(2) An assessment in a case involving a loss of tax brought about carelessly by the company (or a related person) may be made at any time not more than 6 years after the end of the accounting period to which it relates (subject to sub-paragraph (2A) and to any other provision of the Taxes Acts allowing a longer period).
(2A) An assessment in a case involving a loss of tax—
(a) brought about deliberately by the company (or a related person),
...
may be made at any time not more than 20 years after the end of the accounting period to which it relates (subject to any provision of the Taxes Acts allowing a longer period)."
In Anderson v HMRC [2018] UKUT 159 (TCC) ; [2018] STC 1210 , which was approved by the Supreme Court in HMRC v Tooth [2021] UKSC 17 ; [2021] STC 1049 at [72], Morgan J and Judge Berner stated (at [24]) that they regarded the following propositions as established by the various previous authorities:
"(1) s 29(1) refers to an officer (or the Board) discovering an insufficiency of tax;
(2) the concept of an officer discovering something involves, in the first place, an actual officer having a particular state of mind in relation to the relevant matter; this involves the application of a subjective test;
(3) the concept of an officer discovering something involves, in the second place, the officer's state of mind satisfying some objective criterion; this involves the application of an objective test;
(4) if the officer's state of mind does not satisfy the relevant subjective test and the relevant objective test, then the officer's state of mind is insufficient for there to be a discovery for the purposes of sub-s (1);
(5) s 29(1) also refers to the opinion of the officer as to what ought to be charged to make good the loss of tax; accordingly, the officer has to form a relevant opinion and such an opinion has to satisfy some objective criterion;
(6) although s 29(1) directs attention to the position of the actual officer, s 29(5) refers to the position of a hypothetical officer: Sanderson v Revenue and Customs Comrs [2016] STC 638 at [25];
(7) although there might be some points of contact between the real and the hypothetical exercises required by sub-s (1) and sub-s (5) respectively, the tests for the two exercises are different: Sanderson at [25];
(8) the actual officer referred to in s 29(1) is not required to consider whether the test required for s 29(5) is satisfied: Hankinson v Revenue and Customs Comrs [2012] STC 485 , [2012] 1 WLR 2322 ;"
With regard to the subjective element they held (at [27]) that:
"it cannot be said to be premature for an officer to 'discover'... something even when he knows he is not in possession of all of the relevant facts and does not know how relevant points of law will be resolved."
Further with regard to the subjective element they held (at [28]) that:
"In Sanderson , Patten LJ described the power under s 29(1) in this way (at [25]):
'The exercise of the s 29(1) power is made by a real officer who is required to come to a conclusion about a possible insufficiency based on all the available information at the time when the discovery assessment is made.'
We consider, with respect, that this test is in accordance with the earlier authorities. This passage describes the test somewhat briefly because, of course, that case concerned s 29(5) rather than s 29(1). Having reviewed the authorities, we consider that it is helpful to elaborate the test as to the required subjective element for a discovery assessment as follows:
'The officer must believe that the information available to him points in the direction of there being an insufficiency of tax.'
That formulation, in our judgment, acknowledges both that the discovery must be something more than suspicion of an insufficiency of tax and that it need not go so far as a conclusion that an insufficiency of tax is more probable than not."
With regard to the objective element (at [30]) they held that:
"The officer's decision to make a discovery assessment is an administrative decision. We consider that the objective controls on the decision making of the officer should be expressed by reference to public law concepts. Accordingly, as regards the requirement for the action to be 'reasonable', this should be expressed as a requirement that the officer's belief is one which a reasonable officer could form. It is not for a tribunal hearing an appeal in relation to a discovery assessment to form its own belief on the information available to the officer and then to conclude, if it forms a different belief, that the officer's belief was not reasonable."
In Tooth , which considered the equivalent provisions for discovery assessments in the Taxes Management Act 1970, Lord Briggs and Lord Sales (with whom the other members of the panel agreed) held (at [42]) that deliberately meant a statement "which when made, was deliberately inaccurate", it was not sufficient for it to be "a deliberate statement which is (in fact) inaccurate".
Lord Briggs and Lord Sales (at [63]-[65]) also accepted the following passage from Charlton v Revenue and Customs Comrs [2012] UKUT 770 (TCC) , [2013] STC 866 that discovery involves a change in mind but not necessarily new information:
"In our judgment, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight. The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself."
Further Lord Briggs and Lord Sales accepted ([64]-[65]) the submissions made on behalf of HMRC that:
"whether there is a discovery for the purposes of s 29(1) depends upon the state of mind of the individual officer of the Revenue who decides to make the assessment. For these purposes there is no concept of the Revenue having collective knowledge such that if one officer makes a discovery that is to be regarded as a discovery made once and for all by the Revenue as a whole. The result, according to Ms McCarthy's submission, is that a second or third officer (and so on) can also make the same discovery for themselves, so that each of them becomes entitled serially to issue a discovery assessment."
Lord Briggs and Lord Sales (at [79]) noted that the position was qualified by section 29(1) of the Commissioners for Revenue and Customs Act 2005, which provides that:
"Anything... begun by... one officer of Revenue and Customs may be continued by... another",
noting that:
"This would allow for one officer to begin consideration of a file under s 29(1) of the TMA and make a discovery and then pass it on to another to complete the exercise of assessment without the second having to revisit the opinion of the first officer that there was an insufficient assessment to tax in the return."
However, we note this still requires that the first officer has the subjective view that the assessment to the relevant tax is insufficient.
The legal framework is set out for completeness: we were taken through it at length.
With regard to the objective test, we have already stated our finding that the evidence could only reasonably give rise to a suspicion, rather than a belief, that there was an insufficiency of tax. Hence we find that the objective test is not met as the belief could not have been reasonably held.
This is all the more the case when we consider the information that was, on her own account, before Officer Pinder. It was noticeable from Officer Pinder's letter of 23 May 2018 was in the following terms:
"I believe that the company's self-assessment tax calculation for the above periods are inaccurate. This is because of the reasons set out in the letter sent to you on 16 May 2018 by my VAT colleague Mr Beard.
The checks carried out by my colleague have revealed that the turnover declared in the company accounts is inaccurate...
My colleague has explained the basis upon which he has arrived at the revised figures in his letter."
Similarly, Officer Pinder's witness statement suggests her view regarding the deficiency of CT was formed on the basis of relying on Officer Beard's view of suppression. In her oral testimony she mentioned how she sat down with officer Beard and would go through his calculations: although this was not mentioned in her witness statement. However, what she did not mention in her witness statement or oral testimony is going over the reasons Officer Beard gave for believing BJSKSCL to be trading as Oodles.
We find it was not reasonable for Officer Pinder to merely take as given Officer Beard's view that BJSKSCL was trading as Oodles, without interrogating the reasons for holding this view. We find this to be a further reason for holding that the objective condition was not met.
It follows, in our view, that the conditions for issuing a discovery assessment were not met., other than in respect of discovery assessments for the two failure to notify periods ending in 2014 and 2015. In respect of those periods we accept that there was an understatement of tax, as the profits of the Shere Khan restaurant would be subject to CT. We understood from the hearing that it was common ground that some CT was payable in this period and therefore the discovery assessments were valid. We make a decision in principle that the quantum of the actual discovery assessments made are excessive, as they should not include the estimated profits of Oodles. We make a decision in principle only on this point, as it is not apparent to us what the quantum should be, from the submissions that were made to us. The parties are invited to agree quantum, in respect of the CT for these two years, and if they cannot agree are at liberty to apply to the Tribunal.
Penalties
The amount of VAT subject to any penalty only relates to the amounts in respect of zero rating and input tax, as we have decided for the appellant in respect of suppression of sales.
Likewise, as we have decided that there were no omitted sales for CT purposes and that the discovery assessment was invalid (other than for the two failure to notify periods ending in 2014 and 2015, for which no penalty assessments were raised), any CT penalties fall away.
It is HMRC's case that the VAT penalties relate to deliberate but not concealed behaviour. As such the penalty is 70% of the potential lost revenue: para. 4 of Schedule 24 FA 2007. But that is subject to potential reductions for disclosure, under paras. 9-10 of Schedule 24 FA 2007, which specifies:
" Reductions for disclosure
9(1) A person discloses an inaccuracy or a failure to disclose an under-assessment by—
(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying the inaccuracy or under-assessment, and
(c) allowing HMRC access to records for the purpose of ensuring that the inaccuracy or under-assessment is fully corrected.
(2) Disclosure—
(a) is "unprompted" if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy or under-assessment, and
(b) otherwise, is "prompted".
(3) In relation to disclosure "quality" includes timing, nature and extent.
10(1) Where a person who would otherwise be liable to a 30% penalty has made an unprompted disclosure, HMRC shall reduce the 30% to a percentage (which may be 0%) which reflects the quality of the disclosure.
(2) Where a person who would otherwise be liable to a 30% penalty has made a prompted disclosure, HMRC shall reduce the 30% to a percentage, not below 15%, which reflects the quality of the disclosure.
(3) Where a person who would otherwise be liable to a 70% penalty has made an unprompted disclosure, HMRC shall reduce the 70% to a percentage, not below 20%, which reflects the quality of the disclosure.
(4) Where a person who would otherwise be liable to a 70% penalty has made a prompted disclosure, HMRC shall reduce the 70% to a percentage, not below 35%, which reflects the quality of the disclosure.
..."
Input output penalties (including zero rating)
The penalties in respect of output tax (including zero rating) are explained in schedule 2 to the letter of Officer Beard dated 11 June 2019. Under the heading "description of the inaccuracy" it states:
"Cash sales have been suppressed and under reported in the VAT return. In addition, you have not provided any evidence to demonstrate the zero rated sales claimed."
Officer Beard stated that the behaviour was deliberate for the following reason:
"We consider that the behaviour was deliberate. This is explained below.
From the review of the records provided it is clear that cash sales have been suppressed. In this respect, the cash sales on the Z readings appear to have been manipulated. In addition, no evidence has been provided to demonstrate an audit trail for the zero rated sales claimed in the Returns. Finally, evidence suggests that you have failed to declare any sales in relation to a second restaurant. It is clear that the Z readings were manipulated during the cashing up process which was undertaken by you, and that the manipulated figures were recorded on sales sheets that were used to complete the VAT Returns. Accordingly, it is clear that you knew the Returns were incorrect when you made the Returns." [our emphasis]
It is notable that the explanation in respect of the behaviour being deliberate in the letter covers behaviour relating to the alleged understatement of sales, rather than the zero rating. Similarly, HMRC's statement of case states the behaviour to be deliberate since:
"355. No evidence was provided to demonstrate an audit trail for the zero-rated sales declared in the returns."
Officer Beard stated that the behaviour was prompted for the following reason:
"The disclosure was Prompted because you didn't tell us about the Inaccuracy before you had reason to believe that we'd found out about it, or were about to find out about it."
With regard to reductions for the quality of disclosure, Officer Beard allowed the following reductions, totalling 25%:
" Telling
I have allowed 5% for telling. Whilst you have provided information regarding the business in general, you have not admitted to any inaccuracies.
Helping
I will allow 10% for helping. During the enquiry, you only provided Bank Statements. Subsequently in the Caseworker Reconsideration, you have provided sales information for three VAT periods only, despite repeated requests for all the information requested under a Schedule 36 Information Notice.
Giving
I will allow 10% for giving access to your records. During the enquiry, you only provided Bank Statements. Subsequently in the Caseworker Reconsideration, you have provided sales information for three VAT periods only, despite repeated requests for all the information requested under a Schedule 36 Information Notice."
Under the policy in HMRC's Compliance Handbook these are out of, potentially, maximum reductions of 40% for helping, 30% for telling and 30% for giving access (totalling 20%).
In the letter of 11 February 2021, which reduced the amendment to the assessment in respect of input tax, Officer Beard did not adjust the reductions for disclosure, noting that (separately, but identically, in respect of input and output tax):
"Behaviour and quality of disclosure remain as per original Penalty."
Input tax penalties
The penalties in respect of input tax are explained in schedule 2 to the letter of Officer Beard dated 11 June 2019. Under the heading "description of the inaccuracy" it states:
"Over claiming Input Tax. During the enquiry, you provided no evidence to demonstrate Input Tax has been claimed correctly, whilst the purchases and Input Tax claimed in the VAT Returns are significantly greater than the purchases noted in the Annual Accounts."
Officer Beard stated that the behaviour was deliberate for the following reason:
"We consider that the behaviour was deliberate. This is explained below. During the enquiry, no evidence to demonstrate Input Tax has been provided despite requests under a Schedule 36 Information Notice. When the Input Tax and Purchases claimed in the VAT returns are compared to the Purchases in the Annual Accounts there is a significant difference suggesting that Input Tax has been over claimed."
Officer Beard stated that the behaviour was prompted for the following reason:
"The disclosure was Prompted because you didn't tell us about the Inaccuracy before you had reason to believe that we'd found out about it, or were about to find out about it."
With regard to reductions for the quality of disclosure, Officer Beard allowed the following reductions, totalling 20%:
" Telling
I will allow 5% for telling. In this respect, you have not provided any explanations for the over claimed Input Tax.
Helping
I will 10% for helping. [sic] Whilst no information was provided during the enquiry, despite the issuance of a Schedule 36 Information Notice, you have subsequently provided some Purchase Invoices and Ledgers during the Caseworker Reconsideration for 11 periods.
Giving
I will allow 15% for giving access. Whilst no information was provided during the enquiry, despite the issuance of a Schedule 36 Information Notice, you have subsequently provided some Purchase Invoices and Ledgers for during the Caseworker Reconsideration for 11 VAT periods."
As noted above, under the policy in HMRC's Compliance Handbook these are out of, potentially, maximum reductions of 40% for helping, 30% for telling and 30% for giving access (totalling 20%).
Careless or deliberate?
The burden of proof is on HMRC to show deliberate behaviour.
Deliberate behaviour, in this context, requires proof that the taxpayer knowingly provided HMRC with a document which contained an inaccuracy, intending that HMRC rely upon it as accurate. This incudes where a taxpayer suspects that a document contains an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC. However, the suspicion must be more than merely fanciful: CPR Commercials Ltd v HMRC [2023] UKUT 61 . As noted in the statement of case, the burden of proof is on HMRC.
In our view the behaviour with regard to the input tax was careless rather than deliberate. The record keeping of the company appears to be chaotic. We accept Mr Saddiq's evidence that he lost the records whilst the office of Oodles was refurbished and only rediscovered them, by chance, over a year later. Similarly, his failure to keep records in respect of the expenditure on petrol by employees suggests a chaotic and disorganised operating system. We accept Mr Saddiq's evidence that he was not able to obtain records from his former bookkeeper and accountant as they were uncooperative. With the help of Mr Khan, the appellants have produced a certain amount of evidence which persuaded HMRC to vary the original VAT assessment. This all suggests that the errors in the returns were attributable to carelessness, rather than deliberate behaviour on the part of the first appellant.
With regard to the zero rating we have also reached the view that the behaviour was careless. The explanation in the statement of case for the behaviour being deliberate, being lack of accompanying evidence, is as consistent with carelessly failing to retain records as it is with deliberately failing to audit zero rated sales.
We agree with HMRC that the disclosure was prompted.
We therefore adjust the calculation of the penalty so it is based on careless rather than deliberate behaviour.
Given the detailed correspondence and calculations provided to HMRC by Mr Khan, on behalf of the appellant, we consider the reduction for helping is too little. We would increase that from 10% to 20%. We consider the reductions for telling (5%) and giving (15%) that were allowed by HMRC are appropriate, for the reasons stated in HMRC's letter which we quote above.
Personal liability notice
We have found, above, that the inaccuracy was not deliberate, accordingly the requirement for a PLN in paragraph 19(1) of Schedule 24 to Finance Act 2007 is not met.
Accordingly, the appeal against the PLN is allowed.
Right to apply for permission to appeal
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.
Original release date: 18 July 2024
Reissued following a r.41 review: 16 th MAY 2025