Judgment summary
This is HMRC's appeal against the FTT decision in Harte v HMRC [2024] UKFTT 00493 (TC), released on 30 May 2024 (1). The appeal concerns discovery assessments made under s29 TMA 1970 and the operation of the extended time limits in s36 TMA 1970 (2).
The core legal question was whether, where a single assessment figure for a tax year comprises insufficiencies of tax arising from different errors, satisfying the conduct condition in s29(4) and the time-limit conditions in s36 for one insufficiency validates the assessment as a whole, even if other insufficiencies within it were not brought about carelessly or deliberately, or would otherwise be time-barred (3).
The FTT had concluded that showing one type of conduct for one insufficiency did not allow HMRC to include in the assessment other insufficiencies which did not arise from that type of conduct (4). The Upper Tribunal agreed with the FTT's construction and dismissed HMRC's appeal (4, 51).
Background
Mr Harte was self-employed during the relevant period, providing consultancy services to Tasca Tankers Limited (TTL) and others, along with ad hoc activities including the sale of plant and machinery equipment (5).
Mr Harte's appeal before the FTT included challenges to six discovery assessments issued on 3 July 2018 for tax years ended 5 April 2010 to 2016 (excluding 2014/15, for which HMRC had opened an in-time enquiry and issued a closure notice). The amounts sought ranged from £58,653.84 to £78,682.76 (6).
Four categories of insufficiency were identified: undeclared bank receipts ("Bank Statement insufficiency"); personal expenditure on a corporate credit card treated as income ("Credit Card insufficiency"); capital allowances claimed for a vehicle ("Capital Allowance insufficiency"); and a home-office expense claim ("Deductible Expense insufficiency") (7).
These errors were identified through an enquiry into Mr Harte's 2014/15 tax return, and HMRC concluded similar errors were likely to have occurred in other years he operated as a self-employed consultant with TTL (8).
The FTT found that the Bank Statement insufficiency was deliberate; the Capital Allowance and Deductible Expense insufficiencies were careless; and the Credit Card insufficiency arose despite Mr Harte having taken reasonable care (9).
Core dispute
HMRC argued that once deliberate conduct was established for the Bank Statement insufficiency, HMRC could competently assess under s29(4) for both that insufficiency and the Credit Card insufficiency, even though the latter was not brought about by deliberate or careless conduct, and that the 20 year time limit in s36(1A) applied to the whole assessment (10).
Mr Harte argued the assessments should be reduced to exclude amounts not brought about by deliberate or careless conduct, and that assessments for 2009/10 to 2011/12 should be reduced to exclude amounts brought about carelessly rather than deliberately, since although within the 20 year deliberate-conduct time limit, they fell outside the 6 year careless-conduct time limit (10).
The FTT held it was open to a taxpayer to show that an assessment, while prima facie valid because it included some deliberate insufficiency, was excessive to the extent it also included insufficiencies for which conduct under s29(4) had not been shown or the s36(1) time limit had passed (11).
On appeal, HMRC contended that once deliberate conduct is found for any insufficiency in a year, the assessment for that year is valid as a whole and the 20 year limit applies to all parts of it. Mr Harte argued each distinct insufficiency is its own "case" or "situation" for ss 29 and 36, such that insufficiencies arising despite reasonable care should be excluded entirely, and careless insufficiencies excluded if a separate assessment for them would be time-barred under s36(1) (13).
Court findings
The Upper Tribunal held that s29 is the logical starting point, since without an assessment no question of compliance with time limits arises (23). Both s29(4) and s29(5) refer back to "the situation mentioned in subsection (1)", concerning the objective fact of the undercharge, and this cross-reference concerns the particular loss discovered, not the assessment as a whole (25, 27).
The Tribunal rejected HMRC's reliance on the word "any" in s29(1), noting it must be read alongside the requirement that the amount assessed make good to the Crown "the loss of tax", meaning each situation is relevant to making good the loss of tax arising from it (26). There is no indication that Parliament intended the causal link in s29(4) to be diluted or satisfied "in part", and reading it as if it said "wholly or in part" would add words Parliament did not use (27).
A loss of tax not brought about by deliberate or careless conduct, where s29(5) is not relied on, cannot be validly included in a discovery assessment; there is nothing in the text permitting such a loss to be brought within an assessment by reason of culpable conduct relating to a different loss (28-29).
On s36, the Tribunal found that it presupposes a valid discovery assessment already exists in respect of the relevant loss, and whether HMRC may rely on the extended limits depends on whether the s29 gateway has been passed for that specific loss (31). The word "case" in s36 refers to the insufficiency to which the s29 power relates, not to whatever amounts HMRC aggregate under a single assessment (32). HMRC's construction would give primacy to the time-limit provision over the validity gateway in s29, which the Tribunal rejected as structurally problematic (33).
The Tribunal considered the taxpayer's "£1" example illustrative: it would be an astonishing outcome if an item shown to have arisen despite reasonable care could be assessed twenty years later simply because a different item in the same year involved deliberate conduct (35). HMRC's response, based on the public interest in taxpayers paying the right amount of tax, did not meet these concerns, and reliance on s50(6) TMA to mitigate unfairness missed the point, since the question was what could properly be included within the scope of a discovery assessment in the first place (36).
The Tribunal considered and distinguished Hargreaves CA and Hargreaves UT, finding the relevant statements obiter and not addressing the precise construction issue before it (38-44). It also found that Hurley v Taylor, Johnson v Scott and Hudson v Humbles did not assist, as the two-stage burden analysis in those cases did not preclude a taxpayer from showing that a loss of tax fell outside the permitted scope of the discovery assessment (45-46). The Tribunal placed no significant reliance on Clark v HMRC or the Schedule 24 Finance Act 2007 penalty regime by way of analogy (48-49).
Applying its construction to the facts, the Tribunal held the FTT was entitled to treat the Credit Card insufficiency as outside the permitted scope of the assessments, and to remove the Capital Allowance and Deductible Expense insufficiencies for 2009/10 to 2011/12 as not assessable on a deliberate basis, representing overcharges under s50(6) (50).
Outcome
The Upper Tribunal held that the FTT interpreted the relevant TMA provisions correctly, such that a taxpayer can argue he has been overcharged to the extent that insufficiencies of tax did not meet the culpability conditions in s29(4) TMA and/or the conditions for the extended time limits in s36 were not complied with (50).
The Appellants' appeal was dismissed (51).
Major issues / areas of contention
- Whether, once one insufficiency within a single discovery assessment satisfies the conduct condition in s29(4) TMA 1970, the assessment for that year is valid in its entirety regardless of the conduct behind other insufficiencies within it (3, 17).
- Whether the 20 year time limit in s36(1A) TMA 1970 applies to the whole of an assessment where only part of the loss of tax was brought about deliberately, or whether the applicable time limit must be assessed separately for each insufficiency (3, 10, 19).
- Whether the taxpayer could rely on s50(6) TMA 1970 to argue he was overcharged to the extent that particular insufficiencies did not meet the s29(4) conduct condition or fell outside the relevant time limit under s36 (11, 21).
- The correct construction of the phrase 'the situation mentioned in subsection (1)' in s29(4) and s29(5) TMA 1970, and whether it refers to the assessment globally or to each discrete discovered loss (25, 27, 32).
- The proper interpretation and weight to be given to the Court of Appeal's obiter remarks in Hargreaves v HMRC [2016] EWCA Civ 174 and the Upper Tribunal's obiter remarks in Hargreaves v HMRC [2022] UKUT 34 (38-44).