In Richard Atherton v HMRC [2019] UKUT 0041 (TCC) the Upper Tribunal (UT) has held that a discovery had not become stale by the time an assessment was issued under section 20, Taxes Management Act 1970 (TMA) and that the taxpayer had been careless in making an inadequate 'white space' disclosure in his self-assessment return.

Background

Mr Atherton (the taxpayer) was a partner in a hedge fund. He engaged a firm of accountants, Fitzgerald and Law (F&L), to complete his tax returns. In 2008, F&L introduced the taxpayer to NT Advisers (NTA), who provided tax avoidance arrangements.

NTA recommended to the taxpayer a tax avoidance arrangement, known as Romangate, as a way to shelter his 2007/08 partnership income by creating an employment loss.

The taxpayer implemented Romangate in 2009. Following advice from F&L, he claimed the Romangate loss in his 2007/08 tax return, reducing the tax he would otherwise have to pay from £2 million to nil. The taxpayer used box 3 on the additional information pages of his tax return to make a standalone claim for loss relief and box 20 on the partnership pages to try to 'force' the year 2 loss into the computation of year 1 liability.

Later in 2009, HMRC opened an enquiry into the loss relief claim under Schedule 1A, TMA . In December 2013, NTA wrote to HMRC and accepted that due to retrospective legislative changes, Romangate was ineffective.

Following the Supreme Court's decision in Cotter v HMRC [2013] UKSC 69, HMRC concluded that its enquiry into the taxpayer's loss relief claim was invalid but was of the view that it had made a discovery, for the purposes of section 29, TMA, on realising that the Supreme Court's confirmation in Cotter that a claim could be 'forced' into a tax return for an earlier tax year meant that HMRC should have treated the taxpayer as having made a claim in his return (rather than a standalone claim) and therefore the assessment had become insufficient. HMRC therefore issued an assessment in 2014 under section 29, TMA.

The taxpayer appealed this assessment to the First-tier Tribunal (FTT).

FTT decision

The appeal was dismissed.

The two issues before the FTT were (1) whether there had been a valid discovery by HMRC and if there had been, was the discovery stale; and (2) whether the insufficiency in the taxpayer's 2007/08 return was brought about by his carelessness.

1. The discovery issue

The effect of the Supreme Court's decision in Cotter was that HMRC had been wrong to open the 2009 enquiry on the basis that the loss relief claim was a standalone claim. HMRC should have opened the 2009 enquiry under section 9A, TMA, as the claim was made ‘in’ the taxpayer's return and was not a standalone claim. The discovery issue turned on whether HMRC’s realisation of the effect of Cotter, which was released when HMRC was out of time to open an enquiry under section 9A, was a discovery for the purposes of section 29, TMA.

The FTT concluded that HMRC had made a valid discovery in 2014, when it realised the effect of the Supreme Court's decision in Cotter and this discovery was not stale.

2. The carelessness issue

The FTT also concluded that the taxpayer was careless in making an inadequate white space disclosure. It was careless to use box 20 on the partnership pages of the return to try and 'force' the year 2 loss into the computation for the year 1 liability, without providing any further explanation.

The taxpayer appealed to the UT.

UT decision

The appeal was dismissed.

In reaching its decision, the UT considered the same two substantial issues as the FTT.

1. The discovery issue

When HMRC opened its enquiry in 2009, it made a discovery of insufficiency of tax, for the purposes of section 29, TMA. The UT agreed with the FTT that HMRC made a new discovery in 2014, when it had appreciated the effect of the Supreme Court's decision in Cotter. In the view of the UT, the 2009 discovery was too long prior to 2014, as the concept of staleness meant that a valid discovery assessment had to be issued by HMRC without undue delay following the making of the discovery. However, although both discoveries related to the Romangate loss, they were separate discoveries as there was nothing to prevent HMRC from making successive different discoveries in relation to the same tax liability. Accordingly, the discovery assessment was valid.

2. The carelessness issue

The UT also agreed with the FTT that the taxpayer had been careless in making an inadequate white space disclosure. However, in relation to causation, it considered the FTT had failed to ask the right question. Section 118(5), TMA, to which the FTT had not referred, provides that a situation is brought about carelessly if a person fails to take reasonable care to avoid brining it about. The insufficiency of tax in the taxpayer's return was caused by 'forcing' the loss into the return but this could have been avoided by the taxpayer making a standalone claim. The taxpayer was therefore careless.

Comment

The UT's conclusion that HMRC had made a discovery, for the purposes of section 29, TMA, on realising the effect of the Supreme Court's decision in Cotter, is not surprising as the Courts have confirmed that for a discovery to be made all that is required is a new conclusion, there does not need to be any new facts and it is sufficient for HMRC to simply change its mind (Cenlon Finance Co Ltd v Ellwood [1962] AC 782 and HMRC v Charlton Corfield & Corfield [2012] UKUT 770 (TCC)). Given that the discovery assessment was issued shortly after HMRC's realisation of the effect of the Supreme Court's decision in Cotter, it was not stale.

With regard to the issue of carelessness, although the UT concluded that the taxpayer had been careless in 'forcing' his claim into his return, it did not consider that 'forcing' a claim into a return would be careless in all circumstances, for example, where a taxpayer acted reasonably in taking advice from a professional adviser he would not be careless.

A copy of the decision can be viewed here.