Backdated tax assessments can be issued

 In Tax

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In what circumstances can HMRC issue tax assessments more than 4 years after the end of a tax year?

Income tax – Graves v HMRC [2018] UKFTT 164

Case Summary from LawSkills | Private Client specialist trainersMr Graves had offshore investments in the Channel Islands, but had not declared any income in relation to offshore investments. HMRC found out about these investments and made assessments under s.29 Taxes Management Act 1970 (TMA) for the five years 2001/2 – 2005/6 inclusive. Mr Graves appealed the assessments, and now sought full reasons for the Tribunal’s decision.

The facts

Mr Graves was in his 80s and, as described by the Tribunal, harboured “an ineradicable sense of injustice about his treatment at the hands of the Inland Revenue and then HMRC”, as well as the Department of Work and Pensions and other Government bodies. He was convinced that, far from owing HMRC significant sums of money (about which proceedings were ongoing), he was owed huge amounts by way of refund of tax on account of expenses he had incurred and other things. He reacted to any request for information, particularly a tax return, by “scrawling hand written notes on the document and returning it. These notes never answer the questions and in some cases are scurrilous and occasionally nastily racist”.

Mr Hall, from HMRC’s legal office, had recognised that Mr Graves’ behaviour was that of a vulnerable person, and had conducted HMRC’s case accordingly. He had drawn a distinction, however between Mr Graves’ current vulnerability and his state of mind in the years to which the appeals related.

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In September 2010 HMRC had written to Mr Graves informing him they had received information about an offshore bank account he held, and asking for information about the gross income received from it. A few months later, in January 2011, HMRC wrote to him again, setting out the income they believed he should be assessed on, including financial institutions in the Channel Islands. The letter warned Mr Graves that in the absence of further information estimated assessments would be raised. In July 2011 an assessment under s.29 TMA was raised for the tax year 2005/6. HMRC treated a letter they received from Mr Graves as an appeal and offered a review, which was carried out. No response was received from Mr Graves.

In March 2013 HMRC raised assessments for 2001/2 – 2005/6 inclusive. Again, a letter from Mr Graves (in April 2013) was treated as an appeal. More reviews were offered; no response was received.

None of the letters from HMRC mentioned that the assessments were made more than 4 years after the year of assessment, so were outside the normal time limits; neither did the letters say anything about whether Mr Graves’ conduct was regarded as careless, negligent or deliberate, or that he had a right to contest whether his conduct fell within any of those descriptions, irrespective of whether he agreed the figures.

Part of the assessment had concerned payments from DWP that information from DWP showed Mr Graves had refused to accept. It was agreed by HMRC that even though state benefits were charged on an accrual basis, it would be unfair to tax Mr Graves on that which he did not receive. On that basis, the assessments for 2002/2 and 2002/3 were reduced to nil. HMRC still believed Mr Graves owed tax in relation to the other three years they had assessed.

The law – provisions of TMA

“29  Assessment where loss of tax discovered

(1)     If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—

(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or….

the officer …may… make an assessment in the amount… which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.”

“36  Loss of tax brought about carelessly or deliberately etc

(1)     An assessment on a person in a case involving a loss of income tax or capital gains tax brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates (subject to subsection (1A) and any other provision of the Taxes Acts allowing a longer period).

(1A)     An assessment on a person in a case involving a loss of income tax or capital gains tax—

(a)     brought about deliberately by the person,

(b)     attributable to a failure by the person to comply with an obligation under section 7, . . .

may be made at any time not more than 20 years after the end of the year of assessment to which it relates (subject to any provision of the Taxes Acts allowing a longer period).”

The decision

The Tribunal noted that “Mr Graves made no meaningful or relevant submissions about the assessments”.

HMRC submitted:

  • In relation to 2003/4 they would have to show there was negligent conduct on Mr Graves’ part [s.36(1A) TMA]
  • In relation to 2004/5, HMRC could not contend Mr Graves’ conduct was deliberate so they asked the Tribunal to cancel the assessment
  • In relation to 2005/6, as the assessment had been made after 4 but within 6 years from 2005/6, they had to show the loss of tax was brought about carelessly [s.36(1) TMA].

In HMRC’s view, Mr Graves’ conduct in 2003/4 was negligent, and in 2005/6 was careless.

HMRC submitted that whatever might be said of Mr Graves’ state of mind in 2018, there was evidence showing his knowledge and control of his financial affairs at the relevant time. The evidence included the large number and variety of bank accounts and movements between them; that he had instructed a financial advisor at that time; and that Mr Graves had said in the hearing that he had deliberately opened the account in the Channel Islands and had used the money to assist his children in house purchases. All this, HMRC submitted, pointed to someone who knew what he was doing, but did not take any steps to discover what his tax liabilities were.  “A prudent person in his situation would have taken steps to find out whether he had any liability in respect of untaxed interest in the amounts the appellant had.

The Tribunal accepted HMRC’s submissions that Mr Graves’ conduct in relation to 2002/3 and 2004/5 was not that of a prudent person mindful of his tax obligations. It was not reasonable for him in his circumstances to keep quiet about his interest bearing accounts and the untaxed interest arising on them. Mr Graves had not shown that the figures for those two years were excessive.

Points to note

  1. The tribunal noted that “Mr Hall has continued to do his best to help Mr Graves, to give every benefit of the doubt that could reasonably be given…and to conduct the HMRC case mindful of Mr Graves’ state of mind and idiosyncrasies. In return he has received no co-operation from Mr Graves but a lot of sometimes very nasty abuse. His behaviour was an outstanding example of a public servant doing his duty to the highest standard”. Practitioners may be encouraged — their clients’ unusual and perhaps difficult behaviour might not cause as many difficulties as they might think.
  2. Mr Graves did not, however, have legal advisers, and practitioners will want to alleviate any difficulties their clients cause for HMRC where they can.
  3. The Tribunal had noted in an earlier hearing that a charity may have tried to help Mr Graves in these matters — they exhorted him to seek help from a charity such as TaxAid or TaxHelp.

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