In HMRC v John Hicks  UKUT0040, the Upper Tribunal (UT) allowed HMRC’s appeal. It found there had been carelessness on the part of the taxpayer's adviser so the discovery assessments raised were in time after all.
- Where a taxpayer has not provided HMRC with sufficient information to make them aware that tax has been underpaid, and they later become aware of the deficiency, they can issue a Discovery Assessment under s29 TMA 1970.
- The time limit for this is 4 years unless HMRC can show the taxpayer (or someone acting on their behalf) was careless (6 years) or that they deliberately understated the tax due (20 years).
- A taxpayer is protected from discovery by making suitable disclosures to HMRC unless there is carelessness.
Mr Hicks claimed a trading loss on his 2008/9 tax return, which was carried forward to use against the profits arising on the same trade in 2009/10 and 2010/11.
- The losses arose under a tax avoidance scheme disclosed under DOTAS.
- In December 2010 HMRC opened an inquiry into the 2008/09 return, finding no trading loss arose.
- On 30 March 2015 HMRC raised discovery assessments into 2009/10 and 2010/11.
- A Statutory Review of the decision to open discovery assessments confirmed HMRC’s decision.
The FTT had found that:
- Sufficient information had been provided to HMRC to alert the hypothetical officer to the potential loss of tax.
- Mr Hicks had not acted carelessly, so the discoveries were out of time as the four-year time limits applied.
The Upper Tribunal disagreed and allowed HMRC’s appeal:
- There was carelessness by the taxpayer's tax adviser. The insufficiency in the assessments occurred because the adviser gave counsel that a reasonably competent tax expert could not have given and failed to give the information which a similarly competent adviser ought to have given. That recommendation should have been that certain expenditure claimed by Mr Hicks was not deductible.
- As a result the 6 year discovery time limit applied and the 2009/10 and 2010/11 discovery assessments were valid.
Since carelessness had been established, the UT did not need to decide whether sufficient information had been supplied to HMRC so as to alert the 'hypothetical' HMRC officer of the potential insufficiency in the original assessment. However, they did discuss it, rejecting HMRC's arguments that it had not.
The Tribunal also considered in outline whether Mr Hicks himself had been careless or whether the scheme provider, Montpelier, had acted carelessly, even though any decision on these points would not affect the outcome of the appeal. The UT thought that Mr Hicks would have been careless if he had not used an adviser and, more importantly, that Montpelier was careless. Its suggestion that "the scheme was perfect for derivatives traders" was wrong and carelessly so.
The UT rejected Mr Hicks’ ground of challenge that discovery had actually been made in early 2012 when HMRC wrote to him expressing 'concerns' on a number of issues as part of a check of his 2008/09 return and that this discovery was stale. The Tribunal did not have enough evidence to show a discovery in 2012.
Links to our useful subscriber guides:
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review?
How to appeal a decision of HMRC
What type of decision is appealable? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?
Link to guides
Discovery assessment and time limits
HMRC have the power to re-open a past year of assessment if they discover a past under assessment that results in a loss of tax, and raise a Discovery Assessment.