Burgess and Brimheath Developments: discovery assessments

As readers will be aware, once the time limit for opening an enquiry has expired, or an enquiry is closed, the taxpayer’s liability for the relevant tax year is generally regarded as final. In such circumstances, HMRC can only demand a further tax payment by issuing a discovery assessment pursuant to TMA 1970 s 29, in relation to individuals, and FA 1998 Sch 18 para 41, in relation to companies. As there are no material differences in the wording of the two provisions, for ease of reference, we shall refer to these provisions as the ‘discovery assessment provisions’ throughout the remainder of this article.

 

A discovery assessment, as the name suggests, can only be made by HMRC in circumstances where it has made a ‘discovery’ that tax has been underpaid in relation to a period where it is not open to HMRC to make an adjustment through the enquiry process. It is important to remember that the discovery assessment provisions can only be used by HMRC in circumstances where:

The underlying facts of Burgess and Brimheath Developments Ltd v HMRC [2015] UKUT 578 (TCC) (reported in Tax Journal, 20 November 2015) are not important for present purposes. In the case of Mr Burgess, HMRC issued discovery assessments for income tax in relation to alleged failures to return profits of his business as a sole trader for the tax years 1996/97 to 1999/2000. In the case of Brimheath, the assessments related to corporation tax on alleged under-declarations of profits for the accounting periods ended 30 November in each of the years 1999 to 2008 (apart from 2000). The taxpayers appealed against the discovery assessments to the First-tier Tribunal (FTT).

 

Before the FTT, Brimheath Developments & Anor v HMRC [2014] UKFTT 301 (TC), the taxpayers’ appeals were unsuccessful. The FTT found that in relation to both taxpayers, profits had been under-declared and upheld HMRC’s assessments to tax (with one exception, which is not important for present purposes). The taxpayers appealed the FTT’s decision to the UT.

 

Before the FTT, the validity of the discovery assessments did not form the basis of the taxpayers’ appeals and the FTT made no findings in relation to whether the above tests had been satisfied, seemingly content to proceed on the basis that, as the taxpayers had not raised the issue, it was not necessary for it to satisfy itself that the discovery assessments were valid. 

 

In the UT, the taxpayers did not challenge the FTT’s substantive finding that they had under-declared their profits for the relevant periods, but contended that it had made errors of law in failing to consider the underlying validity of the discovery assessments. The focus of the appeal before the UT was therefore whether the FTT had properly considered whether the discovery assessments had been validly made. 

 

The taxpayers argued that the FTT had made errors of law in failing to consider:

HMRC submitted that it understood, from the way the taxpayers had argued their case before the FTT, that only the underlying substantive issue required determination and there was no obligation on it to raise the competence and time limit issues. It argued that these issues were new points of law which had not been argued by the taxpayers before the FTT; and, as such, they should not be allowed to raise them before the UT.

 

The UT was not impressed with HMRC’s arguments and agreed with the taxpayers that HMRC had not discharged the burden of proving that in their case the conditions necessary for issuing a discovery assessment had been met; namely, that the tax loss had arisen from the taxpayers’ deliberate conduct and that the assessments were therefore in time. In the view of the UT, this was a positive requirement of the legislation and it was not sufficient for HMRC to simply rely on the taxpayers’ failure to raise validity objections in their appeals and to assume that validity issues had been conceded by the taxpayers. Appeals against discovery assessments do not require taxpayers to expressly object to the validity of the assessments. The UT concluded that given HMRC’s failure, it was not open to the FTT to uphold the discovery assessments simply because it had been established that there were under-declared profits of the businesses. The FTT erred in not allowing the appeals because HMRC had failed to prove that the assessments were validly issued. The UT also refused to remit the matter to the FTT because to do so would give HMRC a ‘second bite of the cherry’, which, in the view of the UT, would not be just and fair. 

 

The UT has confirmed that when considering an appeal against a discovery assessment, HMRC must establish before the FTT that the necessary conditions for issuing the discovery assessment were satisfied and that the assessment is therefore valid. The appeal cannot be dismissed simply because the FTT is satisfied that there has been an underpayment of tax. 

 

Generally, in an appeal to the FTT, it is the appellant taxpayer who bears the burden of proof. He must prove his case, on the balance of probabilities, and demonstrate, for example, that an assessment is excessive – it is, after all, the taxpayer’s appeal against a decision of HMRC and it is therefore for the taxpayer to prove his case. However, in relation to the validity of discovery assessments, the burden shifts and it is incumbent upon HMRC to prove, again on the balance of probabilities, that the necessary circumstances existed to permit a discovery assessment to be made (see HMRC v Household Estate Agents Ltd [2008] STC 2045). 

 

There are very good reasons for this. The discovery assessment provisions are designed to afford additional protection to the Crown beyond the ordinary statutory limitation periods. In cases of carelessness, the ordinary time limit of four years is extended to six years; and, in cases where the loss is brought about deliberately, the period is extended to 20 years (TMA 1970 ss 34 and 36). The ordinary limitation period is designed to provide certainty and finality to taxpayers who, since the introduction of self-assessment, have had greater responsibility for completing and filing their returns and providing the information to HMRC on which their liability to tax will be determined. 

 

As mentioned in our introduction, once the time limit for opening an enquiry has expired, or an enquiry has been closed, the taxpayer’s liability for the relevant year is generally regarded as final. However, as HMRC has the power to demand a further tax payment by issuing a discovery assessment, Parliament has provided that certain conditions must be satisfied before it can issue a discovery assessment. Such pre-conditions are designed to moderate the issue of discovery assessments; and, as it is HMRC which will be asserting that it is entitled to issue a discovery assessment, and that the necessary conditions are therefore satisfied, the burden of establishing that those conditions are satisfied, naturally falls on HMRC. 

 

During the UT hearing, HMRC argued that it was not for it to argue a point which was not in issue before the FTT. The UT had little difficulty dismissing this argument. Citing Phipson on Evidence, the UT explained that if one party bears the burden of proof on an issue, but fails to plead a positive case on it, the other side has no obligation to argue against the point. If HMRC fails to plead, it will fail to discharge the burden.

 

In this case, HMRC had assumed that because the taxpayers had not advanced specific arguments on the validity of the discovery assessments, the issue of validity did not need to be determined by the FTT. The UT was of the view that the validity of the assessments was an ‘essential element of HMRC’s case’ which needed to be positively proved by HMRC. By making no findings on whether HMRC had discharged the burden of proof regarding the validity of the assessments, and yet still dismissing the taxpayers’ appeals, the UT found that the FTT had made an error of law. 

 

As HMRC had failed to argue the point, the UT refused to permit it to do so on appeal – following the longstanding rule that new issues should not be introduced for the first time on appeal (barring exceptional circumstances which were not present in this case). 

 

HMRC regularly seeks to use the discovery assessment provisions and a number of judicial decisions have reduced the substance of what amounts to a ‘discovery’ to an almost meaningless level. What is required for there to be a ‘discovery’ was succinctly expressed by the tribunal in HMRC v Charlton [2013] STC 866: 

 

‘In our judgment, no new information, or fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion or correction of an oversight.’

 

As a consequence of the very broad meaning given to the word ‘discover’ by the courts, in order for  a discovery assessment to be found to be invalid the focus tends to be on whether the taxpayer has acted with reasonable care and provided HMRC with sufficient information.  

 

In Burgess, the UT acknowledged that the outcome may appear ‘unsatisfactory’ since both taxpayers had been found, as a matter of fact, by the FTT to have understated their profits. However, the UT was bound to decide the case according to the law and itself said ‘it is not for this tribunal to seek to achieve any result other than that prescribed by the law’.

 

The UT’s decision represents an important restatement of the legal position in relation to the burden of proof which operates where HMRC decides to issue a discovery assessment which is subsequently appealed. HMRC must prove its validity irrespective of whether the taxpayer argues the issue. It remains to be seen whether HMRC will seek to appeal the decision to the Court of Appeal but the authors would not be surprised if it did.