Upper Tribunal allows taxpayers' appeals on 'deliberate' behaviour

In Anthony Outram and another v HMRC [2024] UKUT 203 (TCC), the Upper Tribunal (UT) overturned the First-tier Tribunal's (FTT) decision concluding that it erred in law when deciding that two brothers had deliberately filed an inaccurate return.

Background

Anthony Outram and Ross Outram (the Appellants) are brothers who participated in a tax avoidance arrangement (the Scheme).

Initially, HMRC opened a COP 9 enquiry on the grounds of suspected fraud arising from the submission of incorrect tax returns containing loss claims believed to be knowingly incorrect. The Appellants declined the opportunity to make a contractual disclosure to HMRC under the COP 9 regime. 

In February 2015, HMRC issued discovery assessments to the Appellants pursuant to section 29, Taxes Management Act 1970 (TMA), in relation to their 2005/06 tax returns (the time limit for HMRC to enquire into the returns had expired), which included trading losses they claimed had been generated as a consequence of their participation in the Scheme. The Appellants appealed the discovery assessments to the FTT.  

Prior to the FTT hearing, the Appellants had conceded that the losses claimed were not allowable and that the Scheme was ineffective. The only issue to be determined at the hearing was the validity of the discovery assessments. 

In order for the assessments to be within the extended time limit of 20 years for deliberate conduct, HMRC had to show that the Appellants, or a person "acting on [their] behalf", had deliberately brought about a loss to tax.

FTT decision

The appeals were dismissed. 

The FTT concluded that the Appellants had knowingly entered into the Scheme with the sole aim of creating a significant loss in order to then claim substantial repayments of tax. 

In the view of the FTT, the Appellants were not carrying on a trade on a commercial basis with a view to a profit and few of the badges of trade were present. The Appellants did not use a trading platform which would have been the logical thing to do if they intended to make a profit. 

The FTT concluded that the Appellants knew, when they filed their SA returns, that they were not carrying on a trade that entitled them to make a claim for loss relief. In claiming non-existent losses they had acted deliberately, the extended time limits for discovery applied and the discovery assessments were therefore validly issued under section 29(4), TMA. 

The FTT's decision was released on 27 April 2021 (the Original Decision). The Original Decision was subsequently amended by the FTT and an amended decision was released on 25 September 2023 (the Revised Decision). The Revised Decision was not published but a copy can be found as an appendix to the UT's decision (see link below). 

The Appellants appealed to the UT in relation to the issue of deliberate behaviour and against the Revised Decision. 

UT decision 

The appeals were allowed and the case remitted to a differently constituted FTT for determination.   

The Appellants' main arguments were that the FTT's decision in respect of deliberate behaviour constituted an error of law, and was unreasonable on the evidence before it. The Appellants also argued that the changes made to the Original Decision were too extensive and significant to be justified under Rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273 (the Tribunal Rules) and were beyond the scope of review under Rule 41 of the Tribunal Rules.

Whilst the UT accepted that the FTT had set out the correct test when determining what constitutes deliberate conduct, it considered that the FTT had erred in applying that test to the facts of the case. In particular, the FTT applied its own assessment that there was no trade without considering why the Appellants appreciated that there was no trade. The FTT had failed to consider or take into account the subjective knowledge of the actual taxpayers concerned. 

With regard to the issue of the Revised Decision, the UT found that there is no restriction on the substance of the amendments which may be made by the FTT following a review under Rule 41 of the Tribunal Rules. In doing so, the UT did not follow the UT's decisions in Vital Nut Co Ltd v HMRC [2017] UKUT 192 (TCC) and JS v Secretary of State for Work and Pensions [2013] UKUT 100 (AAC), as it considered those decisions to have been wrongly decided.

Comment

This decision will be welcomed by taxpayers as it confirms that it is necessary for the FTT to take into account the subjective knowledge and intention of the taxpayers concerned, when determining deliberate conduct. 

It is also worthy of note that the UT did not follow the UT's earlier decisions in Vital Nut and JS, notwithstanding the approval of the guidance provided in those cases by the Court of Appeal in Point West GR Ltd v Bassi [2020] EWCA Civ 795 (at paragraphs 48-49). 

A copy of the UT's decision can be viewed here.