In Timothy and Alison Johnson v HMRC [2022] TC08483, the First Tier Tribunal (FTT) found discovery assessments were validly raised as the appellant’s tax agent had been careless in omitting compensation payments from their tax returns.

  • In 2007, the appellants entered into an interest rate hedging product.
  • Following a review by the Financial Conduct Authority, the appellants were awarded compensation in January 2014. This consisted of compensation of £86,347 and interest of £18,509 from which tax had been deducted at 20%.
  • 2013-14 Tax Returns were completed and included a white space note stating that the £86,347 was not considered taxable.
  • In January 2018, HMRC opened enquiries and Discovery Assessments were raised assessing the full compensation to tax.
  • The Discovery Assessments were raised on the basis that the agent for the appellant had acted carelessly in omitting the amounts.
  • The appellants Appealed to the FTT on the basis that the Discovery Assessments were out of time.

The FTT dismissed the appeal finding that:

  • The appellant’s tax advisors had been careless, whilst they had acted in good faith:
    • The compensation award letters suggested that the figures should be taxable.
    • HMRC guidance released before the tax return filing date stated the amounts were taxable in the year of receipt and a further technical document the agent had reviewed also suggested the amounts received were taxable in full.
    • While taking a position that is not in line with HMRC (or other) guidance is not careless if a detailed technical review has been undertaken, the advisors had done insufficient research to ascertain that a different tax treatment was correct.
    • A deduction had been claimed for the costs of the hedging products against rental income and as such a repayment of those deductions should be taxable accordingly.

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?

Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Timothy and Alison Johnson v HMRC [2022] TC08483

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