Discovering that something is stale is usually accompanied by disappointment. We have all looked forward to a biscuit or a piece of cake with nice cup of tea only for our hearts to sink when we discover the intended tasty treat has gone stale. Imagine how much more disappointing it would be if you were HMRC and discovered tax liabilities of £87m but were told by the Tribunal that the assessments raised were stale and consequently invalid! That is what the Tribunal ruled in the Hargreaves case in April and no doubt a lot of tea will be required for HMRC to swallow that huge dried up piece of Garibaldi.
Discovery
The point of law concerns the discovery provisions within Section 29 Taxes Management Act. The legislation allows a Revenue Officer to make an assessment if broadly he or she “discovers” that income has not been assessed or a claim to relief has become excessive. There have been many cases in which the question of what constitutes a discovery has been examined. Essentially, a Revenue Officer must be able to show that they did not have the necessary information to be able to understand that the liability shown in taxpayer’s return was insufficient.
Mr Hargreaves
The appeal against HMRC’s assessments by Mr Hargreaves were on the grounds that no discovery had been made but also concerned a separate and specific point: how long can HMRC wait after making a discovery before raising an assessment. There is no statutory limit written into the legislation but the Courts have considered this issue recently. In simple terms, the Courts have questioned whether something can still be “discovered” once the information has been with HMRC for a length of time.
Mr Hargreaves was the owner and chairman of Matalan. He filed income tax returns on the basis that he was not resident in the UK in years when he sold shares and received dividends. His advisors relied on HMRC’s published guidance on the number of days a non-resident person could spend in the UK without becoming UK tax resident, in the days before the statutory residence test. HMRC made enquiries and decided that Mr Hargreaves could not rely on the day counting test in HMRC’s guidance and that he had been resident in the UK. The effect of making him UK tax resident would have been to bring £87million of tax into charge in the UK.
The Tribunal considered the basis on which the return was made and agreed that it was incorrect; HMRC had discovered that income should be charged to income tax in the UK. However, the Tribunal concluded that the Revenue Officer had made that discovery in November 2004 but did not make an assessment until January 2007 over two years later. This delay meant that the discovery was stale and therefore the assessment was invalid. The Tribunal referred to Patullo v R & C Commissioners (2016), in which the Upper Tribunal ruled that a discovery would become stale after 18 months.
The question of staleness was also considered in the recent residence case J Charman v RCC, where some of the assessments under appeal were set aside for this reason. See our earlier newsletter
What does this mean?
The case does not affect HMRC’s ability to recover tax where it has opened an enquiry into a specific return and is able to amend a self-assessment upon completion of its enquiry. The assessing power in these circumstances does not involve a section 29 TMA “discovery”. However, there will be cases where HMRC has made enquiries into one or more years in respect of a particular issue or specific transactions but has not opened an enquiry into a tax return within the required time limit. In these cases, HMRC must now keep an eye on not only the time limits for making an assessment but also on the time that has elapsed between making a discovery and raising an assessment.
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