Or, indeed, is HMRC?…
The recent Upper Tribunal decision in Burgess and Brimheath [2015] UKFT 578 will irritate and embarrass HMRC in equal measure. The Tribunal itself considered that the result of the case “may appear unsatisfactory. Each of the appellants has been found by the First-tier Tribunal (“FTT”) to have seriously understated their taxable income over an extended period. That taxable income will remain untaxed.” Oh dear: but, frankly, HMRC have only themselves to blame. How come?
Mr. Burgess (and subsequently his company Brimheath Limited) had allegedly failed to disclose the full amount of taxable trading profits over a period of years. HMRC issued assessments. The taxpayers appealed. The FTT held that “there were grounds on which HMRC could base the assessments on Mr. Burgess and that the evidence adduced by and on his behalf was insufficient to displace the assessments raised against him. Likewise, in relation to Brimheath and the assessments for 2001 to 2008, the FTT found that the evidence was insufficient to displace those assessments.” In other words, the FTT agreed that the profits of both Mr. Burgess and Brimheath were understated.
The taxpayers appealed to the Upper Tribunal. They pointed out that the law is not that simple. Establishing that profits have been understated (what the Upper Tribunal called “the substantive issue”) is only part of the story. You also need to consider whether the conditions to make a “discovery” are fulfilled; and if they are, to consider the separate question of whether HMRC are still in time to make any necessary assessments.
Crucially, HMRC had not placed any evidence before the FTT on these points. HMRC said that this didn’t matter: the taxpayers had not, before the FTT, objected to the assessments on either of these grounds, and it was now too late for them to do so at the Upper Tribunal. Not so, said the Tribunal. If the assessments were to be valid, it was only on the grounds first, that HMRC had made a “discovery” (the “competence issue”); and second, that the extended assessing time limits applied (the “time limit issue”). On the facts of this particular case, each limb was true if and only if the taxpayers had deliberately understated their profits. There was no doubt at all that the burden of proof in relation to demonstrating such deliberate understatement lay with HMRC. It was not for the taxpayers to raise objections to the assessments on the basis that there had been no deliberate understatement: on the contrary, demonstrating deliberate understatement was an integral part of what HMRC had to show before the FTT. Since HMRC had failed to do this (apparently considering it unnecessary), the decision of the FTT was flawed in law and could not stand.
The Upper Tribunal then had to consider what to do next. Should the case be remitted to the FTT for a re-hearing and the hearing of evidence on these points? The Tribunal decided not: “In the absence of HMRC having put a positive case to the FTT on the competence and time limit issues, the only course open to the FTT was to allow the appellants’ appeals. In those circumstances, to remit the appeals would allow HMRC to have a second bite of the cherry. That, in our judgment, would not be in the interest of justice and fairness.”
It’s unsatisfactory that income which “ought” to have been taxed won’t be taxed. But in our experience HMRC had this coming. We have ourselves seen far too many cases in practice in which HMRC have issued assessments without regard to procedural requirements, only to be forced to withdraw them on challenge. Hopefully this case will remind HMRC that there are still some rules to this game and that it behoves them to follow them.
For more on assessments and competency to make them, get in touch with your usual BKL contact or use our enquiry form.
