Discovery Allowed by Tribunal – N Pattullo v HMRC

The question of what constitutes a discovery remains an area of ambiguity, although recent cases tended to have sided with HMRC’s view that virtually anything can be considered a discovery.

A further recent case was heard on the subject in N Pattullo v HMRC (TC03958), although the decision in the case is unlikely to be too controversial or unexpected, especially considering the case involved an avoidance scheme.  In the current climate, the courts are tending to be reluctant to favour taxpayers in cases where they have used an avoidance scheme.

Mr Pattullo participated in a scheme which generated capital losses of around £2.6m which he reported on his 2003/04 tax return.  HMRC concluded that he had participated in an avoidance scheme and issued a notice under TMA 1970, s.20(1) requesting relevant documents.  The taxpayer did not comply with this request and instead sought a judicial review to revoke the notice, but this request was dismissed by the Court of Session in 2009.

In the meantime, the Court of Appeal had found in favour of HMRC in the case of J Drummond v CRC (2009) which involved a similar second-hand insurance policy scheme.  Therefore, HMRC raised a discovery assessment for £835.400 as they were now satisfied that his original return was incorrect.

The taxpayer appealed, arguing that there had been no discovery as no new information had come to light.  The Tribunal found that the decision in Drummond v CRC constituted a discovery as it converted a “suspicion” of an underpayment of tax into a “positive view”.  It was doubtful that a hypothetical officer would have been aware of these avoidance schemes before the Drummond case was heard.

The taxpayer made a final attempt to protect his position by arguing that the grounds of his appeal should be amended to argue that the original avoidance scheme actually worked.  This was again dismissed by the tribunal who felt that, bearing in mind there were a number of appeals on similar schemes to Drummond pending, he was trying to jump on a “bandwagon” allowing other taxpayers to argue his case for him.  They felt the amendment was too vague and dismissed the appeal.

The final decision will likely not be a surprise to many, but does highlight the current attitude of the courts to the use of such avoidance schemes, and the wide definition of “discovery” that HMRC are using.

Whose Liability is it anyway? – Sparrey [2014] TC 03940

In a recent case the tax payer, a Mr Sparrey proved he did not need to pay HMRC for an agreed tax underpayment.  This was because as a PAYE liability, prima facie, the tax should have been accounted for by the employer.

The Tribunal found that the employer and their payment agent did not take reasonable care, so HMRC should not have directed the tax to be collected from the individual taxpayer.  The latter had depended upon his employer to calculate the tax correctly and should not be penalised for their lack of care.

This case was not directly to do with Extra Statutory Concession A19, but it was mentioned, and may be of interest to those still arguing on past liabilities.

A number of underpayments we have seen have resulted from the misapplication of PAYE procedures by the employer.  This new case emphasises that, in those circumstances, HMRC have very limited powers to transfer liability to an individual employee, away from the employer.

It may also provide food for thought on other arguments where HMRC seek recompense from individual employees which may fall more aptly on the corporate body.

Transfer of liability to an individual may occur where (Reg 72 Income Tax (PAYE) Regs 2003 – SI 2003/2682).  The employer satisfies HMRC:

a)     That they took reasonable care and

b)    That the error to fully deduct was made in good faith

Or alternatively:

That the employee received the monies knowing that the employer had wilfully failed to deduct the amounts due.

Crucially, the employee has the right of appeal against an HMRC direction, so swift action and expert advice may be required.