In Joanne Lunn and Vanilla Monsoon Ltd v HMRC [2024] TC09197, clients of the discredited Christopher Lunn failed to make disclosures when invited by HMRC following the enforcement of a search warrant. It led to HMRC making Discovery Assessments with the addition of tax-geared penalties for failure to take reasonable care.
- Past tax returns for Joanne Lunn and Vanilla Monsoon Ltd (VML), the appellants, were prepared by the media accountants Christopher Lunn & Company (CLAC).
- VML was a personal service company wholly owned by Ms Lunn.
- Under a search warrant, CLAC was raided by HMRC and subject to a fraud investigation in 2010/11.
- Papers for both appellants were seized in the raid and those records led to the case enquiries.
- Following the CLAC raid, HMRC wrote to both Ms Lunn and VML several times inviting them to review their tax affairs and disclose any irregularities. No disclosures were made.
- HMRC opened an enquiry into the appellants' tax returns noting the inflated expenses claimed by Ms Lunn in her accounts, and charges between VML and Ms Lunn that gave the parties a deduction and a claimed trading loss respectively.
- HMRC made Discovery Assessments and assessed Penalties on underpaid Corporation Tax for accounting periods ending 31 March 2008 and 2009, 2016 and 2017.
The taxpayers appealed.
The FTT had to determine:
- Whether the discovery assessments for each year were validly raised.
- Whether Penalties were charged correctly.
The burden of proof in respect of the discovery assessments lies with HMRC.
- If discovery assessments are validly raised, the burden of proof in disputing the amounts assessed moves to the appellants.
- Ms Lunn claimed her personal expenses were, in part, related to the use of her intellectual property, including 'her little black book'. She did not provide HMRC with a comprehensive list of these assets.
- The FTT was not convinced Ms Lunn had operated a trade with VML in either 2006/07 or 2007/08 and no losses were available to set against her other income.
- Similarly, the costs purported to be incurred by VML for the Benefit of the trade could not be substantiated. It seemed an amount of £750 was for an astrology course she attended whilst in another employment.
- The FTT found that on the balance of probabilities, the costs of sales claimed by VML were an arbitrary apportionment of amounts between the two parties. It was a paper exercise without a commercial foundation.
- For VML, the raid by HMRC covered only the years up to 31 March 2009. For the later years, HMRC presented no documentary evidence but relied on the similarity of facts from earlier years and argued a Presumption of continuity should apply.
- On this basis, the FTT again found a loss of tax in the relevant periods.
For Ms Lunn:
- Concerning the validity of the discovery assessments, HMRC did not form a prejudiced view because of the involvement of CLAC and Ms Lunn's father. HMRC pointed to specific facts that underpinned their conclusions and the FTT felt those facts were reasonable.
- The FTT found that the actions taken were deliberate behaviour on the part of CLAC.
- The nature of the behaviour meant the discovery provisions in s.29 TMA did not apply which would have limited the time frame to four years. Instead, the time limit was extended to twenty years under s.36 TMA and the discovery assessments were validly raised with respect to all the earlier years.
For VML:
- The same grounds for discovery were upheld for the 2008 and 2009 returns.
- The assessments for 2016 and 2017 were also validly made because insufficient information was available until a review of the CLAC papers for HMRC. Also taking into account the decision in Veltema v Langham [2004] ALL ER 436, the normal time limit for a discovery assessment of four years from the end of the accounting period meant the assessments were both validly issued.
Penalties:
- On the personal assessments, it was Ms Lunn's behaviour rather than that of CLAC/Mr Lunn that was relevant. The FTT found her behaviour to be negligent as no tax expertise was necessary to know the preparation of her returns was not based on commercial reality. The quantum of tax outstanding was relatively small and HMRC had abated the penalty by 65% to reflect that and Ms Lunn's cooperation.
- For the 2008 return for VML, the company was also found to have been negligent. HMRC had abated the penalties in the same way as for Ms Lunn personally on the same grounds.
- For VML for the 2009, 2016 and 2017 returns, HMRC found the behaviour to be careless by the director acting on behalf of the company. Ms Lunn had failed to take reasonable care. The penalty was reduced to slightly below 30% by HMRC to reflect the limited disclosure made.
The FTT found:
- All the discovery assessments raised were validly issued.
- They were satisfied with the quantum of those assessments.
- The penalties were all validly levied and set at an appropriate level.
The appeals were dismissed.
Useful guides on this topic
How to appeal an HMRC decision
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How to appeal a penalty (subscriber version)
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Wholly and exclusively ... toolkit
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Investigations: the presumption of continuity
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Discovery Assessments
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Information powers
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Penalties: deliberate behaviour
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