Wilkes – HMRC's discovery assessments were invalidly issued 

In HMRC v Jason Wilkes [2021] UKUT 150 (TCC), the Upper Tribunal (UT) dismissed HMRC's appeal against a decision of the First-tier Tribunal (FTT) which held that discovery assessments issued by HMRC to assess the high income child benefit charge (HICBC) were invalid.

Background

During the relevant years, Mr and Mrs Wilkes were married and Mrs Wilkes was entitled to, and received child benefit. Mr Wilkes' adjusted net income for tax purposes exceeded £50,000 and was greater than that of Mrs Wilkes. Mr Wilkes did not submit a tax return and HMRC did not issue to him a notice to file.

Following a letter received from HMRC asking him to check if he was liable for the HICBC (introduced by section 8 and Schedule 1, Finance Act 2012), Mr Wilkes had two telephone conversations with an HMRC officer. Following the second of those conversations, the officer formed the view that Mr Wilkes was liable to the HICBC for certain tax years which had not been assessed. Mr Wilkes was not charged a 'failure to notify' penalty, as HMRC considered that he had a reasonable excuse for his failure to notify it of his income tax chargeability under section 7, Taxes Management Act 1970 (TMA). However, HMRC issued discovery assessments under section 29(1)(a), TMA, for the HICBC in respect of which Mr Wilkes was liable.

Mr Wilkes appealed the discovery assessments to the FTT.

FTT decision

The appeal was allowed.

The FTT observed that the type of income tax assessment that should have been made in respect of Mr Wilkes’ liability to the HICBC was a self-assessment under section 9, TMA. He should have notified HMRC of his income tax chargeability (under section 7, TMA), upon which HMRC would have required him to file a tax return (under section 8, TMA). The FTT’s analysis of section 9 led it to conclude that what Mr Wilkes "ought" to have self-assessed was an amount chargeable to, and payable by way of, income tax, contrasting that with the assessment power in section 29(1)(a) which referred to “income which ought to be assessed to income tax”.

The FTT concluded that, on the correct interpretation of the words of section 29(1)(a), the HMRC officer did not discover that any income which ought to be assessed to income tax, had not been so assessed. HMRC argued that the effect of such an interpretation was anomalous, in that there was no power to raise a section 29 TMA assessment where a taxpayer is liable to the HICBC but has not been required to file a self-assessment tax return, but there was such power in respect of a taxpayer liable to the HICBC if he has filed a self-assessment tax return (due to section 29(1)(b) TMA).

The FTT rejected HMRC’s contention that this result would be avoided by reading section 29(1)(a) so that it permitted a discovery assessment of “amounts” rather than “income” which ought to be assessed. In the view of the FTT, it was not possible to construe “income which ought to be assessed” as meaning “amounts which ought to be assessed”. 

The FTT therefore concluded that HMRC had not discovered any income which ought to have been assessed to income tax that had not been so assessed and that the assessments had not been validly raised with the consequence that the assessments were reduced to nil.

HMRC appealed to the UT

UT decision

The appeal was dismissed.

HMRC contended that, on the basis that no return was submitted by Mr Wilkes, his income had not been assessed to a further charge of income tax: the HICBC. Accordingly, HMRC made a discovery that there was income that ought to have been assessed and had not been assessed and section 29(1)(a) applied. Alternatively, HMRC contended that on a proper purposive construction of section 29(1)(a), the word “income” is to be read as including any amount liable to income tax. Failing that, there was an obvious drafting error which the FTT failed to correct.

The UT decided the purposive construction argument in favour of Mr Wilkes. In its view, HMRC expressed the purpose of section 29(1)(a) too broadly; a broad intention to cover any shortfall in income tax cannot be inferred from the wording of the provision. The UT noted that section 29(1)(a) is not inextricably linked to the self-assessment regime and there are other powers available to HMRC to ensure that the HICBC is assessed. The fact that, in relation to some of those powers, particularly the power to require the filing of a self-assessment return, the relevant time limit may be shorter than that available in respect of a discovery assessment, was not, in the UT's view, sufficient to lead it to conclude that the absence of the power to raise a discovery assessment in certain circumstances makes the situation unworkable or absurd.  

In relation to the question of whether there was "income which ought to have been assessed", the UT considered the approach taken by the FTT in Wiseman v HMRC [2020] UKFTT 383 (TC) (Wiseman), in which the FTT held that on a straightforward and literal reading of section 29(1)(a) there was power to assess the taxpayer for the HICBC by means of a discovery assessment. The UT decided the approach taken in Wiseman was one that adopts an overly strained interpretation of section 29(1)(a) and was not correct. The HMRC officer could not fairly be described as having discovered that there was income that had not been assessed. Rather, he discovered that Mr Wilkes should have paid the HICBC. The assessment made was one to make good that loss of tax. The UT therefore determined this argument in favour of Mr Wilkes.

Finally, the UT considered HMRC's contention that the FTT erred in its application of the principle in Inco Europe Ltd v First Choice Distribution (a firm) [2000] 1 WLR 586 (Inco Europe), and should have corrected an obvious drafting error. The UT was not persuaded that the principle in Inco Europe could be relied upon to read in words that would allow HMRC to use section 29(1)(a) to assess the HICBC, because it was not satisfied that this was the sort of drafting mistake that fell within the principle in that case. The UT decided that, in the present case, there would have been a more fundamental misunderstanding about Parliament’s intention in enacting section 29 in its current form, leading to a failure to make appropriate provision for assessments to the HICBC to be made outside the self-assessment system. Correcting the misapprehension would, in the UT's view, amount to judicial legislation, rather than the correction of an obvious drafting error. The UT therefore also determined this argument in favour of Mr Wilkes.

Comment

As the UT acknowledged, although the amounts involved in this case were relatively small, the issues raised are of wider significance. The decision clarifies the position regarding the use of discovery assessments to assess taxpayers for the HICBC, particularly in light of the FTT's decision in Wiseman, in which the FTT declined to follow the approach taken by the FTT in Wilkes. More broadly, the decision is a useful example of the judiciary upholding the limits and conditions which delineate HMRC's legislative collection and enforcement powers, in particular, in relation to discovery assessments.

The decision can be viewed here.