B e f o r e :
LORD JUSTICE AULD
LORD JUSTICE CHADWICK
LADY JUSTICE ARDEN
|| Simon Langham (Inspector of Taxes)
||- and -
(Transcript of the Handed Down Judgment of
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Ms Ingrid Simler (instructed by the Solicitor of Inland Revenue) for the Appellant
Mr. Michael Sherry and Ms Louise Rippon (instructed by M & S Solicitors) for the Respondent
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Lord Justice Auld:
- The appeal is by Simon Langham, an Inspector of Taxes at Kings Lynn, from a decision of Park J, upholding, on an appeal by way of case stated, a decision of the General Commissioners that on or before 31st January 2000 he could have been reasonably expected, on the basis of information made available to him, to be aware that Mr. Veltema's assessment to tax was insufficient so as to cause a loss of tax for the purpose of section 29 of the Taxes Management Act 1970 ("the TMA"). In consequence of his ruling, he disallowed an additional assessment to tax made by the Inspector under section 29(1) TMA.
- The appeal raises an important point of principle concerning the scheme of self-assessment for tax in sections 8 and 9 of the TMA and of later "re"-assessment by the Inland Revenue under section 29 TMA where loss of tax is "discovered", a relatively new scheme introduced by section 178 of the Finance Act 1994 and operated with effect from the income tax year 1996/97.
The statutory scheme
- Before self-assessment was introduced by these provisions, the scheme was that a personal return made under section 8 TMA was assessed for tax by the Inland Revenue, which the taxpayer could challenge by appeal, such appeal often being settled by agreement. There were often issues as to the scope of such an agreement, which the House of Lords, in Scorer v. Olin Energy (1985) 58 TC 592, held, in the context of corporation tax, had to be viewed objectively, having regard to the surrounding circumstances, including all the material known to be in the Inspector's possession.
- The present scheme is that, by section 9 of the TMA, a taxpayer must include in his return a self-assessment, which, by section 8(1A)(a), he must make and normally deliver by 31st January of the year following the year of assessment ("the filing date"). His return should disclose all the relevant information and correctly assess, on the basis of it, the tax due. The Inland Revenue may then enquire into the return by issuing a formal notice within 12 months after the filing date (section 9A(2) TMA). At the end of any such enquiry the Inland Revenue may amend the return (section 28A(2) TMA) and issue a closure notice (section 28A(1) and (3) TMA). If the Inland Revenue make no enquiry and the taxpayer has not amended his return, the self-assessment return becomes final on the expiry of that 12 months enquiry period, subject only to the possibility of making a "discovery" assessment under section 29 TMA.
- The discovery procedure in section 29 has its origin in earlier tax statutes and may apply where, after normal finality of an assessment, some new fact comes to light or incorrect application of the law (subject to section 29(2)) or where, for any reason, it newly appears that the taxpayer has been undercharged; see Cenlon Finance Co. Ltd. v. Ellwood (1961) TC 176, per Viscount Simonds at 203-204. Section 29 enables the Inland Revenue, where it discovers an insufficient assessment, subject to one or other of two conditions, to make an assessment in the amount or further amount necessary to make good the loss of tax (section 29(1) and (3) TMA).
- The first condition ("culpable mistake") is fraud or negligence on the part of the taxpayer in failing or failing properly to assess his liability to tax or in claiming relief (section 29(4) TMA – to which a further time limit of 20 years applies). However, nothing in the appeal turns on this condition because the Inspector did not allege fraud and the General Commissioners' finding of no negligence is not challenged by the Inspector.
- The second condition ("innocent mistake"), which applies when an Inland Revenue officer is out of time to make an enquiry under section 9A(2) of the TMA into the taxpayer's return, is that the Inland Revenue officer "could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of" such failure or excessive claim for relief (section 29(5)TMA – to which a further time limit of 5 years from the filing date applies).
- Section 29(6) sets out circumstances in which, for the purpose of section 29(5), "information is made available to an [Inland Revenue officer] …". Broadly speaking, that information includes the information in the return and accompanying documents and in any other documents provided by the taxpayer for the purpose of any enquiry into the return under sections 9A and 19A of the TMA, and any information the existence or relevance of which to any insufficiency in the self-assessment could reasonably be expected to be inferred by the officer from any of those documents. I had better set out the subsection in full. It provides:
"(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if-.
(a) it is contained in the taxpayer's return under section 8, 8A or 11 of this Act in respect of the relevant chargeable period (the return), or in any accounts, statements or documents accompanying the return;
(b) it is contained in any claim made as regards the relevant chargeable period by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or
(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above –
(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii) are notified in writing by the taxpayer to an officer of the Board."
- Inland Revenue Manuals give instructions to officers responsible for checking self-assessment returns to check the information against, among other information, the taxpayer's P11D Form showing his remuneration and benefits; see: 1/05/01 "Returns", para. 1.1; 2/05/01, "Action on receipt of form P11D", para 3558; and 30/04/01, SE8001 "Emolument: transfer of real property to employees and directors – general", which states that where land is shown as transferred to the taxpayer by his employer "an Inspector must consider whether the transfer is at full value and, if not, whether the undervalue is a profit from the directorship or employment"; and that, where the transfer "appears to be at less than full market value", reference should be made to the Valuation Office. This material cannot, of course, be an aid to construction of the TMA. Its only possible relevance - and then only on Mr. Veltema's case on the construction of the Act - is as to what the General Commissioners could reasonably have expected the Inspector to do in the light of the material made available to him by the taxpayer.
- Miss Ingrid Simler, on behalf of the Inland Revenue, informed the Court that, whatever the Manuals say, the reality is that Inland Revenue staff in the main simply data-process the information on the returns, largely as a consistency check, and scrutinise only a very small number of them on a random basis or where there is thought to be high risk. She also noted - whilst maintaining its irrelevance to the issue of the Inspector's knowledge of the insufficiency of Mr. Veltema's assessment - that the General Commissioners, in their decision, made no finding as to what the Inspector should have done in the circumstances or as to general practice. She acknowledged that what happened in practice by way of scrutiny of returns is no aid to construction of the Act, any more than that which, according to the Manuals, should have happened.
- There are two main issues in the appeal:
1) whether, as the Inspector contends, only awareness or an inference by him of an actual insufficiency in the self-assessment, though not necessarily its precise extent, would have disentitled him from making a discovery assessment under section 29(5), or whether, as Mr. Veltema contends, an awareness or inference by the Inspector of circumstances suggesting a possible insufficiency and the need for some basic check did so; and
2) in considering the appropriate state of mind of the Inspector under section 29(5), whether, as the Inspector maintains, it could only be derived from the information provided by the taxpayer as defined in section 29(6), or whether, as Mr. Veltema maintains, section 29(6) does not constitute an exhaustive definition of "information made available to an officer of the Board" for the purpose of section 29(5) and that, on all the information before the Inspector, including, for example, the P11D Form, he could not, on the agreed facts, have been unaware that the assessment was or might be insufficient within section 29(5).
- The agreed material facts are as follows. Mr. Veltema, who is ordinarily resident in the United Kingdom for tax purposes, was, for the tax year ended 5th April 1998, the only director and employee of the British Horticultural Company Limited ("the Company"), a farming company that he owned jointly with his wife. On 6th March of that year Mr. Veltema, as sole director, resolved that a house near King's Lynn, which he occupied, and which was owned by the Company, should be transferred to him as a benefit in kind. And, on the same day the Company conveyed the house to him for no value. The deemed value for tax purposes would, therefore, be the open market value of the house on that date.
- Such a transfer had been under consideration for some time – at least as early as January 1997. At that time the Company had obtained from a firm of chartered surveyors and valuers, Cruso & Wilkins, a written valuation of £105,000. At or around the time of the transfer Cruso & Wilkins, in response to the Company's enquiry whether the valuation had changed over the intervening 14 months, advised that the valuation was nearer to £100,000 than £105,000.
- On 30th July 1998 Mr. Veltema's accountants, Pannell Kerr Foster, pursuant to sections 8 and 9 of the TMA, sent to the Inspector of Taxes at King's Lynn Mr. Veltema's tax return, including a self-assessment, for the year ended 5th April 1998. It showed as a benefit received from his employment "Assets transferred/payments made for you £100,000". It did not identify the nature of the asset, but there can be no criticism of Mr. Veltema or his accountants for that, since there was no requirement in or space on the return form for him to do so. In the schedule to the employment pages of the return, it showed under the heading "other benefits-in-kind", "Asset placed at disposal of Employee: £100,000", again without identifying the nature of the asset, but plainly indicating, when read with the return itself that the Company had transferred it to him. It is accepted by Miss Simler, on behalf of the Inspector, that Mr. Veltema disclosed all the relevant information.
- The Inspector at King's Lynn already had available information as to valuation of the house at £100,000 from the P11D form for Mr. Veltema provided by the Company to the Company Tax Unit in Leicester, which, as the Inspector acknowledged before the Commissioners, had been compared with the information in Mr. Veltema's personal return. As the Judge put it, in paragraph 28 of his judgment, "In other words, the P11D was on the Inspector's desk when he was going through Mr. Veltema's self-assessment". It described the transaction as "Transfer of house previously occupied by director", and indicated £100,000 as its market value and cash equivalent to Mr. Veltema and that he had paid nothing for it.
- On 7th October 1999 Pannell, Kerr and Foster sent to the Leicester Company Tax Unit the Company's accounts, corporation tax computations and returns for the periods ended 24th February 1998 and 31st December 1998. In the accounts for the year ended 31st December 1998, note 13 to the financial statements recorded that the Company had transferred to its sole director the Company house that he had occupied for many years and that the benefit in kind attributable to the director in respect of it was estimated at £100,000. There was also a chargeable gains computation attached as a schedule to the Company's return in which the sale price/market value of the house was recorded as £100,000.
- On 19th October 1999 the Inspector of Taxes at Leicester wrote to the Company enquiring whether the valuation of £100,000 represented an open market value and requesting a copy of any professional valuation prepared in connection with the transfer. The Company provided the Inspector with Cruso & Wilkins's written valuation of 24th January 1997.
- On 19th January 2000 - a few days before the end of the section 9A enquiry period, but too late for practical purposes - the Inspector at Leicester notified the Company that the District Valuer had reported that the open market value at the date of the transfer to Mr. Veltema was £160,000.
- In March 2000 the Company and the Inspector at Leicester agreed a figure of £145,000, indicating, on the basis of that agreement, that Mr. Veltema's self-assessment to tax was insufficient within section 29(1)(b) of the TMA.
- In or about June 2000 the Inspector at Leicester advised the Inspector at King's Lynn of the revised valuation, indicating an insufficiency on Mr. Veltema's self-assessment return. This, of course, was long after the enquiry period under section 9A of the TMA had closed on 31st January 2000. It was thus too late for the Inspector at King's Lynn to give notice under section 9A of his intention to open an enquiry into Mr. Veltema's tax return. He could only seek to make good the agreed loss of tax, namely £18,000, being 40% of £45,000, by recourse to section 29 of the TMA, which is what he sought to do. On 13th November 2000 he raised an assessment to tax in that amount against Mr. Veltema, maintaining that the loss of tax was attributable to negligent conduct on his part (section 29(4) TMA) or that he, the Inspector, could not have been reasonably expected, on the basis of the information made available to him before that date, to be aware of the assessment being insufficient (section 29(5) TMA).
General Commissioners' decision
- On Mr. Veltema's appeal to the General Commissioners against the assessment, the Inspector maintained that both of the conditions were satisfied, though he still relied only on negligent conduct in relation to the first. Mr. Veltema's case was that, in his return alone and/or when considered with other information available to the Inspector, there was available to the Inspector information that could reasonably have been expected to have prompted him to make obvious and simple enquires that would have revealed the insufficiency.
- On 16th May 2001 the General Commissioners, in a briefly expressed decision, allowed Mr. Veltema's appeal, holding that neither condition had been satisfied and that, in particular in relation to the second:
"(i) The taxpayer's return properly informed the Inspector of the receipt of a benefit by transfer of an asset of £100,000 which benefit the taxpayer had received from his employer, British Horticulture Company Limited.
(ii) The Inspector at King's Lynn would be aware that, in respect of the Company's tax affairs, the valuation upon the P11D would have to be the subject of consultation by the Valuation Office under section 19(1) ICTA 1988 and, therefore, the Inspector should have been aware that the valuation of £100,000 would be scrutinised and could have raised that issue with the taxpayer before 31 January 2000."
- Miss Simler criticised the Commissioners' reasoning because, she said, they did not apply the statutory test in section 29(5) as to whether the Inspector at King's Lynn could have been reasonably expected to have been aware of the insufficiency. She maintained that, instead, the Commissioners applied a test of their own devising based on his constructive awareness that the P11D valuation would be scrutinised, not an awareness by him that Mr. Veltema's assessment was actually insufficient or even that he could have been reasonably expected to scrutinise it and raise an issue as to its sufficiency.
The Judge's decision
- The Inspector, on his appeal to Park J, challenged only the General Commissioners' finding as to non-satisfaction of the section 29(5) condition, maintaining: 1) that awareness or constructive awareness of actual insufficiency, not of possible or suspected insufficiency, is the statutory test; and 2) that the words in section 29(5), "on the basis of" immediately preceding the words "the information made available to him before that time" confined the information that should fix the Inspector's knowledge, actual or constructive, to that set out in section 29(6), namely the information and documents provided by Mr. Veltema as specified in section 29(6) (a) to (c) and information the existence and relevance of which could be inferred from the information and documents specified in those sub-paragraphs (section 29(6)(d)).
- Park J dismissed the appeal, agreeing with the outcome reached by the General Commissioners and holding that section 29(6) had a broader application than that for which the Inspector had contended. In summary, he held:
(1) that 29(5) would not be satisfied if, on the information available as defined in section 29(6) or otherwise, the Inspector could have been reasonably expected to be aware that the assessment might be insufficient so as to prompt him to make some basic checks of the return; it was not necessary, in order to negative the condition for the taxpayer to show the Inspector's awareness of actual insufficiency.
(2) that the words 'on the basis of" in section 29(5) did not confine the 'information made available to' the officer to the information listed in section 29(6), but extended it to include any further information that the officer would have obtained from basic checks that he could reasonably have been expected to make (see paragraphs 23 and 24 of the judgment).
- After applying that approach to the information made available by Mr. Veltema to the Inspector and also to that available to him in the P11D form provided by the Company Tax Unit in Leicester before the end of the section 9A enquiry period, Park J. concluded:
"29. In those circumstances it seems to me that the Inspector could reasonably have been expected to be aware, on the basis of the information in the return, perhaps by itself but certainly taken together with other information which was readily available to him and to some of which he did have regard when reading the return, that the largest item disclosed in the return represented the transfer of the house to …[Mr. Veltema] for no consideration, and that the figure of £100,000 had been entered on the basis that it was the market value of the house. I have expressed the foregoing sentence in the positive, because if it is put that way the sense of it is more easily assimilated. But under the statute the position seems to me to be even stronger, because strictly the question should be formulated in negative terms: was it the case that the Inspector could not have been reasonably expected to have been aware that the house had been transferred to …. [Mr. Veltema] for no consideration, and that the amount of £100,000 was entered as being the market value? In my opinion it cannot possibly be said that that was the case.
30. There are consequential questions to be considered. On the footing that the Inspector could reasonably have been expected to be aware that the house had been transferred to Mr. Veltema for no consideration, what could he reasonably have been expected to do next? In my opinion he could reasonably have been expected to do what the company's Inspector did 15 months later when he received the company's tax return, namely to refer the valuation to the District Valuer, asking the District Valuer whether he agreed with the valuation of £100,000. … the District Valuer can be expected to have come back with his opinion that the value was greater than £100,000 in, at most, a matter of months. If the King's Lynn Inspector had referred the matter to the District Valuer in September 1998 I say with confidence that the Inspector would have known long before 31 January 2000 that the self-assessment, which had been based on a value of £100,000, was insufficient."
- Miss Simler made the following main submissions:
1) The purpose of the section 29 discovery provision is to enable an Inland Revenue Officer to make of an assessment after the enquiry period where there has been an insufficiency of tax through no fault on the part of the taxpayer or of the Inland Revenue and where the information provided in the return has not indicated or suggested that there was in fact an insufficiency. The courts have given a wide meaning to the word "discovery" in this context, namely as covering any case in which for any reason it newly appears that the taxpayer has been undercharged; see e.g Cenlon Finance Co. Ltd. v. Ellwood  40 TC 176, per Lord Simonds at 204.
2) The Judge, in reaching his decision, misunderstood how the system of self-assessment is intended to, and does, work. Its essence is that the taxpayer makes his own assessment and that payment of tax follows from that assessment, not from any action by the Inland Revenue. Responsibility for its accuracy remains on the taxpayer throughout, as indicated by section 9(1) TMA, which defines a self-assessment as:
"an assessment of the amounts in which, on the basis of the information contained in the return and taking into account any relief or allowance a claim for which is included in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment …"
3) This basic misconception of the Judge led him wrongly, and without any evidential basis, to conclude that the Inspector at King's Lynn would have read Mr. Veltema's return and accompanying documents with a view to seeing whether they disclosed anything that it would be sensible for him to investigate. In fact, in the absence of information within returns indicating a risk of error or evasion, the vast majority of self-assessment returns are not the subject of investigation or enquiry by the Inland Revenue. They are processed by administrative staff checking only for arithmetical and other obvious errors.
4) The test in section 29(5) is awareness of actual insufficiency; here, neither the return nor the associated documents made the Inspector aware of any actual insufficiency, nor, for that matter did the P11D, even if relevant for the purpose. There is no obligation in the statute to oblige the Inspector to make enquiries unless he is put on notice by the information made available by the taxpayer as to the insufficiency of the return. And the Judge wrongly substituted the question "Could the officer have been reasonably expected to take steps to determine whether there was an under-valuation" for the statutory test. Putting an Inspector on notice that there might be an insufficiency is not enough to negative section 29(5), and so to interpret it would put an unnecessary and onerous burden of investigation on him.
5) In any event, the Judge wrongly assumed that the Inspector could have written to Mr. Veltema's accountants to clarify the entries in his tax return without first opening an enquiry under section 9A TMA; such a course would have been contrary to guidance issued to Inland Revenue staff. The Judge wrongly assumed that it would have been a simple matter for the Inspector to have referred the valuation of £100,000 to a District Valuer for an independent valuation; such a process could be administratively cumbersome.
6) The words in section 29(5), "information made available to him" as defined in section 29(6) confined such information to the material there specified, and, therefore, the Judge should not have relied for the purpose on the availability of the P11D form.
- Mr. Michael Sherry, on behalf of Mr. Veltema, made the following main submissions:
1) There is no responsibility on the taxpayer "throughout", as Miss Simler had contended, only an onus to make a proper return and submit it within the requisite period. Thereafter, it is for the Inspector, if he wishes to enquire into the return, to do so within the enquiry period. If the Inspector does not enquire into it, or does so and finds no reason to amend the return, the statutory scheme of self-assessment is final, subject only to the discovery provisions of section 29. In the absence, as here, of fraud or negligence, discovery may justify a new assessment, but only that which "the officer could not have been reasonably expected, on the basis of the information made available to him" to have become aware of before the end of the enquiry period.
2) To interpret section 29(5) as confined to cases in which the information provided by the taxpayer must show an actual insufficiency, not simply the likelihood or possibility of it, would deprive the words in section 29(5). "could not have been reasonably expected … to be aware of the situation" of any meaning or purpose. If the information itself revealed an insufficiency, there would be no need for an objective assessment by the Commissioners of what an Inspector could or could not reasonably have been expected to be aware. And where the information available to the Inspector fell short of information of actual insufficiency, but pointed to the possibility or likelihood of it, the General Commissioners would be, and were in this case, entitled to consider what enquiries he could reasonably have been expected to take in the light of the available information and of the Inland Revenue's known and published procedures, including the Revenue Manuals' instructions for a check against the Form P11D (in fact undertaken) and a reference to the District Valuer.
3) The purpose of section 29(6) was to treat as available to the Inspector information provided by the taxpayer in his return and accompanying documents, or otherwise furnished by him for the purpose of any enquiry into the return, even if that material, for some reason not attributable to the taxpayer, had not in fact become available to the Inspector through some administrative failure.
4) The passage in section 29(5) "on the basis of the information made available to [the Inland Revenue officer]" does not confine information for the purpose to that specified in section 29(6). If that had been intended, the passage would have read "on the basis only of the information made available to him", and/or the opening words of section 29(6) would have read "For the purposes of subsection (5) above, information is made available to an [Inland Revenue Officer] if, but only if" it fell within the specified categories. Otherwise, in a case where the Inspector, within the enquiry period, knows, or is put on notice of the possibility, from material available to him but not specified in section 29(6), that the self-assessment return is or may be insufficient, it would not prevent him later being able to rely on it as a section 29 discovery, a notion that the Judge, in paragraphs 32-34 of his judgment, described as "remarkable".
- It is important to return to the basis of the Inspector's challenge by way of case stated of the General Commissioner's findings, namely that, as a matter of law, the condition in section 29(5) of the TMA was satisfied, and to the terms of that condition, namely whether "the officer could not have been reasonably expected, on the basis of the information made available to him" at the material time "to be aware of the" insufficiency. Mr. Sherry submitted that that is a question of fact upon which the General Commissioners' decision is final and that there was ample evidence upon which a reasonable body of Commissioners properly instructed as to the law could have reached their decision. But the first question for this Court, which is one of law, is whether, in applying the statutory question, they and the Judge interpreted it correctly. As I have indicated in paragraph 11 of this judgment, there are two issues, though the second may not be material to the outcome of the appeal, depending on the answer to the first.
- The first issue is whether awareness or inference of actual insufficiency is required to negative the condition, or would awareness that it was questionable do? And, whatever the source of the information, should the Commissioners also take into account what enquiry it could reasonably have been expected to prompt the Inspector to undertake and the likely result of that enquiry? The second issue is, what is the relevant information before the Inspector on the basis of which he could be said to have been reasonably expected to be aware of an insufficiency? Is it simply that emanating from the taxpayer and any inference that could reasonably be expected to be inferred from it, as specified in section 29(6)? Or may it also include other information before him, for example, the P11D form, as in this case?
- As to both of those questions, it may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer. This is subject to the exercise by the Inland Revenue of: 1) whatever routine or random checks that it sees fit to make as a form of "light monitoring" of self-assessment returns; 2) its statutory power of enquiry under section 9A where it considers it appropriate; and 3) in the absence of fraud or negligent conduct, subject to further scrutiny thereafter only in the event of newly discovered information and/or reasonably drawn inferences therefrom that the self-assessment was insufficient resulting in loss of tax.
- If, as here, the taxpayer has made an inaccurate self-assessment, but without any fraud or negligence on his part, it seems to me that it would frustrate the scheme's aims of simplicity and early finality of assessment to tax, to interpret section 29(5) so as to introduce an obligation on tax inspectors to conduct an intermediate and possibly time consuming scrutiny, whether or not in the form of an enquiry under section 9A, of self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it. I should emphasise that I say that, not in reliance on Miss Simler's information to the Court that the Inland Revenue do not customarily make much of an initial check of self-assessment returns and accompanying documents. Such practice, if it is general, cannot affect the proper interpretation of the statutory provisions, though it would appear to me to be consistent with the aims of simplicity and speed of the new statutory scheme as I read it, namely that there is nothing in the Act that obliges an Inland Revenue officer to enquire into a return, for example in a case such as this, to obtain expert valuation evidence for the purpose of checking the accuracy of a valuation indicated in a return.
- More particularly, it is plain from the wording of the statutory test in section 29(5) that it is concerned, not with what an Inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of. It speaks of an Inspector's objective awareness, from the information made available to him by the taxpayer, of "the situation" mentioned in section 29(1), namely an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency, as suggested by Park J. If he is uneasy about the sufficiency of the assessment, he can exercise his power of enquiry under section 9A and is given plenty of time in which to complete it before the discovery provisions of section 29 take effect.
- In my view, that plain construction of the provision is not overcome by Mr. Sherry's argument that it is implicit in the words in section 29(5) "on the basis of the information made available to him" (my emphasis) and also in the provision in section 29(6)(d) for information, the existence and relevance of which could reasonably be inferred from information falling within section 29(6) (a) to (c), that the information itself may fall short of information as to actual insufficiency. Such provision for awareness of insufficiency "on the basis" of the specified information or from information that could reasonably be expected to be inferred therefrom does not, in my view, denote an objective awareness of something less than insufficiency. It is a mark of the way in which the subsection provides an objective test of awareness of insufficiency, expressed as a negative condition in the form that an officer "could not have been reasonably expected … to be aware of the" insufficiency. It also allows, as section 29(6) expressly does, for constructive awareness of insufficiency, that is, for something less than an awareness of an insufficiency, in the form of an inference of insufficiency.
- Accordingly, I do not agree with Mr. Sherry that the Commissioners, in considering whether the Inspector could not have been reasonably expected to be aware of the insufficiency, were entitled to take into account what enquiries he could reasonably have been expected to undertake from the information provided to him under section 29(6) and what he could have reasonably learned from them. The fact that the statutory test is framed in the negative, that the Inspector could not have been reasonably expected to have been aware of the insufficiency, does not, in my view, affect the subject matter of the objective awareness with which the provision is concerned, actual insufficiency.
- The answer to the second issue– as to the source of the information for the purpose of section 29(5) - though distinct from, may throw some light on, the answer to the first issue. It seems to me that the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under the section only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a section 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question. If that other information when seen by the Inspector does cause him to question the assessment, he has the option of making a section 9A enquiry before the discovery provisions of section 29(5) come into play. That scheme is clearly supported by the express identification in section 29(6) only of categories of information emanating from the taxpayer. It does not help, it seems to me, to consider how else the draftsman might have dealt with the matter. It is true, as Mr. Sherry suggested, he might have expressed the relevant passage in section 29(5) as "on the basis only of information made available to him", and the passage in section 29(6) as "For the purposes of subsection (5) above, information is made available to an officer of the Board if, but only if," it fell within the specified categories. However, if he had intended that the categories of information specified in section 29(6) should not be an exhaustive list, he could have expressed its opening words in an inclusive form, for example, "For the purposes of subsection (5) above, information … made available to an officer of the Board … includes any of the following".
- In the event, the P11D Form does not add much to the information provided by Mr. Veltema in his individual return and associated documents, save that it indicated that the asset shown in the return as transferred to him and valued at £100,000 was the Company's house, that £100,000 was the market value cash equivalent, and, as was implicit in his return, that he had paid nothing for it. It did not identify or even suggest a possible insufficiency in the valuation of the market price at that level. Accordingly, it added little, if anything to the section 29(6) information before the Inspector and would be immaterial to the outcome of this appeal, even on the Judge's interpretation of section 29(5). On my interpretation – awareness of actual insufficiency – it is irrelevant.
- On the facts of the case before the General Commissioners, I agree with Miss Simler's submission that, applying the proper statutory test, there was no basis upon which they could have found that the Inspector ought reasonably to have been aware, in the terms provided by section 29(5), of the insufficiency of the assessment on the basis of the information contained in Mr. Veltema's tax return or, even if relevant, in the P11D Form. As she observed, that information may well have led him to conclude that the assessment had been based on a valuation of £100,000, but there was nothing to suggest that the valuation was unreliable.
- Accordingly, I would allow the Inspector's appeal and order restoration of his section 29 assessment.
Lord Justice Chadwick :
- I agree that this appeal should be allowed for the reasons set out by Lord Justice Auld. But, in the circumstances that we are differing from the judge and the General Commissioners on a point of some general importance, I have thought it appropriate to add some observations of my own.
- The taxpayer's appeal to the General Commissioners was from an assessment made under section 29(1) of the Taxes Management Act 1970 ("TMA") in respect of the year of assessment ending 5 April 1998. The relevant provisions in that Act – section 29, and sections 8, 9 and 9A – were, at the material time, and are now, in the form substituted, or inserted, by Chapter III of Part IV of the Finance Act 1994. Section 8 provides that, for the purpose of establishing the amount in which a person is chargeable to income tax for a year of assessment, he may be required to make a return. Section 9 requires that every return under section 8 shall include a self-assessment – that is to say, an assessment of the amount in which, on the basis of the information contained in the return, the taxpayer is chargeable to income tax for the year of assessment. Section 29(1) empowers the Revenue, if it discovers (as regards any taxpayer and any chargeable period) that an assessment to tax is or has become insufficient, to make an assessment in the further amount which, in its opinion, ought to be charged in order to make good the loss of tax.
- Section 29(3) TMA provides that, where a taxpayer has made and delivered a return under section 8 TMA in respect of the relevant chargeable period, he shall not be assessed under section 29(1) in respect of that period and in the same capacity as that in which he made the return unless one of the two conditions mentioned in sections 29(4) and (5) is fulfilled. The relevant condition, for the purposes of this appeal, is that in section 29(5) – the second condition.
- The second condition, so far as material to this appeal, is that, at the time when "an officer of the Board" ceased to be entitled to give notice of intention (under section 9A) to enquire into the taxpayer's return under section 8 TMA, "the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above" – that is to say, in the present context, to be aware that the self-assessment to tax made in a return under section 8 TMA was insufficient. It is common ground, in the present case, that the time at which the Revenue ceased to be entitled to give notice of intention to enquire into the taxpayer's self-assessment for the year 1997/98 was 31 January 2000.
- The grounds upon which it is said that the taxpayer's self-assessment for the year 1997/98, made (as it was) in a return delivered on 30 July 1998, was insufficient is that the value of the item "benefit received from employment" shown in that return was understated. The benefit was described as "Asset placed at disposal of Employee: £100,000". It is, I think, accepted that the Revenue knew, before 31 January 2000, that the asset in question was a house formerly occupied by the taxpayer as an employee. The assessment under section 29(1) TMA is made on the basis that the open market value of the house transferred, at the date of the transfer, was £145,000. The circumstances in which the Revenue rely on that figure have been explained by Lord Justice Auld. It is not accepted that the inspector of taxes responsible for the taxpayer's affairs knew, on or before 31 January 2000, that the value of the asset chargeable to tax as a benefit from employment was in excess of the amount (£100,000) stated in the return.
- The question for the General Commissioners, the judge and, now, this Court is whether the inspector responsible for the taxpayer's affairs could have been reasonably expected, on the basis of the information made available to him before 31 January 2000, to be aware that the value of the asset transferred and chargeable to tax as a benefit from employment was understated in the return.
- In order to address that question it is necessary to have in mind the meaning given to the expression "information . . . made available to an officer of the Board" by section 29(6) TMA. So far as material for the purposes of this appeal, information is made available to an officer of the Board if – "(a) it is contained in the taxpayer's return under section 8 . . . in respect of the relevant chargeable period (the return); or in any accounts, statements or documents accompanying the return; . . . ; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in [section 29(1)] . . . – (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) . . . above; . . ."
- The information contained in the return delivered on 30 July 1998 was that an asset had been transferred to the taxpayer and received by him as a benefit from his employment which was chargeable to tax. Further, it appeared from the return that the value placed upon the asset was £100,000. It could, I think, reasonably be expected that the inspector responsible for the taxpayer's affairs would infer, from that information contained in the return, that other relevant information existed. In particular, it could reasonably be expected that the inspector would infer that the value of £100,000 placed on the asset was supported by a valuation, written or oral. But he could not reasonably be expected to infer that the valuation, if it existed, would disclose a value other than £100,000. To put the point another way, the inspector could reasonably be expected to infer that information as to the value of the asset existed; but he could not reasonably be expected to infer that information as to a value in excess of £100,000 existed.
- On the basis of the information which was actually made available to him – or which must be treated as made available to him, because he could reasonably be expected to infer that it existed and was relevant – of what could the inspector have been reasonably expected to be aware? He could, I think, reasonably have been expected to be aware of what he would have discovered if he had called for the information as to the value of the asset which then existed; that is to say, of what he would have discovered if he had called for the Cruso & Wilkins valuations to which Lord Justice Auld has referred. That information would have made him aware that the house had been the subject of a valuation in writing made in January 1997; that the value attributed to the house by that valuation was £105,000; but that that value had been revised to a figure nearer to £100,000 at or around the time of the transfer. But the inspector would not be aware, from that information, that the open market value of the house at the time of the transfer was significantly in excess of £100,000. The most that can be said is that, in the light of what he did know (or must be treated as having known), he might have chosen to refer the value to the District Valuer; and that if he had done so, the District Valuer would have reported as he did in response to the reference made by the inspector who was dealing with the employer company's affairs.
- The question posed by the second condition is whether the inspector responsible for the taxpayer's affairs could have been reasonably expected, on the basis of the information made available to him before 31 January 2000 (giving to that concept the extended meaning which section 29(6) TMA requires), to be aware that the value of the asset transferred and chargeable to tax as a benefit from employment was understated in the return. The question is not whether the inspector could reasonably have been expected, on the basis of information which was not available to him (even after giving the concept its extended meaning), to have become aware that the value of the asset was understated if he had made inquiries which it would have been reasonable for him to make. The General Commissioners and the judge addressed the second of those questions; and reached the conclusion that it should receive an affirmative answer. In addressing the wrong question they erred in law. Had they addressed the correct question, they would, in my view, have been led to the conclusion that that question must be answered in the negative. That is the answer which I would give to the first of those questions.
Lady Justice Arden:
- I agree that this appeal should be allowed and with the judgments of Auld and Chadwick LJJ, save one point concerning section 29(6)(d)(i) of the Taxes Management Act 1970. Section 29(6) is set out above in paragraph 8 of the judgment of Auld LJ.
- I agree with Chadwick LJ, for the reasons he gives, that the inspector could not be reasonably be expected to be aware that the valuation if it existed would disclose a valuation other than £100,000 or that it did not support that figure. However Chadwick LJ additionally expresses the view that the inspector could reasonably be expected to be aware of what he would have discovered if he had called for the information as to the value of the asset. On the facts of this case, the attribution of that knowledge does not produce any different results for the reasons that Chadwick LJ then gives. However this formulation is different from that set out in the first sentence of this paragraph. As I see it, section 29(6)(d)(i) does not attribute to the inspector information which is not reasonably to be inferred from information within s 29(6)(a) to (c). The matters set out in those paragraphs are all categories of information actually supplied by the taxpayer. The valuation was not so produced. Moreover, in circumstances such as this the valuation might not in fact support the figure in the taxpayer's tax return. In that event, in my judgment on the true construction of section 29(6)(d)(i) the inspector is not to have attributed to him the further information that he would actually have obtained if he had asked for that valuation, unless and until it is produced to him.
- With the qualification, I agree with the reasons given by my Lords.
(1) Appeal allowed.
(2) The assessment to tax in the sum of 18,000 be restored.
(3) Costs order made by Park J be set aside and sums paid on account of that order be returned by the respondent to the appellants. Further, appellants to pay contribution towards the respondent's reasonable costs in the Court of Appeal subject to a maximum contribution of £6,000.
(4) Application for leave to appeal to the House of Lords (which the parties have agreed to be dealt with in writing and communicated to them in writing) to be made in court at a suitable date.
(Order does not form part of the approved judgment)
Respondent's application for Leave to Appeal to the House of Lords as follows:
1. The respondent taxpayer applies to the Court of Appeal for permission to appeal its decision in this case to the Judicial Committee of the House of Lords.
2. The case involves arguable points of law of general importance in respect of which permission ought to be given to appeal to their Lordships' House notwithstanding that the point has already been the subject of judicial decision.
Arguable point of law
3. Although the court was unanimous in allowing the Crown's appeal, the learned judge had reached a different conclusion. When granting leave to appeal to the Court of Appeal Peter Gibson LJ described Park J's decision as "the judge's lucid judgment."
4. It is submitted therefore that this is an issue upon which judicial minds may differ and that therefore the decision of the Court of Appeal on the two issues before the court (as set out in paragraph  of the Court of Appeal decision) raise arguable points. Moreover in its decision the members of the Court of Appeal express differing views on the interpretation of section 29(6)(d) of the Taxes Management Act 1970; see paragraphs , , .
5. For these reasons and for the reasons set out in Park J's judgment and in the respondent taxpayer's skeleton argument before the Court of Appeal the respondent taxpayer submits that the appeal raises arguable points of law.
General public importance
6. This appeal is of general public importance. In the Revenue's skeleton argument before the Court of Appeal at paragraph 3 it was submitted that the appeal:
"raises an important point of principle concerning the machinery of the self-assessment tax system."
and this is echoed in the court's decision at paragraph  per Auld LJ:
"The appeal raises an important point of principle concerning the scheme of self-assessment for tax."
7. As was noted by the learned judge at paragraph 1 of his judgment it is the first case in which the self-assessment system has been considered by the courts.
8. As the Revenue submitted at paragraph 3 of its skeleton argument before the Court of Appeal,
"its result is liable to affect a large number of taxpayers who are within the self-assessment system."
Specifically in every case where the taxpayer submits a return containing a valuation, which to the best of the taxpayer's knowledge is correct, the taxpayer will not have certainty of outcome until the expiry of five years after the date his return should be filed; section 43(1) of the Taxes Management Act 1970. Contrast the general limitation of one year following the filing date in which enquiries may be opened under section 9A, envisaged as the norm by the scheme of self-assessment. That will be so in all cases where a taxpayer has disposed of a chargeable asset to a connected person. (A similar increase in uncertainty will follow for the purposes of stamp duty land tax and will arise in all cases where land is transferred to a company from a person who is connected with it; FA 2003, section 53 and schedule 10, para 30). Further there will be many other cases affected.
9. The number of returns likely to be affected by the court's decision is likely to run into the hundreds of thousands every year.
10. One consequence of the court's decision, to construe section 29(5) and (6) narrowly, is that in an attempt to bring themselves within the ambit of those provisions, in particular section 29(6)(a), taxpayers and their advisers will inundate the Revenue with additional documents and information. Given that, as the Crown informed the court, in the vast majority of cases the Revenue do not look at tax returns in detail, the result is likely to be considerable waste of time, energy and expense throughout the country every year.
11. For these reasons the respondent taxpayer submits that this is an appropriate case in which to grant permission for the respondent to appeal to the Judicial Committee of the House of Lords.