Hankinson v HM Revenue and Customs

On 24 January 2005 an officer of HMRC assessed Mr Hankinson to income tax and capital gains tax in respect of the tax year 1998-1999. The bill came to over £30 million. The reason why the assessment was made so long after the end of the tax year in question was that it was what is called a “discovery assessment” made under section 29 of the Taxes Management Act 1970. This appeal from the Upper Tribunal [2010] UKUT 361 (TCC) [2010] STC 2640 (Warren J, President and Judge Colin Bishopp) concerns the conditions that must be fulfilled before a discovery assessment can be made.

Section 29, as it stood at the relevant time, provided:

Although “discovery assessments” have a long history it is common ground that the circumstances in which they may be made were tightened on the introduction of self-assessment. The mechanics of the self assessment scheme are contained in the Taxes Management Act 1970, as amended. A taxpayer must make and normally deliver a tax return by 31 January of the year following the year of assessment (“the filing date”). His return should disclose all the relevant information and correctly assess, on the basis of it, the tax due. It must also include a self-assessment of the tax due. HMRC may then enquire into the return by issuing a formal notice within twelve months after the filing date. The power to open an enquiry is unfettered. If HMRC give notice of enquiry there are wide powers enabling HMRC to require the taxpayer to produce documents and particulars. At the end of any such enquiry HMRC may amend the return and issue a closure notice. If HMRC make no enquiry and the taxpayer has not amended his return, the self-assessment return becomes final on the expiry of that twelve month enquiry period, subject only to the possibility of making a discovery assessment. That twelve month period is often referred to as the “enquiry window”.

Section 20 of the Taxes Management Act 1970 (and now Schedule 36 to the Finance Act 2008) also gives powers to call for information. These powers may be exercised after the enquiry window has closed. Notice under section 20 (1) and 20 (3) may be given by an inspector authorised by HMRC, but it can only be given with the consent of the tribunal. If the inspector gives notice in exercise of these powers he must give the taxpayer a written summary of his reasons for applying for consent: section 20 (8E). The giving of a notice under section 20 is a precursor to the making of a discovery assessment; and it can only be done where there is a sensible or practical possibility of a discovery assessment being made under section 29: R (oao Johnston) v Branigan[2006] EWHC 885 (Admin) §§ 14, 15; R (oao Pattullo) v HMRC[2009] CSOH 137 [2010] STC 107 § 91.

Moses LJ explained the changes to section 29 consequent upon the introduction of self-assessment in Tower MCashback LLP 1 v HMRC [2010] EWCA Civ 32 [2010] STC 809 (§§ 12 – 18). He pointed out (§ 24):

This summary of the provisions is both accurate and entirely uncontroversial; but understandably it does not address the point raised by this appeal. It is useful background, but no more.

In the present case the assessment was raised on the ground that HMRC had discovered that, as regards the tax year 1998-1999, Mr Hankinson had been resident and ordinarily resident within the UK. On Mr Hankinson’s appeal to the First Tier Tax Tribunal (Judge Avery Jones CBE and Judge Clark) the FTT decided that Mr Hankinson was indeed resident and ordinarily resident in the UK for that year of assessment. They also decided that Mr Hankinson’s residence and ordinary residence had been “discovered” by HMRC; and that the undercharge to tax for that year of assessment was attributable to negligent conduct by Mr Hankinson. For good measure they also decided that when the enquiry window closed an officer of the Board could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the undercharge to tax for that year of assessment. There is no appeal against any of these findings of fact.

The issue on the appeal is this. In order to invoke the power under section 29:

Is it sufficient that an officer of the Board discovers that there has been an insufficiency for the year of assessment in question; or

Must he also consider whether either or both of the conditions in section 29 (4) and (5) is or are fulfilled?

Both the FTT and the Upper Tribunal held that the making of a discovery was sufficient; and that whether either or both the conditions are fulfilled is a question of objective fact to be decided in case of dispute by way of appeal. The essence of the contrary argument, advanced by Mr Mathew QC for Mr Hankinson, is that the conditions laid down in section 29 (4) and (5) are pre-conditions to the raising of an assessment. These pre-conditions are safeguards for the taxpayer introduced to counter-balance the introduction of (i) the extraordinary power of random enquiry (for 12 months after a tax return has been submitted) given to HMRC, and (ii) the extensive obligations of disclosure imposed on the taxpayer, inherent in the self assessment regime effective from 1996/97.

Mr Mathew began by describing the nature of an assessment. In Whitney v IRC [1926] AC 37, 52 Lord Dunedin said:

This was repeated by Lord Nolan in Golden Bay Cement Co Ltd v Commissioner of Inland Revenue [1998] STC 1172, 1176 in which he said that the Privy Council could not accept a particular submission because:

In the present case the liability was created by the combination of the taxing statute and the fact that Mr Hankinson was resident and ordinarily resident in the UK during the year of assessment. His liability to pay tax did not depend on fulfilment of the pre-conditions in section 29, for the simple reason that the statutes do not say so. Accordingly, whether the pre-conditions are or are not satisfied is irrelevant to Mr Hankinson’s actual liability to pay tax. The discovery assessment was simply the administrative particularisation of the amount that Mr Hankinson was required to pay. Thus, the argument runs, the fetters imposed upon the making of an assessment are procedural fetters which preclude HMRC from issuing the piece of paper quantifying liability. The next step in the argument is that, in order to comply with the pre-conditions, the HMRC officer who discovers an undercharge must himself consider whether either or both of the pre-conditions is or are satisfied. If he gives no consideration to that question, then the pre-conditions are unsatisfied with the result that the purported assessment cannot lawfully be issued. Equally if, after consideration, he considers that neither pre-condition is satisfied he cannot lawfully issue an assessment.

Ms Simler QC, appearing with Mr Nawbatt for HMRC, says that this argument is wrong. They say that section 29 does not require the officer making the assessment to have discovered both that there is a loss of tax and that one or both of the pre-conditions is satisfied. In practice the officer is likely to consider these conditions, but there is no legal requirement to do so. The real safeguard for the taxpayer lies in the fact that in considering the validity of the assessment the Tribunal is concerned not with whether the officer considered that the conditions were fulfilled but whether the conditions are in fact fulfilled; and that the burden of showing that one or both conditions are fulfilled rests on HMRC.

Although Mr Mathew is technically correct in saying that tax is imposed by statutory charging provisions rather than by assessment, the Taxes Acts do not always use these expressions with perfect technical accuracy. As Nolan LJ pointed out in Walters v Tickner [1993] STC 624, 625-6 words, even in a taxing statute, are sometimes loosely used; and the words “charge” and “assessment” do not always bear the same meanings. I do not, therefore, think that the first step in Mr Mathew’s argument is as solid as he would wish it to be.

Nor, in my judgment, is Mr Mathew’s argument borne out by the words of the section itself. I begin with section 29 (1). This sub-section comes into operation if an officer of the Board “discovers” an undercharge. The word “discovers” in this context has a long history. Although the conditions under which a discovery assessment can be made have been tightened in recent years following the introduction of the self-assessment regime, the meaning of the word “discovers” in this context has not changed. In R v Commissioners for the General Purposes of the Income Tax for Kensington[1913] 3 KB 870 Bray J said that it meant “comes to the conclusion from the examination he makes and from any information he may choose to receive”; and Lush J said that it was equivalent to “finds” or “satisfies himself”. In Cenlon Finance Co Ltd v Ellwood[1962] AC 782 the House of Lords considered the meaning of the word “discovers”. They rejected the argument that a discovery entailed the ascertainment of a new fact. Viscount Simonds said:

Lord Denning said:

In R (oao Pattullo) v HMRC Lord Bannantyne said of this part of what he called a two-stage process (§104):

That section 29 (1) is dealing with the subjective views of the officer concerned is borne out by the consequence of the making of a discovery viz. that he may make an assessment of the amount “which ought in his … opinion” to be charged to make good the loss of tax. It is true that this power is said to be subject to sub-sections (2) and (3). However, those sub-sections do not refer to the officer’s opinion at all.

Sub-section (2) refers to the making of an error in a return which was in fact made in accordance with generally prevailing practice. The burden of proving the existence of the error and a generally prevailing practice rests on the taxpayer. In HMRC v Household Agents Ltd[2007] EWHC 1684 (Ch) [2008] STC 2045 Henderson J said of equivalent provisions relating to corporate taxpayers (§ 45):

If the burden of proof lies on the taxpayer, it makes no sense for HMRC to have to investigate the question before issuing the assessment, as the logic of Mr Mathew’s argument necessarily entails.

In addition by contrast with sub-section (1), which refers to the officer’s opinion, the satisfaction of the conditions in sub-sections (4) and (5) is to be judged as a question of fact. This emerges most clearly from the decision of this court in Langham v Veltema [2004] EWCA Civ [2004] STC 544 in relation to the second of the two conditions. Auld LJ said (§ 33):

Likewise in HMRC v Household Agents Ltd Henderson J said of the equivalent provisions (§ 48):

Henderson J’s discussion of the burden of proof and the party upon whom it lay is predicated on the basis that the question whether either or both of the conditions are satisfied is to be decided ex post facto by an impartial tribunal; and not on the say-so of HMRC before making the assessment. If section 29 required the officer to consider whether either or both of the conditions were fulfilled and come to a conclusion on the matter, one would have expected the section to have said so. One might also have expected that the officer would have been required at least to state which condition he considered to have been satisfied, even if he might not be required to give full reasons for his conclusion. But section 29 imposes no such requirement. This is in marked contrast to the power to call for information under section 20. It is also notable that in Langham v Veltema Auld LJ said (§ 32):

What goes for section 29 (5) must go for section 29 (4) too. HMRC cannot have an obligation to investigate whether the taxpayer has been guilty of negligence or fraud before issuing the assessment, especially where section 29 does not, on its face, impose such an obligation. But in practical terms it seems to me that if Mr Mathew’s construction is right it would have the effect of imposing such an obligation on HMRC, because the material necessary to form a concluded view on that question would almost always be in the taxpayer’s possession and would not have accompanied his self-assessment return.

Mr Mathew also said that if the officer considered the conditions and came to the view that one of them had been fulfilled, then on any subsequent appeal by the taxpayer HMRC would be entitled, on proper notice, to rely on fulfilment of the other condition either as well as or instead of the condition which the assessing officer had considered had been fulfilled. This submission is in my judgment inconsistent with Mr Mathew’s primary position. If HMRC can change horses mid-stream, it must follow that they can rely on non-fulfilment of one of the conditions without having given it a moment’s thought before issuing the challenged assessment.

The provision relating to appeals contained in section 29 (8) also points against Mr Mathew’s construction. That says that an objection to the making of an assessment on the ground that neither of the two conditions mentioned is fulfilled must not be made otherwise than on “an appeal against the assessment”. Necessarily this presupposes that there is an assessment against which an appeal can be mounted; even if the ground of appeal is that the making of the assessment was precluded by non-fulfilment of the conditions. Mr Mathew said that one of the purposes of section 29 (8) was to prevent the taxpayer from challenging the issuing of an assessment by judicial review. That is undoubtedly right. He went on to say that another purpose was to protect the taxpayer against the possibility of substantive appeals when the real battle was over the question whether either or both conditions had been satisfied. He may well be right about that; but in an appropriate case in which that question can be decided as a discrete question, sensible case management would allow a preliminary issue to be determined. In some cases, however (and this was one) the question of satisfaction of the conditions and the underlying tax liability cannot be divorced. A further result of section 29 (8), as it seems to me, is that the taxpayer cannot apply for an order in advance preventing HMRC from making an assessment on the ground that no consideration has been given to the fulfilment of the conditions. This, too, points against Mr Mathew’s construction.

The Upper Tribunal put the point as follows (§ 23):

I agree. I agree also with the FTT’s alternative way of putting the point (§ 97):

In addition as the Upper Tribunal pointed out, Mr Mathew’s argument would lead to conceptual confusion. They said (§ 26):

I cannot see that it matters for the purposes of this appeal whether there is a duty to make a discovery assessment or merely a power. Even without the superimposition of a duty the conceptual confusion remains. Mr Mathew argues that the task of the FTT is to be sure, upon the taxpayer’s challenge to the validity of the assessment, that the responsible HMRC officer applied the tests correctly before he made the assessment. In other words the FTT must be satisfied that there was a “discovery” made on the correct basis (i.e. not on mere suspicion or speculatively) and that fulfilment of the pre-conditions was properly considered on the basis of pertinent evidence. But that does not answer the problem. Suppose that the officer considers the pre-conditions and forms the opinion that the insufficiency is due to negligence on the part of the taxpayer. The taxpayer appeals. The FTT considers that the officer was justified in forming the opinion that he did on the materials available to him, but that on further consideration (and perhaps in the light of further material submitted by the taxpayer) they disagree with his conclusion. If the officer’s opinion is the touchstone then they must uphold the assessment. In that event the result of Mr Mathew’s argument is that the taxpayer has less protection than would be afforded to him if the FTT had to decide whether the pre-conditions were in fact fulfilled or not. If, however, the satisfaction of one or both conditions is to be decided by the FTT as a question of fact on all the evidence, what is the relevance of the officer’s opinion to the question the FTT have to decide? In my judgment Mr Mathew’s stress on the protection given to the taxpayer militates against rather than in favour of the interpretation he propounds.

Mr Mathew retorts that an assessment must either be valid or invalid when it is issued. It cannot have a half life dependent on a subsequent finding by the FTT. The concept of a valid assessment becoming invalid is insupportable. The effect of the Upper Tribunal’s construction is to create a new kind of assessment: one which is subject to further statutory tests, if challenged, and may be voidable. Until that decision, an assessment has either been valid or invalid. That has been the statutory position since the inception of income tax in 1803. A valid assessment creates a defined liability. There is nothing in section 29 to justify the introduction of an assessment of intermediate status. However, in my judgment Mr Mathew’s interpretation of section 29 does not bear out this robust submission. Consider again the case of the officer who carefully considers whether the pre-conditions have been satisfied and comes to the conclusion that at least one of them has been. Mr Mathew’s argument would suggest that such an assessment is valid. But now suppose that the FTT disagrees with him, and allows the taxpayer’s appeal. Surely the assessment has now become invalid; or perhaps never was valid in the first place. Mr Mathew’s retort was that success for the taxpayer in front of the FTT would result in the discharge of the assessment; and that was not the same as the assessment becoming invalid. But if that submission is right it would mean that a valid assessment could be issued even if neither condition was in fact satisfied, just because a tax inspector thought they were. Yet that contradicts the words of section 29.

Both Mr Mathew and Ms Simler invited us to read the decision of the House of Lords in Scorer v Olin Energy Systems Ltd[1985] AC 645, although neither made oral submissions about it. In that case, following an assessment made by the tax inspector, the taxpayer appealed against the assessment and also produced a computation of profits claiming a deductible loss. The loss had arisen in part of the taxpayer’s business called the “shipping division” while the profits had accrued in part of the taxpayer’s business called the “airbreaker division.” The taxpayer claimed to set off the loss against the profits. The appeal was compromised when the inspector said in writing that he agreed the taxpayer’s computation. The question before the House was whether that agreement precluded the Revenue from raising a subsequent discovery assessment when they changed their mind about the correct tax treatment of the loss. Thus the question concerned the scope of the agreement. That in turn was in effect a question of construction. Lord Keith of Kinkel (who gave the leading speech) made two points. First he said that the material presented in the taxpayer’s computation “was sufficient to bring home to the mind of an ordinarily competent inspector in his position precisely what they were claiming”. Second he said (p. 658) that:

This is a wholly orthodox approach to the construction of any agreement in writing. To paraphrase a well-known statement: the House was ascertaining the meaning that the documents would have conveyed to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the agreement. I cannot see that this case bears on the point we have to decide.

However, for the reasons I have given I consider that both the FTT and the Upper Tribunal came to the right answer for the right reasons. I would dismiss the appeal.

I agree.

I also agree.