InN Pattullo v HMRC[2016] UKUT 270 (14 June 2016), the UT found that HMRC had made a discovery (TMA 1970 s 29(1)) and that HMRC could not have been aware of the insufficiency of tax at the time the enquiry window had closed (s 29(5)).
Mr Pattullo had entered into a tax avoidance arrangement in the 2003/04 tax year. The arrangement had involved the use of capital redemption contracts (CRCs) and had sought to take advantage of the wording of TCGA 1992 s 37. Some 925 participants in the scheme had been identified and 909 enquiries opened. However, at the time Mr Pattullo had submitted his return, disclosure of the CRC scheme had not been required by law. It was ultimately held that the scheme did not achieve its purpose.
The first issue was whether a discovery could comprise a series of discoveries. The FTT had found that the threshold had been crossed in the period June to November 2009, when the Drummond [2009] STC 2206 case (which concerned a similar scheme) had been decided by the Court of Appeal and leave to appeal had been refused. The UT detected no error of law in this finding.
Mr Pattullo also argued that TMA 1970 s 29(1) required HMRC to make an assessment immediately upon making a discovery. The UT agreed, noting that the requirement for the discovery to be acted upon while it remained fresh arose on the natural meaning of s 29(1) itself. However, the FTT had found that the discovery had been made sometime between July and November 2009 and that the assessment had been made in January 2010. The discovery had therefore not been stale by the time of the assessment.
The second issue was the level of knowledge and expertise to be expected of the hypothetical officer, when deciding whether he should have been aware of the insufficiency of tax (TMA 1970 s 29(5)). The UT thought that the discovery in sub-s (1) found its counterpart in the state of awareness in sub-s (5). The question of reasonableness therefore came not in the need to construct a fictional hypothetical officer, but rather in the test of whether the actual officer ought reasonably to have been aware of the insufficiency.
The UT found that in January 2006 (when the enquiry window had closed), a hypothetical officer would not have had any real understanding of the arcane world of CRCs. Furthermore, the Drummond case had only reached the Court of Appeal in 2009. The FTT had therefore been right (although it had erred in law when ascertaining the characteristics of the hypothetical officer) to find that the hypothetical officer could not have been aware of the insufficiency.
Why it matters: The UT clarified what is meant by ‘discovery’. It considered that there may be ‘hesitation on the doorstep, shifting forwards then back again before finally going in’; ‘crossing the threshold’ was therefore not like ‘crossing the Rubicon’. The UT also refined the notion of reasonableness of ‘the hypothetical officer’. It noted that the question of reasonableness should arise as an objective test, by reference to the standards of knowledge and expertise reasonably to be expected of an HMRC officer dealing with tax returns raising ‘this kind of question’ and giving ‘this amount of information’. The question was therefore whether the officer’s lack of awareness of the insufficiency as at the relevant date could properly be categorised as unreasonable.
InN Pattullo v HMRC[2016] UKUT 270 (14 June 2016), the UT found that HMRC had made a discovery (TMA 1970 s 29(1)) and that HMRC could not have been aware of the insufficiency of tax at the time the enquiry window had closed (s 29(5)).
Mr Pattullo had entered into a tax avoidance arrangement in the 2003/04 tax year. The arrangement had involved the use of capital redemption contracts (CRCs) and had sought to take advantage of the wording of TCGA 1992 s 37. Some 925 participants in the scheme had been identified and 909 enquiries opened. However, at the time Mr Pattullo had submitted his return, disclosure of the CRC scheme had not been required by law. It was ultimately held that the scheme did not achieve its purpose.
The first issue was whether a discovery could comprise a series of discoveries. The FTT had found that the threshold had been crossed in the period June to November 2009, when the Drummond [2009] STC 2206 case (which concerned a similar scheme) had been decided by the Court of Appeal and leave to appeal had been refused. The UT detected no error of law in this finding.
Mr Pattullo also argued that TMA 1970 s 29(1) required HMRC to make an assessment immediately upon making a discovery. The UT agreed, noting that the requirement for the discovery to be acted upon while it remained fresh arose on the natural meaning of s 29(1) itself. However, the FTT had found that the discovery had been made sometime between July and November 2009 and that the assessment had been made in January 2010. The discovery had therefore not been stale by the time of the assessment.
The second issue was the level of knowledge and expertise to be expected of the hypothetical officer, when deciding whether he should have been aware of the insufficiency of tax (TMA 1970 s 29(5)). The UT thought that the discovery in sub-s (1) found its counterpart in the state of awareness in sub-s (5). The question of reasonableness therefore came not in the need to construct a fictional hypothetical officer, but rather in the test of whether the actual officer ought reasonably to have been aware of the insufficiency.
The UT found that in January 2006 (when the enquiry window had closed), a hypothetical officer would not have had any real understanding of the arcane world of CRCs. Furthermore, the Drummond case had only reached the Court of Appeal in 2009. The FTT had therefore been right (although it had erred in law when ascertaining the characteristics of the hypothetical officer) to find that the hypothetical officer could not have been aware of the insufficiency.
Why it matters: The UT clarified what is meant by ‘discovery’. It considered that there may be ‘hesitation on the doorstep, shifting forwards then back again before finally going in’; ‘crossing the threshold’ was therefore not like ‘crossing the Rubicon’. The UT also refined the notion of reasonableness of ‘the hypothetical officer’. It noted that the question of reasonableness should arise as an objective test, by reference to the standards of knowledge and expertise reasonably to be expected of an HMRC officer dealing with tax returns raising ‘this kind of question’ and giving ‘this amount of information’. The question was therefore whether the officer’s lack of awareness of the insufficiency as at the relevant date could properly be categorised as unreasonable.
