Mark Campbell v The Commissioners for HMRC

HMRC appealed on the basis that the FTT erred in law by applying the wrong test in determining whether Mr Campbell was trading, and that on the facts, if the FTT had applied the correct test, it would have reached the conclusion that he was trading.

Ms Inglis said that the ordinary meaning of “trade” is a commercial operation whereby a person provides goods or services to customers for reward. Section 989 of the Income Tax Act 2007 extends that meaning to include “any venture in the nature of trade”. The identification of a trade requires an evaluation of all the facts in light of the framework established by case law. The so-called “badges of trade” are helpful indicators of trading, but are not to be treated as a checklist and no single badge is decisive: Marson v Morton [1986] STC 463 (“Marson v Morton”) .

In this case, said Ms Inglis, the FTT provided three reasons for its decision. These were the absence of any connection between Mr Campbell’s activities and an existing trade; the absence of evidence to support a finding that Mr Campbell had engaged in a similar activity over a protracted period of time, and the fact that Mr Campbell was not a professional property developer. The first factor entailed the FTT focussing on one badge of trade to the exclusion of all others, effectively elevating this factor to the status of a pre-condition for the existence of a trade. The second and third factors were not relevant to trading status. As a result, the FTT erred in law by evaluating the facts according to the wrong framework. This was an error of principle. Ms Inglis said that HMRC’s appeal was not a challenge based on Edwards v Bairstow [1956] AC 14 (“Edwards v Bairstow”) to the FTT’s findings of fact, but was an assertion that the FTT had not applied to the facts the correct statutory and case law framework.

If account is taken of all relevant facts found by the FTT, argued Ms Inglis, then the preponderance of factors pointed towards trading, and if the FTT had applied the correct legal test it would have reached the conclusion that Mr Campbell was trading.

For Mr Campbell, Mr Gordon emphasised the guidance given by the Upper Tribunal in Jerome Anderson v HMRC [2018] UKUT 0159 (TCC) to the effect that an appellate tribunal should only interfere with an FTT finding as to the existence of a trade if the FTT has made an error of principle. HMRC’s argument as to the “three reasons” given by the FTT for its decision was based on taking one paragraph of the Decision ([77]) in isolation. The FTT correctly directed itself as to the law, including the direction in Marson v Morton that the badges of trade were simply one step in the analysis. The reference to the duration of Mr Campbell’s activities was a permissible finding in building up a picture, and did not mean that the FTT thought that a short-term activity could not constitute a trade. In any event, the overall facts did not point to Mr Campbell’s activities being a trade.

The principles to be applied in determining whether activities amount to a trade for income tax purposes are well-established. We did not detect any material disagreement between the parties on those principles. In Eclipse Film Partners No 35 LLP v HMRC [2014] EWCA Civ 95 (“Eclipse”), the Court of Appeal said this, at [114]:

In brief summary, the badges of trade were described in Marson v Marton as follows:

A helpful analysis of the leading authorities was undertaken by the Court of Appeal in Ingenious Games LLP v HMRC [2021] EWCA Civ 1180. That analysis referred (Footnote: ¹) to the following observations of Sir Terence Etherton C in Eclipse:

The FTT considered this issue under a section headed “Was the repeated activity by the Appellant trade activity?”. It set out the arguments made by HMRC, that the properties were bought, sold and redeveloped at a profit, acquired for the purpose of generating a profit, that any residential use was purely incidental, and that all of the properties had been modernised. So, the FTT had those submissions in mind when it set out on its discussion.

The FTT referred to Macmahon & MacMahon v IRC [1951] 32 TC 311 as demonstrating that the fact that a property has been used as a residence is not fatal to a trading argument. It then set out the statutory definition of trade, and referred to the badges of trade. In relation to the badges of trade, the FTT pointed out the significance of repeated transactions which was discussed in Pickford v CIR [1927] 13 TC 251. It noted that modification of an asset is a badge of trade, but “by itself, that is not enough”. It then discussed cases dealing with other badges such as the nature of the asset; the source of finance, and the length of ownership. The FTT continued by setting out the badges of trade described in Marson v Marton, and noted that they were not to be used as a checklist.

At [63]-[78] the FTT then considered the four properties in question, which it noted had produced profits before expenses of £263,000. It stated at [67]:

The FTT then made various findings of fact in relation to the four properties, which were largely adverse to Mr Campbell or did not accept his explanations: [68]-[75].

The FTT set out its conclusions at [76]-[78]:

It is in our opinion evident when the FTT’s decision is considered as a whole that the FTT did not, as HMRC asserted, simply give three reasons for their decision, or treat connection to an existing trade as a pre-condition to trading status. The FTT correctly directed itself as to the law, and made a number of detailed findings relevant both to the badges of trade and to the more impressionistic approach to the existence of a trade left open by Eclipse and Ingenious Games. It is tolerably clear that, read together, at [76] and [77] the FTT is focussing on profit generation, length of ownership, modification and connection to an existing trade as the most relevant factors in its analysis. It sets out its conclusions at [76] that while modification of the properties resulting in a profit is indicative of trading, the generation of profit and length of ownership, while normally pointing towards trading, in this case did not. It would have been preferable if the FTT had spelt out why it considered that they did not point to trading on the facts, but we infer that the FTT accepted Mr Campbell’s evidence (which it had described) as to at least some of the reasons for the relatively short length of ownership of all but the first of the properties.

At [77], the FTT then identified factors which it considered pointed away from a trade. We do not consider that any of those factors can be said to be irrelevant, and, as we have explained, the authorities establish that a “checklist” approach based on the badges of trade is not necessary.

At [78], the FTT did not accurately describe the decision in Salt v Chamberlain. In fact, it was one of the taxpayer’s arguments in that case that the commissioners had erred by applying a rule that an individual could never trade in securities for tax purposes, but it was held that this had not been the basis of the commissioners’ decision. However, it was made clear in Ingenious Games that in order to amount to an error of law, a tribunal’s error must have been material to its decision as to the existence of a trade. Here, the FTT had given its reasons for its decision before its gratuitous reference to Salt v Chamberlain, and in concluding [78] by stating “Connection with an existing trade is a relevant consideration”, the FTT made no error. Therefore, we do not consider that this was a material error by the FTT in reaching its decision.

In concluding as it did at [77], the FTT may well have approached the trading question differently from the way in which we, or a differently constituted FTT, might have approached it. However, it is made abundantly clear by the Court of Appeal’s reversal of the Upper Tribunal’s decision in Ingenious Games regarding the FTT’s finding as to the trading question that that is not the test in this appeal. The test is whether the FTT made an error of principle or whether a conclusion that Mr Campbell was trading was the only reasonable conclusion for a tribunal to have reached: Eclipse at [113]. The weight to be given to a particular factor, as long as it was not irrelevant, was a matter for the FTT, and is not for this Tribunal to second-guess. That is patently so where, as here, that factor (connection to an existing trade) was a conventional badge of trade.

In conclusion, we find that the FTT’s decision on this issue was one which involved no error of principle and which was within the range of decisions open to it. HMRC’s cross-appeal is therefore dismissed.

We move on to the world of CGT.

The Upper Tribunal (Judge Herrington) granted Mr Campbell permission to appeal on the ground that “the FTT has wrongly discounted the application of section 222(8) [TCGA] to the facts of the case”.

There is no appeal against the FTT’s finding that none of the properties benefitted from the “main residence” exemption in section 222(1).

HMRC raised two issues regarding the scope of this ground of appeal.

First, section 222(8) requires both that the accommodation in which the taxpayer lives was provided by reason of employment, and also that the taxpayer intended to occupy the property disposed of as his only or main residence. Ms Inglis argued that Ground 1 did not extend to a challenge to the FTT’s finding on the latter issue. In our opinion, that would be a highly curious result, because it would make little sense to grant permission on terms which meant that even if the taxpayer succeeded, the FTT’s finding that section 222(8) was not available would be undisturbed. Ms Inglis confirmed that that was indeed HMRC’s position. Having considered the application for permission to this Tribunal, we are satisfied that it extends to all aspects of the exemption in section 222(8).

Second, before the FTT Mr Campbell conceded that he could not benefit from the main residence exemption in section 222(1) in relation to 2 Bramshill Close. Ms Inglis said that he could not now seek to argue for the first time in this appeal that he was exempt from CGT on the disposal of that property on the alternative basis of the exemption in section 222(8). Mr Gordon accepted that the section 222(1) point had been conceded, but argued that the FTT had put the section 222(8) issue “in play” in relation to 2 Bramshill Close by considering and making findings as to Mr Campbell’s intentions in relation to all four properties. We consider this point below when we deal with the disposition of Mr Campbell’s appeal on this ground.

Mr Gordon said that the exemption in section 222(8) turns on two separate tests, namely:

Mr Gordon argued that the FTT did not address the statutory definitions of JRA and disregarded the unchallenged evidence on behalf of Mr Campbell which demonstrated that those tests were met on the facts. In particular, the FTT wrongly discounted the medical evidence as to the JRA issue, and the written evidence was not challenged. The FTT wrongly assumed that because Mr Campbell was living in “the family home” or what he referred to as “home” it could not fall within the statutory definition. The FTT also erred in misapplying the “intention” requirement in section 222(8), and again ignored the unequivocal and unchallenged evidence. The FTT referred to “the nature, quality, length and circumstances of any occupation relied on”, but that confused the test of intention with that of actual occupation as a main residence. In reaching its decision on intention, the FTT focussed on actual occupation, ignored material factors and took into account immaterial factors.

For HMRC, Ms Inglis submitted that this ground of appeal amounted to a series of challenges to the facts found by the FTT, based on Edwards v Bairstow, which did not satisfy, or even engage with, the very high threshold for such a challenge. She argued that Mr Gordon’s invitation to the Tribunal to reconsider large swaths of evidence as if it were the first-instance decision maker was simply impermissible.

In relation to whether Mr Campbell was living in JRA at the times of the disposals, Ms Inglis said that the FTT was entitled to discount the medical evidence and to take into account that he was living in “the family home”. The other facts referred to by the FTT in determining this issue were all relevant and material. In relation to the intention element of the test, the FTT gave full and detailed consideration to this issue in relation to each property. Contrary to Mr Gordon’s assertions, said Ms Inglis, Mr Campbell’s evidence was neither unequivocal nor unchallenged.

The exemption from CGT provided by section 222(8) treats as a person’s only or main residence (and therefore exempt under section 222(1)) a dwelling-house owned by that person during a period in which he satisfies two conditions. The first is that he resides “in living accommodation which is for him job-related” (the “JRA condition”). The second is that he “intends in due course to occupy the dwelling-house…as his only or main residence” (the “Intention condition”).

Living accommodation is “job-related” if it is provided by reason of the person’s employment and (relevantly in this appeal) (1) it is necessary for the proper performance of the duties of employment that the employee should reside in that accommodation, or (2) the accommodation is provided for the better performance of the duties of employment, being an employment in which it is customary for employers to provide accommodation for employment: section 222(8A)(a)(i) and (ii).

The FTT stated at [85] that it would first consider the JRA issue, before considering the main residence exemption. The first section, headed “Does the Appellant reside in JRA?”, is at [86]-[97]. It is followed by a longer section headed “Does PRR apply?”, at [98]-[128].

The first section deals solely with the JRA condition in section 222(8), and says nothing about the Intention condition. It concludes at [97]:

The section which follows does make a number of findings as to Mr Campbell’s intentions in relation to all four properties. However, it makes those findings not in relation to the Intention condition in section 222(8), but (as its heading suggests) in relation to the main residence exemption in section 222(1).

On a straightforward reading, the FTT made no findings in relation to the Intention condition in section 222(8), because it did not need to do so, having found that that the JRA condition was not satisfied. On the other hand, in the section dealing with section 222(1), the FTT considered and made detailed findings as to intention, and both parties appear to have assumed in this appeal that those findings apply to the Intention condition in section 222(8).

Notwithstanding the parties’ assumption, we consider that the natural and better reading of the relevant sections of the FTT’s decision is that the FTT did not intend to, and in fact did not, make any finding whether the Intention condition was satisfied. That is what the FTT was saying at [97]: having found that the JRA condition was not satisfied, it was unnecessary to consider whether the remainder of section 222(8) was satisfied. That is why there was no consideration of the Intention condition in the section of the judgment dealing with section 222(8). The reason why Mr Campbell’s intentions are considered, and findings made, in the section dealing with section 222(1) is in our view presumably that while it is actual occupation which is most relevant to section 222(1), the authorities indicate that, in the absence of any statutory definition of “only or main residence”, intention or expectation is also relevant. The leading authority in that regard is the decision of the Court of Appeal in Goodwin v Curtis [1998] STC 475, in describing the “quality of occupation” which must be assessed in considering the “only or main residence” definition as being determined in part by the expectation of permanence and continuity of occupation (Footnote: ²).

The result of the FTT’s approach is that while there is no finding as to the Intention condition in section 222(8), there are findings of fact as to Mr Campbell’s intentions as regards the four properties in the context of section 222(1). We will consider what that means for this ground of appeal when we have considered the appeal under this ground against the FTT’s finding on the JRA condition, since if we dismiss the appeal on that issue, the Intention condition would become academic.

Living accommodation must be provided by reason of a person’s employment as part of the definition of JRA. Although it was not referred to by the FTT, for this purpose “employment” has the meaning given by Chapter 2 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”): Section 222(8D) TCGA. Under section 66 ITEPA, “employment” broadly means an employment the earnings from which are taxable as general earnings under ITEPA.

So, the first question for the FTT was whether Mr Campbell had a relevant employment. Mr Campbell’s case was that he was employed as a carer for his father, who (it was common ground) suffered from a serious medical condition. The issue which the FTT had initially to determine was, we assume, whether such responsibilities as Mr Campbell had arose under an employment. We would have expected this question typically to have involved consideration of whether Mr Campbell had an enforceable contract for caring responsibilities, and with whom, and what the terms of that contract were. In fact, the FTT made no findings as to any of those issues and referred to no evidence on those issues. However, in discounting medical evidence which referred to Mr Campbell being “employed as [his father’s] carer since April 2010”, the FTT did state (at [92]) that this reference was unlikely to have resulted from “independent knowledge that there was a legally enforceable contract of employment in place”.

The phrase “legally enforceable contract of employment” in [92] might be thought to refer to the existence of an employment contract. However, although neither party had said so in their skeleton arguments, we were told in the hearing that in fact it was common ground that Mr Campbell did have a contract of employment, with the relevant authority, to care for his father. We find it inexplicable that the FTT made no findings on that issue, but we have proceeded on the basis of the common ground between the parties, and the absence of any challenge by HMRC to the existence of an ITEPA employment.

On that basis, under section 222(8A) TCGA, whether or not the family home in which Mr Campbell resided during the relevant period was JRA turned on two questions. First, was the living accommodation in the family home “provided for him by reason of his employment”? Second, if so, was it necessary for the proper performance of the duties of the employment that Mr Campbell should reside in that living accommodation?

As regards the second question, Mr Gordon pointed out that the second requirement could alternatively be satisfied (under section 222(8A)(a)(ii)) if the living accommodation was provided for the better performance of the employment duties and the employment was of a kind in which the provision of such accommodation for employees was customary. We agree, but it does not appear from the Decision that that was an alternative basis which was considered by the FTT at any stage, or as to which the FTT referred to any evidence regarding what was “customary”: [86]. Therefore, we do not consider that it can properly form an element of an appeal against the FTT’s decision, and we consider only the “necessary for the proper performance” alternative.

We turn to the first question, namely whether the family home in which Mr Campbell resided and in which he carried out his caring responsibilities was “provided for him by reason of his employment”. As we have said, the FTT considered that issue at [86]-[97]. At [86], the FTT appears to have wrongly conflated the first and second elements of section 222(8A):

It appears from this introductory paragraph that the FTT may have thought that the “by reason of employment” test was whether it was necessary to reside in the accommodation to perform the duties.

The FTT considered medical evidence submitted on behalf of Mr Campbell, and concluded that all it did was to confirm the medical position and needs of Mr Campbell’s father, and that this care was being provided by Mr Campbell: [89]. The FTT placed weight on the references in that evidence to the living accommodation as “the family home”: [90], [91]. The FTT considered that the fact that Mr Campbell bought 10 Woodhouse Close with the initial intention of moving into that property with his girlfriend was inconsistent “if he was under a contract of employment to provide round the clock care”: [92]. The FTT appears to have found that Mr Campbell’s parents would not require him to leave their property if he had nowhere else to reside and that this “would not be so if the accommodation were JRA as an employer would be under no obligation to continue to provide accommodation once the employment relationship has come to an end”: [93]. The FTT referred to Mr Campbell’s evidence that he was “living at home” as not sitting well with the accommodation only being provided because of care needs: [94], [95]. At [96], the FTT stated:

The FTT set out its conclusion at [97]:

The issue being considered by the FTT was whether the accommodation in which Mr Campbell was residing (the family home) was provided “by reason of [the] employment” which (it was apparently common ground) existed for his caring responsibilities in relation to his father. It is striking that the FTT did not consider what the words “by reason of employment” meant in this context as matter of law. In our opinion, there is nothing to displace the assumption that they should bear the same meaning as they have in the other contexts in which they occur in ITEPA, such as the codes dealing with securities or benefits acquired by reason of employment. There are many decisions on the meaning of “by reason of employment”, including in particular Wicks v Firth 56 TC 318. In John Charman v HMRC [2021] EWCA Civ 1804 (“Charman”) the Court of Appeal said this about the test, at [47]:

The test can give rise to difficult questions where there may be more than one causative effect of the relevant benefit.

In Charman, The Court of Appeal emphasised that the FTT’s evaluation of this issue can only be challenged on appeal on limited grounds, at [46]:

On 25 October 2023, the Supreme Court released its decision in HMRC v Vermilion Holdings Ltd [2023] UKSC 37. Although the appeal was determined on a different ground, the decision does summarise at [11]-[12] the meaning of “by reason of employment”.

In this case, we consider that unfortunately the FTT did misdirect itself in law as to the applicable test. Not only did it not consider the meaning of the words “by reason of employment”, it appears from [86] that it may have considered the test to be whether it was necessary for Mr Charman to reside in the family home in order to perform his employment duties. That is a materially different, and stricter, test, and is indeed an additional requirement imposed by the definition in section 222(8A). Further, its conclusion, at [97], was that the accommodation was not provided “for the purposes of employment”, which again is a different question. In relation to the factors taken into account by the FTT in reaching its decision (summarised at paragraph 75 above), it is difficult to see that several of these are material to the test(s) enunciated in Wicks v Firth, and the factor relied on by the FTT at [96] is in our view clearly irrelevant.

If one approaches the question by asking, as suggested by Oliver LJ in Wicks v Firth, what it was that enabled Mr Campbell to enjoy the ability to reside in the family home, we do consider that the FTT was justified in considering whether this was merely a “family arrangement”. However, we agree with Mr Gordon that there is nothing in the JRA condition which precludes accommodation in a family home from being provided by reason of employment. We also agree with Mr Gordon that the medical evidence, discounted by the FTT, in fact was directly relevant to the second question arising under the JRA condition, namely whether the accommodation was necessary for the proper performance of the employment duties.

We have concluded that the FTT erred in law in its conclusion that the accommodation lived in by Mr Campbell was not provided by reason of employment, because it failed to direct itself as to the correct test, and took into account irrelevant factors.

However, as we have explained, in order to succeed on Ground 1, Mr Campbell would also need to establish that he satisfied the Intention condition. We have set out above our conclusion that, while the FTT made no finding on this issue in the context of section 222(8), it clearly did make findings as to Mr Campbell’s intentions in the context of section 222(1). Those findings appear unhelpful to Mr Campbell’s case in relation to the Intention condition. However, we do not consider that those findings can simply be directly read across, and therefore considered in this appeal, in relation to section 222(8). That is because those findings were made in relation to a different question, namely a multi-factorial evaluation of whether the properties qualified as Mr Campbell’s only or main residence. The Intention condition in section 222(8) looks solely at intention, so the intermingling of findings as to intention with findings as to actual occupation in the FTT’s conclusions relating to section 222(1) cannot be safely transposed to amount to a clear finding in relation to section 222(8).

There is another difficulty with evaluating the FTT’s findings as to intention. The Decision records at [13] that neither party had “requested an oral hearing”. Given that the hearing took place at a time when Covid was still a significant concern, it is not surprising that the parties did not want a hearing in person. However, it was clear that questions of fact and evidence would be central to the appeal, particularly as regards the Intention condition and the challenge to HMRC’s finding of deliberateness in relation to the penalties. Against that background, we are surprised that the FTT did not exercise its discretion to direct a video hearing, so that Mr Campbell and the witnesses could be examined and cross-examined, and questions asked by the tribunal. While we are satisfied that there was no procedural error in determining the appeal on the papers, this was sub-optimal given the central importance of contentious issues of fact.

We have found that:

Since we have found that the FTT’s decision on this issue involved an error of law, we may, but need not, set that decision aside. If we do set that decision aside, we may remake it or remit it to the FTT with instructions for its reconsideration: section 12 Tribunals, Courts and Enforcement Act 2007.

We consider that the error was material, so the decision should be set aside. Regretfully, we have concluded that we should remit this issue to the FTT. The right question was not asked by the FTT when it looked at the “by reason of employment” issue, and questions of Mr Campbell’s intentions in relation to the properties disposed of must be considered by reference to section 222(8), not section 222(1). Both of those issues turn on findings of fact which we are not in a position properly to make, and in respect of which there has been no oral hearing of the evidence.

In remitting this issue, we consider it sensible and in accordance with the overriding objective for the application of section 222(8) to be determined by the FTT in relation to all four properties in question, including 2 Bramshill Close.

We consider that it would be preferable for a differently constituted FTT, taking a fresh approach to the issues, to determine the remitted appeal.

In reconsidering this issue, we instruct the FTT to determine, by way of oral hearing (either in person or remote, as the FTT directs), whether Mr Campbell was exempt from CGT on any or all of the relevant disposals under section 222(8), and in so doing to determine :

The reconsideration shall be on the basis of the findings of primary fact made in the Decision, although not inferences drawn from primary fact. Each party has permission to adduce further evidence.

The Assessments for 2012-13 and 2014-15 were issued by HMRC under section 29 TMA. Section 29, so far as material, provided as follows for the relevant periods:

HMRC’s position was that since Mr Campbell did not submit tax returns as required under section 7 TMA for those years, the normal time limits for issuing an assessment were extended by section 36(1A) TMA as follows:

Ground 2 of Mr Campbell’s appeal asserts that the FTT erred in law because the burden was on HMRC to prove (1) that HMRC had made a discovery of an insufficiency of tax and (2) that Mr Campbell had failed to submit tax returns under section 7, and the FTT had no evidence, or at least referred to no evidence, as its basis for concluding that HMRC had discharged its burden as regards these conditions. As a result, the Assessments had not been proved to be valid and could not stand.

Mr Gordon argued that the FTT’s only reference to the procedural validity of the Assessments was at [131] and [133], and to some extent the paragraph at [150] dealing with penalties, and these contained no discussion of the law or the evidence on which the FTT had relied. He said that HMRC had provided no evidence that they had made a discovery or that Mr Campbell had failed to comply with section 7.

Ms Inglis argued that the FTT clearly understood that the burden in relation to procedural validity was on HMRC. Moreover, she said, HMRC advanced a clear and positive case in this regard before the FTT, supported by the witness evidence of Mr Malcolm Weir.

The burden of establishing that HMRC made a discovery of an insufficiency of tax, and that Mr Campbell had not complied with section 7 so that the extended time limit applied, lay with HMRC. The FTT had to be satisfied that HMRC had discharged the burden as to both those issues.

We consider first the FTT’s findings and then the case put forward by HMRC to support those findings.

We firmly reject Mr Gordon’s contention that the only relevant passages in which the FTT discussed these issues were [131] and [133]. The relevant sections of the Decision are in fact as follows:

Earlier in the Decision, the FTT had summarised HMRC’s statement of case as including the following, at [14(18)]:

At [20], the FTT stated:

 So, the FTT appreciated that the burden of proof lay with HMRC on both procedural issues. The FTT addressed those issues, and found that there had been a discovery ([134]) and that no returns had been made as required by section 7 ([133]).

The argument that the FTT had no evidence to reach these conclusions is not accepted. HMRC’s Statement of Case included statements that both conditions had been satisfied (as recorded at [14(18)]). In fact, the Statement of Case discusses the discovery position in some detail. As regards the witness statement of Malcolm Weir produced on behalf of HMRC, Mr Weir was the HMRC decision-maker in relation to the matters in question. His witness statement addressed both the existence of a discovery on the facts, and the failure to notify tax liability under section 7, and explained why in Mr Weir’s view both conditions were satisfied, so that the Assessments were validly issued. Mr Campbell did not seek to challenge or question the failure to comply with section 7.

Mr Gordon suggested that there was some doubt about whether Mr Weir’s witness statement had been before the FTT, and indeed whether it had been received by Mr Campbell. We gave HMRC permission to produce evidence relevant to those issues, which they duly did, from which we are fully satisfied both that the witness statement was part of the evidence before the FTT, and that it had been provided before the hearing to Mr Campbell (who had in fact given written comments on it).

We have concluded that the FTT made no error of law in relation to the issues of whether HMRC made a discovery and the extended time limit in section 36(1A)(b). The FTT correctly directed itself as to the law, and made findings on the basis of the evidence which it was entitled to make.

The appeal under Ground 2 is dismissed.

The Penalties were imposed on Mr Campbell under Schedule 41. The aggregate penalties were substantial, exceeding £40,000.

Under paragraph 1 of Schedule 41, a penalty is payable for failure to notify chargeability to tax under section 7 TMA, unless the taxpayer can show that he has a reasonable excuse for the failure. The penalty is expressed as a percentage of potential lost revenue, and varies depending on whether the failure was “deliberate and concealed”, “deliberate but not concealed”, or neither deliberate nor concealed. Reductions are available depending on whether there has been disclosure by the taxpayer, and whether any such disclosure was prompted or unprompted. HMRC also have power to reduce a penalty for “special circumstances”.

In this case, the penalties were calculated by HMRC on the basis that the failure to notify was deliberate but not concealed, and that disclosure was prompted.

Ground 3 of Mr Campbell’s appeal is that the FTT erred in law in deciding that the failure to notify in this case was deliberate. Mr Gordon says that the FTT gave no consideration to the meaning of “deliberate” in this context, and in any event had insufficient evidence on which to reach its conclusion. Ms Inglis said that this was again an Edwards v Bairstow challenge which failed to meet the high hurdle, and the FTT was entitled to reach its decision on the evidence before it.

The FTT’s consideration of this issue was contained in the following paragraphs:

The categorisation of Mr Campbell’s failure to notify as deliberate was an important issue for the FTT to consider in relation to the appeal against the penalties. In addition to affecting significantly the maximum potential amount of the penalties, while a finding of deliberateness is not the same as a finding of dishonesty, it clearly signifies a high degree of culpability. In addition, the Schedule 41 regime which was applicable in this case, in contrast to some other codes, does not provide for reduced penalties for a failure to notify which is merely careless rather than deliberate.

It is, therefore, unfortunate that the FTT did not refer to the legislation or to any case law on the meaning of “deliberate”. In HMRC v Tooth [2021] UKSC 17, the Supreme Court said this in relation to the meaning of deliberate inaccuracy in a tax return:

The approach laid down in Tooth is consistent with that previously proposed in Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC) which was approved by the Upper Tribunal in CF Booth Ltd v HMRC [2022] UKUT 217 (TCC). Put simply, in order for HMRC to discharge the burden of demonstrating that an act or omission by a taxpayer was deliberate, they will need to establish to the normal civil standard that the act or omission was intentional; the fact that an act or omission may have been careless, mistaken or stupid is not enough.

In relation to a failure to notify liability to tax, we consider that, broadly, this means that HMRC needed to establish that Mr Campbell was aware of the obligation to notify and chose not to comply even though he could have done so.

The FTT at [147]-[150] gave three reasons for its conclusion that Mr Campbell’s failure to notify was deliberate. The first was that a statement made by Mr Campbell in an email to HMRC “suggests an understanding of CGT”. The second was that he did not keep records. The third was that Mr Campbell did not “make enquiries with HMRC as to the likely tax implications”.

These reasons were insufficient to justify a finding of deliberate behaviour. The second and third reasons might be relevant to a consideration of whether Mr Campbell acted carelessly in not notifying a liability to tax, but, as we have explained, that was not the question before the FTT. The application by the FTT of an incorrect test to the issue is evidenced by the FTT’s statement that Mr Campbell “should have known” that the property disposals would have tax implications; that is not the threshold for deliberateness. As to the first reason, an inference that Mr Campbell understood CGT is insufficient of itself to justify a finding of deliberateness. In any event, this was an inference reached not on the basis of evidence as to Mr Campbell’s intentions at the relevant time but on the basis of a statement in an email which was sent after the periods in respect of which the failure to notify arose.

We have concluded that the FTT erred in law in concluding that the Penalties should be upheld on the basis of deliberate behaviour. The FTT did not properly direct itself as to the applicable legal test to be applied, and did not give reasons which would justify a finding of deliberate failure to notify.

The error was material, and so we set the FTT’s decision on that issue aside. We will deal with the disposition of Ground 3 after we have dealt with Ground 4.

Ground 4 asserts that the FTT failed to consider the quantum of the Penalties and accepted HMRC’s methodology without demur. In particular, Mr Gordon challenged the basis of what appear to have been HMRC’s decisions on the levels of mitigation to be given for disclosure and for co-operation. He argued that the Penalties should have been fully mitigated.

Ms Inglis said that since Mr Campbell did not raise any argument before the FTT concerning penalty mitigation, arguing only that there should be no penalties at all, and since Mr Campbell did not have specific permission to appeal on this ground, he could not now raise that issue in this appeal. In any event, she argued, the penalties imposed were within the permitted statutory range and the reductions were in keeping with HMRC’s published guidance.

We reject Ms Inglis’ argument that Mr Campbell does not have permission to appeal on this ground. It is clearly covered by the terms of Judge Herrington’s grant of permission to appeal.

The entirety of the FTT’s discussion of mitigation of the Penalties was as follows:

This was no more than a factual description of the bases on which HMRC had calculated the level of mitigation. It contained no consideration by the FTT of whether HMRC’s approach was flawed, let alone any reasoning. That may be because, as Ms Inglis said, Mr Campbell did not make specific challenges on the issue of mitigation. However, in deciding (at [152]) to uphold the Assessments and the Closure Notice, the FTT was approving all aspects of HMRC’s methodology in relation to penalty mitigation, but without any consideration of whether it was flawed. The failure to give any reasons on that issue was an error of law.

We cannot properly determine Mr Gordon’s detailed points of criticism in relation to HMRC’s approach to mitigation because the FTT did not make the findings of fact or law which would be necessary for us to do so. Therefore, we cannot properly determine the appropriate level of mitigation.

However, we agree that the FTT erred in not considering or giving any reasons for upholding the level of mitigation of the Penalties. That error was material, and so we set the decision on that issue aside.

We have set aside the FTT’s decisions in relation to the issues of deliberateness and mitigation as regards the Penalties as set out above. We do not consider that we can remake those decisions, because we do not have the evidence and relevant findings of fact which we would need to do so.

We therefore remit these matters to a differently constituted FTT, and in reconsidering these issues, we instruct the FTT to determine, by way of oral hearing (either in person or remote, as the FTT decides):

The reconsideration shall be on the basis of the findings of primary fact made in the Decision, although not inferences drawn from primary fact. Each party has permission to adduce further evidence.

We have dismissed HMRC’s cross-appeal on the trading issue, and Mr Campbell’s second ground of appeal relating to the validity of the Assessments. In relation to Mr Cambell’s other three grounds of appeal, the FTT’s decisions are set aside and remitted for reconsideration by a differently constituted FTT on the following terms:

The reconsideration shall be on the basis of the findings of primary fact made in the Decision, although not inferences drawn from primary fact. Each party has permission to adduce further evidence.