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Special Commissioners' Decisions/Special Commissioners' Decisions 2007/Kennerley v Revenue and
Customs Commissioners - [2007] STC (SCD) 188
[2007] STC (SCD) 188
Kennerley v Revenue and Customs Commissioners
SpC 578
SPECIAL COMMISSIONER: DAVID DEMACK
26 OCTOBER 2006,
Return - Self-assessment - Discovery assessment - Taxpayer submitting tax return before due date - Revenue subsequently raising assessment on taxpayer to make good loss of tax - Whether assessment invalid on
grounds that no notice of enquiry had been given by Revenue to taxpayer - Taxes Management Act 1970, ss
9A, 29.
The taxpayer was a publican. He submitted self-assessment tax returns for the years ending 5 April 1999 to
2002, the first three of which were prepared by a friend from incomplete records. The Revenue learned that
an enquiry into his VAT affairs had revealed poor record-keeping and understatement of turnover. As a result it opened enquiries into all four self-assessment returns. The taxpayer then submitted his tax return for
2002-03 before the 31 January 2004 filing date. Section 9A1 of the Taxes Management Act 1970 provided
that if a return was delivered on or before the filing date the Revenue might enquire into it if notice of intention to do so was issued within 12 months after the filing date. It therefore had until 31 January 2005 in
which to give notice to enquire into the 2002-03 return. No notice of enquiry was ever raised in respect of
that return, but in the year to January 2005 the Revenue requested information relating to the 2002-03 return. It was dissatisfied with the level of response from the taxpayer's accountant, and dealt with the taxpayer directly. It held discussions with him and at a meeting of 4 February 2005 it proposed adjustments for
seven years of assessments from years ending 5 April 1997 to 2003 inclusive. The taxpayer then instructed
new accountants. They sought the advice of specialists who raised various points on the proposed settlement in relation to the year ended April 2003. They argued that the taxpayer had not been notified by the
Revenue that it intended to enquire into his 2002-03 return. On 1 September 2005 the Revenue raised an
assessment for that year under s 292 of the Act, which provided that if it discovered that a self-assessment
was insufficient, it might make an assessment to make good the loss of tax. It could not do so unless one of
two conditions were satisfied. By sub-s (4) one of those conditions was that the situation was attributable to
'fraudulent or negligent conduct' on the taxpayer's part, or somebody acting on his behalf. The Revenue's
assessment was based on £28,000 gross income for the year, as declared by the taxpayer in a loan application to a bank. The income declared on his 2002-03 return was £10,654. On 21 December the taxpayer
made a formal settlement offer for the years of assessment up to and including 2001-02. It was accepted.
He made no offer for the year ending 2003. He appealed from the Revenue's assessment for that year, on
the ground that it was not validly made under the discovery provisions of s 29, in that no notice of enquiry
had been given within the s 9A time limit. The tax in question, including national insurance contributions,
totalled £4,377.25. The submissions on his behalf were made on the basis that ss 9A and 29 of the Act
were interlinked.
Held - Sections 9A and 29 were not interlinked. They were completely separate. Section 9A related to
enquiries, and s 29 to assessments where loss of tax was discovered. The first question in relation to s 29
was whether the inspector
[2007] STC (SCD) 188 at 189
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discovered, ie found out, that the self-assessment return for 2002-03 was insufficient. The section set no
time limit, nor did it require the Revenue to commence an enquiry into the taxpayer's affairs. The inspector
in the present case did discover that the self-assessment was insufficient and so was entitled to make the
assessment, subject to one of two conditions. The condition in sub-s (4) applied, at least insofar as it related to negligent conduct. In returning his income as £10,654 instead of the true figure of £28,000 the taxpayer did that which a reasonable person taking precautions would not have done, so that he was indeed
negligent. As all the conditions in s 29 for the making of an additional assessment of the loss of tax discovered were satisfied, the assessment was validly made and in the correct amount. The appeal would therefore be dismissed (see paras 20, 21, 22 and 23, below).
Notes
For the Revenue's discovery powers, see Simon's Direct Tax Service A3.1613.
For the Taxes Management Act 1970, ss 9A, 29, see the Yellow Tax Handbook 2006-07, Part 1a, p 32-33
and p 71.
Cases referred to in decision
Blyth v Birmingham Waterworks Co (1856) 11 Exch 781, [1843-60] All ER Rep 478, Exch Ct.
Jonas v Bamford (Inspector of Taxes) [1973] STC 519, 51 TC 1.
Andrew Watters, of Levy Watters, chartered accountants, for the taxpayer.
Anne Aldridge, of the Appeals Unit LC Eastern England, for the Revenue.
DECISION
INTRODUCTION
1. The issue for determination in this appeal by Mr Brian Kennerley is whether an amended assessment to
income tax for the fiscal year 2002-03 raised on 1 September 2005 was validly made by Her Majesty's
Commissioners for Revenue and Customs (HMRC) under the 'discovery' provisions of s 29 of the Taxes
Management Act 1970 (TMA), no notice of enquiry having been given by them within the time limit provided
for that purpose in s 9A of TMA. The tax in question, including national insurance contributions, totals
£4,377.25.
THE LEGISLATIVE FRAMEWORK
2. By s 8 of TMA an individual taxpayer is required to complete a self-assessment tax return, and to deliver
it to an officer of the Board (usually a tax inspector) by a deadline date, which is normally the 31 January
next following the year of assessment.
3. If the inspector is not satisfied of the correctness of such a return, he may enquire into it under s 9A of
TMA. So far as relevant to the instant case, s 9A provides:
'(1) An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention
to do so ("notice of enquiry")-(a) to the person whose return it is ("the taxpayer"),
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(b) within the time allowed.
(2) The time allowed is:
(a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the filing
date ...
[2007] STC (SCD) 188 at 190
(4) An enquiry extends to-(a) anything contained in the return, or required to be contained in the return, including any claim or election included in
the return ...
(6) In this section "the filing date" means the day mentioned in section 8(1A) or, as the case may be, section 8A(1A) of
this Act.'
It is common ground that on the facts of the instant case, "the filing date" was 31 January 2004.
4. And by s 29 of TMA an officer may raise an assessment to tax when he or she discovers a loss of tax.
The relevant parts of that section for present purposes are the following:
(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
(b) that an assessment to tax is or has become insufficient, or
(c) ...
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in
the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown
the loss of tax.
(2) [Subsection (2) deals with errors and mistakes in returns. It is common ground that it plays no part in the appeal.]
...
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant
year of assessment, he shall not be assessed under subsection (1) above-(a) in respect of the year of assessment mentioned in that subsection; and
(b) in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent
conduct on the part of the taxpayer or a person acting on his behalf.
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[The second condition is contained in sub-s (5). It is common ground that that subsection plays no part in the appeal.]'
6. 'Discovery' has been widely defined by the courts. For instance, in Jonas v Bamford (Inspector of
Taxes) [1973] STC 519, a case relied upon by HMRC, they prepared capital statements pointing to under-declarations of income which the taxpayer sought to explain as arising from betting winnings. The Inspector had no direct evidence of actual under-declarations of liability in the year for which the taxpayer was
assessed, and the taxpayer's counsel suggested that as a result the inspector had not made a discovery.
Walton J dealt with the suggestion thus (see [1973] STC 519 at 538):
'There can be no doubt at all that the inspector of taxes discovered that the taxpayer was the possessor of resources
which could not be explained by reference to known sources of capital and income. This is virtually the classic case of
"discovery". In law, indeed, very little is required to constitute a case of "discovery" ...'
[2007] STC (SCD) 188 at 191
7. Whilst dealing with Jonas v Bamford, it is convenient to rehearse the following observations of Walton J
on continuity (see [1973] STC 519 at 540):
'But so far as the discovery point is concerned once the inspector comes to the conclusion that, on the facts which he
has discovered, the taxpayer has additional income beyond that which he has so far declared to the inspector, then the
usual presumption of continuity will apply. The situation will be presumed to go on until there is some change in the
situation, the onus of proof of which is clearly on the taxpayer.'
8. In the instant case, Mrs Aldridge of HMRC and appearing for them, contended that the condition contained in s 29(4) of TMA had been satisfied in that Mr Kennerley had been guilty of negligent conduct, as that
phrase was defined by Baron Alderson in Blyth v Birmingham Waterworks Co (1856) 11 Exch 781 at 784,
namely:
'Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent reasonable man would not do.
The defendants might have been liable for negligence, if, unintentionally, they omitted to do that which a reasonable
person would have done, or did that which a person taking reasonable precautions would not have done.'
THE FACTS
9. I take the facts from the oral evidence of Mr M S Lodge, an inspector of taxes, and an agreed statement
of facts supplemented by the contents of the bundle of documents before me.
10. Mr Kennerley trades as a publican from 'The Red House' public house at Stalybridge, Cheshire. In
December 2001 he submitted his self-assessment tax returns for the years of assessment ended on 5 April
1999, 2000 and 2001. They were prepared by his friend Mr David Lord from incomplete records. He submitted his return for the year ended on 5 April 2002 in November 2002. HMRC opened enquiries into all
four returns on 21 January 2003. Subsequently, they informed Mr Kennerley that the decision to open the
enquiries was made as a result of information provided by HM Customs and Excise following an enquiry into
his VAT affairs which revealed poor record keeping and at the conclusion of which Mr Kennerley accepted
he had understated his turnover in VAT returns.
11. Mr Kennerley submitted his tax return for 2002-03 in January 2004, ie before the filing date provided by
s 9A(2) of TMA, so that HMRC had until 31 January 2005 in which to raise an enquiry into it.
12. In the year to January 2005 HMRC requested a considerable amount of information relating to Mr
Kennerley's return for 2002-03, but, as mentioned earlier, no notice of enquiry into his return for that year
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was ever raised. As the Inspector dealing with the matter was dissatisfied with the level of response from
Mr Kennerley's then accountant in dealing with the enquiries, on 3 November 2004 he informed both Mr
Kennerley and his accountant that thereafter he would deal with Mr Kennerley directly. Following receipt of
further information from Mr Kennerley and his bookkeeper, the inspector arranged a meeting with Mr
Kennerley. It was held on 5 January 2005 and included discussion about how the enquiries might be concluded. Following the meeting, on 13 January 2005 the inspector wrote to Mr Kennerley enclosing a schedule of proposed adjustments to his self-assessment returns for the seven years of assessment ended 5 April
1997 to 2003 inclusive. The adjustments were dependent on the provision of the previous accountant's
working papers. Following receipt of those papers, on 28 January 2005 the inspector suggested that the
figures proposed in his letter of 13 January
[2007] STC (SCD) 188 at 192
2005 be adjusted for the first four years under enquiry and be reduced in the year to 5 April 2001, but that
the figures for the years ended in 2002 and 2003 be confirmed. Mr Kennerley responded to the inspector's
letter on 2 February 2005 by arranging a meeting with him for 4 February 2005.
13. At that meeting, following discussion, the inspector proposed the following adjustments for approval by
his superiors: (a) that for all seven years of assessment under consideration, excluding that ending in 2001,
the adjustments should be those proposed in the letter of 13 January 2005; and (b) that for the year ended in
2001, the adjustment should be a figure between those proposed in the letters of 13 and 28 January 2005.
14. Mr Kennerley then instructed new accountants to deal with the matter. They sought specialist advice
from Messrs Levy Watters (LW) on HMRC's proposals. Following a meeting with HMRC on 10 June 2005,
LW wrote to HMRC on 13 June 2005 raising various points on the proposed settlement in relation to the year
ended in April 2003. They argued: (a) that Mr Kennerley had not been notified by HMRC that they intended
to enquire into his return for that year; (b) that HMRC could not claim that there was discovery after 31 January 2005; and (c) that, consequently, HMRC were time-barred from including that year in any enquiry.
15. On 31 August 2005 HMRC issued closure notices and revenue amendments for the years of assessment 1998-99, 1999-2000, 2000-01 and 2001-02; and on 1 September 2005 they raised discovery assessments for the years 1996-97 and 1997-98, their contents reflecting the figures discussed at the meeting of 4
February 2005.
16. On 1 September 2005 HMRC also raised the assessment under appeal. It was based on Mr Kennerley having gross income in that year of £28,000, he having so declared in an application for a loan made to
MBNA Europe Bank Ltd in July 2002. That compared with a declaration of income in his tax return of
£10,654. HMRC agreed that Mr Kennerley should be entitled to capital allowances in a revised figure of
£2,252, so that he was assessable on an additional sum of £15,094, the additional tax and national insurance contributions amounting to £4,377.25. As I understand it, Mr Kennerley does not dispute that, if he is
liable for the sums assessed, they have been correctly calculated.
17. On 21 December 2005 Mr Kennerley made a formal offer in settlement of tax, penalties and interest for
the years of assessment up to and including that of 2001-02. It was accepted on 13 January 2006. But he
made no offer in relation to the year 2002-03. The appeal remains open in relation thereto, and is the subject of these proceedings.
18. The 'discovery' on which Mrs Aldridge claimed to rely for the 2002-03 assessments consisted of: (a) an
undated admission by Mr Lord, the friend who assisted Mr Kennerley in preparing his tax returns, written in
response to a letter from HMRC of 18 June 2004 that at some stage 'we were working from incomplete records'; (b) an acknowledgment by Mr Kennerley that he had been the subject of a VAT enquiry by HM Customs and Excise at the conclusion of which he accepted that he had understated his turnover in VAT returns;
(c) a declaration of income and business turnover in Mr Kennerley's MBNA loan application form of July 2002
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significantly above that he returned for income tax purposes; (d) an acceptance by Mr Kennerley of adjustments to his tax liability in the years prior to 2002-03, and an apparent acceptance of the adjustments suggested by HMRC for 2002-03; (e) an acceptance by Mr Kennerley of his failure to meet his obligations under
the Taxes Acts as evidenced by a letter of offer in settlement of outstanding tax liabilities in years prior to
2002-03 dated 21 December 2005, and his payment of penalties arising from that failure; and (f) a presumption of continuity.
[2007] STC (SCD) 188 at 193
SUBMISSIONS AND CONCLUSION
19. Mr Watters, the accountant representing Mr Kennerley, maintained that the question of whether the
amended assessment for 2002-03, against which the present appeal lies, was validly made under the 'discovery' provisions of s 29 of TMA could be answered only by responding to the following three questions: (1)
was there a discovery by the inspector after 31 January 2005 that in the tax year 2002-03 Mr Kennerley had
income which ought to have been assessed but which was not assessed?; (2) whether the 'discovery' legislation allowed HMRC to 'discover' that a return had been negligently submitted in the normal enquiry window
but had not opened an enquiry, and relied on s 29 of TMA to raise a subsequent 'discovery' assessment?;
and (3) whether s 29(4) of TMA applied to the 'discovery' assessment on Mr Kennerley's 2002-03
self-assessment return?
20. I find it unnecessary to rehearse the submissions of Mr Watters in relation to each of those questions.
That is due to Mr Watters having made his submissions on the basis that ss 9A and 29 of TMA are interlinked, whereas in my judgment they are completely separate: the former relates to enquiries into returns, the
latter to assessments where a loss of tax is discovered.
21. The first question to be asked in the instant case in relation to s 29 is whether the inspector discovered,
ie found out, that Mr Kennerley's self-assessment return of 2002-03 was, or had become, insufficient. That
section itself requires no time limit for the purpose, nor does it require HMRC to commence an enquiry into
the taxpayer's affairs. Clearly, in Mr Kennerley's case, the inspector did discover that his self-assessment
for 2002-03 was insufficient. Thus, the inspector was entitled, subject to sub-ss (2) and (3), to make an assessment in the further amount which ought to be charged to make good the loss of tax.
22. Subsection (2) is not in point in the instant case. Subsection (3) deals with self-assessment returns
and indicates that a taxpayer is not to be assessed unless one of the two conditions in sub-ss (4) and (5) is
satisfied. In the instant case, HMRC maintain, and I accept, that the condition in sub-s (4) is that applicable,
at least in so far as it relates to negligent conduct. As I mentioned earlier, Mrs Aldridge relied on the definition of negligence offered by Alderson B in Blyth v Birmingham Waterworks Co. I am quite satisfied, and
hold that in making his return for 2002-03 Mr Kennerley in returning his income as £10,654, instead of the
true figure of £28,000, did that which a reasonable person taking precautions would not have done, so that
he was indeed negligent.
23. As all the conditions contained in s 29 of TMA for the making of an additional assessment of the loss of
tax discovered are satisfied, I hold that the assessment under appeal was both validly made, and made in
the correct amount.
24. I dismiss the appeal. I find it unnecessary to rehearse the submissions of Mrs Aldridge, although I
should record that they essentially mirror my conclusions.
Stephen Hetherington
Barrister.
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1
Section 9A, so far as material, is set out at para 3, below
2
Section 29, so far as material, is set out at para 4, below