A special commissioner decided that the conditions for making a discovery assessment under TMA 1970, s. 29 were satisfied where the taxpayer had failed to establish that she had incurred a loss following her participation in a tax avoidance scheme and the raising of the assessment did not breach her human rights.

Facts

In 1998–99 the taxpayer participated in a scheme suggested by her bank with the object of producing an allowable capital loss of about £1m. She applied that loss in her 1998–99 tax returns to eliminate the capital gains she had made in that year, and carried a small balance forward which she used in her returns for 1999–2000 and 2000–2001 to reduce gains occurring in those years. In her 1998-99 return she made a disclosure under the heading ‘additional information’ of the source of the loss.

The Revenue became aware of the scheme, and started investigating it, in December 1999. Several hundred taxpayers had participated in it and claimed allowable losses.

As the result of an administrative failure a batch of letters, including those to the taxpayer and her advisers, indicating an intention to open an enquiry, were not posted. The Revenue accepted that the enquiry notices had not been given and accordingly that they could not pursue a s. 19A request for information. Since the enquiry window had closed they could not open an enquiry by the giving of another notice. The Revenue offered those who had received enquiry notices terms to settle their claims for allowable losses. The taxpayer was offered the same terms on the basis that if she did not accept an assessment would be made under s. 29 for the additional tax which would arise for 1998-99 on the basis that the losses were not allowable. The assessment was subsequently made under TMA 1970, s. 29(1) and (5) effectively disallowing the scheme loss claimed in her 1998-99 tax return.

The taxpayer appealed against that assessment contending that under TMA 1970, s. 29, construed conventionally, the Revenue were not permitted to make the assessment; alternatively, s. 3 of the Human Rights Act 1998 (HRA 1998) required a construction of s. 29 which proscribed the assessment; alternatively, HRA 1998, s. 6–8 required the tribunal to grant relief against the assessment because the Revenue had acted in a way which was incompatible with the taxpayer's human rights. The taxpayer also contended that the amendments made by the Revenue to the return of the trustees under the scheme disallowing the loss showed that the loss had not been granted, and was therefore not an allowable loss, by virtue of TCGA 1992, s. 16(2A).

Issues

Whether the Revenue were entitled to raise the assessment disallowing the loss claimed by the taxpayer; and whether they had contravened the taxpayer's human rights by doing so.

Decision

The special commissioner (Charles Hellier) dismissed the appeal.

Allowable loss

The loss could only have been an allowable loss in the hands of the trustees if it was claimed by the trustees, but whether or not the alleged loss (once claimed) was an allowable loss was a matter to be determined by the proper application of the statute to the facts, and there was nothing in the statute which conferred on the Revenue the ability to cause a loss to be or not to be allowable. There was nothing in s. 16(2A) of the 1992 Act which indicated that the claim for the loss had to be accepted before the loss was an allowable loss. That provision served the administrative purpose of letting the Revenue know of the claim for the loss. It did not confer on the Revenue a right to deny it. TMA 1970, s. 42 and 43 dealt with the machinery for the making of a claim. There was no indication in those sections that a decision or action of the Revenue could affect the validity of a claim.

Section 29(1)(c) of TMA 1970 dealt with the situation in which any relief which had been given was or became excessive. That did not indicate that a relief was in the gift of the Revenue. Thus the taxpayer was not shut out from contending, nor was the tribunal shut out from holding, that the loss was an allowable loss (available to the taxpayer by virtue of TCGA 1992, s. 71(2)).

However, the taxpayer had not discharged the burden of proving that there was a loss. On the evidence it was more likely than not that there was no loss; and if there was a loss it was not freely available to the taxpayer. Accordingly, the taxpayer was not entitled to deduct the claimed allowable loss in determining her net chargeable gains in her 1998–99 return and the tax assessed by that (self-assessment) return was insufficient.

Discovery assessment

The tax inspector might raise an assessment under s. 29 only if he newly came to the conclusion that it was probable that there was an insufficiency; and at the relevant time an officer of the Board could not reasonably have been expected, taking into account the general knowledge and skill that might reasonably be attributed to him, and on the basis only of the s. 29(6) information, to have concluded that it was probable that there was an insufficiency. The test was objective awareness of an officer of the Board not the objective awareness of the inspector who made the assessment. The evidence pointed to a pre-ordained tax scheme and it was inherently implausible that it would result in an allowable loss. An inspector equipped with a reasonable knowledge of tax law could reasonably be expected to conclude from the taxpayer's disclosures that he had participated in a tax scheme. It would be reasonable to expect him to wish to question the workings of the scheme and the genesis and existence of a remarkable £1bn loss. But he would also be aware that some tax schemes worked and delivered the benefits claimed. There was nothing to suggest that this scheme did not work. An inspector could not reasonably be expected to conclude from the clear hints that there was a scheme that it was unlikely that it would work. By claiming the losses under the heading allowable losses in her tax return the taxpayer was representing that they were available and allowable: a far clearer indication of doubt in the disclosure would be required to counter that representation than mere omission.

Human rights

Moreover, the legislation did not infringe the taxpayer's human rights and, even if the actions of Revenue had been incompatible with those rights, no remedy was appropriate. The Human Rights Act 1998, s. 6(1) provided that it was unlawful for a public authority to act in a way which was incompatible with the taxpayer's human rights. A fair balance had to be struck between the demands of the interest of the community and the protection of the individual's rights, and a reasonable proportionality between the means used and the end pursued. The requisite proportionality might not exist where the individual concerned had had to bear an individual and excessive burden or if the provisions were arbitrary or excessive. But the state was allowed a wide margin of appreciation in the evaluation of that balance.

The object of s. 29 and the enquiry provisions was to provide a means by which the state might secure the payment of taxes which should be due, in circumstances where the taxpayer had not volunteered those taxes. Such an aim involved some conflict with the individual's right to retain his property, but in s. 29 and the enquiry provisions the state limited the time for which a person's assets were at risk. One was not required to look just at s. 29 and contrast it with the s. 9A enquiry procedure but to consider the whole regime and ask whether it failed to strike a fair balance. Nor did the way in which the Revenue operated cause the taxpayer to bear an excessive burden.

For there to be a fair balance, the legislation had to provide to an honest and careful taxpayer a period after which, if he provided all the required information, he would know the limit of his tax liabilities. A taxpayer who made a completely full and frank disclosure achieved certainty at the end of the enquiry window or on completion of the enquiry. A taxpayer who made a non-negligent partial disclosure might have to wait a few more years. That was not an unfair balance and it was sufficiently precisely formulated to enable a taxpayer to regulate his conduct so as to be able to foresee to a reasonable extent the consequences of his actions.

Furthermore, the tribunal was not convinced that there had in fact been any discrimination or any discrimination in relation to which it would be appropriate to grant any remedy. There would always be minor differences in the treatment of taxpayers but art. 14 ECHR addressed not the random differences which arose in the normal administrative process, but differences in treatment which arose from a feature of the individual which caused him to be treated differently. There was nothing in the present case which indicated that the different treatment accorded to the taxpayer arose from her personal attributes, status, beliefs or persuasions. It arose as the result of an administration error in failing to send out a batch of letters. That was not the kind of discrimination meant by art. 14.

(2008) Sp C 692.
Decision released 16 June 2008.