Discovery assessment issued during enquiry period was invalid

In Timothy Norton & Another v HMRC [2023] UKUT 48 (TCC), the Upper Tribunal (UT) confirmed that a discovery assessment made during the enquiry period was invalid because the conditions in section 29(5), Taxes Management Act 1970 (TMA), could not be satisfied at that time.

Background

Timothy Norton and his wife were directors of a car dealership (the Company). The Company had purchased two cars, a Maserati and a Ford GT40, which were kept at the Company's premises.

Mr Norton had used the cars for both private and Company business. The Company handbook prohibited use of the cars without the express permission of management and required users to ensure the cars were taxed, had adequate insurance and a valid MOT, before use. If the cars were to be used, vehicle excise duty (VED) was paid before use, and a Statutory Off-Road Notification (SORN) was made after use. On each occasion Mr Norton used a car he paid VED in advance and checked the car had an MOT.

The Company declared the benefit of the cars on Mr Norton's P11D. Following a PAYE audit in 2016, HMRC concluded that, having regard to section 114, Income Tax (Earnings and Pensions) Act 2003 (ITEPA), the cars were made available to Mr Norton for private use for periods longer than those for which a benefit in kind was declared. Accordingly, HMRC issued NIC determinations to the Company and made income tax assessments against Mr Norton for various years under section 29, TMA (the Discovery Assessments).

Mr Norton and the Company appealed to the First-tier Tribunal (FTT), arguing, amongst other things, that the cars had not been "made available" to Mr Norton for the purposes of section 114, ITEPA, and the Discovery Assessments were invalid because they were stale and, in relation to 2016/17, because the assessment had been issued during the enquiry period.   

The FTT dismissed the appellants' arguments that the presence of a SORN or the prohibition in the Handbook meant the cars were not available. This was on the basis that any restriction imposed by a SORN could be easily remedied, while it was highly likely that Mrs Norton agreed, or would agree or acquiesce, to Mr Norton's use of the cars. However, the FTT accepted the Handbook prohibited use of the cars for private purposes without the permission of the board. Accordingly, for those years in which Mr Norton did not make any private use of the cars, the conditions in section 114, ITEPA, were not satisfied. The overall result was that a benefit in kind arose in relation to the Maserati for all relevant tax years and for the GT40 for 2013/14 to 2016/17.

The FTT also rejected Mr Norton's arguments that the Discovery Assessments were stale and that the requirements in section 29(5), TMA, were not satisfied in respect of 2016/17, because the assessment was issued at a time when the enquiry period was still open.

Mr Norton and the Company appealed to the UT, maintaining the arguments advanced before the FTT.

UT decision

The appeals were allowed in part.  

In terms of the benefit in kind issue, the UT was of the view that the appellants' distinction between actual and potential availability put an impermissible gloss on the statutory wording of section 114, ITEPA. The FTT was entitled to conclude that the fact a SORN was in place and using the cars without payment of VED would be illegal, was not an effective restraint upon their use, such that the cars were available for private use by Mr Norton at all times. 

The UT also found there were no grounds for interfering with the FTT’s finding that Mrs Norton generally consented to Mr Norton using the cars for private purposes. Further, any requirement for Mr Norton to obtain the permission of management could have been satisfied by him simply deciding, as a director, that he would use the car.

Disagreeing with the FTT, the UT found that for Mr Norton to drive one of the cars without first ensuring VED was in place would be a breach of the Handbook. However, the UT decided the prohibition was at most a conditional one and was not an effective restraint upon use in circumstances where Mr Norton could comply with the Handbook by arranging prior payment of VED. The appeals on the benefit in kind issue were therefore dismissed. 

With regard to the assessment issued to Mr Norton for 2016/17, the UT disagreed with the FTT, finding that in a case where the condition in section 29(4), TMA, was not applicable, the words of section 29(3) amounted to an unambiguous prohibition on any assessment being made while the conditions in section 29(5) had not been met. The conditions in section 29(5) were temporal, and it followed that a discovery assessment made during the ‘enquiry period’ was invalid, because the conditions in section 29(5) cannot be satisfied at that time. Accordingly, the UT allowed Mr Norton’s appeal in relation to the assessment which had been issued for 2016/17.

Comment

This decision provides taxpayers with helpful guidance on the circumstances in which a benefit in kind will arise in respect of private use of company vehicles by employees. However, perhaps of more importance to taxpayers and practitioners will be the UT's confirmation that a discovery assessment issued under section 29, TMA, cannot be issued during an enquiry or while HMRC is still in time to open an enquiry. This is an issue that has arisen frequently in recent times, and the UT's decision provides much needed clarity on this aspect of tax law.  

The decision can be viewed here.