Tribunal Upholds HMRC's Assessment Power in Complex Tax Avoidance Case

Citation: [2023] UKFTT 945 (TC)
Judgment on

Introduction

The case of EF Brosch & Ors v The Commissioner for HMRC (2023) is a pivotal First-tier Tribunal (Tax Chamber) decision that illustrates the complexities involved in determining whether a hypothetical HM Revenue and Customs (HMRC) officer could reasonably be expected to be aware of tax losses or insufficiencies from the information made available by taxpayers. This case centers around the effectiveness of stamp duty land tax (SDLT) avoidance schemes and the subsequent adequacy of disclosure provided by the taxpayers in their SDLT1 returns.

Key Facts

The appellants employed SDLT avoidance schemes known as “Jeepster” and “Hummer” which were designed to exploit sub-sales rules in the Finance Act 2003 to reduce SDLT liabilities. The schemes were promoted by Cornerstone Tax Advisers and entailed sub-sales by way of an assignment or gift within couples, either unmarried or married.

HMRC later discovered that the schemes were ineffective, leading to a loss of tax not recorded in the SDLT1 returns. The preliminary issue addressed by Tribunal Judge Brooks was whether a hypothetical officer, based on the disclosures made, could reasonably be expected to be aware of the loss in tax.

The Tribunal’s legal analysis focused on several key principles:

  1. Discovery Assessments: Under Paragraph 28 of Schedule 10 to the Finance Act 2003, HMRC can make a discovery assessment when there has been an insufficiency in the amount of tax paid due to fraud, negligence, or excessive relief. However, the Tribunal applied constraints to this power, as outlined in Paragraph 30 of Schedule 10, which prevents HMRC from issuing assessments after the closure of an enquiry window unless information made available to HMRC would not have allowed a hypothetical officer to be reasonably expected to be aware of the insufficiency of tax.

  2. Hypothetical Officer Standard: Drawing from Sanderson, Beagles, and confirmed principles from Carter & Kennedy UT, the Tribunal considered the knowledge expected of a hypothetical officer. This officer would possess general competence and skill but does not need to have specialized expertise. The awareness must reach a standard that would justify making an assessment and not merely prompt an enquiry.

  3. Adequacy of Disclosure: The Tribunal examined whether the disclosure provided, in this case via the SDLT1 returns and an accompanying Disclosure Note, was sufficient to clearly alert the hypothetical officer to the insufficiency. The adequacy of disclosure is impacted by the clarity of the tax law and the complexity of the arrangements, as suggested by Charlton and Hicks.

  4. No Adverse Inference from Privilege: HMRC’s refusal to waive privilege over legal advice received in 2007 did not invite any adverse inference, in line with the rulings in Sayers v Clarke Walker and Samuel Smith Old Brewery v Philip Lee.

Outcomes

The Tribunal determined that the SDLT1 returns and Disclosure Note did not provide enough information for a hypothetical officer to be reasonably expected to be aware of the insufficiency of tax. As a result, the grounds for appeal based on the adequacy of the information made available to HMRC were dismissed, and the Tribunal ruled in favor of HMRC. The additional grounds relating to the strike out application were deemed unnecessary to address following this conclusion.

Conclusion

The EF Brosch & Ors v The Commissioner for HMRC case reaffirms the principle that taxpayers bear the burden of providing adequate disclosure to allow for the reasonable detection of tax insufficiencies by HMRC. Even when complex tax avoidance schemes are employed, the information disclosed must be sufficient to establish a clear understanding of the underlying transactions and expected tax consequences. Where ambiguity prevails, a hypothetical officer of reasonable competence and knowledge would not be expected to infer an insufficiency, and as such, HMRC’s power to assess for tax losses beyond the enquiry window remains intact.