< Go Back Tribunal find HMRC's Discovery Assessments were unfair and “in terrorem” Posted: Sep 3, 2019
Sebastien Cussens v HMRC TC/2018/05468 -  UKFTT 0543 (TC) 07337 the First Tier Tribunal (FTT) were asked to consider the veracity of a number of ' Discovery Assessments' raised by HMRC for 2005 through to 2016 together with corresponding Penalty Determinations. The total amount at stake was £342,943.
The FTT noted that the assessments were based upon the principles outlined in
which, in a nutshell, suggests that in the absence of accurate information the Crown can do little more than make reasonable inferences, that the Inspectors figures...ought to be...fair. There was one important caveat in this case... Johnson v Scott  STC 48 "The fact that the onus is on the taxpayer to displace the assessment is not intended to give the Crown carte blanche to make wild or extravagant claims". Section 29 Taxes Management Act 1970 provides that HMRC may; . What troubled the FTT wasn't the usual assertion by HMRC that the onus was on the appellant to dislodge their assessments but the distinct lack of any reference to who bears the onus of establishing that the assessments were made based upon fair and proper inferences being drawn from established facts, a concept sometimes referred to 'best judgement' a phrase borrowed from VAT cases. "...make an assessment in the amount, or further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax"
The FTT took guidance from the decision of Wool J in
Van Boeckel v C & E  STC 150 and Rahman (No.2) v HMRC  STC 150 which although VAT related set out a series of principles to examine the idea of 'Best Judgement': The Respondents must be in possession of some material upon which a best judgement assessment can be properly based, The Respondents are not required to undertake the work which the taxpayer would ordinarily undertake to arrive at a conclusion about the exact amount of tax due, The Respondents are entitled to exercise their best judgement power by making a value judgement on the material available, The Tribunal should not treat an assessment as invalid simply because it takes a different view as to how the best judgement could or should have been applied to the material available to the Respondents. Before the Tribunal interferes, it needs to be satisfied that the proported best judgement assessment was wholly unreasonable, The Tribunal is to start by assuming that the Respondents made an honest and genuine attempt to arrive at a fair assessment, It is for the Tribunal to arrive at the proper sum for the tax payable in the event that it decides the assessment(s) fail to satisfy the best judgement criteria, The Tribunal added that any assessment must be methodologically sound and not methodologically flawed although this may be covered by considering if the assessment was wholly unreasonable as set out above.
Having set out those principles the FTT also added that there were two stages requiring their consideration;
The First was if the assessment(s) was raised according to best judgement. If the assessment was not considered to be made by best judgement then the FTT had no need to consider the second stage which was: To consider if the assessment ought to be reduced by reference to further evidence or argument available to the Tribunal.
In this case, to cut a long story short, the FTT found that the assessments were not methodologically sound and that, in effect, HMRC had adopted an unreasonable (to the point of unthinkable) 'margin' and plucked figures of expenditure completely out of the air. They then used the RPI to scale the inflated figures backwards in time. No consideration was given by the HMRC officer regarding the plausibility of the derived figures. The FTT decided that HMRC's 50% net profit margin for the sale of second hand vehicles was neither fair or anything that could be considered best judgement.
They did note that the appellant did not act as one would normally expect (for reasons set out in the Judgement) but then suggested that HMRC's actions were "in terrorem" in a bid to bludgeon the appellant to come to heel.
The FTT concluded that the assessments were so wild, extravagant and unreasonable that they were not raised for the purpose authorised by S29 TMA 1970 and were thus invalid. The appeal was allowed.
This was another shot accross HMRC's bows and a warning to Inspectors that their assessments must be reasonable and based on proper material and wild, speculative and unreasonable assessments would be vulnerable to challenge. It also has, probably, announced the more widespread use of the legalistic term "in terrorem" in correspondence received by HMRC from advisers!
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