The High Court held that the ordinary six-year time-limit for raising an assessment to income tax or capital gains tax in TMA 1970, s. 34 did not apply to a taxpayer's own self-assessment or amendments thereto.

Facts

The taxpayers were UK nationals. In October 1997 they sold their controlling shareholding in a company for £20.3m. On that disposal they would be liable for CGT in the sum of about £7.6m. On 28 January 1999 they filed tax returns for the year 1997 – 98 in which they claimed that they were not resident or ordinarily resident in the UK in that tax year. Although the returns also required them to provide information if they were resident in another country for the purposes of claiming relief under a double taxation agreement that information was not provided. The returns did, however, claim that they had spent only 71 days in the UK in the relevant tax year.

In March 1999 the Revenue served notices on the taxpayers under TMA 1970, s. 9A requesting a detailed schedule of arrival and departure dates for each visit to the UK in the tax year and other details such as the purpose of the visits, the address at which the taxpayers stayed during their visits and whether they had used credit cards whilst in the country. When no response was received, notices under s. 9A requesting the same information were sent directly to the taxpayers at an address in Spain. There was no appeal against those notices but no direct response from the taxpayers. Instead they instructed UK solicitors who wrote to the Revenue setting out the days allegedly spent in the UK but not providing the other information. Faced with that, the Revenue used their powers under TMA 1970, s. 20(3) to obtain copies of the taxpayers' credit card and mobile phone records. These indicated that their credit cards and hones had been used in the UK on many more days than the taxpayers claimed they had been in the country.

In April 2002 the Revenue obtained consent from the general commissioners to issue notices under TMA 1970, s. 20(1) requiring the taxpayers to provide the relevant information and documents relating to the period from 6 April 1996 to 5 April 1998. This included credit and debit card accounts, telephone bills and copies of their passport entries for that period. The taxpayers failed to comply with the notices and on 31 July 2002 the Revenue caused an information to be laid before the general commissioners for the purpose of determining the validity of the notices and imposing penalties on the taxpayers for non-compliance with them. The general commissioners upheld the validity of the notices and imposed the maximum penalty of £300 each on the taxpayers for their failure to comply with the notices. In November 2002 a High Court appeal was instituted against the decision of the general commissioners, but in May 2003 it was dismissed by consent. The taxpayers were ordered to pay the costs of the Revenue. Subsequently, further penalties were imposed for non-compliance with the notices.

In March 2005 the Revenue served notices under s. 28A on each of the taxpayers to amend their returns so as to include a liability to CGT on the part of each taxpayer in the sum of £3,846,011.60 due on the disposal of their shares. On 8 August 2006 penalty determinations were made in the sums of £3,151,809.30 and £3,195,271.61 respectively.

Assessments were also issued for the tax year 1995–96 in respect of UK dividends and for Sch. E income tax in relation to another company. The taxpayers' appeals from all the assessments and notices were to be heard together by the special commissioners.

The taxpayers appealed against a preliminary decision by which the special commissioners had ruled against them on two issues of principle.

First, the taxpayers had contended that, since a closure notice operated to amend the return and in particular the assessment to tax contained therein, it constituted an assessment within the meaning of s. 34 and must therefore be made within the time prescribed. The Revenue's case was that the statute drew a clear distinction between assessments properly so-called and other mechanisms for adjusting the liabilities of the taxpayer and that the amendment of a return effected by a closure notice was so described in s. 28A(2) in order to distinguish it from an assessment which would be subject to the time-limits in s. 34. The practical effect of applying s. 34 to the process under s. 28A would be that a taxpayer could (as in this case) spin out an inquiry beyond the s. 34 time-limit and so require the Revenue to prove either fraud or negligence in order to give effect to the conclusions of the investigation.

Secondly, the taxpayers contended (and the Revenue accepted) that in the penalty appeals listed the burden rested on the Revenue to prove that the conditions set out in TMA 1970, s. 95 were satisfied. The Revenue therefore had to satisfy the special commissioners that the returns were incorrect and were delivered either fraudulently or negligently. Because the special commissioners would consider not only those appeals but also the taxpayers' appeals against the closure notices it was contended (relying on art. 6(2) of the European Convention on Human Rights) that the burden of proof also rested on the Revenue in those appeals to prove that the returns were incorrect thereby reversing the normal burden of proof in non-penalty cases which under TMA 1970, s. 50(6) required the taxpayer to show that the amount of the Revenue's assessment was wrong.

Issues

Whether the time-limit imposed by TMA 1970, s. 34 applied to the closure notices served by the Revenue under TMA 1970, s. 28A(2) so as to amend the taxpayers' returns containing the self-assessment of their liability to CGT; and whether art. 6 of the European Convention on Human Rights ('ECHR') as applied by the Human Rights Act 1998 to the taxpayers' appeals against the penalty determinations under s. 95 altered the burden of proof in relation to the appeals against the other assessments and notices which were listed for hearing at the same time but did not themselves involve any element of penalty.

Decision

Patten J (dismissing the appeals) said that, on the first issue, the starting point had to be s. 34 itself which predated the introduction of self-assessment and was drafted to accommodate a scheme under which all assessments were made by the Revenue and not by the taxpayer. Those included discovery assessments under what was then s. 29(3). The draftsman therefore clearly thought that in order to give effect to the scheme of self-assessment as finally settled, it was neither necessary nor appropriate to alter the terms of s. 34. Under that section, the time-limits imposed continued to apply only to the making of an ‘assessment’.

It was difficult to identify any obvious reason why the provisions of s. 34 and s. 36 which were originally introduced to set time-limits to the Revenue's power to assess a taxpayer should have been applied to the obligations of the taxpayer to include a self-assessment as part of his own tax return. TMA 1970, s. 8 required a return to be made within the time-limits specified by s. 8(1A) and to include a self-assessment of the taxpayer's liability to tax on the declared income and capital gains. Section 9(3) contained default provisions enabling the Revenue to make the assessment in place of the taxpayer if he did not comply with that obligation and to make a determination of tax with the same effect as a self-assessment in the event that no return at all was delivered by the filing date. In those circumstances there was no purpose to be served by imposing a further (and inconsistent) time-limit under s. 34, and s. 34 was not intended to have that effect. That section had always been and remained concerned only with assessments by the Revenue. That was made clear by reading s. 34 in conjunction with s. 36 which was obviously intended to extend the time-limits in cases of fraudulent or negligent conduct by the taxpayer. Section 36 could have no application in the case of a self-assessment by the taxpayer because that was not ‘an assessment on any person for the purpose of making good to the Crown’ a loss of tax. It would involve the taxpayer in effect alleging negligence or fraud against himself. The suggestion that s. 34 could apply to the taxpayer was also inconsistent with the structure and provisions of TMA 1970 in relation to the audit of self-assessments made by the taxpayer. The taxpayer's right to amend a self-assessment by the Revenue carried out under s. 9(3) or s. 28C depended upon his complying with the time-limits which were imposed under TMA 1970, s. 9ZA.

It was unlikely that Parliament would have wished to protect the Revenue's power to recover an overpayment of tax from the time-limit under s. 34 but not to have given equal treatment to an inquiry designed to recover undeclared tax. The more likely reason for not qualifying s. 28A in a similar way was that there was no need to do so because s. 34 had no application to s. 28A. The draftsman had been careful in his choice of terminology and s. 28A did not involve an assessment within the meaning of s. 34.

On the second issue, on the penalty appeals the special commissioners would need to be satisfied on the evidence that the returns were incorrect and that they were made either negligently or fraudulently. The determination of those matters was unlikely to be affected by the incidence of the burden of proof and the determination of the issue of residence would determine all the appeals including the penalty appeals in a way that was art. 6 compliant.

The issue about the burden of proof when properly analysed presented the special commissioners with no real problems in terms of how they should conduct the hearing of the appeals. However, it was not appropriate for them to have entertained any application to rule on whether s. 34 applied to the closure notices under s. 28A. The effect of their determination was to decide that issue for the purposes of the appeal and, given that that would be an issue in any event in relation to the penalty appeals, the determination of that issue at a preliminary stage served no useful purpose. The better course would have been to have determined both the closure notice appeals and the penalty appeals and to have then ruled on the s. 34 point (so far as was necessary) as part of a single exercise.

Chancery Division.
Judgment delivered 23 May 2007.