In Mark Stewart Wyatt v HMRC [2024] TC09297, the First Tier Tribunal (FTT) found that Discovery assessments made on a property developer were invalid: they assessed both Income Tax and Capital Gains Tax (CGT) on the same transactions.
HMRC contended that the taxpayer realised a profit from property development activities in 2007-08 and 2009-10.
- In March 2016, HMRC issued a ‘protective assessment’ for 2009-10. This stated that it was to cover potential lost Income Tax and/or Capital Gains Tax in respect of the disposal of two properties.
- Subsequent letters from HMRC in 2018 set out why they considered the property development venture to be a Trading activity.
- These letters included two tax calculations for each property: an Income Tax calculation (on the basis of trading), and a Capital Gains Tax (CGT) calculation (on the basis of a capital disposal).
- HMRC raised Discovery assessments, each containing a single figure which was the sum of the amount that would be due on a trading transaction and the amount that would be due on a capital disposal.
- For 2007-08, £184,587 was assessed. An assessment based on a trading disposal would have been for £90,360.
- For 2009-10, the assessment totalled £228,544. An assessment based on a trading disposal would have been for £123,595.
- The assessments effectively taxed the same disposal proceeds twice: once as a trading disposal and once as a capital disposal.
- The taxpayer Appealed against the assessments to the First Tier Tribunal (FTT).
- HMRC noticed the potential issue with the assessments and requested that the FTT expressed a view.
The FTT found that:
- Section 29 TMA 1970 allows an HMRC officer to make an assessment for an amount which ‘in his opinion’ is to be charged to make good to the Crown a loss of tax.
- In this instance, the officer’s opinion was that the tax due was, at most, the amount due on the basis of a trading transaction.
- Because the assessments raised exceeded that figure by including CGT, they fell outside the boundaries of HMRC’s assessment power.
- Section 29 TMA 1970 should be read as constraining the power of an officer to raise an assessment to be no more than the maximum amount which in their opinion needs to be charged to make good the loss of tax.
- While an officer of HMRC may make very generous assumptions in quantifying an amount to assess in order to ensure that the assessment is not insufficient, where the officer has clearly expressed their opinion as to the maximum possible tax liability they are not entitled to assess for more than that figure.
The assessments were not validly made and were struck out.
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? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Badges of Trade: Are you trading or not?
Are you trading, running a business, or just buying and selling investments? Is your 'side-hustle' taxable? The 'Badges of Trade' are a set of indicators, built up over time by the courts, to decide when an activity is a trading or investment activity.
Is it a trade, a business, or an investment activity?
Starting in business or running one? Is your new or existing business a trade, a business or an investment activity? The distinction is very important for tax purposes. This guide runs through key issues for tax purposes.
Profits from dealing in or developing UK land
These rules apply UK Income tax or Corporation tax to all profits from trading in and developing UK land, regardless of your country of residence.
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