On 4 February 2021, the First-tier Tribunal (FTT) rendered its decision in Odey Asset Management LLP and others v HMRC [2021] UKFTT 31 (TC). The case not only provides useful guidance on the taxation of certain incentive arrangements, but it also discusses the validity of HMRC discovery assessments and staleness.
The appeals were made in respect of a mixture of amendments made by HMRC to the appellants’ tax returns on the issue of closure notices and the issue of discovery assessments under TMA 1970 s 29, and an amendment to the partnership’s tax return for the tax year 2011/12 under TMA 1970 s 30B.
Procedurally, s 29(1) and s 30B provide mechanisms for HMRC to issue assessments where the time limit of 12 months to enquire into an individual’s self-assessment return or a partnership tax return has expired, respectively. Sections 29(1) and 30B apply where an HMRC officer discovers a tax insufficiency in the assessment/returns. In such circumstances, HMRC may make an assessment in the amount which, in the officer’s opinion, ought to be charged in order to make good the loss of tax. However, HMRC can issue a discovery assessment only if, inter alia, at the time when HMRC ceased to be entitled to open an enquiry into the return (or issued a closure notice in respect of an existing enquiry), the officer could not reasonably have been expected, on the basis of the information made available to the officer at that time, to be aware of the loss of tax. Further, for any discovery assessment to be valid, as the case law presently stands, it must not become stale by the time the assessment in question is made.
In this case, the FTT, on the facts, accepted the appellants’ argument that s 30B was not the appropriate provision for adjusting the allocation of income between members and should be restricted to adjustments to the total profits of the partnership. This conclusion differs from another recent FTT decision – in HFFX LLP and other v HMRC [2021] UKFTT 36 (TC) of 8 February 2021 – in which the FTT took the view that the insufficiency of tax was in relation to the profit of a separate member, rather than the total profits of the partnership. In HFFX, the FTT decided that those assessments would have been valid, as the power in s 30B to make a partnership assessment does not require the total profit of the partnership to be found to be insufficient; i.e. unlike in Odey, s 30B does allow HMRC to amend a partnership’s statement to reallocate amounts of profit between members.
Although finding on the facts that the amendment issued to the partnership in respect of 2011/12 and the discovery assessments issued to certain members in respect of 2011/12 and 2013/14 were invalid, the FTT rejected the argument that the discovery assessments were stale given that HMRC made the discovery at a time when the officer was still weighing the strength of the arguments and working out the precise tax charge for each member. The FTT stated staleness ‘is not just a question of simply how much time has elapsed between the discovery and the issue of the assessments and whether the assessments could have been made sooner. The status of discussions and awareness of the likely issue of the assessments must be a relevant factor in assessing whether the issue remains “live” or has becomes “stale”’.
By the time the discovery assessments were made and issued, HMRC was sufficiently engaged with the appellants, requesting clarifications and additional information from them, that the appellants must have been aware of the ongoing issues in relation to their tax position and that, if these were not resolved, further assessments would be issued. The FTT, however, made it clear that there is a difference between HMRC forming a view of insufficiency of tax and HMRC requesting information to further develop its view (already formed) about such insufficiency. Demonstrating the difference rests on detailed proof, such as email correspondence between HMRC and taxpayers, the witness evidence presented, as well as the cross-examination during the hearing which brought to light the rationale behind HMRC actions pre-issuing assessments. Further, discovery requires the detection of an insufficiency of tax, rather than a detailed calculation of what the insufficiency is.
The FTT’s decision in Odey, when read alongside HFFX, emphasises the number of challenges still remaining in the application of tax administration rules to partnerships, in particular over the ability to raise discovery assessments by HMRC. Further, although HMRC does not accept, in principle, that staleness should play any role in such a case, it accepts that there is, at present, case law binding on the FTT that staleness operates as a ground of invalidity, even if the assessment is made in time.
On 4 February 2021, the First-tier Tribunal (FTT) rendered its decision in Odey Asset Management LLP and others v HMRC [2021] UKFTT 31 (TC). The case not only provides useful guidance on the taxation of certain incentive arrangements, but it also discusses the validity of HMRC discovery assessments and staleness.
The appeals were made in respect of a mixture of amendments made by HMRC to the appellants’ tax returns on the issue of closure notices and the issue of discovery assessments under TMA 1970 s 29, and an amendment to the partnership’s tax return for the tax year 2011/12 under TMA 1970 s 30B.
Procedurally, s 29(1) and s 30B provide mechanisms for HMRC to issue assessments where the time limit of 12 months to enquire into an individual’s self-assessment return or a partnership tax return has expired, respectively. Sections 29(1) and 30B apply where an HMRC officer discovers a tax insufficiency in the assessment/returns. In such circumstances, HMRC may make an assessment in the amount which, in the officer’s opinion, ought to be charged in order to make good the loss of tax. However, HMRC can issue a discovery assessment only if, inter alia, at the time when HMRC ceased to be entitled to open an enquiry into the return (or issued a closure notice in respect of an existing enquiry), the officer could not reasonably have been expected, on the basis of the information made available to the officer at that time, to be aware of the loss of tax. Further, for any discovery assessment to be valid, as the case law presently stands, it must not become stale by the time the assessment in question is made.
In this case, the FTT, on the facts, accepted the appellants’ argument that s 30B was not the appropriate provision for adjusting the allocation of income between members and should be restricted to adjustments to the total profits of the partnership. This conclusion differs from another recent FTT decision – in HFFX LLP and other v HMRC [2021] UKFTT 36 (TC) of 8 February 2021 – in which the FTT took the view that the insufficiency of tax was in relation to the profit of a separate member, rather than the total profits of the partnership. In HFFX, the FTT decided that those assessments would have been valid, as the power in s 30B to make a partnership assessment does not require the total profit of the partnership to be found to be insufficient; i.e. unlike in Odey, s 30B does allow HMRC to amend a partnership’s statement to reallocate amounts of profit between members.
Although finding on the facts that the amendment issued to the partnership in respect of 2011/12 and the discovery assessments issued to certain members in respect of 2011/12 and 2013/14 were invalid, the FTT rejected the argument that the discovery assessments were stale given that HMRC made the discovery at a time when the officer was still weighing the strength of the arguments and working out the precise tax charge for each member. The FTT stated staleness ‘is not just a question of simply how much time has elapsed between the discovery and the issue of the assessments and whether the assessments could have been made sooner. The status of discussions and awareness of the likely issue of the assessments must be a relevant factor in assessing whether the issue remains “live” or has becomes “stale”’.
By the time the discovery assessments were made and issued, HMRC was sufficiently engaged with the appellants, requesting clarifications and additional information from them, that the appellants must have been aware of the ongoing issues in relation to their tax position and that, if these were not resolved, further assessments would be issued. The FTT, however, made it clear that there is a difference between HMRC forming a view of insufficiency of tax and HMRC requesting information to further develop its view (already formed) about such insufficiency. Demonstrating the difference rests on detailed proof, such as email correspondence between HMRC and taxpayers, the witness evidence presented, as well as the cross-examination during the hearing which brought to light the rationale behind HMRC actions pre-issuing assessments. Further, discovery requires the detection of an insufficiency of tax, rather than a detailed calculation of what the insufficiency is.
The FTT’s decision in Odey, when read alongside HFFX, emphasises the number of challenges still remaining in the application of tax administration rules to partnerships, in particular over the ability to raise discovery assessments by HMRC. Further, although HMRC does not accept, in principle, that staleness should play any role in such a case, it accepts that there is, at present, case law binding on the FTT that staleness operates as a ground of invalidity, even if the assessment is made in time.
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