In John Hargreaves v HMRC UKUT 00034, the Upper Tribunal (UT) remade a decision of the FTT, dismissing an appeal against discovery assessments. The appeal had been made on the basis that HMRC's discovery was stale however the Supreme Court quashed that concept in another case, Tooth. The UT was obliged to follow the reasoning of the higher court and then consider the discovery on its own merits.

  • Mr Hargreaves disposed of his Matalan shares in May 2000: he claimed to have become Tax Resident in Monaco from March 2000 and did not declare the gain on his UK Self Assessment return.
  • HMRC opened an enquiry into his return, concluded that he was UK resident in the year of the sale and assessed him £6 million in income tax.
  • HMRC did not raise an assessment for an estimated £84million in Capital Gains Tax (CGT) until 2007.
  • Mr Hargreaves dropped his claim that he was non-resident, but claimed that the conditions for a Discovery Assessment had not been met. He appealed to the First Tier Tribunal (FTT).

The FTT allowed the appeal finding the discoveries were invalid:

  • There were more than three years between the discovery that the taxpayer was non-resident and the raising of a CGT assessment. The assessment had lost its quality of newness and had become stale.
  • While the assessment was invalid as it was stale, the then FTT went on to consider that the other requirements for a discovery assessment were met:
    • The taxpayers or his advisers had been negligent (the Negligence Condition).
    • Insufficient information had been provided in the return for a hypothetical office to identify a shortfall or tax (the Information Condition).
    • The return had not been completed in line with prevailing practice (the Practice Condition).

HMRC appealed to the UT on the staleness point whereas Mr Hargreaves appealed on the three other points. 

The UT remade the decision of the FTT to dismiss Mr Hargreaves appeal, the discovery assessments had been validly issued:

  • The parties agreed that the decision in Raymond Tooth v HMRC [2019] EWCA 826 was binding, the discovery was not stale and was valid.
  • The other conclusions of the FTT were considered:
  • The Negligence Condition had not been met:
    • The taxpayer did not follow the tax advice he had received which stated the importance of having a leased property in his own name for a period of at least three years, a residence permit in Monaco and moving personal belongings.
    • That he didn’t seek further advice was negligent.
    • However, given that no further advice was sought, it was not possible to say whether that advice would have changed the way that the tax return was filed.
    • The FTT was wrong to reach the conclusion that this further advice would have changed the filing position and the negligence was linked to the tax shortfall.
  • The Information Condition was satisfied as:
    • A tax return claim that he was not UK resident or ordinarily resident, was insufficient of itself for a hypothetical office to have considered that claim was correct.
    • The taxpayer’s disclosure identified that there would be an insufficiency of Income Tax should the claim for non-residence status be incorrect, however, there was no such information in respect of the capital disposal.  The hypothetical officer would not have been aware of a CGT shortfall if the residence status claimed was incorrect.
  • The Practice Condition was not satisfied as:
    • Reliance on HMRC guidance that was overruled by the Supreme Court in Gaines-Cooper did not mean that theirs wasn’t established practice as a result of that guidance.
    • The residence advice the taxpayer received did not consider a day count and the subjective intention was solely enough to determine residence status. This contradicted the taxpayer's position that a simple day count was the established practice to follow.
    • A leading practitioner text also suggested the approach to residence status was a multi-pronged approach rather than simply a day count.

Useful guides on this topic

Discovery Assessments
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?

Discovery Assessments: At a glance
This is a freeview 'At a glance' guide to Discovery Assessments. What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment?

SRT: Statutory Residence Test
What is the statutory residency test? Why is it important and how does it work?

HMRC delay frustrates Discovery Assessment
In Hargreaves v HMRC [2019] TC07090 HMRC's long delay in raising an assessment on an £84m capital gain meant that there was no 'discovery' and it was invalid.

Tooth: Discovery basic condition not met
In HMRC v Raymond Tooth [2021] UKSC 17, the Supreme Court ruled on two important issues in relation to HMRC's powers in making Discovery Assessments. Entering the correct figures in the wrong boxes of a tax return because there is nowhere else in the return to put them and to then make a full disclosure of that fact, cannot be construed as a deliberate error and the concept of 'staleness' in respect of assessments has a very narrow application.

External links

John Hargreaves v HMRC UKUT 00034

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