Ball Europe - Accounting entry not included in tax return sufficient to preclude discovery assessment

In Ball Europe Ltd v HMRC [2021] UKFTT 23 (TC), the First-tier Tribunal (FTT) has held that the presence of amounts in a taxpayer's accounts but not its tax return was sufficient for a 'hypothetical officer' of HMRC reasonably to be expected to be aware of a tax insufficiency and this prevented HMRC from issuing a valid discovery assessment

Background

Ball Europe Ltd (BEL) was incorporated and resident for tax purposes in the UK.  It was part of a US-headquartered international group.  Various members of the group entered into an inter-company loan facility on 21 January 2003. Part of the transaction involved the issue of a loan note to BEL in the amount of £10,812,449.  Although it did not refer to this loan note in its tax return, it did include it in five places in the relevant set of annual accounts, including the Statement of Recognised Gains and Losses (STRGL).  The accounts included a specific reference to BEL having 'made an unrealised gain by receiving a promissory note due from a fellow group undertaking of £10,812,449'.

HMRC issued a discovery assessment to BEL on 12 July 2006, assessing the principal value of the promissory note to corporation tax.  BEL appealed the discovery assessment and a review of HMRC's position was requested. HMRC confirmed its position in November 2010.  The appeal was notified to the FTT in December 2010 and the appeal was stayed behind a lead case, the decision in which was to determine whether the promissory note constituted taxable income.

In February 2019, it was agreed that the validity of the discovery assessment should be brought before the FTT for determination. The parties agreed that, in light of the decision in the lead case, the gain made on the income from the loan note was taxable, but they did not agree on whether the discovery assessment had been validly raised.

Relevant law

Paragraph 41, Schedule 18, Finance Act 1998 (FA98) provides that a revenue officer may make a discovery assessment if he or she discovers that an amount which ought to have been assessed to tax has not been so assessed.  Where a company has delivered a return for the relevant period, this power may only be exercised after the closure of the enquiry window if the officer 'could not have been reasonably expected, on the basis of the information made available to them before that time, to be aware of [the deficiency of tax]' (paragraph 44(1), FA98).

Information is regarded as being available to an officer of HMRC if it is contained in a relevant return or the documents accompanying it, or if its existence and relevance (i) could reasonably be expected to be inferred by an officer of HMRC from such information; or (ii) are notified in writing to an officer of HMRC by the company or its agent (section 44(2) FA98).

FTT decision

The appeal was allowed.

The FTT held that a hypothetical officer of HMRC would have been aware that there was an amount in the accounts that had not been brought into tax: a recognised but unrealised gain was included in the accounts (which were provided to HMRC) and despite not being in the profit and loss account, the sum was clearly referred to in the STRGL and it was clear that this amount was not in BEL's tax return.The critical question for determination was whether a hypothetical officer should reasonably have been aware that this amount ought to have been brought into tax. In the view of the FTT:

• Given the close relationship between accounting and tax regimes (especially in light of the rules applying to loan relationships), a hypothetical officer in this situation must be taken as having some accounting knowledge.

   

• Even basic accounting and tax knowledge would be sufficient to recognise that:

   

  • not all taxable income was included in the Profit and Loss account
  • something accounted for as 'capital' or 'reserves' might still constitute income
  • gains could be 'derived from an asset', and
  • Schedule D case VI (which applied at the relevant time) could be used as a catch-all provision if the income did not fall under any other head of charge. 

     

• Applying this reasoning, a hypothetical officer must have realised that a more detailed consideration of the gain recognised in the STRGL was required.  The case was not so complex that a hypothetical officer could not reasonably have been expected to be aware of the insufficiency and enough information was available to make the hypothetical officer aware that there was an insufficiency of tax and that an assessment should have been raised.

Comment

The knowledge to be attributed to a hypothetical officer has always been a difficult issue because the FTT, when considering this test, cannot take account of the actual knowledge of a specific HMRC officer, but has to look generically at what a non-existent officer might be expected to know. Historically, the FTT has been extremely generous to HMRC when applying the hypothetical officer test and this decision will come as a huge disappointment to HMRC. Given the importance of HMRC's discovery assessment powers, it is anticipated that it will seek to appeal this decision to the Upper Tribunal.

The decision can be viewed here.