G2: Discovery assessments

- Aware of an insufficiency/undercharge

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Awareness relates to insufficiency not discovery of insufficiency 

 

“Both s. 29(4) and s. 29(5) use the same language as s. 29(3) in referring to “the situation mentioned in subsection (1) above”. [HMRC] submitted that this referred to the fact of the undercharge, and had nothing to do with the officer's discovery of the fact. I accept this submission which seems to me plainly to be right as a matter of language.” (Hargreaves v. HMRC [2014] UKUT 395 (TCC), §21(6)).

 

Burden of proof on HMRC (but not likely to be relevant) 

 

"[203] With respect, we think it would have been preferable if the FTT had simply considered the evidence in relation to the information made available to the hypothetical officer which it summarised at [93]-[101] and, applying the objective test in section 29(5), reached its conclusion without reference to the burden of proof."  (HMRC v. Hicks [2020] UKUT 12 (TCC), Morgan J and Judge Brannan)

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“…it seems to me that the burden of establishing that [43] or [44] apply must rest on HMRC, because in the absence of any evidence of fraud or negligent conduct ([43]), or of material to satisfy the test of objective non-awareness ([44]), there would be no basis for a conclusion that either of those paragraphs applied, and nothing to displace the general rule that discovery assessments may not be made. I would add, however, that in relation to [44] the question is unlikely to be of much practical significance, because the nature of the enquiry is an objective one and the return and accompanying documents which have been submitted to HMRC should always be available.” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §48).

 

“…although the onus under s. 29(5) is on HMRC as it is under s. 29(4), in practice the question is unlikely to be of much practical significance, because the return and accompanying documents in fact submitted to HMRC should always be available and the nature of the enquiry is an objective one.” (Hargreaves v. HMRC [2014] UKUT 395 (TCC), §21(8) – see also §24(1) “common ground”).

 

“…the burden of proof of establishing that the condition contained in section 29(5) is satisfied lies on HMRC.” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §166).

 

Awareness is an objective question 

 

“The subjective opinions of the assessing officer or the Board about fulfilment of the conditions have no part to play in the operation of s 29.” (Hankinson v. HMRC [2011] EWCA Civ 1566, §§27 - 28).

 

“The test is both an objective and a negative one.” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §29).

 

“Unlike s. 29(2), s. 29(4) and s. 29(5) are not concerned with the officer's subjective views, but with the objective facts: has there been fraud, or negligence, or was the information objectively insufficient“(Hargreaves v. HMRC [2014] UKUT 395 (TCC), §21(6)).

 

But perhaps not completely objective 

 

"[169] Although the FTT incorrectly considered that it was reasonable “to assume that the hypothetical officer will be likely to be in a similar position [to that of the actual officer] by [the summer of 2014]”, the FTT noted the acknowledgement of the Court of Appeal in Sanderson at [25] that “…there would inevitably be points of contact between the real and hypothetical exercises which sub-ss 29(1) and (5) involve [although] the tests are not the same.”(HMRC v. Hicks [2020] UKUT 12 (TCC), Morgan J and Judge Brannan)

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"To the untutored mind, that reference to “the officer” would appear to be a reference back to the officer (“an officer”) mentioned at the beginning of subsection (5) who, at the cut-off date, ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return. In other words, it is a particular individual, not an abstract hypothetical officer with the knowledge and expertise mentioned in Charlton nor an average or reasonable officer riding the fiscal equivalent of the Clapham omnibus.” (Pattullo v. HMRC [2016] UKUT 270 (TCC), §79, Lord Glennie, did not base his decision on this view, however)

 

“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.” (Freeman v. HMRC [2013] UKFTT 496 (TC), §52).

 

Relevance of burden of proof terminology 

 

“Awareness is a matter of perception and of understanding, not of conclusion. I wish, therefore, to express doubt as to the approach of the Special Commissioner in Corbally-Stourton v Revenue and Customs Comrs [2008] STC (SCD) 907 and of the Outer House in R(on the application of Patullo) v Revenue and Customs Commissioners [2010] STC 107, namely, that to be aware of a situation is the same as concluding that it is more probable than not.” (HMRC v. Lansdowne Partners Ltd Partnership [2011] EWCA Civ 1578, §70).

 

“The Upper Tribunal noted that the test was one of awareness, a matter of perception and understanding, and not one of certainty or probability (paragraph 92); and not one of conclusion. However, a state of awareness, understanding or perception seems to be the result of the application of the test rather than the test itself (cf paragraph 58). Moreover, it is difficult to see why a conclusion is excluded from a state of awareness. One plus one equals two. Two is the result of adding one to one. It is a conclusion. Knowing that one plus one makes two is a state of awareness. We agree, however, that the awareness of a hypothetical officer is not to be measured by probabilities. Probability is normally deployed to determine facts. The deemed awareness of the hypothetical officer is determined by reference to the s 29(6) information available, the attributes he is deemed to have, and the thought processes with which he is imbued.” (Pattullo v. HMRC [2014] UKFTT 841 (TC) §71).

 

“In our view, although Mr Stewart had indicated as early as October 2007 the probability that he would be making assessments under the relevant statutory provisions, this did not amount to a conclusion that it was probable that there was an insufficiency; it was not until November 2009 that he had the information enabling him to make a reasonable calculation of the amount of the insufficiency.” (Thomas v. HMRC [2016] UKFTT 133 (TC), §96).

 

Aware of actual insufficiency rather than possibility/need for further enquiries 

 

“…it is plain from the wording of the statutory test in s 29(5) that it is concerned, not with what an Inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of. It speaks of an Inspector's objective awareness, from the information made available to him by the taxpayer, of “the situation” mentioned in s 29(1), namely an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency …” (Langham v. Veltema [2004] EWCA Civ 193, §33).

 

“Had he applied his mind to the question, his experience of other EBTs, and indeed common sense, might well have led him to doubt the correctness of the self-assessment and to open an enquiry; but that is a very different thing from saying that he should be regarded as knowing, or as having inferred, what such an enquiry would probably have revealed.” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §40).

 

“ ‘Awareness’ refers to the officer's awareness of an insufficiency in the self-assessment return, rather than an awareness that he should do something to check whether there is an insufficiency. It is not enough that the officer should realise that he should make further enquiries;” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §167(1)).

 

Constructive awareness/inference of insufficiency is sufficient

 

“Such provision for awareness of insufficiency "on the basis" of the specified information or from information that could reasonably be expected to be inferred therefrom does not, in my view, denote an objective awareness of something less than insufficiency. It is a mark of the way in which the subsection provides an objective test of awareness of insufficiency, expressed as a negative condition in the form that an officer "could not have been reasonably expected … to be aware of the" insufficiency. It also allows, as section 29(6) expressly does, for constructive awareness of insufficiency, that is, for something less than an awareness of an insufficiency, in the form of an inference of insufficiency.” (Langham v. Veltema [2004] EWCA Civ 193, §34).

 

“Section 29(5) allows for constructive awareness of insufficiency, that is, for something less than an awareness of insufficiency, in the form of an inference of insufficiency…” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §167(6)).

 

Unnecessary to be able to quantify the tax loss 

 

“It is not necessary for the officer to arrive at a precise calculation; the information available will frequently be insufficient to achieve anything other than an approximation. However, it is necessary for the officer to be able to arrive at the view that income or gains are attributable to the particular year so that the loss of tax can be sufficiently identified for the purposes of s 29(1) TMA 1970. There is a difference between knowing that a person is potentially assessable and having a sufficient basis to enable the HMRC officer to arrive at a reasonable estimate of the alleged loss of tax for the year in question.” (Thomas v. HMRC [2016] UKFTT 133 (TC), §93).

 

“…the test in s 29(5) is not that the officer should be able to quantify the potential tax loss, only that he/she could be reasonably expected to be aware of the potential tax loss.” (Ive v. HMRC [2014] UKFTT 400 (TC), §35(2)).

 

No account taken of what enquiries the officer could reasonably be expected to undertake 

 

“…account should not be taken of what enquiries the Inspector could reasonably have been expected to undertake from the information supplied to him under s 29(6) and of what he could have reasonably learned from such enquiries” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §32(b)).

 

Sufficient that the information justified the assessment 

 

“I do not suggest that the hypothetical inspector is required to resolve points of law. Nor need he forecast and discount what the response of the taxpayer may be. It is enough that the information made available to him justifies the amendment to the tax return he then seeks to make. Any disputes of fact or law can then be resolved by the usual processes.” (HMRC v. Lansdowne Partners Ltd Partnership [2011] EWCA Civ 1578, §56 – the lack of indication that rebates of management fees to partners had been treated differently to those paid to non-partners did not stop the officer having awareness).

 

“It is scarcely surprising that HMRC’s confidence that the Scheme did not work increased over time. However, in this case that was largely attributable not to additional material information, but to the detailed research and efforts of HMRC which were co-ordinated by Officer Boote… On the facts in this case, the hypothetical officer had sufficient information available (taking into account section 29(6)) at closure of the enquiry window to make it reasonable for him to have been justified in raising an assessment for the insufficiency. The central issues, relating to section 730 and trading, were not matters of such complexity that the disclosure did not achieve this result.” (Hicks v. HMRC [2018] UKFTT 22 (TC), §§119…121, Judge Thomas Scott).

“In our view, section 29(5) requires that a taxpayer should make sufficient disclosure in order to enable an officer to make an informed decision whether an insufficiency existed sufficient to justify, in the words of Moses LJ, the exercise of the power to raise a discovery assessment under section 29(1).” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §173).

 

Or not:

 

“HMRC may have sufficient disclosure to raise a discovery assessment because of a ‘possible insufficiency’ (see [25] of Sanderson) under s 29(1) but that disclosure may be insufficient to protect a taxpayer from such an assessment because the disclosure did not create awareness of an actual insufficiency.” (Miesegaes v. HMRC [2016] UKFTT 375 (TC), §97 relying on Sanderson, CA).

 

Level of legal understanding 

 

“Whether it is put as a characteristic of the ordinarily competent HMRC officer, or as part of the knowledge and understanding which the Charltonesque hypothetical officer would bring to bear on an examination of the tax return, I agree with the observations of the FTT at paras 74 and 77. I would not expect the hypothetical officer as early as 31 January 2006 to have any real understanding of the arcane world of CRCs. Some might have been aware of SHIPS – SI had begun investigations into SHIPS in 2004 – but investigation into CRCs was lagging behind the investigation into SHIPS.” (Pattullo v. HMRC [2016] UKUT 270 (TCC), §82, Lord Glennie).

 

“The officer must be assumed to have such a level of knowledge and understanding that would reasonably be expected in an officer considering the particular information provided by the taxpayer.” (HMRC v. Charlton [2012] UKUT 770 (TCC), §58).

 

“So the hypothetical officer is in general taken to understand the law as it relates to the facts disclosed by the taxpayer…It is also clear that the hypothetical officer is not deemed to consult with more specialist colleagues even if, in the real world, it might be supposed that that is what an HMRC officer considering the taxpayer’s return would do:  Charlton  at [53].” (Miesegaes v. HMRC [2016] UKFTT 375 (TC), §§82…88)

 

“In argument before us [HMRC] came close to suggesting, as we understood it, that a hypothetical officer could not be expected to understand complex or specialist areas of tax law. We disagree. If the disclosure (factual and technical) is adequate in the circumstances of the case, a hypothetical officer can reasonably be expected to be aware of an insufficiency even in a complex case or one involving specialist technical knowledge. If the disclosure is inadequate then it is fair that a hypothetical officer could not reasonably be expected to be aware of insufficiency in such a case. That is the balance that section 29(5) strikes.” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §179).

 

“However, an HMRC officer, in order, ever, to become aware of an insufficiency of tax must have some general knowledge of tax law and practice. We do not consider that it is reasonable to expect him to be aware of the arcane world of capital redemption contracts or that they are specifically mentioned in the HMRC Manual.“ (Pattullo v. HMRC [2014] UKFTT 841 (TC) §74, upheld on appeal – see above).

 

Unlikely possibilities arising from facts which would not lead to insufficiency of tax block awareness 

 

“…however unlikely it may have been as a matter of practical common sense, it was a course of action legitimately open to the trustees, and there were therefore circumstances in which the Company could properly have deducted the £60,000 in computing its Sch D profits. Since the Company computed its profits on the basis that the £60,000 was deductible, and since no relevant adjustment was made to reverse that deduction in the tax computation submitted to the Inspector, he was entitled to proceed on the basis that the Company's self-assessment was correct.” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §39).

 

Substantive taxing provisions not to be interpreted as requiring officer to make any factual presumptions 

 

“[The taxpayer] submitted that the structure of s 43 of the Finance Act 1989 is such that the Inspector was required to proceed on the footing that the £60,000 was not deductible unless the Company provided evidence of the payment of actual emoluments within the requisite period. I do not agree. As I have already pointed out, it was possible (if unlikely) that the trustees had in fact used the £60,000 to pay actual emoluments before the date when the Company's return for 1999 was submitted, and in submitting the return as it did the Company was in effect representing that this was indeed what had occurred. The Inspector was in my view clearly entitled to accept this representation at face value, in the absence of anything in the documents supplied with the return to show that it was wrong.” (HMRC v. Household Estate Agents Ltd [2007] EWHC 1684 (Ch), §42).

 

Too much information may block awareness unless relevance explained 

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“The information contained in the additional material may have been fully covered within the return or, alternatively, there may be so much material that the Inland Revenue officer 'could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware'(new Section 29(5) TMA 1970,) of the particular point of liability, unless the taxpayer or agent had explained its relevance. Where voluminous information beyond the accounts and computations is sent with the return, therefore, it is recommended that there should be a brief indication of the relevance of the material.” (Tax Bulletin 23 (1996)).

 

“Information will not be treated as being made available where the total amount supplied is so extensive that an officer "could not have been reasonably expected to be aware" of the significance of particular information and the officer's attention has not been drawn to it by the taxpayer or taxpayers representative.” (Statement of Practice 1/06).

 

“In our view, the Statement of Practice is not inconsistent with the case law. We agree that, in context, the Statement of Practice insists on sufficient disclosure necessary to disclose an insufficiency but is also warning taxpayers not to "bury" relevant information in a mass of disclosures. This seems to us a perfectly reasonable point to make and we agree that the officer is not required to find a needle in a factual haystack.” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §190).

 

Complex legal issues may block awareness 

 

“I wish to leave open the possibility that, even where the taxpayer has disclosed enough factual information, there may be circumstances in which an officer could not reasonably be expected to be aware of an insufficiency by reason of the complexity of the relevant law.” (HMRC v. Lansdowne Partners Ltd Partnership [2011] EWCA Civ 1578, §69).

 

"[197] In a relatively simple case, where the legal principles are clear, it would be sufficient for a taxpayer simply to give a full disclosure of the factual position. The return must also make clear what position the taxpayer is adopting in relation to the factual position (e.g. whether a receipt was not taxable or whether a claim for relief was being made).

[198] But there may be other cases where the law and the facts (and/or the relationship between the law and the facts) are so complex that adequate disclosure may require more than pure factual disclosure: namely some adequate explanation of the main tax law issues raised by the facts and the position taken in respect of those issues.

[199] Plainly, the greater the level of disclosure, the greater the officer's awareness can reasonably be expected to be. If a disclosure on a tax return includes all material facts and, in complex cases, an adequate explanation of the technical issues raised by those facts and the position taken in relation to those issues, it would be reasonable to expect an officer to be aware of an insufficiency. What constitutes reasonable awareness is linked to the fullness and adequacy of the disclosure – the expertise of the hypothetical officer remains that of general competence, knowledge or skill which includes a reasonable knowledge and understanding of the law." (HMRC v. Hicks [2020] UKUT 12 (TCC), Morgan J and Judge Brannan)

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“We respectfully agree with Moses LJ that the possibility should remain open that mere factual disclosure may not, in some cases involving complex issues of law, be sufficient…But there may be other cases where the law and the facts (and/or the relationship between the law and the facts) are so complex that adequate disclosure may require more than pure factual disclosure: namely some brief explanation of the main tax law issues and the position taken in respect of those issues. An officer is not required to play "spot the [fiscal] ball" in complex cases.” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §§173…177).

 

Uncertain area of law may block awareness unless taxpayer discloses its view of the law

 

“But what if the law is unclear rather than complex?  The Chancellor in Lansdowne  at [56] (cited also in Charlton at [52] and Sanderson  at [23])  said that an HMRC officer is not required to resolve points of law.  What does this mean for a taxpayer who has completed his tax return fully disclosing all relevant facts but on a particular view of the law which others might interpret somewhat differently?  Does that mean the hypothetical officer is not fixed with an awareness of the insufficiency (should the taxpayer’s view prove to be wrong) because the hypothetical officer is not required to resolve an uncertain question of law?  We think that the answer may be that where interpretation of the law is uncertain, the taxpayer needs to disclose not only the law on which he relies but his view of the law.” (Miesegaes v. HMRC [2016] UKFTT 375 (TC), §84).

 

Not required to state that the return is doubtful 

 

“We should also add, at this point, that section 29(5) does not require a taxpayer to state or imply that his or her return is or may be doubtful or incorrect.” (Blumenthal v. HMRC [2012] UKFTT 497 (TC), §185).

 

But a contrary view can be found:

 

“The full factual position would have included a statement that the petitioner was part of such a scheme and a full statement of the legal position would have included a statement of doubt or a statement that a contrary position to the HMRC was being insisted upon together with a clearer picture of the operation of the scheme.” (Re Pattullo [2009] CSOH 137, §115).