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Cite as: [2008] UKSPC SPC692, [2008] STC 907, [2008] STC (SCD) 907, [2008] UKSPC SPC00692

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Mrs Lavinia Frances Corbally-Stourton v Revenue & Customs [2008] UKSPC SPC00692 (16 June 2008)

Spc00692

Assessment – Discovery assessment under s.29(1) TMA – Whether assessment precluded by section 29(5)TMA

Assessment – Discovery assessment under s.29(1) TMA – Whether s.3 HRA requires section 29 to be read differently – Whether HMRC's actions in relation to the appellant and section 29 were incompatible with Convention rights

Assessment – Whether made

Section 16(2A) TCGA 1992, and section 71(2)TCGA – Was a taxpayer prevented from arguing that a loss was an allowable loss in his hands because it had been disallowed by HMRC in the hands of the trustees – held : no.

THE SPECIAL COMMISSIONERS

MRS LAVINIA FRANCES CORBALLY-STOURTON Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: CHARLES HELLIER

Sitting in public in London on 8 and 9 May 2008

John Barnett of Burges Salmon for the Appellant

Ingrid Simler QC and Akash Nawbatt, instructed by the Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This appeal is about the discovery assessment provisions of section 29 Taxes Management Act 1970. These provisions permit an officer of HMRC to make an assessment where he discovers that an assessment is or has become insufficient. There are restrictions in that section on his ability to make such an assessment; the restriction relevant to this appeal is that in section 29(5) which prohibits the making of a discovery assessment after the close of the 'self-assessment enquiry window' if at that time an officer could, on the basis of information then available to him, reasonably have been expected to have been aware of the insufficiency.

The setting for this appeal is the self-assessment provisions of the TMA. Section 9A TMA provides that an officer of HMRC may enquire into a return, but that he may do so only if he gives the taxpayer notice of his intention to do within a window, which in this case was 12 months from the filing date of 31 January 2000. If an enquiry is started HMRC may require the taxpayer to provide further information and documents under section 19A TMA, and at the end of the enquiry the inspector will give a closure notice setting out his conclusions and if appropriate amending the assessment. The taxpayer may apply for a closure notice to be issued (for example if he feels that HMRC are dragging their feet) and may pursue a refusal to give a closure notice by an appeal.

Thus section 29 provides in limited circumstances a second opportunity for HMRC to seek further tax from a taxpayer. But the effect of section 29(5) is deny access to that second route if an officer could reasonably have been expected to have been able to make the adjustment at an earlier stage based on the information then available. I shall address later the question of what information is to be treated as having been available for the purposes of that exercise.

In 1998/99 Mrs Corbally-Stourton participated in a scheme (the Castle Trust scheme) suggested to her by her bankers Coutts & Co ("Coutts") which was intended to deliver to her a capital loss (an "allowable loss" in the terminology of TCGA 1992) of about £1m. She applied this loss in her 1998/99 tax returns to eliminate the capital gains she had made in that year, and carried a small balance forward which she used in her returns for 1999/2000 and 2000/2001 to reduce gains occurring in those years. In her 1998/99 return she made a disclosure in the "white space" on the return of the source of the loss.

HMRC became aware of the Castle Trust Scheme, and started investigating it, in December 1999. Several hundred taxpayers had participated in it and claimed allowable losses. Dr Branigan, an officer of HMRC at Special Compliance Office dealing with the Castle Trust Scheme and Mrs Corbally-Stourton's return, tried unsuccessfully to open an enquiry into her return in December 2000. His attempt to do so foundered because of administrative failures at HMRC. As a result the self-assessment enquiry window for 1998/99 closed on 31 January 2001.

HMRC continued their enquiries into the Castle Trust Scheme and had negotiations with Coutts and other advisers relating to the scheme. In November 2003, having come at some stage prior to that date to the conclusion that the scheme did not work, they discussed settlement proposals with those persons.

On 18 October 2004 HMRC wrote to Mrs Corbally-Stourton indicating that an assessment had been made on her under section 29(1) and (5) effectively disallowing the Castle Trust Scheme loss claimed in her 1998/99 tax return.

The Appellant appeals against that assessment and contends:-

(i) that under the provisions of section 29 construed under conventional canons of construction, HMRC were not permitted to make this assessment;

(ii) that, if that is not the case, then section 3 Human Rights Act 1998 (HRA) requires a construction of section 29 which proscribes this assessment;

(iii) that, if that is not the case, then sections 6 to 8 HRA require this tribunal to grant relief against the assessment because HMRC acted in a way which was incompatible with a Convention right.

Mr Barnett did not assiduously press any contention that the Castle Trust Scheme losses were allowable losses available to the Appellant notwithstanding any settlement reached by HMRC with others involved. In the discussion below however I shall deal with this issue first (after setting out my findings of fact) since its resolution affects to some extent the HRA arguments. Having dealt with it I shall turn to the other issues raised by the Appellant.

The Evidence and Finding of Fact

I heard oral evidence from Dr Nicholas Branigan, the officer who dealt with the assessment under appeal. He also provided a witness statement. There was a statement of agreed facts and a bundle of copy correspondence which included three of the documents under which the Appellant participated in the Castle Trust Scheme. In addition to those facts set out above, I find the facts as follows.

The Castle Trust Scheme

I find that scheme was intended to operate in the following manner:-

(1) On 11 March 1997 Mr Tanreer Makhdumi executed a deed under Guernsey law setting £125,000 on Legis Trust of Guernsey as trustee of the Castle Trust. The principal beneficiary was the settlor's mother who was resident in Pakistan.

(2) It was expected by those involved in the promulgation of the scheme that, through the agency of Exco Bierbaum Securities GmbH, (a derivatives broker and member of the Frankfurt Stock Exchange) that the trustees would enter into two reciprocal derivative contracts. Under the first contract the trustees were to become obliged to make a set payment to the counterparty (PDR) if the average price of Deutche Telecom Shares over the set life of the contract exceeded a set figure, and if the average was lower than that figure then the counterparty would make payment of the same sum to the trustees. Under the second contract the obligations to pay were the reverse.

(3) The terms of the derivative contracts expressed that both would expire on 8 April 1997 when settlement would be made. The set payment was £1,000,000,000.

(4) On 4 April 1997 the trustees, through the agency of Exco, arranged to terminate the option which was then in the money. and in consequence £999,288,500 was to be paid by PDR to an account of the Trustees with UBS. Because the trustees retained the other, out of the money, contract under which they had a contingent liability of £1,000,000,000 which would mature on 8 April 1997, the UBS bank account was assigned by way of security to PDR.

(5) On 7 April UK resident trustees were appointed in place of the Guernsey resident trustees.

(6) On 8 April 1997 the out of the money derivative matured and the trustees were to pay PDR £1,000,000,000 of which the vast majority would come from the £999,288,500 which was to have been paid to them on 4 April 1997.

The object of these transactions was to give rise to an allowable loss of £1,000,000,000 in the hands of the trustees when they were UK resident, but for the gain of £999,288,500 to fall outside the UK capital gains net – being realised by non-UK resident trustees for the benefit of non-UK resident beneficiaries. The next steps involved the parcelling up of the allowable loss and the making of arrangements to enable it to accrue to UK taxpayers. These arrangements relied on the provisions of section 71(2) TCGA as they stood prior to their amendment in 1999. Under those provisions, where a person became absolutely entitled to trust property as against the trustees, any allowable loss which had accrued to the trustees which was represented in that property and could not be used by the trustee in the year in which the person became absolutely entitled was to be treated as accruing to the person who so became entitled. Thus if a taxpayer acquired an absolute interest in part of the trust property he would become entitled to part of the allowable loss which would otherwise have accrued to the benefit of the trustees.

This parcelling up and allocation was to take place by the following steps:-

(i) later in 1997 three new trusts, the Charter Trust, the Magnus Trust, and the Zennith Trust were created;

(ii) the trustees of the Castle Trust made appointments of parts of the Castle Trust property to each of these new trusts. The appointments were made contingent upon Mr Makhdumi's mother surviving until noon on 25 November 1998;

(iii) the trustees of the three new trusts sold shares of their contingent interests in the Castle Trust to UK taxpayers;

(iv) on 25 November 1998, Mrs Makhdumi being still alive, the UK taxpayers became absolutely entitled as against the Castle trustees to parts of the Castle Trust property, and thus eligible under section 71(2) to inherit the unused allowable losses of the Castle Trust.

On 25 November 1998 the trustees of the Charter Trust assigned 1.25% of their contingent interest in the property of the Castle Trust to the Appellant. Under the terms of the assignment the Appellant paid the monies described below and £5,875 to Coutts as Financial Service fees. The documents before me provided that:

(i) under a Deed of Assignment the Charter Trust trustees assigned to the Appellant 1.25% of their interest in the Castle Trust;

(ii) under that deed the "price payable by" the Appellant for that interest was stated to be:

(i) £10,000;

(ii) £5,000 "payable … to Coutts & Co … as the Escrow Agent subject to the Escrow Agent Agreement"; and

(iii) £45,000 "payable to Coutts & Co … as the Escrow Agent subject to the Deferred Payment Escrow Agreement;

(iii) the Escrow Agent Agreement provided that the £5,000 was to be applied in meeting the expenses of securing the agreement of the Revenue to the allowability of the losses, and any balance remitted to Coutts; and

(iv) the Deferred Consideration Escrow Agreement appears to provide that the £45,000 is paid to the Trustees if the losses were allowed by the Revenue and otherwise would be returned to the Appellant.

HMRC's investigation into the Castle Trust Scheme

The trustees of the Castle Trust submitted their tax return for 1997/98 (the first year of their UK residence) on 22 October 1998. That return stated that:

"In March 1997, two derivative contracts (European Average Rate Options) relating to the shares in Deutche Telecom were entered into with PDR International Trust. One option (trade 82834) was closed at a gain on 4 April 1997. The other option (trade 82831) giving rise to the allowable loss terminated on 8 April 1997".

The return gave details of contingent appointments including that to the Charter Trust.

HMRC became aware of the Castle Trust Scheme in 1999 and started an investigation into it in December of that year. A formal enquiry into the trustees' return was instigated on 15 December 1999. Enquiries and requests for information were made of the trustees and others associated with the scheme. Requests were made of the fiscal authorities in Germany and Pakistan for information. The investigation continued into 2003. An exercise was conducted to determine which taxpayers had claimed losses under the scheme. The Appellant was among those identified as having participated in the scheme. Enquiries into the tax returns of at least some of those taxpayers were commenced under section 9A TMA and documents relating to the scheme sought from them under the provisions of section 19A TMA. For the reasons explained below the Appellant was not among those taxpayers. Meetings were held with and correspondence pursued with KPMG and Freshfields acting for the trustees. After the first meeting a representative of Coutts attended all meetings. Several hundred of Coutts' customers had participated in the scheme which had been marketed to them by Coutts.

By early 2002 Dr Branigan said that HMRC had obtained sufficient information to "take a view" on the scheme. By that time he said, and I accept, that he had received information that there was no record of the transactions in the derivatives at Exco and that the counterparty, PDR, was connected to the Castle Trust trustees because PDR was a settlement settled by Mr Makhdumi.

In November 2003 HMRC wrote to KPMG (for the Castle Trust trustees) putting forward proposals for settlement of the investigation, and setting out proposals for the closure of the enquiry into the Castle Trust trustees' return. The letter was copied to Coutts. The proposal made to KPMG for the trustees was that specified settlement terms would be offered to the participants in the schemes if the trustees did not appeal against the closure notices in relation to their tax returns for the relevant years which amended those returns so that no allowable loss was treated as arising from the derivative transactions.

The closure notices were issued on those terms and were not appealed against. After the 30 days for appeal against those notices had expired HMRC sent letters to those taxpayers whose returns were under enquiry setting out the proposals for settlement which it had been agreed would be offered to them. Most of those taxpayers agreed to the proposals. Mrs Corbally-Stourton was not among those taxpayers.

The Appellant's tax return and dealings with HMRC

The Appellant's tax return for 1998/99 was submitted, I understand, by the filing date of 31 January 2000. (As a result the window in which an officer might commence an enquiry under s.9A TMA closed on 31 January 2001).

In her return in the capital gains section and under the heading "Losses" the following entries appeared:

"Losses

date of Disposed Net

Description of Asset date of acquisition disposal Proceeds Losses

14. Beneficial interest

in the Castle Trust 25 Nov 98 25 Nov 98 8.82 77,616.18

16. European Average

Rate Option (Trade 25 Nov 98 (1,003,994.08) 1,003,994.08"

No. 82831)

And in the box entitled "Additional Information", sometimes known as the "White Space" the following appeared

"Note

I am entitled to the loss of £1,003,994.08 by virtue of the provisions of TCGA 1992 s.71(2). The loss is part of a loss of £1,000,000,000 which accrued to the Trustees of Castle Trust on 8 April 1997 on the [disposal] of a European Average Rate Option (Trade No.82831) relating to the shares in Deutche Telecom.

"On 24 November 1998, I purchased for a fee of £77,625.00 (part of which is contingent) from the Trustees of Charter Trust 1.250% of their beneficial interest in the Trust Fund of the Castle Trust. That interest determined on 25 November 1998, when I became absolutely entitled to receive from the Trustees of the Castle Trust the sum of £8.82."

On 19 December 2000 Dr Branigan prepared letters to the Appellant and to Ernst & Young, her then advisers, indicating that he intended to enquire into her 1998/99 tax return. These letters were part of a batch of a dozen or so letters, each indicating an intention to open an enquiry and each relating to taxpayers who had participated in the Castle Trust Scheme. As the result of an administrative failure it appears that the letters were not posted. I find they were not received by the Appellant or her advisers.

On 20 April 2001 Dr Branigan sent a notice under section 19A TMA to the taxpayer requiring the production of documents and information. The Appellant's representatives replied that such a notice could be issued only if notice had been given (in accordance with section 9A) of an intention to commence an enquiry and that none had been received.

After some correspondence and investigation Dr Branigan accepted that the section 9A enquiry notices had not been given and accordingly that he could not pursue the section 19A request for information. Since the enquiry window had closed he could no longer open an enquiry by the giving of another notice. He wrote to the Appellant on 17 October 2001 accepting this situation but said:

"Please note that should Inland Revenue enquiries establish that the Castle Trust losses do not exist then I consider that I may be in a position to make an assessment on you under the authority of section 29(5) Taxes Management Act 1970."

HMRC wrote to the Castle Trust Scheme participants into whose returns an enquiry had been validly opened in January 2004 offering terms to settle their claims for allowable losses. The Appellant was not among those persons because no enquiry had been started into her return in time.

On 25 July 2004 Dr Branigan wrote to the Appellant offering the same terms and indicating that if they were not accepted an assessment would be made under section 29 for the additional tax which would arise for 1998/99 on the basis that the Castle Trust losses were not allowable.

Mrs Corbally-Stourton's advisers replied on 13 October 2004 declining the offer, and on 18 October 2004 Dr Branigan wrote to say that he had that day made a section 29 discovery assessment for 1998/99. This appeal is against that assessment.

Other Findings

I have indicated above that meetings between HMRC and the Trustees advisers were also attended by a representative from Coutts. Whilst I accept that Coutts would have had regard to the interests in the participants in the Castle Trust Scheme – and in particular to the interests of its customers (who included the Appellant) – I do not find that Coutts acted as the agent of the Appellant in those discussions.

I have noted above how HMRC's investigation progressed. Dr Branigan told me, and I accept, that on 31 January 2001 (the date when the enquiry window closed) on the basis of all the information available to him about the Castle Trust Scheme his view was that the likelihood that a challenge to the availability of the Castle Trust losses would be successful was less than 50 per cent. At that stage he was aware of the outline of the scheme, and aware that an argument based on Ramsay principles might succeed but neither confident that it would succeed on the law as he then understood it, nor possessed of the information as to the implementation of the scheme which later led him to the conclusion that it did not work.

Was the loss claimed by Mrs Corbally-Stourton an allowable loss?

Mr Barnett suggested that, whatever the correct analysis of the actual transactions undertaken in the Castle Trust Scheme it was not open to me to consider whether or not the loss claimed was an allowable loss. He put the argument thus:-

(i) the effect of section 71(2) was to attribute an allowable loss to the Appellant only if the Castle Trust trustees had an allowable loss;

(ii) section 16(2A) TCGA provides that a loss is an allowable loss only if a claim is made in respect of it:

"(2A) A loss accruing to a person in a year of assessment shall not be an allowable loss for the purposes of this Act unless, in relation to that year, he gives a notice to an officer of the Board quantifying the amount of that loss; and sections 42 and 43 of the Management Act shall apply in relation to such a notice as if it were a claim for relief."

(iii) that language and the language of sections 42, 43 and 29(1)(c) TMA indicate that if HMRC do not grant or permit the use of the loss, the loss is not an allowable loss;

(iv) the amendments made by HMRC to the trustees' return disallowing the loss (and perhaps the failure of the trustees to appeal against those amendments) show that the loss had not been granted, and was therefore not an allowable loss.

I do not agree. Whilst I accept that the loss can only have been an allowable loss in the hands of the trustees if it was claimed by the trustees, it seems to me that whether or not the alleged loss (once claimed) is an allowable loss is a matter determined by the proper application of the statute to the facts, and that there is nothing in the statute which confers on HMRC the ability to cause a loss to be or not to be allowable.

In my judgment there is nothing in section 16(2A) which indicates that the claim for the loss has to be accepted before the loss is an allowable loss : the subsection serves the administrative purpose of letting HMRC know of the claim for the loss; it does not confer on HMRC a right to deny it.

Section 42 and 43 TMA deal with the machinery for the making of a claim. There is no indication in these sections that a decision or action of HMRC can affect the validity of a claim.

Section 29(1)(c) deals with the situation in which: "any relief which has been given is or becomes excessive". It does not seem to me that this indicates that a relief is in the gift of HMRC. It may indicate that it is possible that HMRC treated a relief as available and now recant, but that is different from whether a loss is an allowable loss for the purposes of the TCGA.

Neither in my view does the trustees' failure to appeal against the closure notice amendment cause the loss to cease to be allowable. It merely indicates that the trustees were content that the loss should not be treated as allowable. Had the trustees appealed, and had the appeal Commissioners or the Courts concluded the loss was not allowable, the position might be different. But they did not.

Thus in my judgment the Appellant was not shut out from contending, nor is this tribunal shut out from holding, that the loss was an allowable loss (available to the Appellant by virtue of section 71(2)).

On the evidence before me it seems that a claim was made by the trustees in respect of the loss in their 1997/98 return. Thus if there was a loss, it was capable of being allowable.

The Respondents say that there was no loss. In this tribunal the burden of proof that there was a loss therefore rests on the Appellant. The Appellant adduced no evidence that the loss was allowable. Dr Branigan's evidence as to the manner in which the Castle Trust Scheme was intended to operate indicated to me that it was possible that the scheme might have resulted in a loss for the purposes of TCGA if it had been carried out as intended. But his evidence as to the absence of a record of the transactions in Exco's records suggests that the scheme was not carried out as intended and permits the conclusion that it is more likely than not that the options were not entered into; and his evidence that Castle Trust and PDR had the same settlor permits the conclusion that those entities were connected for the purpose of section 286 TCGA and therefore that any loss arising was by virtue of section 18 TCGA not freely available.

I find that the Appellant has not discharged the burden of proving that there was a loss; that on the evidence before me it is more likely than not that there was no loss; and that if there was a loss it was not freely available to the Appellant. I therefore find that the Appellant was not entitled to deduct the claimed allowable loss in determining her net chargeable gains in her 1998/99 return, and accordingly the tax assessed by that (self-assessment) return was insufficient.

The application of section 29 TMA

In this section I discuss the application of section 29 without regard to the HRA arguments advanced by Mr Barnett.

Section 29(1) provides:

"(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 capital gains which ought to have been assessed to capital gains tax have not been assessed, or

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

(c) that any relief which has been given is or has become excessive,

the officer … may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their pinion to be charged in order to make good to the Crown the loss of tax."

I shall use the term "insufficiency" as shorthand for the contents of subparagraphs (a), (b) and (c). Baldly stated therefore the section provides that if an inspector discovers an insufficiency he or she may make an assessment subject to (2) and (3).

We discussed at the hearing what it meant for an inspector to discover an insufficiency. I believe that both parties were happy with the paraphrases derived from R v Kensington Income Tax Commissioners ex parte Aramago (1913) 6 TC 279 and applied in R v Commissioners of Taxes for ST Giles and St George Bloomsbury, ex parte Hooper [1915] 3 KB 768 (see also Hancock v Inland Revenue Commissioners [1999] STC (SCD) 287), where Bray J said:

"… it would seem therefore most unlikely that the legislation should have intended by the word discover that he was to ascertain by legal evidence. It provides for a later trial, if I may call it so, the question when either party appeals. This is not the time for legal evidence, and it seems to me to be quite clear that the word "discover" cannot mean ascertain by legal evidence; it means, in my opinion, simply "comes to the conclusion" from the examination he makes, and, if he likes, from any information he receives."

Avery J said:

"I think that the word [discover] means "has reason to believe"."

And Lush K:

"Now if you take the word "discover" as I think it was clearly intended to be taken, as merely an alternative to "find" or "satisfy himself", the difficulty disappears."

It seems to me clear that both these judges and the legislation do not require the inspector to be certain beyond all doubt that there is an insufficiency; what is required is that he comes to the conclusion on the information available to him and the law as he understands it, that it is more likely than not that there is an insufficiency. I shall call this a conclusion that it is probable that there is an insufficiency.

It is clear however that mere suspicion, something short of a conclusion that it is probable that there is an insufficiency is not enough.

There is one other aspect of the word "discover" to which I should refer. This arises from Cenlon Finance Co Ltd v Ellwood [1962] AC 782 to which I was referred by Miss Simler : a "discovery" is something newly arising, not something stale and old. The conclusion that it is probable that there is an insufficiency must be one which newly arises (from fresh facts or a new view of the law or otherwise).

Section 29(1) is subject to subsections (2) and (3). Subsection (2) is irrelevant to this appeal. Subsection (3) requires the satisfaction of one of two conditions. The first condition (in subsection (4)) is that the taxpayer has been fraudulent or negligent; no such allegation is made by the Respondents in this case. The second is that in subsection (5):

"(5) The second condition is that at the time when an officer of the Board:-

(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment, or

(b) informed the taxpayer that he had completed his enquiries into that return

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above."

In my judgment for the reasons which follow, the test in the tailpiece of section 29(5) – the reasonable expectation of the awareness of the situation in subsection (1) – is to be interpreted thus: that the officer could not reasonably have been expected, on the basis of the information mentioned, to have discovered an insufficiency: i.e. to have come to the conclusion that it was probable that there was an insufficiency. I come to that conclusion because the language of the section in referring to the "situation mentioned in subsection (i)" incorporates by reference the idea of a discovery and therefore the concept of a conclusion that it was more probable than not that there was an insufficiency. Thus in my view it is not required that the officer be aware that there was in truth an insufficiency or that he be aware that it was beyond all reasonable doubt that there was an insufficiency, but merely that that information should enable him to conclude on balance that there was an insufficiency. Again a mere suspicion would not be enough, but, a conclusion in relation to which he had some residual doubt may well be sufficient. If he could reasonably have been expected to have come to such a conclusion before the later of the times mentioned he is precluded from making a discovery assessment.

Section 29(5) was considered by the Court of Appeal in Veltema v Langham [2004] All ER 436, [2004] STC 544, and by the High Court in HMRC v Household Estate Agency [2007] EWHC 1684. The judgments in both those cases are of relevance to this case and to the construction I have advanced above of sections 29(1) and 29(5). But first I should set out the provisions of section 29(6):

(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if –

(a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;

(b) it is contained in any claim made as regards the relevant [year of assessment] by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;

(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or

(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above –

(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or

(ii) are notified in writing by the taxpayer to an officer of the Board.

It will be seen in relation to the opening words of section 29(6) that a question arises as to whether it is only the information listed in s.29(6) which is to be treated as being available to the inspector at the relevant time, or whether he must be taken to have that information but may also be taken to have any other information which he or the Board actually has in its possession. This was one of the issues considered by the Court of Appeal in Veltema.

In Household Estate Agents Henderson J reviewed the judgment of the Court of Appeal in Veltema and said:

"31. The Court of Appeal disagreed [with Park J in the High Court], no doubt mindful of the burden that Park J's approach would in practice impose on inspectors dealing routinely with tax returns. In paragraph 30 of his judgment at 293H-I Auld LJ identified the issues as being:

(a) whether awareness or inference of actual insufficiency (of tax) is required to negative the condition, or whether awareness that it was questionable would suffice;

(b) whether account should be taken of enquiries the inspector could reasonably have been expected to undertake, and the likely result of such enquiries; and

(c) whether the relevant information before the inspector is simply that emanating from the taxpayer, and any inference that could reasonably be expected to be drawn from it, or whether it may also include other information before the inspector, such as a form PI ID.

Auld LJ went on to hold that a restrictive or negative answer should be given to each of the above questions. Thus:

(a) he held in paragraphs 34 and 35 (294H-295C) that the subject matter of the objective awareness with which section 29(5) is concerned is "actual insufficiency", and the words "on the basis of (with reference to the specified information) do not denote "an objective awareness of something less than insufficiency";

(b) accordingly, account should not be taken of what enquiries the inspector could reasonably have been expected to undertake from the information supplied to him under section 29(6) and of what he could have reasonably learned from such enquiries (paragraph 35); and

(c) the inspector is to be shut out from making a discovery assessment "only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a section 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question."

(paragraph 36 at 295D-E). So, for example, even if the form P11D had added anything material to the information provided by Mr Veltema in his return and the accompanying documents, it would have been irrelevant to the question of awareness of actual insufficiency posed by section 29(5); see paragraph 37 at 295H-I. Auld J described the passage which I have quoted in this paragraph as "the key to the scheme", and derived support for it from the fact that the only categories of information expressly identified in section 29(6) emanate from the taxpayer.

As I have already said, Chadwick and Arden LJJ both agreed with the judgment of Auld LLJ, but there was one additional point on which they disagreed. Chadwick LJ expressed the view in paragraph 48 (at 2971) that the inspector could reasonably have been expected to be aware of what he would have discovered if he had called for the information as to the value of the asset which then existed. However, Arden LJ disagreed and emphasised in paragraph 51 (at 298H-I) that section 29(6)(d)(i) (the corporate equivalent of which is paragraph 44(2)(d)(i) does not attribute to the inspector information which is not reasonably to be inferred from information within section 29(6)(a) to (c), i.e. the return and accompanying documents supplied by the taxpayer. She continued:

"The matters set out in those paragraphs are all categories of information actually supplied by the taxpayer. The valuation was not so produced. Moreover, in circumstances such as this the valuation might not in fact support the figure in the taxpayer's tax return. In that event, in my judgment on the true construction of section 29(6)(d(i) the inspector is not to have attributed to him the further information that he would actually have obtained if he had asked for that valuation, unless and until it is produced to him."

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

I should also refer to paragraph 33 of Auld LJ's judgment in Veltema in relation to the first question:

"… [Section 29(5)] speaks of an Inspector's objective awareness, from "the information made available to him by the taxpayer, of "the situation" mentioned in section 29(1), namely an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency."

These judgments make plain the information I should treat as being available to the officer at the relevant time but they also raise another issue. Auld LJ's and Henderson J's judgments use the phrase "actual insufficiency". Only if the inspector is objectively aware at the relevant time of an actual insufficiency is he to be shut out from a discovery assessment. Mr Barnett asks whether this means that, contrary to the view I have expressed at paragraph 46 above, the inspector is only shut out where he is objectively aware that there truly is a certain insufficiency.

I do not understand the judgment in that way. Auld LJ is considering the contrast between an actual insufficiency and a possible insufficiency ("an awareness that [the assessment] was questionable): it seems to me that an "actual insufficiency" is used to describe the complement of "an awareness that it was questionable", and accordingly embraces a range of conclusions from absolute certainty to on balance probability, but excludes a conclusion that the insufficiency was merely suspected or "possible" or the sufficiency merely questionable. It does not therefore seem to me that my conclusion at paragraph 46 above is at variance with the views expressed in those judgments.

Indeed as Mr Barnett submitted, if "actual insufficiency" required absolute certainty then there would be almost no practical application for the restriction provided by section 29(5).

Mr Barnett argues that Mrs Corbally-Stourton's case may be distinguished from that of Mr Veltema in Langham v Veltema. He points to the level of disclosure the availability of information, the reliance on other parties and a wealth of other features. But I fear that these were all factual matters which might affect how the principles enunciated in that case might be applied but could not bear on the reasoning which must bind me.

Mr Barnett also argues that the tailpiece of section 29(5) should be read thus:-

"… the officer was not aware and could not reasonably have been expected … to be aware".

He says that for two reasons. First he says it is implicit that this is what is meant, and second if that is not the case then those words should be read in under section 3 HRA. I deal with the HRA arguments below, but at this stage I should address the first argument.

It seems to me that, however generally unfair it might seem that an inspector, who knew he could have assessed at the relevant time but did not, can raise a later assessment because the section 29(6) information was not sufficient on its own to enable him to reach that conclusion, it is impossible to read the legislation as not having that effect. That is for the following reasons:-

(i) the reference in section 29(5) is not to a particular officer of the Board but to "an" officer. The test is more theoretical than personal;

(ii) the judgments quoted above make it clear that section 29(5) is about the objective awareness of an officer rather than the actual awareness of a particular officer;

(iii) the judgments make clear that the purpose of section 29(5) is to confine the relevant material to that in section 29(6). There would be no point in such a restriction if actual awareness by an officer that he could, on the basis of other information, have assessed was enough.

Mr Barnett drew my attention to Auld J's statement at paragraph 36 that the inspector was to be shut out only where the taxpayer in making an honest and accurate return had clearly alerted him to the insufficiency. He says that such a construction of section 29(5) robbed the provision of all effect because a return could never be honest and accurate and at the same time disclose an actual insufficiency.

There are I think two things to be said in reply to this concern. First that it is Auld LJ's synopsis of the legislation and should not be read as legislation itself: the words describe in broad term the scheme as an aid to the interpretation of the statute, but do not replace the statute. Second it seems to me quite possible that an honest and accurate return could reasonably lead an inspector to conclude that it was probable that there was an insufficiency. For example the taxpayer might indicate that in relation to a particular figure in his return he had adopted a view of the law with which he knew HMRC disagreed, giving the inspector sufficient details to enable him to reach at least an estimate of a different figure; or he might record a disposal value for an asset and indicate that HMRC's valuer had in another context concluded that a higher value was appropriate.

In Veltema and Household Estate Agents, it was made clear that the only information which should be treated as being available to the inspector for the purposes of section 29(5) was that listed in section 29(6). But the tailpiece of section 29(6) speaks of what it would have been reasonable to expect the officer objectively to have been aware of on the basis of that information. In determining what it is reasonable to expect of an officer some knowledge must be attributed to him: he must have some awareness of the rules of elementary arithmetic, some knowledge of tax law, and some general knowledge. All of those he must be treated as applying in determining what it is reasonable to expect of him.

In summary it seems to me that I must approach sections 29(1) and (5) thus:-

The inspector may raise an assessment under section 29 only if:

(i) he newly comes to the conclusion that it is probable that there was an insufficiency; and

(ii) at the relevant time an officer of the Board could not reasonably have been expected, taking into account the general knowledge and skill that might reasonably be attributed to him, and on the basis only of the section 29(6) information, to have concluded that it was probable that there was an insufficiency.

And I note that the test is objective awareness of "an officer of the Board" not the objective awareness of the inspector who made the assessment.

In the circumstances of Mrs Corbally-Stourton's 1998/99 tax return I find as follows:-

(i) Dr Branigan did not have sufficient information in 1999, or on 31 January 2001 to come to a conclusion, and did not conclude, that on balance (or on any higher test) there was an insufficiency in relation to 1998/99;

(ii) by early 2002 Dr Branigan had concluded that it was probable that there was an insufficiency;

(iii) that as a result Dr Branigan was newly aware or discovered that there was an insufficiency, and accordingly that he was able, subject to section 29(2) and (3) to make an assessment under section 29(1);

(iv) that the only information which in relation to 1998/99 for the Appellant and which fell within section 29(6) was the information recorded in paragraph 21 above namely the entries on the return and the entry in the White Space;

(v) that on the basis of that information an inspector could have been expected to have been aware that it was possible that there was an insufficiency but could not have been reasonably expected to conclude that it was probable that there was an insufficiency; and

(vi) as a result the condition in section 29(5) was satisfied with the result that subsection (3) did not present the making of the discovery assessment.

I need to say a little more about my finding under (v) above. Mr Barnett submitted that from the information in the return (and from that which could be reasonably informed from such information by virtue of section 29(6)(d)(i)) it could be reasonably expected that an officer would conclude that it was probable that there was an insufficiency.

First he says that the disclosure in the White Space would clearly indicate to an inspector that something was amiss:-

(i) the loss claimed was part of a very large and remarkably round figure of £1,000,000.000;

(ii) there was a purchase on 24 November 1998 of an interest in the Castle Trust and a disposal the very next day.

These disclosures pointed to a pre-ordained tax scheme and it was inherently implausible that it would result in an allowable loss. An inspector equipped with even a basic understanding of tax law would have been aware of the Ramsay doctrine, would have concluded the loss was not available.

Second, he says that an inspector would have been aware from section 71 TCGA (specifically referred to in the disclosure) that a person became entitled to an allowable loss only if it had not been used by the trustees. There is no indication in the disclosure as to whether the losses have not been used. Hence he says the Appellant's return is incorrect. Not only would an inspector be reasonably expected to realise that there was therefore an insufficiency, but he could also have later "discovered" that there was one.

Third, he says that the disclosure makes no reference to whether or not the loss claimed, namely that which accrued to the trustees, was "allowable". Not only would that omission alert an inspector to the likelihood that the loss was not allowable, but it would mean that there could not be a discovery that it was not allowable.

Dr Branigan told me that he could not have concluded on the basis of Mrs Corbally-Stourton's tax return that it was probable that she was not entitled to the loss claimed. He said that he would have been suspicious, and that he would have concluded that Mrs Corbally-Stourton had participated in a tax scheme and that there was something to investigate. He said that he would have been disappointed although not surprised if an inspector without detailed knowledge of tax avoidance schemes had not spotted that something was going on. I do not think however that the test to be applied is what Dr Branigan would have concluded or even what, with his knowledge of the workings of the Revenue, he might expect an inspector to conclude; it is instead an objective test of what might reasonably be expected of an officer.

It seems to me that an inspector equipped with a reasonable knowledge of tax law could reasonably be expected to conclude from the Appellant's disclosure that something was going on, and that Mrs Corbally-Stourton had participated in a tax scheme. It would be reasonable to expect him to wish to question the workings of the scheme and the genesis and existence of the remarkable £1 billion loss. But he would also be aware that some tax schemes work and deliver the benefits claimed. There is nothing, leaving aside for the moment Mr Barnett's later two points, in the disclosure to suggest that this scheme did not work. In my judgment an inspector could not reasonably be expected to conclude from the clear hints that there was a scheme that it was unlikely that it would work.

Neither in my view does the failure of the disclosure to deal with the possible use of the losses by the trustees, or the failure expressly to indicate that they were allowable losses; tip the balance. It seems to me that by claiming the losses under the heading allowable losses in her tax return the Appellant was representing that they were available and allowable: a far clearer indication of doubt in the disclosure would be required to counter that representation than mere omission. It seems to me that those failures neither justify a conclusion that an inspector could reasonably conclude on balance that the losses were not available, nor that there was already such an indication that they were not allowable losses that there could not be a discovery.

The Effect of HRA

Section 3 HRA provides that "so far as it is possible to do so, primary legislation … must be read and given effect in a way which is compatible with the Convention rights." Mr Barnett notes the word "must".

Section 6(1) HRA provides that it is unlawful for a public authority to act in a way which is incompatible with a Convention right. This is subject to subsection (2) to which I shall return later. Section 8 provides that in relation to an unlawful act of a public authority a tribunal may grant such relief as it considers just and appropriate.

Mr Barnett submits that the Appellant's Convention rights bring section 3 into operation. If I am against him on that he says that HMRC's actions have been incompatible with the Appellant's Convention rights and I must accordingly grant relief under section 8. Mr Barnett's submissions in relation to the Appellant's Convention rights interlaced submissions on the incompatibility of the legislation and incompatibility of HMRC's actions. I shall endeavour to address them in the same manner.

Mr Barnett relies upon the Convention rights given by Article 1 of the First Protocol:

"Every natural person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary … or to secure the payment of taxes or other contributions or penalties."

And in connection therewith, Article 14:

"The enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination or any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth, or other status."

Mr Barnett says that the effect of Article 1 of the first Protocol (and Article 14) is to require a fair balance to be struck between the right of the individual to his possessions and the right of the state to secure the payment of taxes, and that balance requires that the measures the state takes should be (a) proportionate, (b) not arbitrary but certain and (c) (by virtue of Article 14) applied and applicable without discrimination. He says that if the legislation is construed as I have done above then that fair balance is not struck and the legislation is therefore not compatible with the Convention rights; and he says that HMRC's actions have been discriminatory in relation to the Appellant's Convention rights..

Proportionality

As regards proportionality Mr Barnett makes the following points both as regards the form of the legislation and its application by HMRC:-

(i) Whereas on 31 January 2001, when the enquiry window closed, the Appellant had done everything within her power, HMRC had not done so : they had not opened an enquiry;

(ii) the legislation disproportionately allows HMRC two bites at the cherry: one to open an enquiry the other a further 5 years under section 29;

(iii) it was disproportionate to open an enquiry into the trustees returns but not that of the Appellant: either the legislation should provide for the opening of an enquiry in such situations automatically, or HMRC should as an administrative matter automatically do so.

It does not seem to me that these features of the system or the operation of the system indicate a lack of proportionality between the regard paid to the Appellant's rights and the right of the State to secure payment of taxes (or require the interpolation into section 29(5) of the additional words suggested in paragraph 54 above).

The authorities show that what is required by the Convention Right is that a fair balance be struck between the demands of the interest of the community and the protection of the individual's rights, and a reasonable proportionality between the means used and the end pursued. The requisite proportionality may not exist where the individual concerned has had to bear an individual and excessive burden or if the provisions are arbitrary or excessive. But it is clear that the State is to be allowed a wide margin of appreciation in the evaluation of this balance.

The object of section 29 and the enquiry provisions is, it seems to me, to provide a means by which the State may secure the payment of taxes which should be due, in circumstances where the taxpayer has not volunteered those taxes. Such an aim involves some conflict with the individual's right to retain his property, but in section 29 and the enquiry provisions the State limits the time for which a person's assets are at risk. Absent fraud it provides a six year limitation unless an enquiry has started, and where a taxpayer provides enough information for the State to assess it puts the taxpayer at risk for the enquiry window only; if an enquiry is started it puts the taxpayer at risk for the period of the enquiry only; if an enquiry is started provides a closure procedure to limit the time the taxpayer is at risk. It seems to me that these procedures as a whole are a curtailment of the State's rights and a balancing of them against those of the individual in a way which is well within the compass of what is fair and the margin of appreciation which must be allowed to the State. It seems to me that one is not required to look just at section 29 and contrast it with the section 9A enquiry procedure; instead you must consider the whole regime and ask whether it fails to strike a fair balance.

Neither does it seem to me that the way in which HMRC operated caused the Appellant to bear an excessive burden. It cannot be said that this assessment came like a bolt out of the blue; there was plenty of early warning. There was not an unreasonable delay in the making of the assessment.

Certainty

As regards certainty Mr Barnett makes the following points both in relation to the form of the legislation and its application:

(i) the enquiry procedure strikes a fair balance;

(ii) section 29 does not strike a fair balance where HMRC could have opened an enquiry or actually held sufficient information from other sources to assess within the enquiry deadline; and

(iii) the alternative of section 29 and enquiry procedures deprive the taxpayer of certainty.

What seems clear to me is that for there to be a fair balance, the legislation must provide to an honest and careful taxpayer a period after which, if he provides all the required information, he will know the limit of his tax liabilities. The enquiry procedure and section 29 provide those limits in overlapping ways. But the existence of one procedure is not to be judged against the other; rather the two are to be considered together. And it seems to me that the combined picture is not one in which the balance in favour of the state is oppressive. A taxpayer who makes a completely full and frank disclosure achieves certainty at the end of the enquiry window or on completion of the enquiry. A taxpayer who makes a non-negligent partial disclosure may have to wait a few more years. That is not an unfair balance. And it is also one which is sufficiently precisely formulated to enable a taxpayer to regulate his conduct so as to be able to foresee to a reasonable extent the consequences of his actions: those precise consequences might depend upon the diligence or otherwise of HMRC but he knows that, depending on his course of conduct, there will come a time within a not unreasonable period when a liability is no longer capable of assessment.

Discrimination

As regards discrimination, Mr Barnett makes the following points:

(i) the effect of Article 14 is that the right secured to the Appellant by Article 1 of the First Protocol must be secured without discrimination. I agree;

(ii) there is discrimination if persons in similar situations are treated differently;

(iii) if HMRC are in possession of information which causes them to make initial enquiries into some taxpayers' returns it is discriminatory if they do not make initial enquiries into the returns of all taxpayers of whom they might, on the basis of that information, initiate such enquiries;

(iv) in particular, the opening of an enquiry into a taxpayer's return in such a situation advantages such a taxpayer in comparison with one into whose return no enquiry is made because:-

(a) it alerts him to the possibility of a tax charge;

(b) it enables him to speed the determination of the uncertainty by issuing a request for the closure of the enquiry, and

(c) it enables him to chuck in the towel in any particular respect by amending his tax return under section 9B TMA during the course of the enquiry: an amendment more than 12 months after the filing date is not possible unless an enquiry has commenced;

(v) generally, on the basis that HMRC normally comply with their Statement of Practice, SP 01/06, the Respondents will not make a discovery assessment where "the taxpayer has fully alerted HMRC to the full circumstances of an entry on the return". The Appellant had so alerted HMRC and so was being treated in a manner which put her at a disadvantage to other taxpayers; and

(vi) the taxpayer was treated differently from other taxpayers who participated in the scheme and in particular was excluded from the settlement negotiation.

(Finally I should note that, had I found that Mrs Corbally-Stourton was precluded from arguing on the facts and law that the trustees' loss was an allowable loss, Mr Barnett would have argued that she was thereby disadvantaged in comparison with taxpayers who were otherwise entitled to test their rights before the Courts and unfairly excluded from the negotiations with HMRC.)

Mr Barnett's arguments under this heading relate to the conduct of HMRC rather than the legislation. He says that the way the legislation has been applied by HMRC rather than the legislation itself has discriminated against the Appellant in the securing of her Convention rights.

Miss Simler argued that if HMRC had acted in a way which was incompatible with the Appellant's Convention rights, the effect of section 6(2) HRA would be to deprive the Appellant of any remedy under sections 7 and 8 HRA. Section 6(2) provides that an act which is incompatible with a Convention right is not to be treated as unlawful if –

"(a) as the result of one or more provisions of primary legislation the authority could not have acted differently; or

(b) in the case of … provisions of … primary legislation, which cannot be read or given effect in a way which is compatible with the Convention rights, the authority was acting so as to give effect to or enforce those provisions."

My conclusion that section 29 is not incompatible with the Appellant's Convention rights means that paragraph (b) has no application. I do not regard paragraph (a) as assisting the Respondents : section 29 did not compel the Respondents to assess the Appellant, nor did it compel them to assess at a different time from the time at which taxpayers whose returns were under enquiry were informed of proposed amendments to their self-assessments. Thus if HMRC's action had been incompatible with Convention rights I do not believe that their actions would have been saved by section 6(2).