In S Miesegaes v HMRC [2016] UKFTT 375 (31 May 2016), the FTT found that a discovery assessment was valid despite a disclosure having been made in a trust return and the assessment potentially having been issued two years after the actual discovery.
Mr Miesegaes had established a trust of which he was the life tenant, whilst the trustee was a company established in Guernsey. The trustee had entered into a partnership which traded in UK property. Mr Miesegaes had received the trust’s share of the profit and had declared this income in his return, claiming an exemption under the UK/Guernsey double tax treaty (art 3(2)). The trustee had also submitted a tax return for the trust which included a ‘white space’ disclosure about the implementation of a scheme which took advantage of the treaty exemption.
Mr Miesegaes had been assessed to additional tax of £311,729.93 under a discovery assessment. He challenged the assessment on the ground that HMRC should have known about the insufficiency of tax at the time the enquiry window had closed (TMA 1970 s 29(5)) as the relevant information had been included in the trust tax return and in his own personal return.
It was accepted that Mr Miesegaes had failed to self-assess the life tenancy income (as the scheme had been retrospectively closed, see next paragraph) and one issue was whether the effect of TMA 1970 s 29(6) was to treat the hypothetical HMRC officer as having had the trust tax return made available to him. In the view of the FTT, under s 29 (6)(d), the fact that the hypothetical officer could have inferred that a trust tax return might exist and might contain something relevant to the entries in the appellant’s tax return was not sufficient to fix HMRC with knowledge of the white space disclosure in the trust tax return.
Mr Miesegaes also contended that on HMRC’s view of the law at the time, no UK resident taxpayer could claim exemption under a double tax treaty for income paid to them as life tenant from a non-resident trust. As it was clear that the taxpayer was claiming such exemption, the hypothetical officer had had enough information before him to be aware of the insufficiency in the appellant’s return. The FTT agreed that the hypothetical officer had known from Mr Miesegaes’ tax return that he had received income as life tenant of a trust and that he had claimed that the income was exempt under the UK/Guernsey double tax treaty. Furthermore, the law had changed with retrospective effect (ITTOIA 2005 s 112(4) and (5)) so that a UK resident life tenant of a trust trading in partnership in the UK at any time, including 2006-7, was no longer entitled to relief under the double tax treaty. However, the hypothetical officer had not known that the trust traded in partnership at this date and so it had not had the relevant knowledge.
Finally, disagreeing with the obiter comment made in Charlton [2013] STC 866, the FTT found that even if a discovery had been made by one officer two years prior to the issue of a discovery assessment by another officer, the assessment would have been valid. There was nothing is s 29(1) about how soon an assessment should follow a discovery.
Why it matters: The FTT found that the test for an assessment and the test for a bar on discovery were not the same. HMRC could have sufficient disclosure to raise a discovery assessment because of a ‘possible insufficiency’ under s 29(1) but that disclosure may be insufficient to protect a taxpayer from such an assessment because the disclosure did not create awareness of an actual insufficiency. The FTT also pointed out that the answer may have been different if the taxpayer had disclosed, before the enquiry window, closed that the income arose through a trade in partnership.
In S Miesegaes v HMRC [2016] UKFTT 375 (31 May 2016), the FTT found that a discovery assessment was valid despite a disclosure having been made in a trust return and the assessment potentially having been issued two years after the actual discovery.
Mr Miesegaes had established a trust of which he was the life tenant, whilst the trustee was a company established in Guernsey. The trustee had entered into a partnership which traded in UK property. Mr Miesegaes had received the trust’s share of the profit and had declared this income in his return, claiming an exemption under the UK/Guernsey double tax treaty (art 3(2)). The trustee had also submitted a tax return for the trust which included a ‘white space’ disclosure about the implementation of a scheme which took advantage of the treaty exemption.
Mr Miesegaes had been assessed to additional tax of £311,729.93 under a discovery assessment. He challenged the assessment on the ground that HMRC should have known about the insufficiency of tax at the time the enquiry window had closed (TMA 1970 s 29(5)) as the relevant information had been included in the trust tax return and in his own personal return.
It was accepted that Mr Miesegaes had failed to self-assess the life tenancy income (as the scheme had been retrospectively closed, see next paragraph) and one issue was whether the effect of TMA 1970 s 29(6) was to treat the hypothetical HMRC officer as having had the trust tax return made available to him. In the view of the FTT, under s 29 (6)(d), the fact that the hypothetical officer could have inferred that a trust tax return might exist and might contain something relevant to the entries in the appellant’s tax return was not sufficient to fix HMRC with knowledge of the white space disclosure in the trust tax return.
Mr Miesegaes also contended that on HMRC’s view of the law at the time, no UK resident taxpayer could claim exemption under a double tax treaty for income paid to them as life tenant from a non-resident trust. As it was clear that the taxpayer was claiming such exemption, the hypothetical officer had had enough information before him to be aware of the insufficiency in the appellant’s return. The FTT agreed that the hypothetical officer had known from Mr Miesegaes’ tax return that he had received income as life tenant of a trust and that he had claimed that the income was exempt under the UK/Guernsey double tax treaty. Furthermore, the law had changed with retrospective effect (ITTOIA 2005 s 112(4) and (5)) so that a UK resident life tenant of a trust trading in partnership in the UK at any time, including 2006-7, was no longer entitled to relief under the double tax treaty. However, the hypothetical officer had not known that the trust traded in partnership at this date and so it had not had the relevant knowledge.
Finally, disagreeing with the obiter comment made in Charlton [2013] STC 866, the FTT found that even if a discovery had been made by one officer two years prior to the issue of a discovery assessment by another officer, the assessment would have been valid. There was nothing is s 29(1) about how soon an assessment should follow a discovery.
Why it matters: The FTT found that the test for an assessment and the test for a bar on discovery were not the same. HMRC could have sufficient disclosure to raise a discovery assessment because of a ‘possible insufficiency’ under s 29(1) but that disclosure may be insufficient to protect a taxpayer from such an assessment because the disclosure did not create awareness of an actual insufficiency. The FTT also pointed out that the answer may have been different if the taxpayer had disclosed, before the enquiry window, closed that the income arose through a trade in partnership.
