A recent First Tier Tribunal decision has found in favour of HMRC making a discovery assessment against a tax payer who claimed Business Asset Taper relief on the sale of land which had been previously let for the growing of grass for silage for a term of less than 365 days.

The case would seem to enable HMRC to issue a discovery assessment, subject to the necessary time limits and conditions for discovery being met, in situations where Business Asset Taper Relief on conacre land sold has previously been claimed.

In this case the Appellant contended that the assessment 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.

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

The dispute was not therefore about whether the Appellant, as part of the partnership, was engaged in the trade of farming when granting short term lets of the land or about the tax treatment of lettings in conacre in general therefore the Appellant was not challenging the correctness of HMRC's ruling disallowing business asset taper relief on the land disposal. Another partner had previously withdrawn his appeal before the General Commissioners on the correct tax treatment of the said disposal of the land.

The dispute was about whether the Appellant'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. The Appellant had the burden of proving on the balance of probabilities the details of the prevailing practice. If the Appellant had 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.

HMRC submitted that the legal requirements for a discovery assessment had been met. According to HMRC, 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. HMRC's 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.

In this case the Appellant 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.

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 the Appellant's 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 Appellant 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.

Chartered Accountants Ireland would be keen to hear the experiences of Agents and Practitioners who we are aware continue to deal with challenges from HMRC on the issue of whether conacre is a trading activity and can thus attract the various reliefs that follow on from trading status.

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