The recent First-tier Tribunal ('FTT') case of Nijjar Dairies Ltd v HMRC1 dealt with two matters. The first was a preliminary issue of whether a discovery determination under paragraph 41(2), Schedule 18, Finance Act 1998, was validly made by HMRC. The second matter was an appeal against an information notice issued by HMRC under Schedule 36, Finance Act 2008. Although both matters are of interest, this blog considers only the preliminary issue.
In 2005, Nijjar Dairies Limited ('NDL') settled a High Court claim brought against it by a competitor by making a payment of £2m and providing an oral apology. In its accounts for the year ending 31 December 2005, NDL claimed deductions of £2m for the settlement payment and £443,185 in respect of legal fees relating to the dispute.
HMRC formed the view that this expenditure was not incurred 'wholly and exclusively' for the purposes of NDL's trade. Therefore on 9 December 2011, it issued a taxpayer notice to NDL pursuant to paragraph 1, Schedule 36, Finance Act 2008 requesting documents and information relating to the settlement and legal fees. On the same day, HMRC wrote to NDL's professional advisor stating that, because time limits were due to expire shortly, protective assessments would be issued on the basis that the settlement and legal fees were not allowable. On 12 December 2011, HMRC wrote a further letter to NDL's advisor, confirming that the protective assessments referred to in their letter of 9 December 2011 had been raised, and enclosing details of the assessments made. The assessments were appealed on 6 January 2012. On 8 June 2012, HMRC wrote to NDL again explaining the reduction in losses. The letter was titled 'Notice of determination' and set out the process for appealing the determination.
The parties' submissions
NDL submitted that raising a discovery determination involved three steps, namely:
- (deciding to make the discovery determination;
- raising the discovery determination; and
- notifying the discovery determination.
NDL submitted that HMRC had not followed these steps until its letter of 8 June 2012 because that letter had for the first time been addressed to NDL (as opposed to its professional advisor), referred to a determination, and set out how NDL could appeal. As paragraph 46(1), Schedule 18, Finance Act 1998 provides that no discovery determination may be made by HMRC more than four years after the end of the accounting period to which it related, the discovery determination had therefore been made out of time.
HMRC submitted that there were only two steps, namely:
- deciding to amend a tax return; and
- recording that decision in some documentary form.
HMRC accepted that the discovery determination had not been issued to NDL until its letter of 8 June 2012, but submitted that the statutory time limit contained in paragraph 46(1), Schedule 18, Finance Act 1998 applied to making the discovery determination and not notifying it. HMRC relied on the lack of a prescribed form for discovery determinations, and submitted that the documentary record of HMRC making the determination was its letter of 12 December 2011 which was within the statutory time limit.
The FTT noted that there was no case law on discovery determinations. NDL and HMRC both accepted, however, that the case law on discovery assessments applied equally to discovery determinations and so the FTT considered a number of those cases in reaching its decision.
The FTT agreed with HMRC that making a discovery determination is entirely separate to its notification and, broadly, favoured the two stage analysis proffered by HMRC. The FTT also agreed with HMRC that the time limits contained in paragraph 46 applied to making and not notifying a discovery assessment.
In the FTT's view the key questions were, therefore, whether the determination was made at the time of HMRC's letter of 12 December 2011 and, if it was, whether it had been recorded in an appropriate form. (Like an assessment, a discovery determination is not made until the decision has been properly recorded.)
The FTT concluded that although HMRC's letters of 9 and 12 December 2011 clearly established that HMRC had by that point decided to disallow the deductions and adjust the losses claimed in 2005 and subsequent years, the file copy of the 12 December 2011 letter did not constitute an appropriate record of the decision because: 'While the letter made clear that HMRC did not accept that NDL was entitled to the losses claimed, it referred only to protective assessments and did not mention a discovery determination or paragraph 41(2) of Schedule 18 to the Finance Act 1998.'
Although not strictly necessary, the FTT went on to state that it considered HMRC's letter of 8 June 2012 to be an appropriate record. However, it recommended that HMRC considers establishing a procedure for recording discovery determinations (as it has for discovery assessments), which was notably lacking.
Accordingly, the FTT held that HMRC did not make a discovery determination at the time of the 12 December 2011 letter and that, in the absence of any other records, it was made on 8 June 2012 (i.e. outside the statutory time period in paragraph 46, Schedule 18, Finance Act 1998).
It is understood that this is the first reported decision on this point and as such provides useful guidance on discovery determinations. It confirms, as one would have expected, that case law in relation to discovery assessments is relevant when considering discovery assessments. It also confirms that it is the decision date (properly recorded), rather than the notification date, which is relevant when calculating the statutory time limits contained in paragraph 46, Schedule 18, Finance Act 1998.