assessment under paragraph 76.  The definition implicitly draws a distinction between the paragraph 76 assessment and a discovery assessment, which is defined to mean only a paragraph 41(1) assessment.  There are two different types of assessment and one, discovery assessment, does not include the other which is an assessment to recover excessive group relief under paragraph 76.

 

The restrictions

37.       The Tribunal believes that paragraph 76 does not have attached to it the restrictions in paragraphs 43 and 44. As the Tribunal says at the outset of its conclusions, there is simply nothing in paragraph 76 which says that this is the position. To apply the restrictions would defeat the obvious policy behind paragraph 76.  Paragraph 76(3) shows that it can be used if excessive group relief has been claimed because the claimant company has failed to, or been unable to, amend its tax return following a reduction in the amount of relief available for surrender by another group company.  The obvious reason why a claimant company would be unable to amend its return is because by the time the amount available for surrender had been established on an enquiry into the surrendering company or the surrendering company has decided to vary its surrenders, its own return has become final, either as a result of no enquiry being made or because enquiries have been settled.  In those circumstances it would be absurd to apply the restriction in paragraph 44 to the claimant company.

 

38.       Paragraph 76(3) also points up a substantial difference between the circumstances in which a paragraph 41(1) assessment may arise and those in which a paragraph 76 assessment can arise.  Group relief is always a matter that involves at least two companies, a claimant company and one or more surrendering companies.  Actions by a surrendering company can affect both its own liability and that of the claimant company.  The drafters of Schedule 18 certainly had in their contemplation the making of assessments and determinations which were not “discovery assessments” and which operated under a separate regime from discovery assessments.  An obvious example is a discovery determination under paragraph 41(2)(b) which is made because of an incorrect statement in the return of one company that affected another.  Such a determination relating to the affairs of two companies is expressly not subject to the restrictions in paragraph 43 and 44 by virtue of paragraph 42(2).  The thinking clearly is that where a question arises with regard to an assessment involving one company which is directly related to another company, the restriction in paragraph 44 which is derived from Cenlon Finance Ltd. v Ellwood (“Cenlon”) 41 TC 176 and Scorer v Olin Energy Systems Ltd. (“Olin”) 58 TC 592, should not apply.  Paragraph 44 applies only to cases where it is a single company’s affairs which are self-contained: they are not meant to apply to cases where two or more companies are affected by the same matter.  Paragraph 41(2) sometimes and paragraph 76(1) always deal with two (or more) company situations and both exclude the operation of paragraphs 43 and 44.  But where even a paragraph 41(2) discovery determination only involves one company, as with paragraph 41(1) the restrictions apply. 

 

39.       This policy is rational because the need for a group relief recovery assessment may often arise without the knowledge of the claimant company – it is the actions of the surrendering company which will determine whether a claim can be sustained. 

 

 

 

Drafting clues in Schedule 18

40.       The Tribunal is also mindful of the fact that Schedule 18 to FA 1998 is a self-contained code drafted in a modern style akin to that of the Tax Law Rewrite Project’s Acts such as the Capital Allowances Act 2001.  Such drafting is careful to make all appropriate cross-references.  A study of Schedule 18 shows that the drafter was perfectly capable of expressly applying the restrictions in paragraph 44 in paragraphs outside paragraph 41.  This can be seen from paragraph 52(1) which is contemporaneous with paragraphs 41 to 45 and expressly invokes paragraphs 41 to 48.  So it is extremely unlikely that the drafter would leave the consequences of paragraph 76 being a subspecies of paragraph 41(1) to be implied.

 

Historical clues

41.       Furthermore, before the enactment of Schedule 18 the provisions relating to the recovery of excessive group relief assessments (which date from 1967 and went through two subsequent consolidations) were always separate from the rules for discovery assessments which in 1967 were in the Income Tax Management Act 1964 and were consolidated in section 29(3) TMA.  It should be noted that section 29(3) TMA 1970, which applied to companies before 1999 but still applies to others, contains no reference to “discovery assessment”.

 

42.       An examination of the evolution of these two assessment provisions is telling.  The position before the coming into force of Schedule 18 was that section 412(4) ICTA 1988 stated that the power to assess for excessive group relief under section 412(3) ICTA 1988 was “without prejudice to the making of an assessment under section 29(3)(c) of the Taxes Management Act 1970”.  As has been seen above, section 29(3)(c) TMA sets out the Respondents’ power to make a discovery assessment in cases of excessive relief. 

 

43.       The predecessor of section 412(4) ICTA 1988 was section 269(2) ICTA 1970 which was in identical terms to its successor, also being without prejudice to section 29(3)(c) TMA.  The group relief recovery provisions had their origin in paragraph 10(3) Schedule 10 Finance Act 1967, and here they were without prejudice to section 5(3)(c) Income Tax Management Act 1964 – section 5(3)(c) of that Act was in identical terms to section 29(3)(c) TMA.

 

44.       For the new CTSA regime, paragraphs 41 to 45 of Schedule 18 reproduced section 29 TMA and codified the case law restrictions arising from Cenlon and Olin. Schedule 18 was designed to consolidate the administration and machinery provisions applying to corporation tax into one place. Section 117(1)(a) FA 1998 disapplied Part IV of the TMA 1970, including section 29, for companies and replaced it with Schedule 18 which was to operate as though part of TMA (section 117(2) FA 1998).

 

45.       It can be seen from this excursion into tax archaeology that before Schedule 18 came into force the power to make a discovery assessment has always been contained in a separate Act from the group relief recovery assessment provisions and also substantially predates them.  Section 29(3) TMA can be traced back to section 52 TMA 1880, which became section 125 Income Tax Act 1918, then section 41 Income Tax Act 1952 and then section 5(3) Income Tax Management Act 1964.  These provisions have been subject to a restriction on the Revenue’s ability to make a discovery assessment in the light of full disclosure and agreement on a matter – a point established beyond doubt in Cenlon. Given that the ultimate predecessor of paragraph 76 was enacted in 1967 (only five years after the House of Lords judgement in Cenlon) it would be surprising if the drafters and Parliament were unaware of the restrictions implicit in a discovery assessment, so if they had wanted to attract them they could have expressly treated the group relief recovery provision as a “subspecies” of the discovery assessment provisions.  But they did not, and went out their way to make the group relief recovery rules capable of being applied without prejudice to the discovery assessment provisions.

 

46.       So it is clear from the history of these provisions that the assessment for excessive group relief has always been separate and had unrestricted, and so wider, powers of assessment than under the discovery assessment provisions.   

 

47.       The Tribunal agrees with the Respondents’ submissions that the history of paragraph 76 shows that it is not simply a subspecies of a discovery assessment as the Appellant claims, but a provision which gives the Revenue a separate and free standing power to make assessments to recover excessive group relief. 

 

48.       Taking all these grounds into account the Tribunal holds that the paragraph 76 assessment for the accounting period ended 31 December 2001, made on 4^th September 2007, was made within six years of the accounting period to which it relates and is in time (paragraph 46 Schedule 18 FA 1998) and is not subject to the restrictions in paragraphs 42 to 45 of that Schedule.

 

Issue (b)

 

49.       Turning now to the second submission of the Appellant, it says that “it is not open to the Revenue, having made an earlier amendment to a self-assessment which has become final, to make an alternative assessment under paragraph 76”. The earlier amendment referred to is dated 14^th September 2005.  This is in effect another way to import the restrictions in paragraphs 43 and 44 into paragraph 76.

           

50.       In other words the Appellant is saying that where there has been a determination of an earlier amendment to a nil amount as a result of an agreement under section 54 TMA, HMRC cannot seek to re-open the matter so agreed by making a new additional assessment.

 

51.       The point which needs to be considered is whether it was the matter which is the subject of the paragraph 76 assessment (the group relief claim) that was determined under section 54 TMA.  The earlier amendment which the Appellant refers to is dated 14^th September 2005.  The Appellant claims that the amount was determined pursuant to section 54 TMA, but at the time it was arguing that the amendment was ultra vires and of no effect.  The review decision of 1^st July 2009 shows that the reviewing officer agreed that there had been no valid enquiry into the return, which meant that no amendment to the Appellant’s return and self assessment should have been made.  He concluded that the Appellant’s return stood as submitted by the Company on 23^rd December 2003 and concluded that the paragraph 76 assessment was valid.

 

52.       The Appellant says in their submission:

“The amendment to the CTSA of 14 September 2005 was determined in a nil amount under TMA s.54 (letter of 1 July 2009)”.

 

53.       HMRC’s letter of 1 July 2009 on this topic says

“I am not satisfied that the letter of 29 March 2004 was a valid notice of enquiry under paragraph 24(3) Schedule 18 Finance Act 1998.  Accordingly the appeal against the revenue amendment for the accounting period ended 31 December 2001 can be determined under section 54 Taxes Management Act 1970 on the basis that the CTSA stands as amended by the company on 23 December 2003”         

 

54.       By way of an aside Mr Singh, Counsel for the Respondents, pointed out that the CTSA return was not amended by the company, despite what the reviewing officer said.  What had actually happened was that when the return had not been filed by the due date (31^st December 2002) a determination under paragraph 36 was made.  When the return was eventually filed in December 2003 the self assessment contained in it replaced the determination: it was not an amendment of it.  This point is however of no relevance to the points at issue

 

55.       A closer look is needed at the purported section 54 TMA agreement.  The Appellant, through Mr Southern, submitted that an additional assessment cannot be raised where there is a section 54 agreement on exactly the same point covered by the additional assessment (section 54 allows the parties to agree a settlement before the appeal is determined by a Tribunal or the Courts).  Mr Southern derives this proposition from the case law.  For example in Olin Lord Keith says—

“It was settled by Cenlon Finance Co., Ltd. v. Ellwood [1961] Ch 50; [1961] Ch 634 that where an agreement has been arrived at under s. 510 of the Act of 1952 [now section 54 TMA] it is not open to the Inspector to make an additional discovery assessment under section 5(3) of the Act of 1964 [now paragraph 41(1) Schedule 18 FA 1998]”

            58 TC at page 639           

 56.      The Appellant says that the very basis of the assessment under paragraph 76 was the same as was the subject of the section 54 TMA agreement and consequently “it is not open to the Revenue, having made an earlier amendment to a self assessment which has become final, to make an alternative assessment under paragraph 76”. The Appellant further says that this amendment has been determined in a nil amount under a section 54 agreement. The Respondents say that it is the appeal against the amendment that is treated as determined under s 54 TMA, not the amendment itself. The Respondents say the reason for this “determination” was because the amendment itself was ultra vires and of no effect. The Respondents’ position, as stated in the review letter of 23^rd December 2003, was that the return stood as submitted by the Appellant on 23^rd December 2003. 

 

57.       The Tribunal believes that what transpired was that the parties agreed that the group relief claim could not stand and this is evidenced by the Appellant’s letter of 19^th June 2008 which states, regarding the group relief claim, that “it would not be correct to maintain the claim any longer”.  The Respondents for their part recognised that the amendment it made to the Appellant’s return was ultra vires, no in time enquiry under paragraph 24 having been started.  The assessment contained in the return was for an amount which took into account the amount of group relief which was subsequently agreed not to be available.  In those circumstances the reviewing officer purported to come to a section 54 TMA agreement that the amendment should be discharged.  Despite what the Respondents say, a section 54 TMA agreement is one which treats the assessment or decision under appeal (and here the Revenue amendment of September 2005 seems to be the decision) as upheld, varied or (relevantly here) discharged.  The Tribunal believes that there was a valid section 54 TMA agreement here.  But a section 54 TMA agreement requires a consensus between the parties as to what is agreed and here the consensus was that the amendment charging £299, 818.20 was invalid and had to be discharged.  What the section 54 TMA agreement did not do was to deal one way or the other with the validity of the claim to group relief.

 

 58.          The paragraph 76 assessment was raised on 4^th September 2007 which is before the section 54 TMA agreement, which arises from the review letter of 1^st July 2009.  This answers Mr Southern’s submission that “there is no provision for a matter which has been finally determined to be revived by a subsequent [the Tribunal’s underlining] identical assessment” as the paragraph 76 assessment was not subsequent to the section 54 TMA agreement: as the Respondents point out it was made nearly two years before the section 54 TMA agreement.  But in fact it does not seem to be part of the ratio decidendi in either Cenlon or Olin that the further assessment should be subsequent to the section 54 TMA agreement – although in relation to the assessing rules at the time of those cases it almost invariably would be.  But even on this basis the Tribunal does not think Mr Southern can succeed.  There is simply no connection as suggested between the subject matter of the paragraph 76 assessment, the excessive claim to group relief, and the subject matter of the section 54 TMA agreement which was that the amendment has to be discharged and the original self assessment had to stand for procedural reasons.   

 

59.       Finally it should be noted that it is only the Cenlon and Olin cases that are said to be the authority for the proposition that a discovery assessment within the meaning of section 29(3) TMA is not possible if there has been a section 54 agreement.  Given that the ratios of Cenlon and Olin are now to be found in paragraphs 43 and 44 Schedule 18 (and in section 29 TMA), it is doubtful if the cases are authority any more even for what they clearly establish.  But even if they are still of authority they do not, in the Tribunal’s view, apply to paragraph 76 assessments.  

 

60.       The Tribunal therefore holds that it was open to the Respondents to recover excess group relief and therefore a paragraph 76 assessment was made in order to do so. The Respondents were entitled to collect the correct amount of tax when they realised that the group relief set off was not valid. The only condition for making the assessment was that it was on time, ands it is within the time limit allowed.  There is nothing in Schedule 18 FA 1998 or the case law which prevents the assessment being made. The Appellant accepts that the group relief claimed was excessive

 

 

Final conclusions

61.       The Tribunal finds as follows:

(1)        The assessment under paragraph 76 to corporation tax in the sum of £299,818 issued on 4^th September 2007 is valid and made within time.

 

(2)        The restrictions in paragraphs 42 to 45 Schedule 18 do not apply to a paragraph 76 assessment

 

(3)        The Cenlon and Olin cases have no bearing on the validity of the paragraph 76 assessment

 

 

(4)        No issues of costs were raised.

 

62.       This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

 

 

 

DR K KHAN

TRIBUNAL JUDGE

 

RELEASE DATE:  5 November 2010