DECISION
Introduction
1.
This decision concerns two matters. The first is a preliminary issue of
whether a discovery determination under paragraph 41(2) of Schedule 18 to the
Finance Act 1998 was validly made. The second matter is an appeal against an
information notice issued under Schedule 36 to the Finance Act 2008.
2.
The Appellant (“NDL”) accepts that the Respondents (“HMRC”) raised a
discovery determination at the time of their letter of 8 June 2012. Both
parties accept that the letter of 8 June 2012 was outside the time limit for
making such a determination. HMRC contend that the letter of 8 June 2012
was a notice of the determination but the actual discovery determination was
validly made at the time of an earlier letter of 12 December 2011. Both
parties agree that if the discovery determination was made at the time of the
letter of 12 December 2011 then it was within the relevant time limit. The
preliminary issue turns on when the discovery determination was made.
3.
The appeal against the information notice turns on whether the documents
requested in the information notice are statutory records of NDL as, under
paragraph 29 of Schedule 36 to the Finance Act 2008, NDL has no right of appeal
against an information notice in so far as it relates to its statutory
records. In relation to any information or documents that are not statutory records,
the issue is whether they were reasonably required by HMRC for the purpose of
checking NDL’s tax position.
4.
For the reasons set out below, we have decided that:
(1)
HMRC did not make a discovery determination at the time of the letter
dated 12 December 2011;
(2)
NDL’s appeal against the requirement in the information notice to
provide documents and information is struck out in so far as they form part of
the company’s statutory records; and
(3)
NDL’s appeal against the requirement in the information notice to produce
documents and information that are not statutory records is dismissed as they
were reasonably required by HMRC for the purpose of checking NDL’s tax
position.
We direct that NDL must comply with the information
notice dated 9 December 2011 within 56 days of the date of release of this
decision.
Background
5.
The Appellant (“NDL”) is a wholesale supplier of dairy and related
products. In 2005, NDL settled a High Court action brought by Medina Dairies
Limited (“MDL”) against NDL and its directors by making a payment of £2 million
and giving an oral apology. A redacted consent order indicates that the action
arose as a result of the acquisition and use of financial information relating
to MDL and a database belonging to MDL containing confidential information
about its business and its customers. The oral apology was to be provided by
Mr Rajinder Nijjar, a director of NDL, to MDL and its terms were as follows:
“[Redacted] I apologise on behalf of myself and my
sons to you, [redacted] for any distress and damage we may have caused you all
arising out of the misappropriation and misuse of [redacted] Confidential
Information and our allegations regarding [redacted] solvency.”
6.
In its accounts and tax return for the year ended 31 December 2005,
which were received by HMRC on 3 January 2007, NDL claimed deductions of £2
million described as a “Litigations settlement” and £443,185 legal fees
described as “Legal charges for case against Medina Dairies concerning price
war”. Note 21 to the accounts explained that:
“In the course of the year the company [NDL] and its
offices (sic) were involved in litigation brought by a competitor of the
company. The action was ultimately settled, with the company maintaining a
denial of liability, on commercial terms for a payment by the company of
£2,000,000.”
7.
The computations stated:
“A sum of £2,000,000 was paid to [MDL] in respect of
an out of court settlement for a claim of unfair competition. NDL settled
without admitting liability because fighting the case would have been risky
given that [MDL] were seeking damages of £9 million.”
8.
HMRC became concerned that the settlement payment and legal fees did not
qualify for deduction for corporation tax because they were not incurred wholly
and exclusively for the purposes of NDL’s trade. HMRC considered that the
payment was, in fact, related to the claim made against NDL and the company’s
directors.
9.
By letter dated 9 December 2011, HMRC issued a notice under Schedule 36
to the Finance Act 2008 to NDL requesting certain documents and information
relating to the settlement and legal fees. That information notice is the
subject of the appeal by NDL.
10.
On 12 December 2011, HMRC sent a letter to NDL’s accountant disallowing
the deductions in relation to the settlement payment to MDL and the legal
fees. HMRC accept that the letter of 12 December was not a valid notice of a
discovery determination but contend that the determination was validly made at
that time. The only question for determination as a preliminary issue is
whether HMRC made a discovery determination within paragraph 41(2) of Schedule
18 to the Finance Act 1998 in respect of the accounting period ending 31
December 2005 at the time of HMRC’s letter of 12 December 2011.
Evidence
11.
There was no real dispute between the parties as to the facts, only as
to the interpretation to be placed on those facts. A witness statement was
produced on behalf of the NDL by Mr Rizwan Javed FCA, the senior partner in
Javed & Co, a firm of chartered accountants who act for NDL and other companies
in the group. We also received a witness statement from Mr Jeff Munaf, an
officer of HMRC, who dealt with NDL in relation to the matters under appeal.
The witness statements of Mr Javed and Mr Munaf stood as evidence in chief and
both of them were cross-examined. There was also a bundle of correspondence
and other documents to which both parties referred. On the basis of the
evidence, we find the material facts to be as set out below.
Facts
12.
In a letter dated 9 December 2011 to the company secretary of NDL, Mr
Munaf issued an information notice under paragraph 1 of Schedule 36 to the
Finance Act 2008 formally requesting certain documents and information in
relation to the dispute with MDL and the compensation payment that was made by
NDL. The documents requested were:
“1. A copy of the original claim documents detailing
the claimant’s ([MDL]) claim and whom the claim was against.
2. Copies of any subsequent claim documents issued
by or on behalf of [MDL] prior to the out of court settlement being agreed.
3. Confirmation of the date that the £2,000,000 was
paid by [NDL] and evidence to support the payment, including a copy of the bank
statement showing the amount leaving the company’s bank account and a copy of
the cheque.
4. Copies of the Druces & Atlee invoices
totalling £443,185 shown at D2 of [NDL] tax computation for the year ended 31
December 2005.”
13.
In a letter of the same date to Mr Javed at Javed & Co, Mr Munaf
referred to the information notice issued to NDL on that day. He went on to say
that, because certain time limits were due to expire in the near future, he
would issue protective assessments on the basis that the £2 million
compensation payment and associated legal costs of £443,185 were not allowable
costs of the company. The compensation and costs were to be regarded as
personal in nature and should be debited to the directors’ loan accounts
resulting in an overdrawn loan account and a charge under section 419 of the
Income and Corporation Taxes Act 1988. Mr Munaf said that the assessments were
simply protective assessments in view of the approaching time limits and he
invited NDL to appeal the assessments pending resolution of the issue.
14.
The appendix to the letter to Javed & Co showed that, in respect of
the year ended 31 December 2005, the returned loss of £3,834,186 would
become a loss of £1,391,001. The appendix also showed that group relief
surrendered would reduce from £1,490,657 to £1,391,001. That reduction would
be treated as applying to Nijjar Holding Company Limited and their tax return
would be amended. There was also a further adjustment in relation to the year
ended 31 December 2006 and the year ended 31 December 2007 to cancel
losses that had been brought forward to reduce profits in those years.
15.
On 12 December 2011, Mr Munaf sent a letter to Mr R Javed of Javed &
Co, NDL’s tax adviser. The letter was headed “Nijjar Group” and the text was
as follows:
“I write further to my letter of 9 December 2011.
I explained in my earlier letter that I would be
arranging for protective discovery assessments to be issued in respect of [NDL]
and Nijjar Holding Company Ltd (Nijjar Holdings Ltd). These referred to
assessments have today been made, a copy of each will arrive separately from
this letter.
The assessments have been made on the basis that the
legal costs of £443,185 and the compensation payment of £2,000,000 claimed by
[NDL] in the company’s tax return for the year ended 31 December 2005 are not
allowable deductions and are private in nature. A summary of the assessments
is on the attached appendix 1.
As explained in my earlier letter these are
protective assessments and I would invite your clients to appeal these
assessments pending resolution of this issue.
If you have any queries or wish to discuss any
matters further please do not hesitate to contact me. I am sending a copy of
this letter to the company secretary of [NDL].”
16.
On the same day Mr Munaf also sent a letter to the company secretary of
Nijjar Holdings Limited enclosing a copy of his letter of the same date to
Javed & Co.
17.
Mr Munaf stated that this was the only discovery determination that he
had ever issued. He said that he had looked at the guidance on discovery
determinations in the manuals on the HMRC intranet and discussed it with a
colleague, although there was no formal record of the discussion.
Unsurprisingly after such a long time, Mr Munaf could not recall exactly what
the manuals said. From what we were shown, it appears that there is very
little guidance in the HMRC manuals about how discovery determinations are
actually made, as opposed to when it is appropriate to make one. Guidance at
COM23080 states:
“If you discover that an amount is incorrectly
stated in a company’s return and it affects the tax payable for another AP of
the company, or the tax liability of another company -
make a Discovery
Determination on the company by writing to it, setting out the amount which in
your opinion ought to have been stated in the return.”
18.
Mr Munaf frankly admitted in his evidence that his failure to state the
discovery determinations in the letter was an error and that it would have been
better to have used the word “determination” or refer to paragraph 41 of
Schedule 18 to the Finance Act 1998 in the letter. He maintained that the
information in the appendix to the letter clearly showed the revised loss
position for the different accounting periods.
19.
NDL appointed Deloitte LLP to advise them in relation to the HMRC
investigation. On 6 January 2012, Mr Horler, then of Deloitte LLP, wrote a
letter to Mr Munaf. The letter was headed “Nijjar Dairies Limited - assessment
for the accounting period to 31 December 2005”. The text of the letter was as
follows:
“Thank you for your assessment dated 13 December
2011. Please accept this letter as an appeal against the assessment on the
following grounds:
1. No discovery has been made, the assessment has
been raised to keep the time limit open and enable HMRC to obtain information;
2. There is no evidence that there are any
transactions that should have been reflected in the loan account that were not,
Consequently the liability under section 419 (as was) does not arise;
3. No conduct amounting to careless or deliberate
behaviour has been demonstrated as having taken place by the company or anyone
acting on its behalf, consequently the assessment is out of time.”
20.
Mr Horler also wrote two almost identical letters in relation to the
assessments for the accounting periods to 31 December 2006 and 31 December
2007. Those letters contained a different paragraph in relation to ground two
of the appeal , namely:
“2. No discovery determination under paragraph
41(2), schedule 18, FA1998 has been made in respect of the losses arising in
the 2005 accounting period. Consequently the losses carried forward from that accounting
period are still available to carry forward in line with paragraph 88, schedule
18, FA 1998;”
The reference to a discovery determination in the two
letters concerning the years ending 2006 and 2007 was the first mention of a
discovery determination in the correspondence.
21.
On 8 June 2012, Mr Munaf sent a letter to the company secretary of NDL.
The letter was headed “Notice of determination” and stated as follows:
“For the year ended 31 December 2005 the company
returned losses of £3,834,186. These losses have now been reduced to
£1,391,001 on the basis that claimed expenses of £2,443,185 are not allowable
deductions of the company.
As a result of this the losses surrendered as group
relief will drop from £1,490,657 to £1,391,001 and there will be no losses
available to be carried forward to the year ended 31 December, 2006.”
22.
The letter then set out the procedure for appealing the determination.
Mr Munaf told us that he issued the letter of 8 June 2012 because he had been
advised that the letter of 12 December 2011 was not a valid notice of
determination as it was not addressed to the taxpayer.
Discovery determination
Legislation
23.
Paragraph 41(2) of Schedule 18 to the Finance Act 1998, as amended, is
as follows:
“If an officer of Revenue and Customs discovers that
a company tax return delivered by a company for an accounting period
incorrectly states -
(a) an amount that affects, or may affect, the tax
payable by that company for another accounting period, or
(b) an amount that affects, or may affect, the tax
liability of another company,
they may make a determination (a “discovery
determination”) of the amount which in their opinion ought to have been stated
in the return.”
24.
Paragraph 42(1) provides that a discovery determination can only be made
in the circumstances specified in paragraphs 43 or 44 of the Schedule. The
relevant parts of paragraph 43 provide that a discovery determination can only
be made if the situation mentioned in paragraph 41(2) was brought about
carelessly or deliberately by the company or a person acting on behalf of the
company. Paragraph 44(1) states that a discovery determination may be made if
an officer of HMRC could not have been reasonably expected, on the basis of
information made available to them before that time, to be aware of the aware
of the situation mentioned in paragraph 41(2) at the time when the officer
ceased to be entitled to give notice of enquiry into the return.
25.
Paragraph 49 of Schedule 18 to the Finance Act 1998 provides that the
rules as to time limits, procedure and appeals for assessments in paragraphs 46
to 48 also apply to discovery determinations. Paragraph 46(1) provides that no
assessment (and, therefore, no discovery determination) may be made more than
four years after the end of the accounting period to which it relates.
Paragraph 46(2) extends the time limit to six years where the tax loss is
brought about carelessly by the company or a related person, including a person
acting on behalf of the company. HMRC contend that the tax loss was brought
about carelessly by NDL or a person acting on its behalf but that is not part
of the preliminary issue that we have to decide.
26.
Paragraph 47 provides as follows:
“Notice of an assessment to tax on a company must be
served on the company stating -
(a) the date on which the notice is issued, and
(b) the time within which any appeal against the
assessment may be made.”
27.
Section 114 of the Taxes Management Act 1970 provides as follows:
“(1) An assessment or determination, warrant or
other proceeding which purports to be made in pursuance of any provision of the
Taxes Acts shall not be quashed, or deemed to be void or voidable, for want of
form, or be affected by reason of a mistake, defect or omission therein, if the
same is in substance and effect in conformity with or according to the intent
and meaning of the Taxes Acts, and if the person or property charged or
intended to be charged or affected thereby is designated therein according to
common intent and understanding.
(2) An assessment or determination shall not be
impeached or affected-
(a) by reason of a
mistake therein as to -
(i)
the name or surname of a person liable, or
(ii)
the description of any profits or property, or
(iii)
the amount of the tax charged, or
(b) by reason of any
variance between the notice and the assessment or determination.”
Submissions
28.
Mr Horler, who appeared for NDL, submitted that the process of raising a
discovery determination was exactly the same as the process for raising a
discovery assessment and consisted of three steps, namely :
(1)
the decision to make the discovery determination;
(2)
the raising of the discovery determination; and
(3)
the notification of the discovery determination.
29.
Mr Horler submitted that HMRC had failed to follow the three steps in
relation to the discovery determination in December 2011. Mr Horler accepted
that Mr Munaf had decided to raise assessments for 2005 and later years as
detailed in his letters of 9 and 12 December 2011 to Mr Javed at Javed &
Co. Mr Horler pointed out that those letters did not mention any determination
or refer to paragraph 41(2) of Schedule 18. The assessments were issued
separately but the first communication from HMRC that referred to the discovery
determination was Mr Munaf’s letter of 8 June 2012. Mr Horler stated that the
letter of 8 June was a notification of the determination because it was
addressed to the company, referred to a determination and set out how NDL could
appeal. Mr Horler observed that these elements were absent from the letter of 12
December 2011.
30.
Mr Horler also put forward an argument based on HMRC’s practice in
relation to VAT assessments. Mr Horler referred to VAT Notice 915 Assessments
and time limits: Statement of Practice which states that HMRC apply the time
limit rules to the date when the assessment is notified rather than the earlier
date when it is made. Mr Horler contended that it made no sense to have
different practices for different taxes administered by the same department
where the legislation was so similar.
31.
Mr Horler also submitted that, if the letter of 12 December 2011 was a
discovery the determination, then it was rendered invalid by the discrepancies
between it and the letter of 8 June 2012 and the discovery determination was
not saved by section 114 TMA.
32.
Miss Bartrup, who represented HMRC, submitted that there are only two
steps in making a discovery determination, namely:
(1)
the decision to amend a tax return; and
(2)
the recording of that determination in some documentary form.
33.
Miss Bartrup accepted that a notice of the discovery determination was
not issued to NDL until 8 June 2012 but submitted that the time limit applied
to the making of the discovery determination and not to the notification of the
determination to the taxpayer. There was no prescribed form for a discovery
determination. Miss Bartrup submitted that the documentary record of the
determination was the file copy of the letter dated 12 December 2011. The
letter was evidence of HMRC’s decision to make the discovery determination,
which was within the relevant time limit. Miss Bartrup contended that the fact
that the letter did not mention a discovery determination, but referred to
protective assessments, did not invalidate the determination or mean that the
letter was not a documentary record of the determination. The letter referred
to specific items and amounts claimed by NDL in its tax return for the year
ended 31 December 2005 which HMRC considered were not allowable deductions
because they were private in nature.
34.
Miss Bartrup referred us to Vickerman v Mason’s Personal
Representatives [1984] STC 231 where an inspector mistakenly referred to
the wrong section of the Taxes Management Act in correspondence before making
an assessment. Scott J in the High Court held that the validity of the assessment,
once made, was a matter of law and it was irrelevant that the inspector had
erroneously relied on the wrong statutory provision in a letter before issuing
the assessment.
35.
Miss Bartrup also referred us to Hankinson v HMRC [2010] UKUT 361 (TCC), [2010] STC 2640, where the Upper Tribunal, at [21], rejected a
submission on behalf of the taxpayer as follows:
“There was also no substance in Mr Mathew’s argument
that the assessment was described as a protective assessment; that was not a
term of art, either before or after self-assessment was introduced, and the use
of the phrase was no more than an indication that the assessment was made in
order that the overall six-year time limit was not breached. The only
pre-condition for the making of an assessment was that the officer had
discovered an insufficiency. There was no dispute in this case that a
discovery had been made.”
36.
Miss Bartrup submitted that the evidence, principally the correspondence
in December 2011, showed that HMRC had decided to raise a discovery
determination at that time.
Discussion
37.
A discovery determination is a determination of an amount
shown on a return. It can only be issued where a return has already been
delivered and the time limit for opening an enquiry into the return has expired
or the enquiry has already been completed. Where HMRC believe that
losses have been overstated by a company in its tax return and they wish to
amend the return, they may issue a determination to adjust the losses.
38.
The preliminary issue is whether HMRC’S letter of 12 December 2011
was a discovery determination within the meaning of paragraph 41(2) of Schedule
18 to the Finance Act 1998. There was no dispute that the letter of
12 December 2011 was sent to Javed & Co and copied to NDL. Both parties
also accepted that HMRC issued a formal notice of the discovery determination
on 8 June 2012. If we find that a discovery determination was made on or
around 12 December 2011 then it will have been made within the extended time
limit. As that is only a preliminary issue, there will need to be a further
hearing to determine whether the tax loss was brought about carelessly. If we
conclude that the determination was not made at the time of the HMRC letter of
8 June 2012 notifying the determination then the determination was not made
within the time limit and cannot be maintained.
39.
There is no case law on discovery determinations but Mr Horler and Miss
Bartrup both accepted that the case law on discovery assessments applies to
discovery determinations.
40.
In Honig v Sarsfeld [1981] STC 247, notices of assessment were
issued to the administrators of a deceased’s estate on 16 March 1970 but did
not reach the administrators until after 7 April 1970. The time limit for
making the assessments expired on 6 April 1970. In the Court of Appeal, Fox
LJ, with whom Mustill and Stocker LJJ agreed, said:
“The giving of notice has nothing to do with the
making of a valid and effective assessment. The statute clearly distinguishes
between the assessment and notice of it and contains no provision which makes
the validity of the assessment in any way conditional on the notice.”
41.
Later, Fox LJ concluded that:
“… the time limit imposed by the statute relates
only to the making of assessments, and not to the service of assessments; and
the statute draws a very clear distinction between the making of assessments
and the giving of notices for the making of those assessments. Mr Honig
referred to the possible dangers of giving notice of assessment long after the
assessment itself was made. No such situation arises here.”
42.
In Burford v Durkin [1991] STC 7, the issue
was whether an assessment had been validly made, for the purposes of regulation
12(1) of the Income Tax (Sub-Contractors in the Construction Industry)
Regulations 1982, in circumstances where the inspector of taxes, on whom the
relevant statutory discretion had been conferred, had duly completed the
assessment form but another inspector of taxes had signed the certificate that
the assessments had been entered in the assessment book; or whether the signing
of the certificate by another inspector of taxes was an unlawful delegation of
discretion. In the Court of Appeal, Nicholls LJ referred, in the course of his
judgment, to counsel for the Crown's account of the Revenue's normal practice
in making an assessment under regulation 12(1), in which step (a) was the
decision to make an assessment in a particular amount and step (b) was the
making of an appropriate documentary record of that decision, with the
intention that it should take effect as an assessment. Nicholls LJ continued
(at pages 16e-17b):
"He told us that step (b) involves the
preparation of a document, either in typed or manuscript form, which records
the prescribed essential ingredients of the assessment to which step (a)
relates: the taxpayer, the amount of the assessment and so forth. That
document, with similar documents relating to other proposed assessments, is
then inserted and bound into a folder known as the assessment book. These
sheets, or cards, form another volume of that book. However, the completion of
the physical process of inserting these sheets or cards into the binder, so as
thereby to form the book, does not of itself complete the assessing procedure.
That procedure is complete, and an assessment is regarded by the Revenue as
having been made when, and only when, an accompanying certificate in the
assessment book is signed. …. The signature and dating of the certificate are
intended to make operative as assessments the details recorded in the
assessment book to which the certificate relates."
43.
In Corbally-Stourton v HMRC [2008] UKSPC SPC00692, the Special
Commissioner referred to Burford and considered how it applied in the
light of current HMRC practice when making an assessment. At [91]-[93], the
decision records
“[An HMRC officer] told me that no longer is an
assessment book maintained. HMRC's practice now is that the relevant officer
will write to the taxpayer indicating that an assessment is to be made and will
key into HMRC's computers the amount of the assessment. That was what had
happened with the Appellant. Once keyed into the computer the amount appears
in a record maintained by the computer (and capable of being printed out) of
the taxpayer's statement. I was shown a printout of the Appellant's statement
which showed an entry for an ‘adjustment from [self-assessment] return 18
October 2004’ recording the entries made when the Appellant was notified that
she would be assessed.
[The Appellant’s representative] put the Respondents
to proof that the Appellant had been assessed.
It seems to me that [the HMRC officer] made the
assessment when, having decided to make it, he authorised the entry of its
amount into the computer. I find that the assessment was made.”
44.
On the basis of the cases cited above, we agree with Miss Bartrup that
the making of the determination is separate from its notification. The making
of the discovery determination is a two-stage process. The first stage is the
decision by an officer of HMRC to amend a tax return. The second stage is the
creation of an appropriate record of that decision. The notification of the
determination is not part of the process of making the determination but is
entirely separate. The time limits in paragraph 46 of Schedule 18 to the
Finance Act 1998 apply to the making of the determination and not to its
notification.
45.
That does not resolve the issue in this case as we must decide whether
the determination was made at the time of the letter of 12 December 2011. In
our view, the letters dated 9 and 12 December 2011 clearly establish that Mr
Munaf had decided to disallow the deductions claimed by NDL in its tax return
for the period ending 31 December 2005 and adjust the losses claimed by
NDL for that period and subsequent years. On the basis of the letters and Mr
Munaf’s evidence, we find that Mr Munaf had decided to adjust NDL’s tax returns
around the time of the letters in December 2011.
46.
The cases show, however, that simply making a decision is not
sufficient: a discovery determination, like an assessment, is not made until
the decision has been properly recorded. As the Special Commissioner in Corbally-Stourton
acknowledged, the appropriate record is no longer necessarily in documentary
form. In that case, it was accepted that information held on a computer and
capable of being printed out could be an appropriate record. Although, there
is no prescribed form for a discovery determination, we consider that the
appropriate record, whether in electronic or physical form, must state
expressly and clearly that a discovery determination has been made on a
taxpayer and in what amount.
47.
In this case, HMRC relied on the file copy of the letter dated 12
December 2011 as the appropriate record and there was no evidence that HMRC held
any other record of the decision to adjust NDL’s tax return. We do not rule
out the possibility that an electronic copy of a letter sent to a taxpayer
stored on HMRC’s computer system could be an appropriate record in some cases.
However, we do not accept that the file copy of the letter of 12 December 2011
addressed to NDL’s accountant was an appropriate record in this case. While
the letter made clear that HMRC did not accept that NDL was entitled to the
losses claimed, it referred only to protective assessments and did not mention
a discovery determination or paragraph 41(2) of Schedule 18 to the Finance Act
1998. The letter did not clearly state that HMRC had decided to make a
discovery determination but left that to be inferred. The letter did not
suggest that there was an appealable determination but referred to assessments
that were to be sent separately and invited NDL to appeal them pending
resolution of the issue. In our view, the letter did not have the appearance
of an official record of a decision to make a determination in relation to a
taxpayer but appeared to be part of the ongoing correspondence between HMRC and
the NDL’s accountant in relation to the tax dispute. The only decision that
the letter clearly recorded was the decision to issue protective assessments.
48.
For the reasons set out in the preceding paragraph, our conclusion is
that the letter of 12 December 2011 was not an appropriate record and,
accordingly, HMRC did not make a discovery determination at that time.
49.
Although it is not strictly necessary for deciding the preliminary
issue, we consider that the letter dated 8 June 2012 was capable of being an
appropriate record of the decision to make a discovery determination.
Notwithstanding our view, we recommend that HMRC consider establishing a
procedure for recording decisions to make discovery determinations (as there is
for assessments) in order to avoid issues such as this from arising in the
future.
50.
We do not accept that the discovery determination is saved by section
114 TMA. That section assumes that a determination has been made and provides
that it is not to be invalidated by reason of certain errors in the
determination or any differences between it and the notification. In this
case, we have held that no discovery determination was made at the time of the
letter of 12 December 2011. It follows that no question of any want of form,
mistake, defect or omission in the determination arises because there was no
determination. Similarly, there was no question of any variance between the
notice and the determination because there was no determination.
51.
In the circumstances, it is not necessary for us to consider Mr Horler’s
submissions on the practice of HMRC in relation to the notification of
assessments for VAT. It is enough, perhaps, to indicate that, notwithstanding
the merger of the different branches of the Revenue in 2005, we do not consider
that the VAT legislation and practice have any application to this area of
direct tax.
Information notice
52.
NDL appeals against the information notice issued by HMRC, under
paragraph 1 of Schedule 36 to the Finance Act 2008, on 9 December 2011
which is described at [12] above.
Legislation
53.
Paragraph 1 of Schedule 36 provides that:
"(1) An officer of Revenue and Customs may by
notice in writing require a person (“the taxpayer”) –
(a) to provide
information, or
(b) to produce a
document,
if the information or document is reasonably
required by the officer for the purpose of checking the taxpayer’s tax
position.”
54.
Paragraph 21(2) of Schedule 36 provides that where a company has made a
tax return, HMRC may not issue a notice for the purpose of checking the
company’s corporation tax position in relation to the period covered by the
return unless one of four conditions is met. In this case, HMRC relied on
Condition B set out in paragraph 21(6) as follows:
"Condition B is that an officer of Revenue and
Customs has reason to suspect that -
(a) an amount that ought
to have been assessed to relevant tax for the chargeable period may not have
been assessed,
(b) an assessment to
relevant tax for the chargeable period may be or have become insufficient, or
(c) relief from relevant
tax given for the chargeable period may be or have become excessive.”
55.
Paragraph 29 of Schedule 36 provides that:
"(1) Where a taxpayer is given a taxpayer
notice, the taxpayer may appeal against the notice or any requirement in the
notice.
(2) Sub-paragraph (1) does not apply to a
requirement in a taxpayer notice to provide any information, or produce any
document, that forms part of the taxpayer's statutory records."
56.
Paragraph 62 of Schedule 36 defines statutory records as follows:
"(1) For the purposes of this Schedule,
information or a document forms part of a person's statutory records if it is
information or a document which the person is required to keep and preserve
under or by virtue of-
(a) the Taxes Acts, or
(b) any other enactment relating to a tax,
subject to the following provisions of this
paragraph.
…
(3) Information and documents cease to form part of
a person's statutory records when the period for which they are required to be
preserved by the enactments mentioned in sub-paragraph (1) has expired."
57.
The effect of paragraphs 29(2) and 62(3) of Schedule 36 is that
information and documents are statutory records if and for as long as NDL is
required by the Taxes Acts to preserve them and NDL has no right of appeal
against an information notice in respect of them.
58.
Paragraph 21(1) of Schedule 18 to the Finance Act 1998 provides that any
company that may be required to deliver a tax return for any period must keep
such records as may be needed to enable it to deliver a correct and complete
return for the period. Paragraph 21(2) provides that the company must preserve
the records for six years from the end of the period. Paragraph 21(5) states
that the records that the company must keep and preserve include records of all
receipts and expenses in the course of the company’s activities. Paragraph
21(6) extends the duty to preserve records to all supporting documents which
includes accounts, books, deeds, contracts, vouchers and receipts.
Submissions
59.
Miss Bartrup submitted that all the documents requested in the
information notice are statutory records which NDL was required to preserve
under the legislation set out above. The effect of paragraph 29 of Schedule 36
is that NDL has no right of appeal against an information notice in so far as
it relates to its statutory records. If any of the documents were not held to
be statutory records, Miss Bartrup submitted that they were, in any event,
reasonably required by HMRC for the purpose of checking NDL’s tax position and
there were no reasons why they should not be produced.
60.
Mr Horler accepted that if we found that the discovery determination had
been made within the time limit then NDL’s objections to the information notice
would fall away. If we were to find that the discovery determination had not
been made at the time of the letter of 12 December 2011, Mr Horler contended
that the material requested could not be relevant as there was no evidence that
any loss of tax, which was denied, had been brought about deliberately by NDL
or a person acting on its behalf. Mr Horler submitted that HMRC should look at
the documents which had been provided, including Counsel’s opinions, in
deciding whether to issue an information notice. Mr Horler accepted, in
closing submissions before us, that NDL’s bank statements and invoices are
statutory records. Essentially, Mr Horler’s submissions were that the
documents that were not statutory records were not reasonably required.
Discussion
61.
Insofar as the documents are statutory records, paragraph 29 makes it
clear that NDL has no right of appeal. NDL accepts that the bank statements
and invoices are statutory records. That covers items 3 and 4 of the
information notice. Accordingly, NDL’s appeal in relation to those items must
be struck out.
62.
We do not consider that the litigation documents at items 1 and 2 of the
information notice are statutory records or supporting documents but that does
not conclude matters. We find that those litigation documents are properly the
subject of the information notice in that they are reasonably required by HMRC
and are relevant for checking NDL’s tax position which includes the accuracy of
the section 419 assessments relating to expenditure made on behalf of the
directors.
Decisions
Decision on preliminary issue – discovery determination
63.
We find that the discovery determination was not made by HMRC at the
time of the letter dated 12 December 2011. In the absence of any other record
of the determination, we conclude that the discovery determination was made by
HMRC at the time of the letter dated 8 June 2012.
Decision on appeal – information notice
64.
We hold that NDL has no right of appeal against the requirement in the
information notice dated 9 December 2011 to provide documents and information
that form part of NDL’s statutory records. Accordingly, NDL’s appeal in
relation to such matters is struck out. We dismiss NDL’s appeal in relation to
the other documents and information requested in the information notice for the
reasons given above. We direct that NDL comply with the information notice
within 56 days of the date of release of this decision.
Rights of appeal
65.
This document contains full findings of fact and reasons for the
preliminary issue and the final decision in relation to the information
notice. Any party dissatisfied with the decisions has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
66.
Either party may apply for the 56 days in respect of the preliminary
issue to run from the date of the decision that disposes of all issues in the
proceedings, but such an application should be made as soon as possible and, in
any event, no later than 56 days from the date of release of this decision.
GREG SINFIELD
TRIBUNAL JUDGE
RELEASE DATE:
14 August 2013
