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Cite as: [2011] UKFTT 169 (TC)

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David Stanley v Revenue & Customs [2011] UKFTT 169 (TC) (14 March 2011)
INCOME TAX/CORPORATION TAX
Assessment/self-assessment

[2011] UKFTT 169 (TC)

TC01038

Appeal number: TC/2010/06737

Income tax – discovery assessments – no notification of chargeability – which test of conduct applicable and which version of s 36 TMA 1970 – effect of transitional provisions on test and on time limit – finding of negligent conduct – assessments confirmed and appeal dismissed

FIRST-TIER TRIBUNAL

TAX

DAVID STANLEY Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE)

SANDI O’NEILL

Sitting in public at 68 Lombard Street, London EC3V 9LJ on 24 January 2011

LA Woon-Sam of Crown Accountants for the Appellant

Karen Weare, Tribunal Caseworker, HM Revenue and Customs, for the Respondents

DECISION

1. The Appellant, Mr Stanley, appeals against assessments made under s 29 of the Taxes Management Act 1970 (“TMA 1970”) for 2003-04 and 2004-05. He also appeals against assessments made under s 29 TMA 1970 for the years 1990-91 to 2002-03 inclusive. The assessment for 2005-06 was made on agreed figures, and is not in dispute in this appeal. To simplify matters we refer throughout to the Respondents as “HMRC”, even though for many of the earlier years covered by the assessments the relevant authority was the Inland Revenue.

2. The issues raised by the appeal were:

(1) Whether there had been a “discovery”;

(2) Whether the assessments had been made within the relevant time limits; and

(3) Whether it was open to HMRC to make assessments for “earlier” years on the basis of Mr Stanley’s behaviour.

The facts

3. The evidence consisted of a bundle of documents containing details of the various assessments and copy correspondence. No oral evidence was given. Mr Stanley did not attend the hearing, and therefore no further information was available except from his representative Mr Woon-Sam in putting forward Mr Stanley’s case. We find the following background facts; we make any necessary further findings of fact later in this decision.

4. Mr Stanley was born in 1961. His existence was not known to HMRC until statements for a bank account in his name came to light during an enquiry into the tax position of a third party in March 2009. Mr Stanley had not been issued with tax returns.

5. Mr Stanley was a self-employed landscape gardener until he became a director of Ashbourne Tree Specialists Ltd in May 2006.

6. Mr Woon-Sam of Crown Accountants prepared a profit and loss account for Mr Stanley in respect of the year ended 31 March 2006. There were no business records. In the absence of records Mr Woon-Sam made estimates of income from cheques banked, and of business expenses.

7. A meeting was held on 1 May 2009 between Mr Stanley with his accountant Mr Woon-Sam and Mrs Clair, an officer of HMRC with Mr Mackley, a higher officer of HMRC.

8. Mrs Clair wrote to Crown Accountants on 15 July 2009. (No copy of this letter was included in the bundle.) She wrote to them again on 2 October 2009, referring to her earlier letter, to which Crown Accountants had not responded. She stated that as advised in her earlier letter, she had now issued assessments to Mr Stanley for 2003-04, 2004-05 and 2005-06. She indicated that she was reviewing the position for earlier years and was considering whether assessments needed to be issued.

9. On 15 December 2009 Mrs Clair wrote to Crown Accountants enclosing tax calculations for the earlier years which she had prepared by scaling back the accounts provided to her for 2005-06. These were for the years 1990-91 to 2005-06; the years before 1990-91 were covered by the personal allowance. She followed up this letter by a telephone call to Mr Woon-Sam on 13 January 2010, in the course of which the figures were discussed.

10. On 25 February 2010 Mrs Clair wrote to Crown Accountants setting out her proposals for dealing with Mr Stanley’s liability arising for the years 1990-91 to 2005-06 inclusive.

11. Crown Accountants responded on 5 March 2010 indicating that Mrs Clair’s calculations of income tax and national insurance based on a scaling back of the 2006 figures would normally be acceptable. However, it had only been in the latest two years that Mr Stanley had felt that his income was sufficient to make him liable for tax. Crown Accountants suggested alternative figures for the income for the three years ending 5 April 2006; the income for earlier years would be covered by personal allowances.

12. On 22 March 2010, following a telephone call from Crown Accountants, Mrs Clair wrote to them to explain the basis on which HMRC would be seeking liability in respect of the earlier years going back beyond the normal time limit. (We consider this below.)

13. On 16 June 2010 Mrs Clair wrote to Mr Stanley explaining that she had arranged the issue of assessments for the years 1990-91 to 2005-06 as outlined in her letter to Crown Accountants of 25 March 2010. She acknowledged that an independent review had been requested.

14. On 27 July 2010 Mr Telfer of HMRC’s Appeals and Reviews Unit wrote to Mr Stanley with the conclusions of the review. His conclusion was that the assessments were correct. He explained the basis for his conclusion.

15. By notice of appeal dated 20 August 2010 Crown Accountants gave notice of Mr Stanley’s appeal. This notice referred to a decision of HMRC dated 26 May 2010, but also referred to HMRC’s review letter dated 27 July 2010. The reference to the decision of 26 May 2010 was to a series of sixteen letters of that date, each enclosing an assessment for one of the years in the series beginning with 1990-91 and going up to 2005-06.

Arguments for Mr Stanley

16. Mr Woon-Sam explained that the appeal was in two parts. The first related to the quantum of the assessments. The second question was whether it was open to HMRC to go back more than six years to assess income.

17. On quantum, the income for the year 2005-06 had been agreed. Normally, this would be used as a basis for working back to assess the previous years. In Mr Stanley’s case, Mr Woon-Sam felt that it had only been in the later years that he had had income above the level of the personal allowance. It was difficult to provide evidence. The only evidence which could be given was that Mr Stanley had two sons who were handicapped, which had meant that he had had to spend a lot of time with them and therefore had not been able to do a lot of work.

18. On the question of going back to earlier years, Mr Woon-Sam argued that the law was quite clear and supported Mr Stanley’s case. In order to assess for earlier years, it was necessary to prove deliberate behaviour. This was not the appropriate situation here.

19. HMRC had referred to the case of Kovak v Morris (1981) 58 TC 493. This was a case of wilful default, which was very different from the present case.

20. Mr Woon-Sam referred to the HMRC Guidance in the Compliance Handbook at CH53800, CH53700, CH53400 and CH53500. In the two examples referred to at CH53800, the taxpayer had to do something for it to be deliberate. At CH53400 HMRC indicated that carelessness was likened to negligence, namely the omission to do something. Mr Woon-Sam referred to Example 3 in CH53500. Mr Stanley’s behaviour had been careless, no worse than in this example. Consideration of the other examples given in the extracts from HMRC’s Guidance showed that Mr Stanley’s behaviour had not been deliberate; the taxpayer had to have done something.

Arguments for HMRC

21. Miss Weare explained that the income for 2005-06 had been agreed. This was the basis for going back to earlier years.

22. There were two issues. The assessment for 2003-04 and 2004-05 were ordinary time limit assessments. When issued, they had been within the previous version of the legislation, as they had been issued before April 2010. The amounts of these assessments were to be decided by the tribunal.

23. The second issue concerned the assessments for earlier years. On Mr Stanley’s behalf, Mr Woon-Sam was disputing HMRC’s ability to go back. If the decision was that HMRC could do so, the amounts of those assessments were also in dispute.

24. Thus the appeal raised the following questions:

(1) whether an officer of the Board had discovered income which ought to have been assessed to income tax for 2003-04 and 2004-05;

(2) in respect of the earlier years, whether there was a loss of tax which had been brought about “deliberately” by Mr Stanley;

(3) whether the estimated profits assessed were reasonable in the light of the evidence.

25. Miss Weare referred to the factual background. Mr Stanley had initially been self-employed for about 30 years. No tax returns had been issued to him; he had been under an obligation to notify HMRC of his chargeability to tax. This had been explained in Mrs Clair’s letter dated 22 March 2010, which referred to the obligation under s 7 TMA 1970 to notify HMRC of chargeability to tax on new sources of income or gains within six months of the end of the tax year in which the liability arose. (Miss Weare indicated that the time limit had previously been the end of the year after the year of assessment.) Mr Stanley had failed to notify HMRC at all.

26. The income for 2005-06 had been agreed, even though the amounts and expenses had been estimated. At the meeting with HMRC, Mr Stanley had informed the officers that he had been paid for his work by cheques put into his bank account. Mr Woon-Sam had calculated the income.

27. Miss Weare provided an additional document. This was a letter dated 30 October 2009 from Crown Accountants to Mrs Clair enclosing a copy of their working papers to show the breakdown of the profit and loss items for the period to 31 March 2006; although a copy of this had been sent to Mr Mackley with a letter dated 27 March 2009, the further copy provided explanations. It showed income of £8,760.20, and income of £9,696 paid into a second account. There had also been an amount of interest. There had been miscellaneous deposits of £13,761.07 and £14,000. Mrs Clair had accepted that the miscellaneous deposits were not income, and thus the income was the identified deposits. (Mr Woon-Sam indicated at the hearing that he believed the miscellaneous deposits to have been amounts from the sale of assets.)

28. It was not disputed that there had been a taxable profit in the two years 2003-04 and 2004-05. Nor was it argued that the year 2005-06 should not be used; the question was how it should be used in arriving at the amount of the assessments. For years before these, s 29 TMA 1970 needed to be used.

29. The time limit for assessments laid down by s 34 TMA 1970 was six years. In October 2009, HMRC had assessed the total amount to which Mr Stanley was chargeable to tax and National Insurance for 2003-04 as £7,015.80 and for 2004-05 as £12,037.97. These were purely estimates, before the stage of agreeing the figures for 2005-06. The assessment for 2005-06 had also been issued in October 2009.

30. On 26 May 2010 a series of assessments for the years 1990-91 to 2002-03 inclusive had been made. These had been arrived at by scaling back the profits for each previous year by £500 progressively year by year. Thus profits for the years before 1990-91 were estimated at a level which would have meant that Mr Stanley’s income for those earlier years was below the level of the personal allowance.

31. Also on 26 May 2010, Mrs Clair had amended the assessments of the amounts chargeable for 2003-04 and 2004-05 to, respectively, £1,614.60 and £1,718.40. Miss Weare accepted on HMRC’s behalf that Mrs Clair should not have amended these assessments without obtaining Mr Stanley’s agreement through his accountants, but requested confirmation of these assessments in the revised figures.

32. HMRC had seen no evidence relating to the years before 2005-06, and saw no reason why the figures assessed should not stand. The figures had had to be estimated, as little was known about Mr Stanley’s lifestyle, but HMRC maintained that the assessments had been made to the best of the officer’s judgment. Reference had been made in the correspondence to the position of Mr Stanley’s sons, but Miss Weare had not been able to ask Mr Stanley about his sons.

33. She referred to the judgment of the Privy Council in Bi-Flex Caribbean Ltd v The Board of Inland Revenue (1990) 63 TC 515, which emphasised that “best of judgment” assessments were prima facie right and remained right until the taxpayer showed that they were wrong; a figure had to be proved before such an assessment could be displaced. In Mr Stanley’s case there was no evidence of an alternative figure for either of the years 2003-04 or 2004-05. HMRC submitted that the assessments for these years should be upheld in the amended figures and that Mr Stanley’s appeal should be dismissed in relation to those years.

34. In relation to the years 1990-91 to 2002-03, Mr Woon-Sam on Mr Stanley’s behalf disputed whether HMRC had the legal power to raise assessments. HMRC had stopped at the point of assessing these 13 years. Section 36 TMA 1970 had been amended by paragraph 9 of Schedule 39 of the Finance Act 2008 to change the time limits for assessment. Miss Weare referred to the construction of the new s 36(1A). The question was whether the element covered by s 36(1A)(b) should be construed as separate from s 36(1A)(a). She referred to Mr Stanley’s failure to notify liability. The issue was whether Mr Stanley’s behaviour was deliberate. The word “deliberate” was not defined, which meant that the dictionary definition should be followed. HMRC considered that Mr Stanley must have known that he needed to pay tax; he made the decision not to tell HMRC about his income.

35. Thus if Mr Stanley was found merely to have been careless, the appeal would have to be allowed. If his behaviour was found to have been deliberate, HMRC asked for the assessments for the 13 years to be held to be valid. If they were so held, the question was whether Mr Stanley had discharged the burden of proving on the balance of probabilities that the amounts assessed were not correct.

36. HMRC submitted that it had been a reasonable approach to take to “scale back” the assessable income for each year until the point had been reached that there was no liability for 1989-90 and previous years. At the meeting with HMRC, Mr Stanley had said that he had worked “on and off” since leaving school. There were questions whether he might not have been working all the time, and whether he might have been abroad, but Mr Woon-Sam was unable to comment. There was no evidence of figures, as no records were kept.

37. Miss Weare referred to Kovak, in which the taxpayer’s failure to submit returns had been found to amount to wilful default; he had not discharged the burden falling on him to prove that the amounts assessed were excessive. If it was found that Mr Stanley’s similar burden had not been discharged, HMRC asked that the assessments should be confirmed (in the case of 203-04 and 2004-05, in the amended amounts) and that the appeals in respect of all the assessments should be dismissed.

Discussion and conclusions

Discovery

38. In a case where an individual potentially liable to tax can be shown to have had income, but such income has not been assessed, s 29(1)(a) TMA 1970 applies. It provides:

“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) . . .

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.”

39. The remaining sub-sections of s 29 only apply where the taxpayer has made and delivered a return under s 8 TMA 1970. Thus, in cases such as that of Mr Stanley, who has never made a return, the only question is whether the HMRC officer concerned has discovered a loss of tax. It has been clearly established in a number of earlier cases which are binding authorities for this tribunal and for the Upper Tribunal that the word “discover” connotes newly becoming aware that income ought to have been assessed to tax. We are satisfied that the officer, Mrs Clair, did “discover” this in relation to Mr Stanley’s income. The initial discovery was in respect of the years 2003-04 to 2005-06. The latter year was subsequently the subject of agreement between Mr Stanley, through his accountants, and HMRC. As a result of information gathered by HMRC, including that provided by Mr Stanley at his meeting with HMRC, HMRC also discovered loss of tax in relation to the earlier years covered by the 13 assessments made on 26 May 2010. Thus, subject to the issue of quantum in relation to all the disputed assessments, we find that the officer did make a discovery in respect of each year for which assessments were made on Mr Stanley.

Whether conduct “deliberate”: time limits for assessment

40. The second question as put in Miss Weare’s skeleton argument was whether there was a loss of tax brought about deliberately by Mr Stanley for the earlier years. Having reviewed in detail the basis on which TMA 1970 was amended by Schedule 39 to the Finance Act 2008, we do not think that this was the appropriate question in the present case. Although the legislation which we refer to is detailed, we consider it necessary to refer extensively to it, both to deal with this issue and to establish what time limit applied to the assessments.

41. Section 36(1) TMA 1970 was replaced with effect from 1 April 2010 by new sub-sections (1), (1A) and (1B) introduced by paragraph 9 of Schedule 39 to the Finance Act 2008 (“Schedule 39”). The original wording of s 36(1) was as follows:

“(1) An assessment on any person (in this section referred to as “the person in default”) for the purpose of making good to the Crown a loss of income tax or capital gains tax attributable to his fraudulent or negligent conduct or the fraudulent or negligent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates.”

42. The replacement subsections are these:

“(1) An assessment on a person in a case involving a loss of income tax or capital gains tax brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates (subject to subsection (1A) and any other provision of the Taxes Acts allowing a longer period).

(1A) An assessment on a person in a case involving a loss of income tax or capital gains tax—

(a) brought about deliberately by the person,

(b) attributable to a failure by the person to comply with an obligation under section 7, or

may be made at any time not more than 20 years after the end of the year of assessment to which it relates (subject to any provision of the Taxes Acts allowing a longer period).

(1B) In subsections (1) and (1A), references to a loss brought about by the person who is the subject of the assessment include a loss brought about by another person acting on behalf of that person.”

43. The introduction of these new sub-sections by paragraph 9 of Schedule 39 was made subject to Article 10 of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provision and Savings) Order 2009 (SI 2009/403), which we refer to as “the Order”:

“10

(1) This article applies where an event specified in paragraph 4 below relates to a year of assessment in respect of which a person (“P”) has not been given notice under—

(a) section 8 of TMA 1970 (personal return),

(b) section 8A of TMA 1970 (trustee's return), or

within one year of the end of the year of assessment.

(2) Where this article applies, the day appointed for the coming into force of paragraphs 1 to 31 and 37 to 65 is 1st April 2012.

(3) But this article does not apply if, as regards P and a year of assessment, 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 an assessment to tax has become insufficient, or any relief which has been given has become excessive.

(4) The events referred to in paragraph (1) above are—

(a) an assessment on P to income tax or capital gains tax,

(b) a claim by or on behalf of P, provided for by any provision of the Taxes Acts, and

(5) Nothing in this article has any application where P is a company.”

44. We also need to set out Article 7 of the Order. This provides:

“7 Section 36(1A)(b) and (c) of TMA 1970 (fraudulent and negligent conduct) shall not apply where the year of assessment is 2008-09 or earlier, except where the assessment on the person (“P”) is for the purposes of making good to the Crown a loss of tax attributable to P's negligent conduct or the negligent conduct of a person acting on P's behalf.”

45. Although Article 7 refers specifically to the new s 36(1A) TMA 1970, it is necessary first to look at the effect of Article 10, which can result in the earlier version of s 36(1) applying instead of the new s 36(1) or (1A) as appropriate. Applying that Article to Mr Stanley’s situation, he was not given notice under s 8 TMA 1970 in respect of any of the years of assessment in question. (The “event” under Article 10(1) and (4)(a) is the 13 assessments to income tax for years before 2003-04 made on Mr Stanley on 26 May 2010.) Thus in principle the Article provides that a series of paragraphs of Schedule 39 to the Finance Act 2008, including in particular paragraph 9, do not come into effect until 1 April 2012; as we have already stated, this was the paragraph which amended s 36 TMA 1970. If paragraph 9 was not to be regarded as taking effect until 1 April 2012 in Mr Stanley’s case, the version of s 36 TMA 1970 which applied to the assessments was the pre-Finance Act 2008 one, and not the amended form with the replacement subsections as set out at paragraph 42 above.

46. In order to establish in Mr Stanley’s case whether s 36 TMA 1970 is to apply in its original form or in the amended form, we have to consider Article 10(3). This only disapplies Article 10 if income which ought to have been assessed to income tax has not been assessed. However, all the 13 assessments do assess to income tax income which ought to have been assessed (and has not previously been assessed). Accordingly, we conclude that Article 10(2) does apply, and therefore that the version of s 36 TMA 1970 which is relevant in Mr Stanley’s case is the original one, ie before amendment by the Finance Act 2008. Contrary to the basis on which the appeal was argued before us by both parties, the test which by virtue of that version of s 36(1) TMA 1970 we are required to apply is that of “fraudulent or negligent conduct”.

47. We ought to point out that HMRC did not get this right; even in Mr Telfer’s review letter, the reference was to “subsection 2(1A) as modified by SI 2009/403, Art 7”. This was incorrect, both because it should have referred to the new version of s 36(1A) rather than to the sub-paragraph number of paragraph 9 of Schedule 39, and because Article 7 did not have the effects claimed for it. (We acknowledge that the review letter did mention that the time limit for assessment was 20 years where the failure under s 7 TMA 1970 was due to negligent conduct, but this was not the result of Article 7.) At the hearing there was no reference in either party’s argument to the Order and its effect on the amendments made to the legislation.

48. One significant effect of the original version of s 36(1) applying is that the time limit for assessment remains 20 years irrespective of whether the conduct in question is fraudulent or negligent. For the years covered by the self-assessment regime, the time limit was “not later than 20 years after the 31st January next following the year of assessment to which it relates. For years before self-assessment came into effect, ie before 1996-97, the time limit was within 20 years from the final day of the year of assessment in question. Although at one point in her argument Miss Weare referred to s 34 TMA 1970 and to the time limits which it has imposed in respect of assessments made within the ordinary time limit, this was only relevant to the assessments for 2003-04 and 2004-05 (and the agreed year 2005-06). In relation to a loss of tax by reference to conduct, the section to be utilised is s 36 TMA 1970.

49. The test laid down by the original s 36(1) TMA 1970 gives the alternative possibilities of fraudulent or negligent conduct. However, we do not consider that it is necessary or appropriate in this case to examine whether Mr Stanley’s conduct was fraudulent. We would be reluctant to make such a finding, given that the hearing was conducted on the basis that the parties assumed the necessary criterion to be that the loss of tax was brought about deliberately rather than carelessly, so that fraud was not specifically alleged. In the absence of specific evidence potentially leading us to any conclusion that fraud was involved, we decline to comment in any way on that issue.

50. Instead, it is sufficient for us to examine whether Mr Stanley’s conduct was negligent. We are satisfied on the evidence that his failure at any time to give notice of chargeability to tax, in accordance with s 7 TMA 1970 in the different versions which have applied in respect of the years covered by this appeal, amounted to negligence. This was a clear omission to fulfil an obligation laid down by the legislation, and it is not appropriate to examine whether Mr Stanley’s conduct was deliberate. We find that his failure to give notice of chargeability was negligent conduct within the applicable version of s 36(1) TMA 1970. The assessments therefore complied with that section.

51. Although we have concluded that the legislation applicable in the present case is the original version of s 36(1) TMA 1970 rather than the sub-sections substituted by the Finance Act 2008, there is one point which we do wish to refer to in relation to those “new” sub-sections. In the course of her argument, Miss Weare indicated that s 36(1A)(a) and (b) were separate. However, her approach appeared to be based on the assumption that failure to comply with an obligation under s 7 TMA 1970 had to be deliberate to come within s 36. Our reading of s 36(1A) is that the respective elements contained in (1A)(a), (b) and (c) are separate, as indicated by the use of the word “or” at the end of (b), which is used disjunctively. As a result, we do not consider that deliberate behaviour, as referred to in (a), is required for a person’s failure to comply with an obligation under s 7, as referred to in s 36(1A)(b). Failure is sufficient, whether or not it is deliberate.