In Paul Munford v HMRC [2017] UKFTT 019 (TC), the First-tier Tribunal (FTT) considered the validity of a discovery assessment which had been issued by HMRC pursuant to section 29, Taxes Management Act 1970 (TMA) and allowed the taxpayer's appeal on the basis that HMRC had not discharged the burden of proving, for the purposes of section 36(1A), TMA, that the taxpayer had deliberately brought about a loss of capital gains tax.

Background

In 2004, the taxpayer purchased two properties, one jointly with his wife (the Ingram Avenue property), and the other in his sole name (the Halsey Street property). The Halsey Street property required full renovation works, which were completed. That property was then subsequently sold to an unconnected third party in March 2006.

In March 2006, the taxpayer made a number of elections for capital gains tax purposes for private residence relief in relation to the Ingram Avenue property and the Halsey Street property. However, his self-assessment return for tax year 2005/06 contained no entries relating to capital gains.

HMRC opened an enquiry into the taxpayer's 2005/06 tax return and concluded that he had not occupied the Halsey Street property during the relevant period claimed and therefore a chargeable gain had arisen. Subsequently, HMRC issued the taxpayer with a discovery assessment pursuant to section 29, TMA (the assessment) and a penalty. The taxpayer appealed the assessment to the FTT.

FTT's decision

Before the FTT, HMRC argued that it had discovered a chargeable gain that ought to have been assessed but had not been, and therefore the taxpayer's self-assessment was insufficient and it was entitled to issue the assessment under section 29, TMA. HMRC further submitted that the loss of capital gains had been brought about deliberately by the taxpayer and therefore the extended time limit provisions contained in section 36(1A), TMA, applied.

The taxpayer submitted that there was no loss of tax and, if there was a loss of tax, the burden of proving, for the purposes of section 36(1A), that he had deliberately brought about a loss of capital gains tax, fell on HMRC who had failed to discharge this burden.

With regard to the question of whether a loss of tax had been brought about deliberately by the taxpayer, the FTT agreed with the taxpayer that HMRC had not discharged the burden of proof which was on it to establish such a loss. Taking into account all relevant factors, and in particular looking at the question of residency, the FTT was of the view that HMRC had failed to establish that the taxpayer had not occupied the property as a private residence. The FTT considered it inherently improbable that the taxpayer deliberately and wrongly claimed private resident relief. In the FTT's view, HMRC's challenge to the evidence amounted to assertions and assumptions and the conditions for making an out of time assessment under section 36(1A) were not satisfied.

Accordingly, the taxpayer's appeal was allowed.

Comment

HMRC often seek to raise discovery assessments pursuant to section 29, TMA, outside the usual 4 year time limit provided for in section 34, TMA. On this occasion, HMRC wished to rely upon the 20 year time limit provided for in section 36(1A), TMA, which allows HMRC to issue an assessment within 20 years where a loss of tax has been brought about deliberately by the taxpayer. This decision confirms that the burden of proving, for the purposes of section 36(1A), that the taxpayer deliberately brought about a loss of tax, is on HMRC. Should HMRC fail to discharge this burden, any discovery assessment it issues pursuant to section 29 will be invalid.

A copy of the decision can be found here.