Michael Freeman v Revenue & Customs [2013] UKFTT 496 (TC) (19 September 2013)
DECISION
Introduction
1.
This appeal concerns whether it is open to the Commissioners of Her
Majesty’s Revenue & Customs (“the Commissioners”) to raise a discovery assessment
dated 21 June 2007 in relation to the Appellant’s 2002/03 tax year. If the
Commissioners are entitled to raise a discovery assessment there is no dispute
that the Appellant owes capital gains tax of £404,702.80 plus interest.
2.
The capital gains tax liability is assessed because the Appellant
believed he was entitled to taper relief on the redemption of £2,606,462 BriTel
Floating Rate Guaranteed Unlisted Unsecured £1 loan notes (“the Loan Notes”) in
the belief that they were non-qualifying corporate bonds. It is accepted that
the Loan Notes were in fact qualifying corporate bonds (“QCBs”) within the
meaning of section 117 of the Taxation of Chargeable Gains Act 1992, and so the
Appellant was not entitled to taper relief.
3.
The appeal concerns whether the Commissioners are time-barred by failing
to have opened an enquiry into the Appellant’s 2002/03 Return. The relevant
time limit for doing so is 31 October 2005.
4.
The appeal concerns whether the Commissioners are permitted to raise a discovery
assessment under s.29 Taxes Management Act (“TMA”) 1970 and in particular
whether s.29 (2) and (5) are satisfied. There is no question of negligent or
fraudulent conduct under s.29 (4) TMA 1970.
Background Facts
5.
The facts in this case are largely agreed and those listed below are
drawn from the Statement of Agreed Facts.
(1)
The Appellant is a commercial property developer and founded, with his
brother, a company which became Argent Group plc (“AG”). In August 1997 he was
the registered holder of 969,990 shares in AG (“AG Shares”). These were
exchanged for 3,637,462 Loan Notes.
(2)
The swopping of the AG Shares for Loan Notes was the subject of a
clearance with the Inland Revenue pursuant to s.138 TCGA on 10 July 1997 and
the clearance was given on 12 August 1997.
(3)
The acquisition of the Loan Notes was mentioned in the “additional
information” section of the tax return (the “1997/1998 White Space Disclosure”)
which stated:
“On 1 August 1997, I sold [the AG Shares]. The
consideration received consisted of [the Loan Notes]. S.135 TCGA 1992 applies
to this transaction and therefore it has not been reported on the CGT pages of
this tax return.”
(4)
In 1998/99 the Appellant redeemed £235,000 of the Loan Notes at par. He
redeemed a further £800,000 worth of Loan Notes at par in 1999/2000. The
redemptions were included on the Appellant’s tax returns for the relevant
years. Taper relief was not claimed in respect of the 1998/99 and 1999/2000
redemptions because the Loan Notes did not, at that point, qualify for taper
relief.
(5)
In December 2002, the Appellant redeemed at par the remaining Loan
Notes, worth £2,602,462. Taper relief was claimed in relation to the December
2002 redemption of Loan Notes because, if they had not been qualifying
corporate bonds, they would have at that point qualified for taper relief on
the grounds that they would have become business assets with effect from 6
April 2000.
6.
On 5 January 2000 the Appellant and his accountants, Arthur Andersen,
were informed that the Inland Revenue were opening an enquiry into his
1997/1998 return under s.9A TMA (“First Enquiry”). Arthur Andersen wrote to the
Inland Revenue on 3 April 2000 including information requested on 5 January
2000 (“Enquiry Letter”).
7.
The information requested was set out in detail in the Enquiry Letter
and stated:
“We enclose the letter from the Chairman of BriTel
Property Acquisitions Limited relating to the share options reported in Mr
Freeman’s tax return. We also enclose guidance notes for completing the form
of instruction in respect of the option, which sets out the option prices used
in the calculation of the sums received … We also enclose a schedule detailing
the options granted and the option prices payable … we have enclosed copies of
the following:
the offering document for AG
the letter from the Company Secretary of [AG]
the letter from the Chairman of BriTel Property
Acquisitions Limited in which loan notes are offered as an alternative to cash;
and
a copy of the loan note issued”
Copies
of the documents listed in the Enquiry Letter were enclosed with that letter.
HMRC were, therefore, provided with an unexecuted copy of the “… loan note
issued …” (the “Loan Note Instrument”) on 3 April 2000.
8.
There was a discussion whether or not the Loan Notes were qualifying
corporate bonds under s.117 (1) TCGA. The Appellant’s advisers stated:
“… It is our opinion that the [Loan Notes] are
non-qualifying corporate bonds. The loan note instrument provides for
“altering the currency of denomination” by way of Extraordinary Resolution. As
s.117(1)(b) [TCGA] provides that a qualifying corporate bond cannot be capable
of being denominated in a currency other than sterling, we would conclude that
the [Loan Notes] are not qualifying corporate bonds …”
9.
On 7 June 2000 Mr D G Pepler, a “Technical Inspector” of the Inland
Revenue stated:
“I agree that the facts point to this being a
non-qualifying corporate bond”.
10.
The Loan Note in para.22 contained the following:
“A meeting of the Noteholders may by Extraordinary
Resolution sanction any modification, abrogation, compromise or release
previously approved in writing by the Company in respect of any provisions of
the [Loan Note Instrument] … and in particular (but without limiting in any way
the general power conferred hereby) shall have the power to sanction any
agreement or waiver for or having the effect of … altering the currency of
denomination [of the Loan Notes] …”
11.
In the Tax Return for 2002/03 (“Tax Return”) under “additional
information” the following White Space Disclosure was made:
“[Loan Notes] 2602462. On 31 December 2002 I
redeemed my entire holding of 2602462 [Loan Notes] at par. The [Loan Notes]
were non-qualifying corporate bonds. The [Loan Notes] were acquired as
consideration for the disposal of shares in [AG] on 1 August 1997. S.135 TCGA
1992 applied to this transaction.”
12.
On 8 February 2006, HMRC wrote to the Appellant and the Appellant’s advisers,
now Deloitte & Touche Private Clients Ltd (“Deloitte”) and stated:
“In addition I intend making enquiries into your tax
return for the year ended 5 April 2003 under what is known as the discovery provisions
…”
The letter also stated:
“As regards the return for the year ended 5 April
2003 you will note that my enquiry is being conducted under the discovery provisions.
The reason for this is because [the Loan Notes] are in fact QCBs which is at
odds with the statement on the capital gains pages to your client’s 2002-03
return.
It is my understanding that your client acquired
these loan notes in exchange for his shares in [AG] in which case the gain
arising on their redemption should be calculated by reference to the market
value of the [AG] Shares in July 1997 which means that no taper relief is due
…”
13.
An assessment was issued on 21 June 2007 which was appealed on 13 July
2007.
14.
An internal review was undertaken by HMRC in October 2010 which varied
the amount of tax due to £404,702.80. In all other respects the internal
review upheld the assessment.
15.
The Appellant gave the Tribunal notice of the Appeal on 19 November
2010.
Legal provisions
|
LEGISLATION
AND CASES
|
|
As
at 31 October 2005
|
|
1.
|
Taxes
Management Act 1970, section 9A
|
|
2.
|
Taxes
Management Act 1970, section 29
|
|
As
at 7 June 2000
|
|
3.
|
Taxation
of Chargeable Gains Act 1992, section 2A
|
|
4.
|
Taxation
of Chargeable Gains Act 1992, section 116
|
|
5.
|
Taxation
of Chargeable Gains Act 1992, section 117
|
|
6.
|
Taxation
of Chargeable Gains Act 1992, section 126
|
|
7.
|
Taxation
of Chargeable Gains Act 1992, section 127
|
|
8.
|
Taxation
of Chargeable Gains Act 1992, section 135
|
|
As
at 31 December 2002
|
|
9
|
Taxation
of Chargeable Gains Act 1992, section 2A
|
|
10.
|
Taxation
of Chargeable Gains Act 1992, section 116
|
|
11.
|
Taxation
of Chargeable Gains Act 1992, section 117
|
|
CASES
|
|
12.
|
Langham
v Veltema 76 TC 259
|
|
13.
|
Corbally-Stourton
v HMRC [2008] STC (SCD) 907
|
|
14.
|
Swift
v HMRC [2010] SFTD 553
|
|
15.
|
R
(on the application of Pattullo) v Revenue and Customs Comrs [2010] STC 107
|
|
16.
|
Lansdowne
Partners Limited Partnership v HMRC [2010] EWHC 2582 (Ch), [2011] STC 372
|
|
17.
|
While
v HMRC [2012] UKFT 58 (TC)
|
|
18.
|
HMRC
v Lansdowne Partners Limited Partnership [2012] STC 544
|
|
19.
|
HMRC
v Charlton [2013] STC 866
|
|
HMRC
MATERIALS
|
|
20.
|
Statement
of practice SP 1/06
|
|
21.
|
Section
29 TMA 1970
|
Section 29 TMA 1970
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 sufficient, 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.
(2) Whereas -
(a) the
taxpayer has made and delivered a return under [section 8 or 8A] of this Act in
respect of the relevant [year of assessment], and
(b) the
situation mentioned in subsection (1) above is attributable to an error or mistake
in the return as to the basis on which his liability ought to have been
computed,
the taxpayer shall not be
assessed under that subsection in respect of the [year of assessment] there
mentioned if the return was in fact made on the basis or in accordance with the
practice generally prevailing at the time when it was made.
(3) Where the taxpayer
has made and delivered a return under [section 8 or 8A] of this Act in respect
of the relevant [year of assessment], he shall not be assessed under subsection
(1) above -
(a) in
respect of the [year of assessment] mentioned in that subsection; and
(b) …
in the same capacity as that in which he made and delivered the return.
Unless
one of the two conditions mentioned below is fulfilled.
(4) The first condition
is that the situation mentioned in subsection (1) above is attributable to
fraudulent or negligent conduct on the part of the taxpayer or a person acting
on his behalf.
(5) The second condition
is that at the time when an officer of the Board –
(a) ceased
to be entitled to give notice of his intention to enquire into the taxpayer’s
return under [section 8 or 8A] of this Act in respect of the relevant [year of
assessment] or
(b) informed
the taxpayer that he had completed his enquiries into that return,
the officer could not have
been reasonably expected, on the basis of the information made available to him
before that time, or 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,
and 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
(ii) where the return is
under section 8 and the taxpayer carries on a trade, profession or business in
partnership, a reference to [any partnership return with respect to the
partnership] for the relevant [year of assessment] or either of those periods;
and
(b) any reference in
paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on
his behalf.
[(7A) The requirement to
fulfil one of the two conditions mentioned above does not apply so far as
regards any income or chargeable gains of the taxpayer in relation to which the
taxpayer has been given, after any enquiries have been completed into the
taxpayer’s return, a notice under section 804ZA of the principal Act].
(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 (a) 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.
Witness Statements
(1)
Witness statement of Michael Freeman
The witness statement of
Michael Freeman comprises 12 pages and was signed on 10 February 2012.
He made the following points:
(1)
He is a solicitor who never practised law but was involved in commercial
property development.
(2)
He gave an extensive background of his business which he started with
his brother and which grew into a significant property development firm. The
firm was later sold to the BriTel Group.
(3)
He received BriTel Loan Notes for his shares in the business and over a
period of time redeemed those Loan Notes in tranches for shares.
(4)
He hired two of the Big Four accounting practices to complete his person
tax returns and received tax advice from them. In July 2002, Deloittes were
his advisers and December 2002 he redeemed all of his remaining Loan Notes.
(5)
He was surprised when a discovery assessment was made into his 2002/3
returns as he understood that the legal status of the Loan Notes had been
agreed with HMRC.
(6)
By 8 February 2006, HMRC were contending that the Loan Notes were not
non-qualifying corporate bonds contrary to the view expressed in 2000. In
reviewing the correspondence between Deloittes and HMRC he said that he could
see “no reference as to why HMRC had changed its mind as to the status of the
Loan Notes, save that HMRC say they believe they had discovered information
which they did not previously have.”
(7)
At all times he made full disclosure of all his tax affairs to HMRC.
(2)
Witness statement of Allison Claire Webster
The witness statement
comprises approximately 6 pages and is dated 16 February 2012. She makes the
following points:
(1)
She is presently a tax partner at Deloittes and had commenced working on
the Appellant’s personal tax affairs in October/ November 2002.
(2)
She was involved in the preparation of his returns for 2002/03 and made
the relevant disclosures regarding the Loan Notes which was stated in the tax
return.
(3)
The reference to the Loan Notes being non-qualifying corporate bonds was
made because it was crucial to the claim for taper relief which was being made
by the Appellant. If the Loan Notes had been qualifying corporate bonds no
taper relief would have been available on redemption in 2002/03.
(4)
She said that at the time of the 2002/03 returns it was not the
prevailing practice to send supporting documents to HMRC with tax returns.
(5)
She confirmed that she had no first hand knowledge of the First Enquiry
in 1997/8 but was aware that the Loan Note instrument had already been supplied
to HMRC and had been subject to a technical review as to its status by HMRC
during the course of the First Enquiry. She was under the impression that the
tax treatment of the Loan Notes as non-QCBs had already been agreed.
(3) Witness Statement of Jane Wright
The
witness statement comprises approximately 7 pages and is dated 10 January
2012. She makes the following points:
(1)
She is part of the Specialist Investigations Team at HMRC in Salford whose job in 2005 was that of an enquiry caseworker in the Complex Personal Returns
Team.
(2)
During the course of an enquiry under Section 9A TMA 1970 into the
affairs of another holder of Britel Loan Notes (“Taxpayer A”), the previous
enquiry case-owner, Dorothy Richardson, had to consider the status of the
Britel Property Acquisition Ltd Loan Notes 2002. The question is whether or
not these Loan Notes were Qualifying Corporate Bonds (QCBs). If the notes were
QCBs then taper relief claimed of over £600K would not be due to the taxpayer.
(3)
The adviser to that taxpayer, Deloitte, said that the Loan Notes were
not QCBs which was at odds with HMRC’s reference material, i.e. the listings in
the “Exemptions from Capital Gains Tax – Qualifying Corporate Bonds” and
“Capital Gains Tax Service” as produced by the Financial Times. These
publications, entitled Interactive Data (formerly Extel), are used by HMRC as a
primary source of reference material on shares and securities which are quoted
on the London Stock Exchange. Ms Richardson sought advice from a Technical
Inspector on 6 June 2005.
(4)
That Inspector, Carol Martin, responded to an advice request on 10 June
2005 and suggested the form of the reply to the specific points raised by
Deloitte with regard to the QCB legislation, the anti-avoidance clearance
procedure and the fact that non QCB status had already been agreed for other,
unnamed, taxpayers for whom they also acted. Ms Richardson had, however, been
aware of one other individual whose liability might be affected by this issue
and had advised the person dealing with that taxpayer. It is at this point-about
the middle of 2005- that Ms Wright assumed responsibility for the enquiry into
Taxpayer A, ( following the retirement of Dorothy Richardson).
(5)
On 29 June 2005 following the advice given by Carol Martin, Ms Wright
wrote to Deloitte in relation to Taxpayer A setting out HMRC’s views on the
status of the Loan Notes.
(6)
Deloitte, in response to HMRC’s letter, wrote on 18 July 2005 that they
disagreed with their view of the Loan Notes, which they believed were non-QCB
Loan Notes.
(7)
Ms Wright informed Carol Martin on 8 August 2005 of the view of
Deloitte.
(8)
On 16 August 2005, Ms Wright telephoned Mr David Cass at Head Office
(Capital Taxes, Capital Gains Technical Group in Solihull) and after she had
made a submission report on 17 August 2005, Mr Cass responded on 7 November
2005 and agreed with the view of Carol Martin. He suggested that Ms Wright contact
other holders of the Loan Notes who may have returned their gains on the basis
that the notes were not QCBs.
(9)
On 14 March 2006, Deloitte conceded in respect of Taxpayer A that the
Loan Notes were QCBs. His affairs were settled accordingly.
(10)
Following Mr Cass’s advice to locate other Loan Note holders (see
paragraph 8 above), Ms Wright located and reviewed the tax return for 2002/03
of Mr M Freeman but did not feel that she had cause to refer to the first
enquiry papers in 1997/98. She felt that enquiry related to a matter
involving capital losses and was not relevant to the present enquiry. Indeed,
in her oral evidence she said that that enquiry had been taken over by another
specialist HMTC team and that the relevant papers were not even in her file when
she took over from Ms Richardson.
(11)
On 30 November 2005 she wrote to Carol Martin advising her that she had
located the file of Mr M Freeman and his 2002/03 return. She explained to Ms
Martin that Deloitte had stated that the Loan Notes had been reviewed and
agreed by one of their colleagues. The enquiry window had just closed on 31
October 2005 so she asked Ms Martin for her view on the discovery position
given the information provided by Mr Freeman in his 2002/03 return in respect
of the Loan Note redemption.
(12)
Carol Martin, on 1 December 2005 considered that they had a discovery
position for 2002/03 returns pursuant to s.29 (5) TMA 1970.
(13)
A discovery letter was issued on 8 February 2006 to Mr Freeman advising
him that, under the discovery provisions, there was to be a review of the
capital gains reported on the redemption of his Loan Notes. HMRC challenged
the statement he made on his return that the Loan Notes were non-QCBs when in
fact they were QCBs.
(14)
Deloitte replied to HMRC on 30 March 2006 in which they disputed that a discovery
could be made.
(15)
On 5 April 2006 Carol Martin was asked to advise and she referred to
their Team Leader, Duncan Cameron, on 20 April 2006 asking for his opinion on
the discovery position. He confirmed that they did have a discovery position
which could be pursued.
(16)
Letters were exchanged between Carol Martin and Deloittes on 28 April
2006 to 1 March 2007 where each side put forward technical arguments and
counter-arguments on the discovery position. The parties could not agree and
an assessment was issued on 21 June 2007.
16.
One point which is made by Ms Wright is that Mr Pepler in a letter dated
7 June 2000 stated that he had agreed “the facts point to this being a
non-Qualifying Corporate Bond”. This is stated in paragraph 19 of the witness
statement.
17.
It was explained during her oral examination that Extel is an
information guide published by the Financial Times dealing financial
information on certain corporate transactions including Qualifying Corporate
Bonds, which is distributed to tax offices which identifies the status of
listed bonds and which would state whether a security is or is not a QCB.
Appellant’s Submissions
18.
The Appellant makes two main submissions. The first is that s.29 (5) TMA
1970 was satisfied in that the hypothetical officer mentioned in that
sub-section would have had the Tax Return made available to him, and on the
basis of information in that Tax Return, and of what a reasonable officer could
be expected to know, he could reasonably be expected to have been aware of an
insufficiency of tax in the Tax Return. The officer who made the original
assessment (Ms Wright) and several other key members of the Complex Personal
Return Team at Salford were very well aware of the tax status of the Loan Notes
before 31 August 2005.
19.
The team at Salford would have had before them the Tax Return of the
Appellant in which he referred to the Loan Notes and notified HMRC that the
Loan Notes were not QCBs. Taken together with his assumed knowledge that HMRC
had changed its position on the status of the Loan Notes, an ordinarily
competent officer would have spotted that the Appellant had been under-assessed
to tax well before 31 October 2005. The hypothetical officer can reasonably be
expected to know that HMRC had changed their mind on the tax status of the Loan
Notes.
20.
The Appellant draws reference to several cases and explains that all the
information HMRC needed to identify the insufficiency of tax was the Loan Note
and knowledge of their change of view from that expressed in the correspondence
with Mr Pepler. In the Appellant’s view, HMRC simply needed to read the Tax
Return, which was both honest and accurate at the time it was submitted and
they would have realised that the Appellant’s position was that the Loan Notes
were not QCBs. The disclosure in the Tax Return of 2002/3 notified HMRC of
this position. The Tax Return was simply informing the Respondents of a matter
already agreed between them (i.e. that the Loan Notes were not QCBs) and
therefore it was difficult to see what else was needed.
21.
The Appellant says that s.29 (5) and (6) are relevant in respect of what
the hypothetical officer should have been aware of and he should have been
aware that there was an underpayment of tax by the Appellant well before 31
October 2005.
22.
The Appellant accepts that the only other document needed to form a view
on the insufficiency of tax is the document governing the Loan Notes and the
relevant wording of the currency provisions therein, but the HMRC had already
taken a view on those provisions and they had changed their mind on the
technical position. They had simply failed to look at the Tax Return in time.
23.
Where a discovery is simply a new interpretation of the law by the
Respondents, in respect of a document already provided to them by the
Appellant, the Officer (in s.29 (5)) could reasonably be expected to be aware
of such a change and taking into account the information provided and the
change of the Respondents’ view, a hypothetical officer ought to have been
aware of the insufficiency of tax from looking at the Tax Return. Further, the
officers in that particular tax office at Salford did know of the change of
mind regarding the QCBs.
24.
The Appellant’s second argument focuses on s.29 (6) (d) (ii), and while
recognising that both this and the earlier argument are stand-alone arguments
they can also be taken together. The Appellants provided the Respondents with
a copy of the Loan Notes in 2000 which satisfied s.29 (6) (d) (ii). The Loan
Note agreement was provided and HMRC knew both of the existence and relevance
of that document. The information was provided to persons who might reasonably
be expected to be in some way responsible for the Appellant’s affairs and who
were in fact so responsible, the Salford office.
25.
Section 29(6) (d) (ii) is concerned with any information provided before
31 October 2005 provided it is within the scope of s.29 (6) (a) to (c) TMA.
26.
The information contemplated by s.29 (6) TMA is the Tax Return including
the 2002/3 disclosures, stating that the Loan Notes were not qualifying
corporate bonds; the foreign currency provisions in the Loan Notes which were
notified to the Respondents in writing in relation to the First Enquiry and the
letter of 3 April 2000 from Arthur Andersen explaining why in their view the
Loan Notes were not a qualifying corporate bond, a view based on the foreign
currency provisions.
27.
For this reason, the letter to HMRC of 3 April 2000 becomes quite
important, though the Appellant says that the existence of the Loan Notes and
the foreign currency provisions, could, in any event, be reasonably inferred
from Tax Return. In any event, the letter of 3 April 2000 and the Loan Notes
were provided prior to the Tax Return and it is not necessary for the
information provided to HMRC to be provided in any particular year so long as
it was provided before 31 October 2005.
28.
The Appellant says that from the information provided before 31 October
2005 an ordinarily competent officer might reasonably have been expected to
raise an assessment to make good an insufficiency of tax. The providing of
sufficient information is all that is required and it is then incumbent on the
officer to use their own powers of inference, understanding and judgment in
reviewing the information made available in arriving at the conclusion that
there was an insufficiency of tax.
Respondents’ submissions
29.
The Respondents say that the assessment is valid. Looking first at s.29
(5) TMA, they say that the hypothetical officer in that subsection is not to be
regarded as having knowledge of the contents of the Loan Notes instrument
attributable to him. This is because the copy of the Loan Notes instrument
were sent to HMRC several years before the taxable transaction occurred, so it
was not made available to the hypothetical officer in s.29(5) within the
meaning of that term as defined in s.29(6) TMA. Without knowing the terms of
the document, the hypothetical officer could not have been reasonably expected
to be aware of the insufficiency. In the Respondents’ view, the officer, Mrs
Wright (or anyone else in HMRC) would not have been consciously aware that HMRC
were changing their view on the status of the Loan Notes in June 2005. Section
29(5) TMA does not involve a test whether in all the circumstances HMRC
could have detected an insufficiency prior to the expiry of the time limit for
opening an assessment. The information which informs the Inspector’s awareness
for the purposes of the statutory test is only that information set out in s.29
(6). It is irrelevant if information is available to the Inspector from other
sources.
30.
The Respondents say that Section 29(6) TMA is exclusive and exhaustive
in defining what information is “made available” to the hypothetical
Inspector. The only relevant information for the purpose of s.29 (5) TMA
(leaving aside any argument on s.29 (6) (d) (ii)) was a brief statement in the
Appellant’s return for 2002/3. There is nothing in that statement which would
lead the hypothetical officer to become aware of an insufficiency such as to
justify the making of an assessment. There is nothing in the statement which
would lead the hypothetical officer to be aware that relevant Loan Notes were
in fact QCBs.
31.
The Respondents’ second point concerns s.29 (6) (d) (ii). They say that
the enclosing of the Loan Notes instrument under cover of Arthur Anderson’s
letter dated 3 April 2000 does not give any notification of its relevance to
the insufficiency in respect of 2002/3. The Appellant places great emphasis on
the notification of relevance and says that the Arthur Anderson letter of 3
April 2000 is silent on the point of relevance and therefore the Appellant
relies on the wording of his Tax Return in 2002/3 as constituting a
notification of relevance for the Loan Notes instruments supplied several years
earlier. The information supplied in the White Space of that year’s return
makes no reference to the Loan Notes instrument previously supplied. If the
Loan Note had been supplied with the 2002/3 Return the situation might have
been different.
Discussion
32.
The issues in this case both centre on s.29 (5) TMA. This section
provides a condition which must be met in order for the Respondents to make an
assessment under s.29 TMA. Unless the conditions in s.29 (5) TMA are met the
Respondents cannot make a discovery assessment.
33.
The Appellant relies on two core arguments which are not strictly
alternative arguments; each argument stands either alone or together. The
Respondents agree that these are the two core arguments on which the case
depends.
34.
The two arguments of the Appellant are:
(1)
That s.29(5) TMA 1970 was satisfied, which is to say that at the
conclusion of the enquiry window for the Appellant’s 2002/03 Return (31 October
2005), an officer of HMRC could reasonably have been expected, on the basis of
information made available to him, to be aware of an insufficiency in the
Appellant’s tax return; and
(2)
That the supply of a copy of the Loan Notes under cover of the Arthur
Andersen’s letter dated 3 April 2000 falls within s.29(6)(d)(ii) for the
purposes of HMRC’s assessment in respect of the year 2002/03.
35.
The arguments can be referred to in shorthand as the (s.29 (5) point)
and the ((d) (ii) point).
36.
Before we start a word about Discovery Assessment.
37.
Where a taxpayer has submitted a Tax Return, HMRC have 12 months within
which to notify the taxpayer of its intention to enquire into the Return (s.9A,
TMA 1970). Outside of this period, HMRC may issue a discovery assessment to
recover any under-assessment of tax unless prohibited from doing (s.29 (3) TMA
1970). HMRC may be prohibited from issuing a discovery assessment where a
hypothetical officer could reasonably have been expected, on the basis of
information provided by the taxpayer, to have been aware of the
under-assessment (s.29 (5) TMA 1970). The information contemplated by that
section is provided if it is any of the following:
(i) Information
in the taxpayer’s return for the relevant year, or in any accounts, statements
or documents accompanying the Return (s.29 (6) (a) TMA 1970).
(ii) Information
contained in any claim for the relevant tax year by the taxpayer acting in the
same capacity as that in which he made the Return, or in any accounts,
statements or documents accompanying such claim (s.29(6)(b) TMA 1970).
(iii) Information
contained in any documents, accounts or particulars that, for the purposes of
any enquiry into the return or any such claim by HMRC officer, the taxpayer
produces or provides to the officer (s.29 (6) TMA 1970).
(iv) Information,
the existence and relevance of which the taxpayer notifies in writing (s.29 (6)
(d) (ii) TMA 1970).
38.
While the term “discovery” is not defined in the legislation, it is
taken to mean coming to a conclusion or having reason to believe which in turn gives
rise to an assessment of tax. In Langham v Veltema [2004] ECWA Civ 193
(“Veltema”), the Court offered the more simplistic meaning of “for any reason,
it newly appears that the taxpayer has been undercharged”.
39.
In the recent decision of Charlton & Others v HMRC [2011] UKFTT 467 (TC) (“Charlton”) the Tribunal introduced the additional requirement
of newness which includes a situation where the original Inspector
changed his mind, or a new Inspector took a different view. In the same case,
the Upper Tribunal in HMRC v Charlton Corfield & Corfield [2012] UKUT 770 (TCC) (“Charlton Upper Tribunal”) the Tribunal confirmed that all that
is required “is that it has newly appeared to an officer, acting honestly and
reasonably, that there is an insufficiency in an assessment” which can be for
any reason, including a change of view, change of opinion, or correction of an
oversight.
40.
HMRC can make a discovery assessment if a hypothetical officer could not
have been reasonably expected, on the basis of information made available to
him before the expiry of the enquiry window or closure of the enquiry, to be
aware of the relevant situation, which justifies the making of the assessment.
This raises an interesting condition for the issuing of a discovery assessment.
In Charlton Upper Tribunal the Tribunal, while recognising that the
hypothetical officer may have no particular knowledge or experience, held that he
must satisfy the test of “reasonable awareness”. The Tribunal said that the
officer “must be assumed to have such level of knowledge and understanding that
would reasonably be expected in an officer considering the particular
information provided by the taxpayer”. It is possible in certain cases, given
the complexity of the law or the transactions involved, that a particular
officer could not reasonably be expected to be aware of an insufficiency on the
face of the documents. The officer who has to be “aware” is not the particular
officer who was in fact involved in the case, but a hypothetical officer.
41.
A taxpayer must therefore make an adequate disclosure to HMRC in that
the information given in the taxpayer’s return must be sufficient to indicate
an insufficiency of tax. In Charlton Upper Tribunal it was held (at p
890f-g) that the information which is to be made available should allow the
hypothetical officer to be able to infer its existence and its relevance,
without the need to consult more specialist colleagues. The particular officer
should be aware of an insufficiency in the self-assessment; it is not enough
that he should merely become aware that he has to do something to check whether
there is an insufficiency.
42.
There are cases which are complex and the standard expected of the
hypothetical officer may be different. In particularly complex tax cases, it
is possible that the taxpayer may disclose factual information but an officer may
not reasonably be expected to be aware of an insufficiency of tax due to the
complexity of the relevant law. In Charlton, the scheme was very
complex and required the attention of one of a small group of tax specialists
within the Revenue. Such a situation may be the exception rather than the
rule.
43.
In Charlton Upper Tribunal the Court in considering the qualities
of the hypothetical officer commented as follows:
“Nor is there any single benchmark of the knowledge
and experience the hypothetical officer should be expected to have. The test of
reasonable awareness must be applied to the circumstances of each case. The
necessity to assume an officer of reasonable knowledge and understanding … does
not suggest that such reasonable knowledge and understanding must be confined
to an assumed average, to be applied in all cases. How would such an average
be determined? The test of reasonable awareness must in our view be applied to
the particular context in which the question arises, and without regard to any
perceived lack of expertise or specialisation of individual officers. The
officer must be assumed to have such level of knowledge and understanding that
would reasonably be expected in an officer considering the particular
information provided by the taxpayer.”
44.
There is no single benchmark of the knowledge and experience the
hypothetical officer should be expected to have. The officer therefore cannot
be taken to know every fact known to HMRC nor is he expected to carry the
entire corpus of knowledge relevant to his job in his head. An officer should
know when he has to look things up and where to look, and when he needs to
consult colleagues. The officer should be equipped to do the job and to
perform the role within HMRC for which he has been appointed. An officer in a
specialist unit would inevitably have more specialist knowledge.
45.
In a regional office,an officer in a specialist unit dealing with
particular taxpayers who receives a White Space Disclosure would be able to
understand what is being explained and claimed and the basis on which the entry
was made. With such understanding, he might reasonably be expected to be aware
of a possible insufficiency of tax. This means that the particular officer’s
knowledge should not be confined to tax law and case law. It will include HMRC
practice and statements of their views as well as guidance given in their
internal manuals for dealing with relevant points.
46.
Against this backdrop let us look at the two main issues.
The Section 29(5) point
47.
The Tribunal’s task is to look at what was notified by the Appellant on
his Return for 2002/03.
48.
The Complex Personal Returns Team at Salford (Jane Wright) had a copy of
the Tax Return of the Appellant. The Return made the following disclosure.
“BriTel Floating Rate Guaranteed Loan Notes 2602462:
On 31 December 2002, I redeemed my entire holding of 2602462 BriTel Property
Acquisitions Limited Loan Notes at par. The Loan Notes were non-qualifying
corporate bonds [emphasis added]. The Loan Notes were acquired as
consideration for the disposal of shares in Argent Group plc on 1 August 1997.
S.135 TCGA 1992 applied to this transaction.”
49.
The emphasised words were of course mistaken but the disclosure did make
clear to any hypothetical officer that the Loan Notes were acquired in exchange
for shares and not subscribed de novo for cash. To that extent the
officer should have been on notice that issues relating to CGT taper relief
might be relevant.
50.
The Appellant says that the staff at Salford were well aware that the
Loan Notes were QCBs and had before them a copy of the Tax Return and therefore
had information showing that there was an insufficiency of tax.
51.
It is the Appellant’s task to show that s.29 (5) is satisfied. This
would require two things, which are:
(i) The hypothetical officer would have had the Tax
Return; and
(ii) On
the basis of information in the Tax Return, and what a reasonable officer could
be expected to know, he could reasonably be expected to have been aware of an
insufficiency of tax in the Tax Return.
52.
Section 29(6) (a) TMA deems the hypothetical officer to be aware of what
is contained in a Tax Return. The officer would also have such information which
a reasonably competent officer would know, not in relation to the taxpayer, but
generally. The hypothetical officer is not a hypothetical officer in a vacuum
but rather one who is standing in the shoes of the actual officer or in this
case, a reasonable officer at Salford.
53.
In the Appellant’s view such an officer would have a reasonable
understanding of what constitutes a QCB as a matter of law and be aware of the
Extel information on the Loan Notes. Extel is a publication which allows HMRC
to check the status of qualifying corporate bonds (one officer considered Extel
to be “gospel” on the point) and therefore would know that the Loan Notes were stated
in Extel to be QCBs
54.
While recognising that the officer is not assumed to have in his head
all relevant knowledge on all taxation matters, it would be assumed that he
would update himself and look at the relevant material as his work requires.
The assumed knowledge, which is different from the actual knowledge, based on
the information provided by the taxpayer would mean that a particular officer
has a general knowledge of the matter, the securities identified and their
implications. In looking at the Return the officer would be aware from the
disclosure that there had been an insufficiency of tax.
55.
The Respondents disagree. They say that this situation is similar to
that arising in Veltema, i.e. it justified enquiry but did not on its
own alert the officer to the insufficiency, or at any rate not without further
investigation. This point is explored in the Charlton Upper Tribunal case
where the Tribunal said (para. 890F-G):
“There is a clear distinction between cases where
the information made available to the officer merely raises questions, which
can only be resolved by obtaining further information and those where the
available information provides awareness of an insufficiency that is sufficient
to justify the making of an assessment. Langham v Veltema is an example
of the former case, Lansdowne an example of the latter.”
56.
The passage above refers to an awareness of an insufficiency, even if it
cannot be quantified at that stage, not of circumstances that might on
investigation reveal an insufficiency. This point was made by Auld LJ in Veltema
(at page 294C-D), he said:
“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 [Self Assessment] scheme’s aim 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 immediate and possible
time-consuming scrutiny, whether or not in the form of an enquiry under s.9A of
self-assessment returns when they do not disclose insufficiency, but only
circumstances further investigation of which might not show it.”
57.
The awareness spoken of is of an actual insufficiency in the
self-assessment in question. It does not mean a mere awareness that the
officer should do something to check whether there is an insufficiency.
58.
In her evidence, Mrs Wright, the officer dealing with the Return at
Salford stated [paragraph 19 of her statement] the first time when she became
aware of any correspondence relating to the 1997/1998 assessment was on receipt
of Deloitte’s letter on 30 March 2006-the relevant papers not having been in
her file, as explained above, when she took over from Ms Richardson around the
middle of 2005 (see paragraph 3(10) above summarising her evidence) In the
circumstances, she would not have been aware of HMRC changing their view on the
status of the Loan Notes in June 2005 from the view taken by Mr Pepler in his
letter dated 7 June 2000, where he stated “the facts point to (the Loan Notes)
being a non-qualifying corporate bond”. Such a change of view may well give
rise to public law remedies but the Tribunal accepts that the officer in
charge, Mrs Wright, knew nothing of the correspondence relating to the First
Enquiry until 2006.
59.
Mr Brandon, in his submissions, attributed to the hypothetical officer a
reasonable knowledge of HMRC’s practice relevant to the return being examined.
This is correct. From Mrs Wright’s evidence, the statement by Ms Richardson
(her predecessor) that Extel was regarded as “gospel”, and the relevant HMRC
manuals (especially paragraph CG53811 which was handed up to the Tribunal) Mr
Brandon suggested it is routine that the officer would consult Extel, which if
done here would have revealed that the Loan Notes were QCBs. That in turn would
have revealed the insufficiency of tax at once. Mr Brandon said in closing
that the need to refer to Extel could be regarded as incorporated by reference
into HMRC manuals, and was therefore part of the knowledge of relevant practice
which can properly be attributed to the hypothetical officer.
60.
It is clear that if we are to assume that the hypothetical officer would
have taken this further step, the insufficiency would have been revealed
without anything resembling the time-consuming enquiries mentioned by Auld LJ
in Veltema. Can we therefore take the view that Extel’s contents are
part of the “information made available” within s.29 (5)? There is no mention
of Extel in the Return. The proper question therefore is can we deem reference
to Extel and its contents to be information whose existence and relevance to
the possible inefficiency could reasonably be expected to be inferred by the
hypothetical officer from the information in the Tax Return as per
s.29(6)(d)(i). Both Counsel towards the end of the hearing disavowed any
reliance on s.29 (6) (d) (i) but did agree that there was a question based on s.29
(6) (d) (ii).
61.
Rather, Mr Brandon made a simple point. He based his argument on s.29(5)
on the view that the knowledge brought to bear on the return entry by the
hypothetical officer included the practice of checking the status of corporate
bonds and whether they are QCBs or non-QCBs against Extel records. In his
view, an officer faced with the disposal involving a non-QCB would inevitably
go to Extel and immediately spot the insufficiency, which would bring s.29(5)
into play.
62.
Mr Brandon in his submissions appeared to go further to say that the
officer would have known that HMRC had changed its view on the status of these
Loan Notes some time before autumn 2005, and should therefore have immediately
detected the insufficiency from the assertion that the Loan Notes were
non-QCBs.
63.
The question is should the reference in Tax Return to QCB be sufficient
to have alerted the officer to check Extel or indeed to know that there was an
insufficiency of tax.
64.
Mr Yates drew reference to the case of Swift v Revenue & Customs
[2010] UKFTT 88 (TC) where Judge Avery Jones discussed the information on the
Return which, in that case, had not been put in the right place but rather
scattered throughout the Return. The question was whether the hypothetical
officer would have spotted the reference to a “LLC” (a Delaware Limited
Liability Company) and from that jumped to awareness that there was an
insufficiency based on his knowledge that HMRC regarded the relief in question
in that case as not due in respect of income from such an entity. Similarly, in
the course of the argument before us in this case we asked Mr Yates to comment
on the fact that the acronym QCB was used in the Return here, suggesting that
this might also trigger an immediate reference to Extel and thus a discovery of
the insufficiency in a very short time. Mr Yates pointed out that in Swift,
the taxpayer made a correct reference to LLC, although in the wrong place,
whereas here the disclosure was incorrect in the first place and would have
led the officer away from the truth rather than towards it. The Tribunal
accepts that distinction.
65.
It is clear to the Tribunal that the officer, based on her own evidence,
and looking at what the hypothetical officer would do, would not have spotted
the insufficiency of tax based on the disclosure made by the Appellant on the
return. The disclosure must point to an actual insufficiency by the disclosure
in the return.
66.
Mr Yates quite correctly points out that s.29 (5) does not involve a
test of whether in all the circumstances HMRC could have detected an
insufficiency prior to the expiry of the time limit for opening an enquiry.
67.
A further point made by the Respondents concerns the source of
information. They point out that the sources of information referred to in s.29
(6) TMA are the only sources of information to be taken into account in
deciding whether an officer ought reasonably to have been aware of the actual
insufficiency of tax. The particular information must clearly alert the officer
to the insufficiency of the assessment.
68.
The Respondents say that the Appellant is wrong to suggest that s.29 (5)
TMA refers to both actual information provided to HMRC, though not necessarily
by the taxpayer himself, and information deemed to have been made available to
an Inspector by virtue of s.29 (6) TMA. The assertion is that only information
deemed to have been made available to the Inspector under s.29 (6) TMA is
relevant. They draw reference to the Court of Appeal decision in Veltema where
Auld LJ, with whom Chadwick & Arden LJJ agreed, held that the test
in s.29(5) must be understood as follows:
(1)
The statutory test is concerned with what an Inspector could reasonably
have been aware of, not what he could reasonably have been expected to do (paras.33-35);
(2)
The information which informs the Inspector’s awareness for the purposes
of the statutory test is only that information set out in s.29 (6). It is
irrelevant if information is available to the Inspector from other sources
(paras.34-37).
69.
The Veltema decision was concerned with the discovery assessment
in respect of a transfer of house from a company to its director. The
director’s personal return merely stated that an asset had been transferred to
the value of £100,000. The company’s P11D (a return of benefits provided to
employees) stated the asset in question was a house valued at £100,000 and that
the director had made no payment for the transfer. The company’s corporation
tax return, sent to a different Inspector over a year later, included the
relevant accounts with a note which recorded that the house had been occupied
by the taxpayer who was the sole director, without payment and with an
estimated value of £100,000. It later transpired after reference to the
District Valuer that the house was in fact worth an agreed figure of £145,000.
This meant HMRC had “corporate knowledge” of the undervaluation prior to the
expiry of the time limit for an enquiry. The Court of Appeal found this not to
be relevant. This was because s.29 (6) provided an “exhaustive list” of
information “made available to” the hypothetical officer. Information within
the corporate knowledge of the Revenue, but not falling within any of the
categories in that exhaustive list, fell to be ignored and therefore not
available to the hypothetical officer.
70.
This view of s.29(6) found support in the decision of Lewison J in Lansdowne
Partners LP v HMRC [2011] STC 372 (“Lansdowne”) at [46]:
“[46] In Langham (Inspector
of Taxes v Veltema [2004] EWCA Civ 193, …the Court of Appeal considered
s.29 and discovery assessments. In my judgment the case establishes the
following propositions:
i)
“Awareness” is the officer’s awareness of an actual insufficiency in the
self-assessment in question, rather than awareness that he should do something
to check whether there is an insufficiency (Para.[33]);
ii) The
test whether an officer could reasonably have been expected to be aware of an
actual insufficiency is an objective test (Para.[33]);
iii) The
source of information referred to in s.29(6) are the only sources of
information to be taken into account in deciding whether an officer ought
reasonably to have been aware of the actual insufficiency (Para.[35], [51]);
and
iv) The
information in question must clearly alert officers to the insufficiency of the
assessment (Para. [36]) …”
71.
This position is supported by the Upper Tribunal decision in Charlton.
72.
This leads us to the disclosure which was made by the Appellant. For the
purposes of s.29 (5) the only relevant information was the disclosure in the
Appellant’s return for 2002/03 and there is nothing in that disclosure which
would lead the hypothetical officer to become aware of an insufficiency which
would justify the making of an assessment. He would not know that the Loan
Notes were in fact QCBs. This position was accepted by the Appellant’s
advisers, Deloittes, in their letter on 23 February 2007 where they said:
“We can accept that the statement contained in our
client’s 2002/03 Tax Return “the BriTel Loan Notes were non-QCBs” was not
sufficient information for the Inspector to be aware of any doubt and open an enquiry
under s.9A TMA 1970 to review the basis of the tax treatment.”
73.
In the Tribunal’s view, even though the additional step of consulting
Extel would have been a short one, the test must be whether the information
disclosed in the Return alerted the officer to an insufficiency of tax. The
answer to that is “no”. The question is not whether the officer should have
taken further steps to check disclosed information or been aware of a piece of internal
information regarding the status of the QCB. The disclosure on the return
should be sufficiently complete and comprehensive and this was not the level of
disclosure which was made. We cannot accept Mr Brandon’s argument that, based
on the disclosure, the hypothetical officer would have checked the status of
the QCBs against the Extel records.
The (d) (ii) point
74.
The Respondents do not dispute that enclosing the Loan Notes under cover
of the Arthur Andersen’s letter dated 3 April 2000 satisfies all the
requirements of s.29(6)(d)(ii) other than the notification of its relevance to
the insufficiency in respect of the particular tax year in question, i.e. 2002/03.
They accept that there is no time requirement for notification in writing in s.29
(6) (d) (ii).
75.
Their point relates to the requirement of notification as to relevance
of an insufficiency of an assessment in a particular year. They draw reference
to Lewison J in Lansdowne at para.52 where he said:
“However, the information relied on under
s.29(6)(d)(ii) must communicate not only the existence of the information but
also its relevance to the situation mentioned in sub.s(1) namely the
insufficiency in the particular year of assessment [emphasis added].”
76.
They say that the Arthur Andersen letter of 3 April 2000 is the only
communication on behalf of the Appellant (prior to the closure of the enquiry
window on 31 October 2005) which could constitute notification in writing for
the purposes of s.29(6)(d)(ii). While the letter states Arthur Anderson’s view
of the Loan Notes as not being QCBs, it is silent on the relevance of the Loan
Notes to 2002/03 or indeed the significance of the status of the Loan Notes to
the application of taper relief. Further, the information in the White Space in
the Appellant’s return of 2002/03 makes no reference to the Loan Notes which
had been previously supplied. For this reason, s.29 (6) (d) (ii) is not
satisfied.
77.
The Respondents say that although the Loan Notes were made available to
HMRC several years before, they were not “made available to” the hypothetical
officer in s.29(5) within the meaning of that term as it is defined by s.29(6)
TMA. The simple question therefore is whether the relevant provisions are
satisfied. In other words whether the submission of the Loan Notes together
with the other contents of the letter from Claire Webster to the Salford Tax
Office of 3 April 2000 satisfies the terms of s.29 (6), i.e. that they
contained “… information, the existence of which, and the relevance of which as
regards to situation mentioned in subsection (1) … are notified in writing by
the taxpayer to an officer of the Board …”.
78.
There no dispute that the information disclosed in the First Enquiry
into the 1997/8 Return informed HMRC of the existence of Loan Notes and
included a copy of the instrument itself and of its relevance to the
Appellant’s liability for that year (1997/98). The disclosure being in
writing to an officer of HMRC, by the Appellant’s accountants on his behalf,
did satisfy s.29 (7) (b) TMA. There is therefore no dispute that the Loan
Notes instrument, which contained the relevant information needed to decide if
it was a QCB, was information the existence of which, and the relevance of
which was notified for the particular year of enquiry-1997/8- as required by
s.29(6)(d)(ii) TMA.
79.
The question is, was that information deemed “information available”
within s.29 (5) TMA in relation to the 2002/3 year of assessment. Mr Brandon’s
argument is that the Respondents have added a “gloss” to the requirement that
it must contain “… notification as to relevance to and insufficiency of an
assessment … in a particular tax year .” The effects of such a requirement
would be to impose a condition of an express mention of the liability in the later
year (2002/3).
80.
Mr Yates said that this would have required the Appellant’s advisers, in
the First Enquiry, to have demonstrated the relevance of the terms of the Loan
Notes to 2002/3 as well as 1997/1998, and that the letter from Arthur Andersen
of 3 April 2000 being “entirely silent” on the relevance to 2002/3 therefore
does not satisfy the requirement of the legislation.
81.
In the Tribunal’s view subsection (d) (ii) has no such temporal
restriction. The Loan Notes instrument which was supplied in 2000 would have
alerted an officer, without more, that its terms would have affected liability
2002/3 because that was the year in which the final redemption would occur.
82.
In the Lansdowne case the Court of Appeal stated that the
hypothetical Inspector should be taken as having before him the partnership
return and statement, the letter from the partnership to the Inspector of March
2006 and a note of a meeting in February 2006, all of which would have alerted
the Inspector of an actual insufficiency of tax. The Court went on to point
out that the hypothetical Inspector does not have to resolve points of law but
it is enough that the information made available to him makes clear the need
for an amendment to the Tax Return. This is a simple requirement.
83.
Mr Brandon made the point that the Loan Notes instrument was
“immutable”. He accepted that changes could be made to the Loan Notes but it
did not affect its status as a QCB. Mr Yates in reply pointed to paragraph 22
of the Loan Notes instrument which allowed the passing of a resolution of
note-holders to change the currency; this was the provision which, in the
Appellant’s view, made the security a non- QCB. The provision also allowed
other changes to be made. In particular, the redemption date could be altered
if a resolution to that effect was passed. He explained that this created an
element of uncertainty about the future and how the security would operate and
drew a parallel with the Lansdowne case where there were similar
uncertainties with regard to the future payment of rebates.
84.
While the Tribunal accepts that the Loan Notes instrument, as drafted,
does give wide powers of alteration under paragraph 22 the Tribunal draws
reference to Mr Cass, a senior technical specialist at HMRC’s Capital and
Saving section, advising Mrs Wright in November 2005 who pointed out that:
“I do not see that paragraph 22 … should be
construed as a provision made for the conversion of the principle of debt
evidenced by Loan Notes into a currency other than sterling. Rather, it is
simply a clause that allows the holders of the Loan Notes to sanction, by way
of an extraordinary resolution, changes to the terms of the Loan Notes that
have been approved …
It is entirely normal for a debt instrument such as
this to contain a clause that allows the issuing company to change, subject to
the consent of the holders of the Loan Notes, the terms and conditions on which
the Loan Notes were issued.”
85.
Mr Cass considered that paragraph 22 is a normal commercial provision
arising in this form of security.
86.
When the Loan Notes instrument was supplied in 2000, could it be said
that an officer would not have been aware of the implications for the year
2002/3? The officer would have been aware if nothing had changed, that there
would have been a final occasion of redemption in 2002/3 and that an incorrect
disclosure regarding the status of the Loan Notes as QCBs or otherwise, as
indicated in the Tax Return for 2002/3, would have resulted in an insufficiency
of tax.
87.
In short, if an officer had the Loan Notes instrument, he would have
known that, in respect of later years of assessment in which a disposal occurred,
if a Tax Return claimed non-QCB status, there would be an insufficiency of
tax. The Tax Return taken with the Loan Note instrument would certainly have
alerted HMRC as to the insufficiency of tax. In fact Mr Pepler, the Inspector
who conducted the First Enquiry, noted that the gains, “on the disposal would
come into charge in 2002/3 at the latest. Other events might trigger an
earlier charge”. The position in 2002/3 would have been clear.
88.
In the Tribunal’s view, it cannot be said, as was been argued by Mr
Yates, that the range of changes envisaged by paragraph 22 was so wide that an
officer could not have been aware of any definite implications for the
year 2002/3. If Mr Pepler recognised as early as the First Enquiry that “other
events”, presumably the possibility of early redemption by resolution or by the
taxpayer’s option under the terms of the Loan Note instrument, would have
triggered a tax charge then certainly there is no reason why an officer in
2002/3 would not equally have realised the same thing. To that extent a distinction
can be drawn with the Lansdowne case since the uncertainty as to the
future in this case is narrower than the uncertainty contemplated by Lewison J
in Lansdowne. In that case the exchange of correspondence in 2000 dealt
only with rebates in one year, to 31 March 1999. Lewison J held that this
cannot have alerted an officer to an insufficiency in 2004/5 because there is
nothing to indicate that this state of affairs would continue. He did say,
rather pointedly, that “it might have been different” if the officer had been
told that it would so continue (at page 391(b)).
89.
We know that the relevance of the information to the insufficiency of
tax need not be notified in a single document. This is provided in s.29 (6) (d)
(ii) which provides mainly that the existence of, and relevance to the
insufficiency of information “are notified in writing”. It does not specify
that it must be in one document.
90.
The Loan Note instrument prescribes the rights of the note-holders in
detail and provides for all relevant future years, subject to any changes made
pursuant to paragraph 22. An officer looking at the returns in 2002/3 would
have been alerted to the fact that the Loan Note had been reported as not being
a QCB, and also to the terms of the instrument itself and the fact that the final
redemption date fell in 2002/3. Armed with the knowledge that HMRC regarded
the Loan Notes as, in fact, QCBs, he would know that such redemption by the
taxpayer occurring in that year was likely to give rise to an insufficiency of
capital gains tax if the taxpayer continued to regard them as non-QCBs and
therefore claimed taper relief. He would, no doubt, also prudently have
checked whether any relevant changes had occurred, but at that point the focus
of the enquiry would be on quantifying the insufficiency rather than
establishing whether there was one.
91.
There is no question that the Loan Note and letter of 3 April 2000 were made
available to the Respondents within the meaning of s.29 (6). The information
provided in 2000 was information provided in writing to the Board on behalf of
the taxpayer and had the hypothetical officer considered it, he could
reasonably have been expected to become aware of the insufficiency to which it
pointed before 31 October 2005.
92.
An officer looking at the return in 2002/3 would know that the statement
in the return that the Loan Notes was not a QCB was at odds with the instrument
itself and that since the final redemption date fell in 2002/3 and that such an
event had occurred in that year, there was likely to be an insufficiency of
tax.
93.
For this reason the appeal is allowed and the Amended Assessment is
discharged.
94.
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: 19 September 2013
