The recent decision of the First-tier Tribunal in Hargreaves v HMRC [2019] UKFTT 0244 (TC) is yet another example of the taxpayer successfully challenging a discovery assessment issued by HMRC on the basis that the discovery was ‘stale’.
Other recent cases include: Hicks v HMRC [2018] UKFTT 22; Anderson v HMRC [2018] UKUT 159 (TCC); Tooth v HMRC [2018] UKUT 38; Gordon and others v HMRC [2018] UKFTT 307; Beagles v HMRC [2018] UKUT 380 (TCC) and Charman v HMRC [2018] UKFTT 765 (TC).
Put shortly, the concept of staleness is that once HMRC has ‘discovered’ a loss of tax to the Crown it must act within a ‘reasonable’ amount of time if it wishes to issue an assessment.
In Charman, the taxpayer argued that a discovery had become stale as HMRC had been provided with all relevant information during the period in which HMRC could have opened an enquiry into the return. The tribunal made the point that the ‘draconian’ discovery rules were not there to give HMRC a ‘second bite of the cherry’, in circumstances where it had simply failed to utilise its enquiry powers properly.
In Hargreaves, the taxpayer filed his tax returns on the basis that he had ceased to be UK tax resident on 11 March 2000, two months before disposing of shares worth £231m. On 16 January 2004, following a newspaper article published in March 2003 (which alleged that the taxpayer spent three days each week in the UK), HMRC opened an enquiry into his 2001/02 return. HMRC was out of time to open an enquiry into the return for the prior year in which the share disposal occurred, and on 9 January 2007 issued a discovery assessment for £84m in respect of the gain on the share disposal. The taxpayer appealed against the assessment on the basis that it had become stale.
The tribunal rejected HMRC’s argument that it only made its discovery of the taxpayer’s continuing UK tax residence in January 2006, following receipt of a report from the taxpayer’s advisers addressing issues raised by HMRC. This was because the officer’s evidence was that he had not changed his initial view of November 2004 on the taxpayer’s residence status, notwithstanding the information subsequently received. The delay in question, i.e. between March 2003 and January 2006, was deemed by the tribunal to be sufficient to render the discovery ‘stale’ and the taxpayer’s appeal was allowed.
The Court of Appeal heard the appeal in Tooth earlier this month and is due to hear the appeal in Beagles later this year. The Court of Appeal will not be bound by any previous authority in this area, and it is hoped it will provide much needed clarity on this emerging area of the law.
HMRC has come to rely on the discovery assessment provisions a great deal in recent years and has stretched the concept to an ever-expanding variety of circumstances. Clearly concerned by these recent cases, and the potential check on its powers, HMRC has been resolute that the concept of ‘staleness’ cannot be discerned from legislation or case law and does not exist, in the hope of returning this particular genie to its bottle.
If the Court of Appeal rejects HMRC’s position and confirms that discovery assessments can be invalid if they are stale, it is to be hoped that it will provide guidance on when and how a ‘discovery’ is likely to become stale. The time periods considered by the tribunals to date have varied considerably and it is difficult to define the parameters of the principle. The Court of Appeal may, however, decide that every case turns on its facts, a position which, in the light of the fact-specific nature of the discovery rules themselves, seems entirely possible. If so, and given the huge increase in HMRC’s use of its discovery powers, we can expect a significant amount of litigation in this area.
The recent decision of the First-tier Tribunal in Hargreaves v HMRC [2019] UKFTT 0244 (TC) is yet another example of the taxpayer successfully challenging a discovery assessment issued by HMRC on the basis that the discovery was ‘stale’.
Other recent cases include: Hicks v HMRC [2018] UKFTT 22; Anderson v HMRC [2018] UKUT 159 (TCC); Tooth v HMRC [2018] UKUT 38; Gordon and others v HMRC [2018] UKFTT 307; Beagles v HMRC [2018] UKUT 380 (TCC) and Charman v HMRC [2018] UKFTT 765 (TC).
Put shortly, the concept of staleness is that once HMRC has ‘discovered’ a loss of tax to the Crown it must act within a ‘reasonable’ amount of time if it wishes to issue an assessment.
In Charman, the taxpayer argued that a discovery had become stale as HMRC had been provided with all relevant information during the period in which HMRC could have opened an enquiry into the return. The tribunal made the point that the ‘draconian’ discovery rules were not there to give HMRC a ‘second bite of the cherry’, in circumstances where it had simply failed to utilise its enquiry powers properly.
In Hargreaves, the taxpayer filed his tax returns on the basis that he had ceased to be UK tax resident on 11 March 2000, two months before disposing of shares worth £231m. On 16 January 2004, following a newspaper article published in March 2003 (which alleged that the taxpayer spent three days each week in the UK), HMRC opened an enquiry into his 2001/02 return. HMRC was out of time to open an enquiry into the return for the prior year in which the share disposal occurred, and on 9 January 2007 issued a discovery assessment for £84m in respect of the gain on the share disposal. The taxpayer appealed against the assessment on the basis that it had become stale.
The tribunal rejected HMRC’s argument that it only made its discovery of the taxpayer’s continuing UK tax residence in January 2006, following receipt of a report from the taxpayer’s advisers addressing issues raised by HMRC. This was because the officer’s evidence was that he had not changed his initial view of November 2004 on the taxpayer’s residence status, notwithstanding the information subsequently received. The delay in question, i.e. between March 2003 and January 2006, was deemed by the tribunal to be sufficient to render the discovery ‘stale’ and the taxpayer’s appeal was allowed.
The Court of Appeal heard the appeal in Tooth earlier this month and is due to hear the appeal in Beagles later this year. The Court of Appeal will not be bound by any previous authority in this area, and it is hoped it will provide much needed clarity on this emerging area of the law.
HMRC has come to rely on the discovery assessment provisions a great deal in recent years and has stretched the concept to an ever-expanding variety of circumstances. Clearly concerned by these recent cases, and the potential check on its powers, HMRC has been resolute that the concept of ‘staleness’ cannot be discerned from legislation or case law and does not exist, in the hope of returning this particular genie to its bottle.
If the Court of Appeal rejects HMRC’s position and confirms that discovery assessments can be invalid if they are stale, it is to be hoped that it will provide guidance on when and how a ‘discovery’ is likely to become stale. The time periods considered by the tribunals to date have varied considerably and it is difficult to define the parameters of the principle. The Court of Appeal may, however, decide that every case turns on its facts, a position which, in the light of the fact-specific nature of the discovery rules themselves, seems entirely possible. If so, and given the huge increase in HMRC’s use of its discovery powers, we can expect a significant amount of litigation in this area.
