Validity of Discovery Assessments under HICBC Scrutinized in Fera v HMRC Case

Citation: [2023] UKFTT 961 (TC)
Judgment on

Introduction

In the noteworthy case of James Fera v The Commissioners for HMRC [2023] UKFTT 961 (TC), the First-tier Tribunal (Tax Chamber) examined the validity of discovery assessments made in retrospect concerning the High Income Child Benefit Charge (HICBC). The central legal question pertained to whether the assessments were correctly issued under the conditions of section 29 Taxes Management Act 1970 (TMA) and whether the retrospective amendments introduced by section 97 Finance Act 2022 (FA 2022) could validate the assessments.

Key Facts

Mr. James Fera was charged with the HICBC for several tax years due to his income exceeding £50,000 annually while receiving child benefit. However, being unaware of the obligation to register for self-assessment and misled by HMRC’s failure to inform them of the need to repay earlier benefit payments upon notifying them of the charge, the Feras faced significant unexpected tax liabilities. Following an “nudge” from HMRC, Mr. Fera ceased claiming child benefit but did not file past self-assessment returns. HMRC later discovered the non-compliance and issued discovery assessments, which Mr. Fera appealed.

The Tribunal’s analysis focused on the interpretation of section 29(1) TMA, as it stood before and after its amendment by FA 2022, and its application to Mr. Fera’s assessments. Under section 29(1) TMA, a discovery assessment can only be valid if certain conditions are satisfied. These conditions are that income, which should have been assessed, had not been assessed, or the assessment was insufficient or any relief excessive. As the HICBC does not relate to the concept of an omission of “income” but rather to a liability based on a tax charge, the discovery assessments were originally invalid. This was confirmed by the Court of Appeal in the case of HMRC v Jason Wilkes [2021] UKUT 150 (TCC), which held that child benefit is not taxable income, and thus cannot satisfy section 29(1)(a) TMA.

This legal position was subsequently altered by section 97 FA 2022, which retrospectively amended section 29(1)(a) TMA to refer to an amount of “income tax or capital gains tax” that ought to have been assessed. However, for this amendment to apply retrospectively and validate a discovery assessment, it must be shielded from valid challenges made by the taxpayer before a specific cutoff date.

Outcomes

The Fera case ignited an examination of whether Mr. Fera’s appeal satisfied the conditions that would preclude retrospective application of section 97 FA 2022’s amendments. The Tribunal concluded that Mr. Fera’s appeal, although generic in terms of legal technicality, inherently challenged the validity of the discovery assessments. As such, the Tribunal determined that the issue whether the discovery assessment was invalid due to lack of “income” omission was indeed raised implicitly before the cutoff date, making the assessments non-protected and invalid. Consequently, the appeal was allowed and the assessments were overturned.

Conclusion

The Tribunal’s decision in James Fera v The Commissioners for HMRC underscores the necessity for clear understanding and communication of tax liabilities by HMRC to taxpayers. It highlights the Tribunal’s commitment to the principles of fairness and justice, particularly for unrepresented taxpayers who might not possess detailed legal knowledge. The decision also emphasizes the importance of statutory interpretation and procedural fairness in tax litigation, and how retrospectively applied legislation can interact with ongoing disputes. The case thus serves as a seminal example of the balance between the legal technicalities and the equitable treatment of taxpayers in UK tax law.

Related Summaries