GC Field & Sons Ltd – SDLT discovery assessments held to be invalid

In GC Field & Sons Ltd and others v HMRC [2021] UKFTT 297 (TC), the First-tier Tribunal (FTT) held that discovery assessments issued in respect of a stamp duty land tax (SDLT) avoidance arrangement were invalid as HMRC had not discharged the burden of proving that either the taxpayers, or their advisers, had been negligent.

Background

The appellants entered into tax avoidance arrangements which were intended to avoid SDLT by utilising sub-sale relief. The arrangements were marketed by ELS Legal LLP (ELS).  Shortly after completion of the transactions and the filing of the relevant SDLT returns, ELS sent HMRC a letter setting out what transactions had taken place and the tax treatment that had been applied to them.

Finance Act 2013 (FA 2013), contained provisions to counteract arrangements of the type adopted by the appellants with retrospective effect, and required persons who had used such arrangements to submit amended SDLT returns (which the appellants did not do).

HMRC wrote to some (but not all) of the appellants informing them that they should amend their returns. The appellants who had been contacted by HMRC asked ELS to deal with the matter.  ELS replied to HMRC stating that the transactions in question were not caught by the retrospective legislation.  ELS's letters of engagement with the appellants provided that it would advise on and implement the arrangements and disclose the arrangements to HMRC but, save in the event that HMRC opened enquiries, its retainer ended at that point.

HMRC failed to open enquiries within the statutory enquiry window.  After the Supreme Court's decision in Project Blue v HMRC [2018] UKSC 30 (which clarified the scope of the anti-avoidance rule contained in section 75A, Finance Act 2003 (FA 2003)), HMRC raised discovery assessments against the appellants on the basis that sub-sale relief was not available.  The discovery assessments did not refer to section 75A, though, as an alternative, notices of determination in relation to the section 75A notional transaction were also issued (it was later agreed by all parties that the planning was ineffective and section 75A did not therefore apply).  

The appellants appealed to the FTT.

Legislation

Section 45, FA 2003, provides for relief from SDLT where a purchaser of land (A) sells the land to someone else (B) between the exchange and completion of the contract for the purchase of the land.  The original contract between A and the seller of the land is disregarded for SDLT purposes and SDLT is paid by B by reference to the consideration that B pays for the property.

Where the purchase of property involves a number of 'scheme transactions' that lead to the total SDLT due on the purchase being less than would have been the case for a notional straightforward purchase by the end buyer from the seller, section 75A, FA 2003, allows HMRC to charge SDLT by reference to that notional transaction.  

Paragraphs 28 and 30, Schedule 10, FA 2003, provide together, amongst other things, that if HMRC discovers an insufficiency in an assessment of tax attributable to fraudulent or negligent conduct on the part of the purchaser, a person acting on their behalf, or their partner, it may make a discovery assessment to make good the loss of tax.

FTT decision

The appeals were allowed.

HMRC argued that it had made a valid discovery that SDLT had been underpaid.  Initially, it based this contention on a revised view of the correct interpretation of section 75A, in the light of the FTT's decision in Project Blue and on full disclosure not having taken place.  However, HMRC later contended that the reasons for the discovery changed and that the discovery was that SDLT had been understated due to the failure of the appellants to submit amended returns, pursuant to the retrospective provisions contained in FA 2013.   

The appellants argued that HMRC had not made a discovery that could found a discovery assessment, since its alleged discovery related to the notional transaction under section 75A, and so the understatement of tax related to the wrong transaction.  In addition, they argued that ELS was not acting on behalf of the appellants, and the understatement of tax was not due to negligence on their part.  An argument that the discovery had gone 'stale' was abandoned in light of the Supreme Court's decision in HMRC v Tooth [2021] 1 WLR 2811. 

The FTT found that HMRC had made a relevant discovery sufficient to found the issue of discovery assessments.  HMRC had discovered an insufficiency of tax relating to the transactions and the fact that its reasoning had changed did not render the assessments invalid; the conclusion in the assessments was wide enough to encompass the change in HMRC's reasons for determining the tax planning that had taken place to be ineffective.  

However, in the view of the FTT, the appellants had not been negligent (ie they had not failed to take reasonable care, by reference to a prudent and reasonable taxpayer in the position of the taxpayer in question, following the Upper Tribunal's decision in Atherton v HMRC [2019] UKUT 41 (TCC)).  The FTT noted that one would not normally expect a 'layman' to be aware of retrospective legislation, or of its effects, and a lay person who failed to realise that retrospective legislation applied to them 'cannot be regarded as failing to take reasonable care in failing to do what the legislation requires'.  While some of the appellants had been informed by HMRC that the legislation existed, they had relied on the advice of ELS to the effect that the legislation did not apply to them.  The burden of proving negligence was on HMRC and it had not discharged it.  

HMRC had failed to offer any evidence of what a reasonably competent tax adviser would have done, or whether they would have taken the view that the relevant provisions of FA 2013 applied to the transactions in question.

In the circumstances, although there had been a discovery of an insufficiency of tax for the purposes of a discovery assessment, HMRC had not proved that the appellants, or a person acting on their behalf, had been negligent and the conditions set out in Schedule 10, FA 2003, for HMRC to make a discovery assessment, were not therefore met.  

Comment

This is the latest in a string of decisions relating to the validity of discovery assessments.  

Although a change of reasoning by HMRC regarding an insufficiency of tax did not invalidate the discovery assessments, HMRC's failure to demonstrate that the appellants, or those acting on their behalf, had been negligent did.

The decision confirms that HMRC may change its reasoning for an insufficiency of tax after it has issued a discovery assessment and this aspect of the decision will be welcomed by HMRC. 

The decision can be viewed here.