SPC00578

INCOME TAX – whether assessment to tax made under s.29 TMA 1970 in absence of enquiry under s.9A TMA valid – yes – appeal dismissed

MANCHESTER TRIBUNAL CENTRE
 
				BRIAN KENNERLEY					Appellant
	
				                 - and -

				THE COMMISSIONERS FOR
			HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	David Demack (Chairman)
Sitting in public in on Manchester on the 26 October 2006

Andrew Watters of Levy Watters, Chartered Accountants, London for the Appellant 

Anne Aldridge of the Appeals Unit LC Eastern England for the Respondents 

                      			
© CROWN COPYRIGHT 2007
DECISION
Introduction 
1.     The issue for determination in this appeal by Mr Brian Kennerley is whether an amended assessment to income tax for the fiscal year 2002/03 raised on 1 September 2005 was validly made by Her Majesty’s Commissioners for Revenue and Customs (“HMRC”) under the “discovery” provisions of section 29 of the Taxes Management Act 1970 (“TMA”), no notice of enquiry having been given by them within the time limit provided for that purpose in section 9A of TMA. The tax in question, including National Insurance contributions, totals £4,377.25. 

The Legislative Framework 
2.      By section 8 of TMA an individual taxpayer is required to complete a self-assessment tax return, and to deliver it to an officer of the Board (usually a tax inspector) by a deadline date, which is normally the 31 January next following the year of assessment. 
3.	If the inspector is not satisfied of the correctness of such a return, he may enquire into it under section 9A of TMA.  So far as relevant to the instant case, section 9A provides: 
“(1)  An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention to do so (“notice of enquiry”) – 
(a)	  to the person whose return it is (“the taxpayer”),
(b)	  within the time allowed.
	 (2)  The time allowed is:
(a)	  if the return was delivered on or before the filing date, up to the end of the period of twelve months after the filing date;
	 (4) An enquiry extends to anything contained in the return, or required to be contained                  in the return, including any claim or election included in the return, …
	 (6) In this section “the filing date” means the day mentioned in section 8(1A) or, as the                  case may be, section 8A(1A) of this Act.  It is common ground that on the facts of                  the instant case, ”the filing date” was 31 January 2004”.
4.     And by section 29 of TMA an officer may raise an assessment to tax when he or she discovers a loss of tax.  The relevant parts of that section for present purposes are the following: 
	(1)  If an officer of the Board or the Board discover, as regards any person(the        taxpayer) and a year of assessment  -
(a)	that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax have not been assessed, or
(b)	that an assessment to tax is or has become insufficient, or 
(c)	…
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. 
(2)       [Subsection (2) deals with errors and mistakes in returns.  It is common ground that it plays no part in the appeal].
(3)      Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above -
(a)	in respect of the year of assessment mentioned in that subsection; and
(b)	in the same capacity as that in which he made and delivered the return, 
unless one of the two conditions mentioned below is fulfilled. 
(4)	The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf. 
[The second condition is contained in subsection (5).  It is common ground that that subsection plays no part in the appeal].
6.     “Discovery” has been widely defined by the courts.  For instance, in Jonas v Bamford (1973) 51 TC 1, a case relied upon by HMRC, they prepared capital statements pointing to under-declarations of income which the taxpayer sought to explain as arising from betting winnings.  The inspector had no direct evidence of actual under-declarations of liability in the year for which the taxpayer was assessed, and the taxpayer’s counsel suggested that as a result the inspector had not made a discovery.  Walton J dealt with the suggestion thus (at page 23): 
“There can be no doubt that the Inspector of Taxes discovered that Mr Jonas was the possessor of resources which would not be explained by reference to known sources of capital and income.  This is virtually the classic case of ‘discovery’.  In law, indeed, very little is required to constitute a case of ‘discovery’…”
7.        Whilst dealing with Jonas v Bamford, it is convenient to rehearse the following observations of Walton J on continuity (at page 25):
 “But, so far as the discovery point is concerned, once the Inspector comes to the conclusion that, on the facts which he has discovered, Mr Jonas has additional income beyond that which he has so far declared to the Inspector, then the usual presumption of continuity will apply.  The situation will be presumed to go on until there is some change in the situation, the onus of proof of which is clearly on the taxpayer”
8.	In the instant case, Mrs Aldridge, of HMRC and appearing for them, contended that the condition contained in section 29(4) of TMA had been satisfied in that Mr Kennerley had been guilty of negligent conduct, as that phrase was defined by Baron Alderson in Blyth v Birmingham Waterworks Co., 1856, 11 Ex 781 at page 784, namely: 
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent reasonable man would not do.  The defendants might have been liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done”.

The Facts

9.        I take the facts from the oral evidence of Mr M S Lodge, an Inspector of Taxes, and an agreed statement of facts supplemented by the contents of the bundle of documents before me.  
10.     Mr Kennerley trades as a publican from “The Red House” public house at Stalybridge, Cheshire.  In December 2001 he submitted his self-assessment tax returns for the years of assessment ended on 5 April 1999, 2000 and 2001.  They were prepared by his friend Mr David Lord from incomplete records.  He submitted his return for the year ended on 5 April 2002 in November 2002. HMRC opened enquiries into all four returns on 21 January 2003.   Subsequently, they informed Mr Kennerley that the decision to open the enquiries was made as a result of information provided by HM Customs and Excise following an enquiry into his VAT affairs which revealed poor record keeping and at the conclusion of which Mr Kennerley accepted he had understated his turnover in VAT returns. 
11.        Mr Kennerley submitted his tax return for 2002/03 in January 2004, i.e. before the filing date provided by section 9A(2) of TMA, so that HMRC had until 31 January 2005 in which to raise an enquiry into it.
12.     In the year to January 2005 HMRC requested a considerable amount of information relating to Mr Kennerley’s return for 2002/03, but, as mentioned earlier, no notice of enquiry into his return for that year was ever raised. As the Inspector dealing with the matter was dissatisfied with the level of response from Mr Kennerley’s then accountant in dealing with the enquiries, on 3 November 2004 he informed both Mr Kennerley and his accountant that thereafter he would deal with Mr Kennerley directly. Following receipt of further information from Mr Kennerley and his bookkeeper, the Inspector arranged a meeting with Mr Kennerley.  It was held on 5 January 2005 and included discussion about how the enquiries might be concluded.  Following the meeting, on 13 January 2005 the Inspector wrote to Mr Kennerley enclosing a schedule of proposed adjustments to his self-assessment returns for the seven years of assessment ended 5 April 1997 to 2003 inclusive.  The adjustments were dependent on the provision of the previous accountant’s working papers. Following receipt of those papers, on 28 January 2005 the Inspector suggested that the figures proposed in his letter of 13 January 2005 be adjusted for the first four years under enquiry and be reduced in the year to 5 April 2001, but that the figures for the years ended in 2002 and 2003 be confirmed.  Mr Kennerley responded to the Inspector’s letter on 2 February 2005 by arranging a meeting with him for 4 February 2005. 
13.     At that meeting, following discussion, the Inspector proposed the following adjustments for approval by his superiors: 
(a)  that for all seven years of assessment under consideration, excluding that ending in 2001, the adjustments should be those proposed in the letter of 13 January 2005; and,
(b)  that for the year ended in 2001, the adjustment should be a figure between those proposed in the letters of 13 and 28 January 2005. 
14.     Mr Kennerley then instructed new accountants to deal with the matter.  They sought specialist advice from Messrs Levy Watters (LW) on HMRC’s proposals. Following a meeting with HMRC on 10 June 2005, LW wrote to HMRC on 13 June 2005 raising various points on the proposed settlement in relation to the year ended in April 2003.  They argued: 
(a)	that Mr Kennerley had not been notified by HMRC that they intended to enquire into his return for that year; 
(b)	that HMRC could not claim that there was discovery after 31 January 2005; and 
(c)	that, consequently, HMRC were time-barred from including that year in any enquiry
15.      On 31 August 2005 HMRC issued closure notices and revenue amendments for the years of assessment 1998/99, 1999/00, 2000/01 and 2001/02; and on 1 September 2005 they raised discovery assessments for the years 1996/97 and 1997/98, their contents reflecting the figures discussed at the meeting of 4 February 2005. 
16.       On 1 September 2005 HMRC also raised the assessment under appeal.  It was based on Mr Kennerley having gross income in that year of £28,000, he having so declared in an application for a loan made to MBNA Europe Bank Ltd in July 2002.  That compared with a declaration of income in his tax return of £10,654.  HMRC agreed that Mr Kennerley should be entitled to capital allowances in a revised figure of £2,252, so that he was assessable on an additional sum of £15,094, the additional tax and national insurance contributions amounting to £4,377.25.   As I understand it, Mr Kennerley does not dispute that, if he is liable for the sums assessed, they have been correctly calculated. 
17.      On 21 December 2005 Mr Kennerley made a formal offer in settlement of tax, penalties and interest for the years of assessment up to and including that of 2001/02.  It was accepted on 13 January 2006. But he made no offer in relation to the year 2002/03.   The appeal remains open in relation thereto, and is the subject of these proceedings. 
18.     The “discovery” on which Mrs Aldridge claimed to rely for the 2002/03 assessments consisted of: 
(a)	an undated admission by Mr Lord, the friend who assisted Mr Kennerley in preparing his tax returns, written in response to a letter from HMRC of 18 June 2004 that at some stage “we were working from incomplete records”; 
(b)	an acknowledgment by Mr Kennerley that he had been the subject of a VAT enquiry by HM Customs and Excise at the conclusion of which he accepted that he had understated his turnover in VAT returns; 
(c)	 a declaration of income and business turnover in Mr Kennerley’s MBNA loan application form of July 2002 significantly above that he returned for income tax purposes; 
(d)	  an acceptance by Mr Kennerley of adjustments to his tax liability in the years prior to 2002/03, and an apparent acceptance of the adjustments suggested by HMRC for 2002/03; 
(e)	an acceptance by Mr Kennerley of his failure to meet his obligations under the Taxes Acts as evidenced by a letter of offer in settlement of outstanding tax liabilities in years prior to 2002/2003 dated 21 December 2005, and his payment of penalties arising from that failure; and 
(f)	 a presumption of continuity.

Submissions and Conclusion 

19.     Mr Watters, the accountant representing Mr Kennerley, maintained that the question of whether the amended assessment for 2002/03, against which the present appeal lies, was validly made under the “discovery” provisions of section 29 of TMA could be answered only by responding to the following three questions: 
	1. Was there a discovery by the Inspector after 31 January 2005 that in the tax year 2002/03 Mr Kennerley had income which ought to have been assessed but which was not assessed?
	2. Whether the “discovery” legislation allowed HMRC to “discover” that a return had been negligently submitted in the normal enquiry window but had not opened an enquiry, and relied on section 29 of TMA to raise a subsequent “discovery” assessment?
	3.  Whether section 29(4) of TMA applied to the “discovery” assessment on Mr Kennerley’s 2002/03 self-assessment return?  
20.    I find it unnecessary to rehearse the submissions of Mr Watters in relation to each of those questions.  That is due to Mr Watters having made his submissions on the basis that sections 9A and 29 of TMA are interlinked, whereas in my judgment they are completely separate: the former relates to enquiries into returns, the latter to assessments where a loss of tax is discovered. 
21.    The first question to be asked in the instant case in relation to section 29 is whether the inspector discovered, i.e. found out, that Mr Kennerley’s self-assessment return of 2002/03 was, or had become, insufficient. That section itself requires no time limit for the purpose, nor does it require HMRC to commence an enquiry into the taxpayer’s affairs.  Clearly, in Mr Kennerley’s case, the inspector did discover that his self-assessment for 2002/03 was insufficient.  Thus, the inspector was entitled, subject to subsections (2) and (3), to make an assessment in the further amount which ought to be charged to make good the loss of tax. 
22.       Subsection (2) is not in point in the instant case.  Subsection (3) deals with self-assessment returns and indicates that a taxpayer is not to be assessed unless one of the two conditions in subsections (4) and (5) is satisfied. In the instant case, HMRC maintain, and I accept, that the condition in subsection (4) is that applicable, at least in so far as it relates to negligent conduct.  As I mentioned earlier, Mrs Aldridge relied on the definition of negligence offered by Alderson B in Blyth v Birmingham Waterworks Co.  I am quite satisfied, and hold that in making his return for 2002/03 Mr Kennerley in returning his income as £10,654, instead of the true figure of £28,000, did that which a reasonable person taking precautions would not have done, so that he was indeed negligent. 
23.        As all the conditions contained in section 29 of TMA for the making of an additional assessment of the loss of tax discovered are satisfied, I hold that the assessment under appeal was both validly made, and made in the correct amount. 

24.         I dismiss the appeal.  I find it unnecessary to rehearse the submissions of Mrs Aldridge, although I should record that they essentially mirror my conclusions. 

David Demack 
CHAIRMAN
Release Date: 11 January 12007

SC/3078/2006