[2011] UKFTT 118 (TC)

TC00994

Appeal number TC/2010/04577

Capital Gains Tax - Assessment – Discovery assessment under s.29(1) TMA – Whether assessment precluded by section 29(4) or section 29(5)TMA –  No –  Appeal disallowed

FIRST-TIER TRIBUNAL

TAX 

	JEREMY STEPHEN TETLEY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: JOHN N. DENT (TRIBUNAL JUDGE)

Sitting in public at Alexandra House, The Parsonage, Manchester on 7th February 2011

David Conlan for the Appellant

Nicholas Branigan for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This appeal is about the discovery assessment provisions of section 29 Taxes Management Act 1970.  These provisions permit an officer of HMRC to make an assessment where he discovers that an assessment is or has become insufficient.  An assessment under Section 29(1) is only permissible where either of the two conditions set out in section 29(4) and 29(5) are met. Section 29(4) requires that the underassessment is attributable to fraudulent or negligent conduct on the part of the taxpayer or person acting on his behalf. Section 29(5) prohibits the making of a discovery assessment after the close of the ‘self-assessment enquiry window’ if at that time an officer could, on the basis of information then available to him, reasonably have been expected to have been aware of the insufficiency.
2.	Section 29(6) and 29(7) define what is meant by “information available to him”.
3.	The setting for this appeal is the self-assessment provisions of the TMA.  Section 9A TMA provides that an officer of HMRC may enquire into a return, but that he may do so only if he gives the taxpayer notice of his intention to do within a window, which in this case was between the date of the return, 25 January 2006, and 31 January 2007.  If an enquiry is started HMRC may require the taxpayer to provide further information and documents under section 19A TMA, and at the end of the enquiry the inspector will give a closure notice setting out his conclusions and if appropriate amending the assessment.  The taxpayer may apply for a closure notice to be issued (for example if he feels that HMRC are dragging their feet) and may pursue a refusal to give a closure notice by an appeal.
4.	Thus section 29 provides in limited circumstances a second opportunity for HMRC to seek further tax from a taxpayer.  But the effect of section 29(4) and 29(5) is to deny access to that second route if either the underassessment is attributable to fraudulent or negligent conduct on the part of the taxpayer or person acting on his behalf or if an officer could reasonably have been expected to have been able to make the adjustment at an earlier stage based on the information then available.  
5.	The appellant argues that the appellant submitted his tax return at the same time as his partners, who had all participated in a similar Tax planning arrangement. The Special Investigations Department of HMRC opened an investigation into the partners’ tax returns, and an inspector of HMRC had found insufficiency in those returns. As the investigation was in the hands of Special Investigations, HMRC were aware of the operation of the scheme as it affected the partners, and ought to have been aware of the scheme as it affected the appellant. Further, the appellant argues that there was an error on the original return, but that error was against the taxpayer rather than against the Revenue.
6.	There is no dispute on the substance of the assessment.  The sole issue for determination is whether the assessment was properly made under section 29 TMA so as to be a valid assessment.
The Facts
7.	There was no dispute on the facts. No evidence was called by either side. The interpretation of Section 37 Taxation of Chargeable Gains Act 1992 as applied  by the appellant in claiming the capital loss of £185,000 was considered by the Court of Appeal in Drummond [EWCA Civ 608 [2009]] and was not in issue before the Tribunal. The only issue was the Discovery Assessment.
8.	The appellant and his three partners availed themselves of a marketed tax avoidance scheme involving capital redemption. The appellant’s partners’ Tax returns were investigated by HMRC within the Inquiry window for those returns.
9.	The appellant came to the attention of HMRC Specialist Investigations Fraud & Avoidance ["SI F&A"] in Edinburgh as a possible participant in the scheme on 5 April 2007. Mr Tetley's 2004/05 tax return was requested and was received by SI F&A on 10 April 2007.
10.	The return was signed and dated by Mr Tetley on 25 January 2006.
11.	Page CG3 of the return shows chargeable gains before losses and taper relief of £369,926 and gains after losses of £46,231.
12.	Pages CG2 and CG3 of the return shows that a capital loss of £185,000 was claimed as a result of the acquisition on 28 June 2004 and disposal on 30 June 2004 of a "Bond 03-100-409".
13.	Page CG6 of the return, 'Further Information', states:
"Asset : Bond 03- 1 00-409. Capital Redemption Bond No 03- 1 00-409.
The bond was acquired from The Jeremy Stephen Tetley Life Settlement. I am both the settlor and beneficiary of this settlement. The provisions of Taxation of Chargeable Gains Act 1992 1992 s.71 apply to this disposal."
14.	 Page CG7 of the return, 'Additional Information', shows the following:
"Capital Loss Calculation:- CRB No 03-100-409
Chargeable proceeds £0.00
Acquisition costs £185,000
Capital Loss £185,000
Additional Information on pages CG2 and CG6."
15.	The return was sent with the returns of the appellant’s partners.
16.	When received by HMRC the information in the return is logged onto a computer which is set to flag  up potential enquiries. Such enquiries were flagged up in respect of the partners’ returns but not in respect of that of the appellant. There is no cross checking against other persons’ returns.
17.	The above entries in the return comprise the information made available to the officer for the purposes of S.29 Taxes Management Act 1970. An amendment to the 2004/05 return was received by HMRC on 2 March 2006 ("the first amendment"). This amended partnership income and profits. There was no amendment to the capital gains tax entries.
18.	A second amendment to the 2004/05 return was received by HMRC on 30 July 2007 ("the second amendment"). The amended self assessment shows that a capital loss of £380,000 arose on capital redemption bond 03-100-409. Chargeable gains after utilisation of this loss is Nil. A capital loss of £10,073 is carried forward.
19.	The time allowed for issuing an enquiry notice in respect of the original
return for 2004/05 expired on 31 January 2007.
20.	The time allowed for Mr Tetley to amend his 2004/05 self assessment expired on 31 January 2007. The first amendment was in time. The second amendment was not in time.
21.	On 25 April 2007 SI F&A wrote to Mr Tetley stating that his 2004/05 return might be incomplete in that it failed to fully disclose the arrangements that gave rise to the claimed capital loss of £185,000 and that as a consequence his affairs were under investigation under HMRC Code of Practice 8. The letter made a request under S.20B (1) Taxes Management Act 1970 for the production of specified documents.
22.	A copy of the 25 April 2007 letter was sent to Mr Tetley's agents, Messrs Chadwick LLP of Manchester. Chadwicks replied by letter dated 25 July 2007 supplying copies of the documents requested. 
23.	On 21 January 2010 an assessment was made on Mr Tetley in respect of the tax year 2004/05 on additional tax of £18,500.00. The assessment was made on the basis that the capital loss claim of £185,000 was ineffective.
24.	Mr Tetley appealed against the assessment. The appeal was received by SI F&A on 11 February 2010. The stated grounds for the appeal are:
"The notice of investigation under reference number SI8/10/178552/GAD dated 25 April 2007 under the signature of N P Branigan, was passed to my professional advisors who informed me that the notice was 'out of time', and therefore invalid and I need take no action. It follows that as the procedure was invalid then so is the notice and reassessment of 21/22 January and I ask that it be cancelled."
25.	On 17 February 2010 SI F&A wrote to Mr Tetley pointing out that the letter of 25 April 2007 did not constitute a notice of enquiry under S.9A Taxes Management Act 1970 and so the time limits in subsection 2 did not apply. The assessment was made under S.29 Taxes Management Act 1970 on the grounds that an officer had discovered an insufficiency in the 2004/05 return. Mr Tetley was invited to request an internal review or to notify the tribunal of his appeal. 
26.	Mr Tetley requested an internal review by letter dated 16 March 2010. 
27.	On 19 April 2010 the internal reviewer, Mr Malcolm Cree, wrote to Mr Tetley upholding the decision to issue the assessment. Mr Cree advised Mr Tetley that his appeal is against an assessment made under the condition set out in S.29 (5) Taxes Management Act 1970; that is whether the information provided in the 2004/05 return was such that an officer could not reasonably have been expected to be aware of an insufficiency in the return on the basis of the information made available to the officer in the return. He stated that a minimum of information was made available in the return, there was no mention that the arrangements were part of a tax avoidance scheme and there was no mention of the specific provisions of Taxation of Chargeable Gains Act 1992 that were claimed to give rise to the capital loss.
28.	The documents submitted by Mr Tetley's agent on 25 July 2007 include the second amendment to 2004/05 which could not amend the self assessment as the time allowed for making an amendment expired on 31 January 2007 (S.9ZA Taxes Management Act 1970).
29.	The capital loss claimed in the second amendment derived from Bond 03-10-409 was changed to £380,000.
30.	The amount subject to capital gains tax in the second amendment was NIL.
31.	Mr Tetley purchased the tax avoidance scheme, from MTM International Tax Consultants (now Montpelier Group) of the Isle of Man. He signed a Professional Services Agreement with MTM (Tax Consultants) Ltd of Alleyne, Aguiller & Altman Annexe, Derricks, St James, Barbados on 22 June 2004. Schedule 1 to the Agreement states that, "The tax advice is given in respect of UK Capital Gains Tax and the acquisition of a Capital Redemption Policy so as to cause a capital loss to arise."
32.	On or around 6 May 2004 Mr Tetley settled a nominal amount (£1,010) to create The Jeremy Stephen Tetley Life Interest Settlement ["the trust"]. Chadwicks advise that a further £380,000 was added to the trust, although no supporting evidence such as a trust bank account statement has been provided to HMRC.
33.	The trustees of the trust are a Mr Robert Elliott and Mr Tetley himself.
34.	On 23 June 2004 the trustees of the trust received a conditional offer from Mossbank Enterprises Ltd of the Isle of Man to sell a capital redemption contract issued by MTM Insurance Co Inc of Barbados. The offer was conditional on the sale being completed by noon on 28 June 2004. The sale price was £380,000.
35.	On 29 June 2004 the trustees of the trust appointed the capital redemption policy out of trust and assigned it to the settlor, Mr Tetley.
36.	On 30 June 2004 Mr Tetley issued a notice to MTM Insurance Co Inc surrendering the capital redemption policy.
37.	Mr Tetley received a notification from MTM Insurance Co Inc in writing on 1 May 2007 that the policy 03-100-409 had been encashed on 30 June 2004. The appellant has provided no evidence to HMRC of the payment of £380,000 by 28 June 2004 either by the trust to Mossbank, or by MTM to the appellant.
HMRC Submissions
Discovery under the Condition set by Section 29(4)
38.	Mr Tetley received a letter from Montpelier Tax Consultants on 4 January 2006 setting out what entries were required to be made in his 2004/05 return. This letter specifies that the loss arising is £380,000.Mr Tetley's original 2004/05 return is signed and dated 25 January 2006. It shows a capital loss of £185,000 when it is clear that the actual loss claim should have been £380,000.
39.	Mr Tetley's agents, in submitting the second amendment on 25 July 2007 are acknowledging the original return is incorrect. No explanation has been given, but the out of time second amendment to the self assessment are material. As they relate to arrangements which ought to be fully documented and it is clear that Mr Tetley received clear instruction from the promoter in regard to entries required in the return, it is HMRC's view that Mr Tetley (or his agents) failed to take reasonable care when submitting the return. This amounts to negligence. Further, HMRC believes that the available evidence points to the fact that the transactions as described in Mr Tetley's return either did not take place or did not take place as described and that any advice received by Mr Tetley in relation to entries in his return describing the transactions was incorrect.  S.29 (4) Taxes Management Act 1970 allows an assessment to be made under S.29 (1) if the insufficiency is attributable to fraudulent or negligent conduct on the part of Mr Tetley or a person acting on his behalf.  
40.	HMRC therefore argue that the condition set out in S.29 (4) Taxes Management Act 1970 is met and the assessment is valid.
Discovery under the Condition set by S.29 (5)
41.	 On 9 November 2009 the Supreme Court refused Mr Drummond's application for leave to appeal. The Court of Appeal decision is therefore final.
42.	The assessment made on 21 January 2010 was made on the basis that the officer had discovered an insufficiency in Mr Tetley's 2004/05 self assessment. The officer believed that Mr Tetley relied on an incorrect interpretation of S.37 Taxation of Chargeable Gains Act 1992 in computing the capital loss.
43.	 An assessment under S.29 Taxes Management Act 1970 is possible because
	1) the enquiry window for 2004/05 had closed,
	2) the officer had made a discovery,
	3) there is insufficient information in the 2004/05 return to prevent an assessment 	being made and 4) the assessment was made within the time allowed by S.34 Taxes 	Management Act 1970.
44.	 Lord Justice Auld in Veltema [EWCA Civ 193 [2004]] considered what is required for the purposes of meeting the condition set by subsection 5. At paragraph 36 he says:
"The answer to the second issue- as to the source of the information for the purpose of section 29(5) - though distinct from, may throw some light on, the answer to the first issue. It seems to me that the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under the section only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a section 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question. If that other information when seen by the Inspector does cause him to question the assessment, he has the option of making a section 9A enquiry before the discovery provisions of section 29(5) come into play.  That scheme is clearly supported by the express identification in section 29(6) only of categories of information emanating from the taxpayer."
45.	Nowhere in Mr Tetley's 2004/05 return does he alert an officer to an actual or potential insufficiency in his self assessment.
46.	In Pattullo [CSOH 137 [2009]] Lord Bannatyne comments on the requirements to make a discovery assessment under the condition set by S.29 (5) Taxes Management Act 1970 following Veltema. He says at Paras 101 to 104:
	"In my view on a proper understanding of Auld LJ's position in Langham v 	Veltema the proper approach to the circumstances in which an assessment under 	section 29 can be made is a two step process which is set forth in Corbally 	Stourton v Commissioners for Revenue and Customs at paragraph 59.
	(i)      He (the officer) newly comes to the conclusion that it is probable that there 	was an insufficiency; and
	(ii)   That at the relevant time an officer of the board could not reasonably 	have been expected, taking into account the general knowledge and skill that 	might reasonably be attributed to him, and on that basis only of the section 29(6) 	information, to have concluded that it was probable that there was an 	insufficiency". Applying a test in those terms would fit in with all the authorities 	to which I was referred. In my opinion the test has to be a two stage one to fit in 	with the underlying purpose of the scheme.  The officer has to discover 	something new otherwise the underlying purpose of early finality of assessment 	would be defeated. His assertion of the newly discovered insufficiency is then tested 	against the adequacy of the disclosure by the taxpayer. It is only if the taxpayer has 	made a return which has clearly alerted the officer to the insufficiency that it will be 	considered adequate and will shut out a section 29 discovery assessment. I recognise 	in reaching the conclusion that there is a two stage test it perhaps appears I am 	accepting a position Mr Johnston took at one stage in his submissions. However, I 	now turn to the approach to and application of that test and in relation to this I judge 	that I differ materially from his position.
	It seems to me that on a proper construction the first preliminary part of the test is no 	more than an assertion by the officer of a newly discovered insufficiency.  The 	heart of the test I judge is clearly contained in part (II) of the test. On a proper 	understanding a discovery assessment can only be foreclosed if the taxpayer has 	clearly alerted in his return the officer to the insufficiency of tax which the officer 	has asserted he has newly discovered, thus rendering it not a new discovery but 	rather something on the information provided by the taxpayer the officer should 	have been aware of during the enquiry window. In my judgement on a proper 	construction the section clearly places the emphasis on the adequacy of the 	disclosure by the taxpayer.  That fits in with the underlying purpose of the scheme.  	Thus the taxpayer is given the right of early finality. However, there is a 	corresponding duty on the taxpayer to clearly alert the officer to the insufficiency.  If 	he does not the officer can newly discover an insufficiency. Accordingly I broadly 	accept counsel for the respondent's argument that in terms of the section it is for the 	taxpayer (once a newly discovered insufficiency is asserted) to prove that he has 	clearly alerted the officer to the insufficiency."
47.	 HMRC therefore argue that the condition set out in S.29 (5) Taxes Management Act 1970 is met and the assessment made for 2004/05 is valid.
The Appellant’s submissions
48.	The appellant did not make a written submission, and the appellant’s submissions are taken from oral information given to the Tribunal.
49.	The appellant, through his representative submitted that HMRC were aware before 30 April 2007 of the progress of Drummond. The appellant and his partners had all used the same scheme and had submitted their tax returns at the same time. Enquiries were raised in respect of the partner’s self assessments, but not in relation to the appellant. The test in Section 29 is whether an officer of HMRC could have been aware. If some officers could have been expected to be aware, then the appellant argued that the decision should be answered adversely as regards HMRC.
50.	Many other enquiries were raised on other returns using a similar scheme. The information in the return of the appellant should have been sufficient to raise an enquiry.
51.	The appellant argued that there was an error in the original return, but the error was against the taxpayer, rather than against the Revenue. 
52.	The scheme was being investigated by Special Investigations, so the Revenue were “aware”.
53.	The appellant had engaged Montpelier on a Tax avoidance scheme, and had relied upon them. If the transaction was not conducted properly, the appellant was a victim of Montpelier.
The Law
54.	Section 29 of the Taxes Management Act 1970 provides:
29  Assessment where loss of tax discovered
(1)     If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or
(b)     that an assessment to tax is or has become insufficient, or
(c)     that any relief which has been given is or has become excessive,
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
(2)     ...
(3)     Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a)     in respect of the year of assessment mentioned in that subsection; and
(b)     . . .in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4)     The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of  the taxpayer or a person acting on his behalf.
(5)     The second condition is that at the time when an officer of the Board—
(a)     ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b)     informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6)     For the purposes of subsection (5) above, information is made available to an officer of the Board if—
(a)     it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;
(b)     it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c)     it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer. . .; or
(d)     it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—
(i)     could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii)     are notified in writing by the taxpayer to an officer of the Board.
Case Law
55.	The Tribunal was referred to the cases of Jason Drummond v HMRC [2009]EWCA Civ 608, Langham v Veltema [2004] EWCA Civ 193, Corbally-Stourton v HMRC [2008] UKSPC SpC 692 and Neil Pattullo re Judicial Review [2009] CSOH 137.
Findings
56.	In the light of the findings of fact, the Tribunal decided as follows:
a)	The appellant submitted his return at the correct time, and no enquiry notice was issued by HMRC. The time limits provided by Section 9A of Taxes Management Act do not apply.
b)	An officer of HMRC made a discovery that there was an insufficiency in the appellant’s self assessment. The condition set out in Section 29 (1) (b) is therefore satisfied. 
c)	Section 29(4). In the finding of the Tribunal the transactions described in the appellant’s return either did not take place or did not take place as described. The appellant conceded that this was possibly the case, and suggested that he was a victim of the conduct of Montpelier. The onus of ensuring that his return is correct is upon the appellant, and the Tribunal came to the conclusion that there had been negligence on his part, or on the part of those advising him.
d)	Section 29(5). The appellant argues that the test in Section 29(5) is whether an officer of HMRC could have been aware and that if some officers could have been expected to be aware, then the decision should be answered adversely as regards HMRC. The Tribunal decided that an officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the insufficiency. The appellant’s return for 2004/05 is incorrect. Nowhere in the return does the appellant alert an officer to an actual or potential insufficiency in his self assessment. In the case of Pattullo, it is made clear that it is for the taxpayer (once a newly discovered insufficiency is asserted) to prove that he has clearly alerted the officer to the insufficiency. In the finding of the Tribunal, at the relevant time, an officer of the board could not reasonably have been expected, on the test set out in Pattullo, to have concluded that it was probable that there was an insufficiency. 
e)	The submissions of the appellant were not accepted by the Tribunal. 
f)	In view of these findings, the assessment made on 21 January 2010 is valid, and the appeal is dismissed
57.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN N. DENT

TRIBUNAL JUDGE
RELEASE DATE: 15 February 2011