Whether the Appellant could argue that the return was made in accordance with the prevailing practice at the time thus resulting in HMRC being unable to issue a discovery assessment in respect of the incorrect claim made for Business Asset Taper Relief

Background

Mrs Evelyn appealed against a discovery assessment dated 15 September 2009 which concerned the application of business asset taper relief to a capital gain arising from a disposal of land. HMRC decided that relief was not available because the partnership of which she was a partner was not carrying out the trade of farming. The discovery increased the taxable capital gain from £39,496 to £122,902 for the year ended 5 April 2005.

The taxpayer contended that the discovery assessment issued by HMRC did not meet the legal requirements of discovery and asserted that her declaration of capital gains in the 2004/05 return complied with the practice generally prevailing at the time the disposal was made.

Facts

The land disposed of had previously been let for the growing of grass under an agreement of less than 365 days with no right of renewal. According to the taxpayer, such lettings in Northern Ireland were, at that time, regarded by HMRC as being engaged in a trade. Therefore the owners were entitled to claim business asset taper relief on gains arising from disposals of land previously subject to conacre. HMRC had allowed business taper relief in similar circumstances on a previous land sale in the year ended 5 April 2001.

The dispute was therefore about whether the taxpayer's error in claiming the relief was because she made the return on the basis or in accordance with the practice generally prevailing at the time. If it was established that the return was made on the basis of prevailing practice, HMRC's discovery assessment would be defeated by virtue of the provisions of section 29(2) of the Taxes Management Act 1970. The burden of proof rested with the taxpayer.

HMRC submitted that the legal requirements for a discovery assessment had been met. At the time of making the 2004/05 return it did not treat all owners of lettings with the conacre label as being engaged in trade. Their longstanding practice had been to consider each case of conacre on its own individual merits. The critical question was whether the owners remained in occupation of the short term lettings for the purposes of farming.

The taxpayer in this case did not remain in occupation for the purposes of farming despite the conacre label attached to the letting. Thus, HMRC had considered the Appellant's claim for business taper relief in her 2004/05 return on its own facts, which complied with the current practice at the time. HMRC stated that it did not make sufficient enquiry into the Appellant's 2000/01 return which led to the error of allowing business asset taper relief on the land disposal in that year. HMRC indicated that it would not take any action to recover the excess taper relief for the year 2001.

Tribunal's Findings

Finding in favour of HMRC, the Tribunal stated that the evidence provided demonstrated that HMRC and taxpayers’ advisers alike held a longstanding consensus about the categorisation of conacre lettings for tax purposes. Essentially the owner must remain in occupation of the letting for farming in order for the letting to be treated as a trade or part of a trade.

In this case, the partnership's letting of land was not a valid conacre therefore the Appellant's error in claiming business taper relief on the chargeable gain in 2004/05 return was made on the basis of her misunderstanding of the correct tax treatment of conacre lettings not on any prevailing practice. In short there was no persuasive evidence of the existence of a prevailing practice which permitted an owner of land let in conacre to treat his activities as a trade regardless of whether he remained in occupation of the land for farming.

The Tribunal held that the taxpayer failed to demonstrate on the balance of probabilities that the insufficiency of the tax assessed in the 2004/05 return was attributable to an error or mistake made on the basis of prevailing practice in existence at the time of the return and therefore the discovery assessment issued complied with the relevant provisions of TMA 1970.

The full text of the case can be accessed at http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC00997.html.