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The First Tier Tax Tribunal has recently held that a discovery assessment may only be issued once in relation to discovery. Consequently, where HMRC seeks to issue a subsequent discovery assessment in relation to the same discovery, it will be prevented from doing so.
HMRC undertook an investigation in relation to the provision of a car benefit (‘BIK’), received by Mr. Kelly, from his employer.
Having visited the employer in September 2014, HMRC discovered an underpayment of tax in relation to the BIK. In February 2016, HMRC issued a discovery assessment to Mr. Kelly for the alleged unpaid tax, in relation to 2010/11, 2011/12, 2012/13 and 2013/14 (‘2016 discovery assessments’).
The 2016 discovery assessments were subsequently appealed. Prior to the appeal being heard by the tribunal, HMRC wrote to Mr. Kelly to notify him that the 2016 discovery assessments were ‘technically flawed’ and therefore, these would be reduced to NIL and vacated. It was understood that the technical flaw related to the assessments failing to refer to Section 29, Taxes Management Act 1970, within the letters.
In June 2017, HMRC issued new discovery assessments to Mr. Kelly for the alleged unpaid tax (albeit, now for a higher amount), in relation to 2010/11, 2011/12, 2012/13, 2013/14 and 2014/15 (‘2017 discovery assessments’).
Mr. Kelly subsequently appealed the 2017 discovery assessments to the tribunal.
The FTT held that a discovery was made at the time of making the visit to the employer in September 2014 and therefore, this formed the ground for the 2016 discovery assessments.
In relation to the 2016 discovery assessments, the FTT held that, despite the assessments failing to cite Section 29, Taxes Management Act 1970, Section 114 (1), Taxes Management Act 1970, renders that an assessment shall not be void or voidable, where there is a mistake, defect or omission in the assessment and the purpose and intention was clear.
Consequently, it was concluded, on the basis that Mr. Kelly knew and understood the basis of the 2016 discovery assessments and the purpose and intention of these were clear, the 2016 discovery assessments were not void (i.e. it was not as though they were never issued) or voidable (i.e. they were validly issued but could be set aside).
Where it was concluded that the 2016 discovery assessments were valid, the tribunal determined that, as there was no subsequent discovery after the issuance of the 2016 discovery assessments, the 2017 discovery assessments were also based upon the discovery made in September 2014. Notably, the legislation refers to ‘an assessment’ and therefore, HMRC are not able to issue two separate discovery assessments on the basis of one single discovery. Consequently, the 2017 discovery assessments were not validly issued.
Finally, the tribunal also considered the status of the 2016 discovery assessments and whether these could still be relied upon in pursuance of the underpayment of tax. Notably, an assessment stands unless either,
In relation to (a.), the tribunal concluded that no agreement had been reached as between Mr. Kelly and HMRC and therefore, the assessment was not cancelled on this basis. However, in relation to (b.), the tribunal held that,
“the notification of the withdrawal by the Tribunal does not simply notify the action taken by HMRC. It goes one step further and states that the appeal is consequently allowed.
We are aware that the standard form letters sent out by the Tribunal in this case are amongst a set of standard form notices and direction which have been approved by a judge of the First-tier Tax Tribunal. In doing so, we are satisfied that the judge carried out a judicial function and decided that when specified circumstances arose, a particular action would follow. In this case the decision taken by that judge was that where a notice of withdrawal was received from HMRC the standard letters in the form sent to HMRC and Mr Kelly should be issued. That judicial decision is recognising that where HMRC withdraw, HMRC is saying that the appeal is no longer contested. As a consequence there is no longer any dispute for the Tribunal to decide and, necessarily, that results in the taxpayer’s appeal succeeding.
As a result, we are satisfied that there was a decision of the Tribunal, validly made under the Tribunal Procedure Rules, which was reflected in the letters of 27 February 2017 issued by the Tribunal.”
As a result, the tribunal held that the 2016 discovery assessments had been cancelled by judicial function.
Mr. Kelly seemingly benefitted from an erroneous evaluation of the 2016 discovery assessments, on the part of HMRC. Had HMRC not determined that the 2016 discovery assessments were technically flawed and not sought to withdraw from the appeal, giving rise to the tribunal canceling the assessment, HMRC could have continued its pursuance of Mr. Kelly through the 2016 discovery assessments.
Notwithstanding this, the tribunal was clear in its determination that only one assessment may be issued in relation to a discovery. Once the assessment has been cancelled, whether by agreement or judicial function, without making an additional discovery, HMRC have no further opportunity to assess the taxpayer in such circumstances.
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