Peter Vaines looks at some important cases for property owners hoping to claim Business Property Relief, HMRC's use of its powers under FA 2008 Sch 36 to request information from taxpayers, and how long HMRC can take to decide it has discovered a taxpayer has paid insufficient tax.
IHT Business Property Relief
It is well known that HMRC are reluctant to allow business property relief for inheritance tax where the business is that of letting property. They have consistently taken the view that the letting of property is a business which consists wholly or mainly in the making or holding of investments, no matter how extensive the services which are provided.
The recent decision in Estate Of Marjorie Ross (Deceased) v HMRC [2017] TC05959 gives a considerable degree of hope because the services provided in that case were sufficient to allow the relief to be given.
There was also the case of M W Vigne (Deceased) v HMRC [2017] UKFTT 632 (TC), which concerned a livery business. Land and buildings are naturally an important part of any livery business and HMRC took the view that, for that reason, business property relief was not available because the business was that of letting or licensing of land; it was therefore a business of making or holding investments.
The Tribunal did not accept this view and rejected all the arguments of HMRC saying that no properly informed observer could have concluded that the business was that of holding investments. They described the view of HMRC as a wholly artificial analysis.
I said before, but it is worth saying again, that it is difficult to resist the observation that HMRC chose to advance a wholly artificial analysis in an attempt to win their case. This is behaviour which they regard as absolutely unacceptable and deserving of serious penal sanctions if it is done by anybody else.
Under the circumstances, it was inevitable that HMRC would appeal. The Upper Tribunal have now heard this case (The Executors of M W Vigne [2018] UKUT 357) and concluded that the FTT were right in allowing the relief. They said that the FTT applied the correct legal test and their decision should not be disturbed. This is an important decision because although decisions of the First Tier Tribunal have no precedential quality, those of the Upper Tribunal are binding on the lower courts just like decisions of the High Court. Accordingly, the confirmation that the FTT expressed the correct legal test in Vignes provides us with the benchmark for this relief for the future.
A crucial point here is that the only other Upper Tribunal case on the subject was that of N Pawson [2013] UKUT 50 (TCC) . The test laid down in Pawson was criticised by the FTT in Vignes. The FTT said that the Upper Tribunal had started from the preconceived idea that the business was the making or holding investments and then asked whether there are factors indicating to the contrary. The FTT said that the proper starting point is to make no assumption one way or the other, but to establish the facts and determine whether the business is wholly or mainly one of making or holding investments.
The judgment reveals that in refusing leave to appeal in Pawson, the Court of Appeal had said there is no presumption that business which consists of the exploitation of land for profit is an investment business. It is odd, to say the least, that HMRC chose to continue to argue the point.
Schedule 36 Notices
A notice under Schedule 36 Finance Act 2008 is a statutory notice to require the taxpayer to provide information and documents which are “reasonably required by the officer for checking the taxpayers tax position”. It does of course carry penalties for non compliance.
The power to seek such information is important to HMRC to enable them to obtain the necessary information to ensure that a taxpayer’s affairs are correct – particularly in the context of self assessment.
However, as with any statutory power there is the risk of it being used inappropriately.
The taxpayer can appeal against a notice in the normal way if he considers that the requirements for the issue of such a notice are not satisfied – which is often that the information or documents requested are not reasonably required for checking the taxpayer’s tax position.
Two recent cases throw an interesting light on such notices. In both cases HMRC considered that the taxpayers lifestyle gave them grounds to believe that there had been omission from their tax returns. In one case, Newton v HMRC [2018] UKFTT 513 (TC), the Tribunal decided that the request for information was unjustified and it was set aside (with incidental reference being made to the relevant time limits which seemed to preclude a notice anyway). In the other case, Holmes and Knight v HMRC [2018] TC6824, the Tribunal decided that the statutory notice was justified – although interestingly no reference to the time limit was made in this case.
Although the facts in each case were different (of course) there are sufficient similarities to suggest that the reasoning may be flawed in one of them. The question is, which one?
Discovery Assessments
The possibility that a discovery can become stale, causing it to go out of time – even if the statutory time limit has not expired – thereby precluding HMRC from raising a discovery assessment, continues to engage the attention of the courts.
It can now reasonably be concluded that a discovery can become stale and that HMRC cannot just:
“Sit on it and do nothing for a number of years before making an assessment just before the end of the limitation period”. Pattullo v HMRC [2016] UKUT 0270.
This follows the Upper Tribunal decision in Charlton v HMRC [2013] STC 866 and that the assessment must be issued whilst it retains its essential newness.
In Gordon & Ors v HMRC [2018] UKFTT 307 (TC) the tribunal found that the discovery was stale and that a delay of 2 years was too long for the discovery to retain its essential newness. And in HMRC v R Tooth [2018] UKUT 38 the Upper Tribunal held that HMRC must act expeditiously in issuing an assessment when they have made a discovery.
However, despite all this, HMRC are undeterred. In the case of Beagles v HMRC [2018] UKUT 0380, faced with a delay of 2½ years from making the discovery to raising the assessment, HMRC simply argued that all these cases were wrong. They failed.
It would seem that in the absence of a Court of Appeal decision to the contrary, this matter must surely now be settled in principle. It will of course depend upon the facts whether or not an assessment is stale in any particular case.
The case, however, does highlight an unsatisfactory feature. No matter how many cases are stacked up against them, it seems that HMRC will continue to argue on the basis that everybody is out of step except them. They should be careful what they wish for. If HMRC can say that all the cases with which they disagree are all wrong, there is no reason why the taxpayer should not do the same. That will give rise to an explosion of unmeritorious litigation which will be in nobody’s interests. A more balanced view, based on established legal principles, must surely be preferred to an intolerance to any view contrary to their own.
For the tax authorities to insist that their view must always be accepted (even if the courts disagree) is as short sighted as it is abhorrent – and hardly likely to engender the respect and the compliance which has been a treasured hallmark of the UK tax system.
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