Anderson - Upper Tribunal considers knowledge test for the purpose of discovery assessments

In Jerome Anderson v HMRC [2018] UKUT 159 (TC), the Upper Tribunal (UT) has dismissed a football agent's appeal upholding the First-tier Tribunal's (FTT) decision to disallow relief for losses incurred in relation to a football academy ran by the agent. The UT also agreed with the FTT that HMRC had issued a valid discovery assessment.

Background

Mr Jerome Anderson (the taxpayer), is a well-known football agent. In January 2009, he paid £2,943,000 to Bafana Soccer Developments Limited (Bafana), a soccer academy based in South Africa.  Bafana had been set up to train and nurture young footballers and to promote their prospects in the lucrative European footballing leagues. In return for the finance he had provided, the taxpayer was able to choose three players from the academy, securing an interest for himself in any future transfer fees made by Bafana in relation to those players.  Bafana went into Administration in 2011 and the taxpayer did not make any significant profits from Bafana.  

The taxpayer's tax return for the 2008/09 tax year, was filed with HMRC on 28 January 2010 and included a claim for £3,002,772 of losses in relation to Bafana.  On 2 May 2012, HMRC issued a 'discovery' assessment under section 29, Taxes Management Act 1970 (the discovery assessment) which disallowed all of the losses  claimed. The taxpayer appealed to the FTT.  

The appeal was unsuccessful. The FTT decided, first, that the discovery assessment had been validly made, and secondly that the taxpayer had not been entitled to the losses he had claimed, either under section 64, Income Tax Act 2007 (ITA) or section 72, ITA, as he was not carrying on a trade with a view to a profit.  

The taxpayer appealed the FTT's decision to the UT.  

UT's decision 

The appeal was dismissed.  

In relation to the validity of the discovery assessment, the UT considered the test to be applied for the purposes of discovery.  It was not in dispute between the parties that the concept of a 'discovery' by an officer involves the application of both a subjective test, as to the officer's state of mind, and an objective test, as to whether that belief was reasonable. 

The UT considered the test described by Patten LJ in Sanderson v HMRC [2016] EWCA Civ 19, and confirmed that the subjective test requires an officer to have more than a mere suspicion of insufficiency of tax, but he or she need not conclude that an insufficiency is more probable than not.  The officer must believe that the information available "points in the direction" of there being an insufficiency. With regard to the objective test, the UT agreed with the UT in HMRC v Charlton [2012] UKUT 770 (TCC), and confirmed that the objective test requires the officer's belief to be reasonable, that is, a belief that a reasonable officer could form.  

The FTT had considered whether the officer's belief was reasonable but had applied too strict an interpretation of the objective test.  However, applying the UT's test to the facts of the present case, both the subjective and objective tests for a valid discovery were satisfied.    

In relation to the second issue, the UT agreed with the FTT that the extent of the taxpayer's activities with Bafana did not constitute a trade.  In the view of the UT, the taxpayer's activities were more akin to an investor, and, even if there was a trade, he had not been carrying on the trade on a commercial basis with a view to a profit.  

Comment

The UT's formulation of the knowledge test for discovery assessments is helpful and provides useful clarification in this important area of the law.  

The FTT asked itself whether the officer's belief that there had been an insufficiency of tax was a reasonable belief. It appears that the FTT applied a wholly objective test as to whether the officer's belief was reasonable. The UT considered that the correct test was whether the officer's belief was one "which a reasonable person could form on the information available to her". 

The UT did not consider that the taxpayer provided sufficient evidence to demonstrate a commercial trade.  As the burden is on the taxpayer, under section 74, ITA, to establish that the trade was carried on with a view to a profit, it is important that taxpayers provide sufficient evidence if they are to discharge this burden.

A copy of the decision can be viewed here.