Analysis
David Atkins (the deceased) had been a Lloyd’s ‘name’ and, during the final year prior to his death, he had made a loss which was disclosed in his tax return. However, there existed a special reserve account for the purpose of meeting anticipated claims and it was the accepted practice that the balance was deductible from what would otherwise have been profits of particular years or subjected to tax if and when subsequently released. While ordinarily income accruing to the executors would be taxed at 20%, legislation provided for any relief to be added back to the income of the deceased in the last full tax year of his life so as to be taxed at a rate of 40%. As this did not tie in appropriately with the provisions for self-assessment, Revenue guidelines as to how to deal with special reserve account valuations indicated that, in order to achieve correct results, an enquiry should be opened within the one-year window following submission of the tax return for the last year prior to death, and then left open until the ultimate destination of the balance was resolved so as to facilitate any necessary adjustment to that tax return. In this case, despite being reminded, the Revenue failed to open an enquiry and, consequently, when later the balance in the special reserve account was together with accrued interest released to the deceased’s executors, the only recourse available to the Revenue was to bring a discovery assessment since the tax return had by then become final. When this was brought, considerable work was undertaken in preparing for an appeal, only for the Revenue to withdraw it at a very late stage prior to the hearing. The deceased’s executors pursued an application for costs on the grounds that the Revenue had acted unreasonably in bringing the proceedings.
Held (awarding costs)
The Revenue was entirely at fault in its initial failure to follow their own guidelines and open an enquiry following the submission of the tax return. That tax return had been made entirely correctly and the Revenue’s statement of case as to why they considered that the discovery assessment would have been sustained, had it not been withdrawn, was completely unfounded. The fact that there was an under assessment was not due to any error or mistake in the tax return, being entirely attributable to the Revenue’s failure to follow their own guidelines, open an enquiry and in that way make an adjustment to the tax return. Moreover, the Revenue’s suggestion that the discovery assessment would have been sustained because the deceased’s executors could not, and did not, rely on the defence in s29(2) of the Taxes Management Act 1970 was ridiculous and completely without merit, since it was predicated on the basis that the under assessment was attributable to an error or mistake in the tax return.
JUDGMENT The respondents had indicated in advance that they would not be represented but had submitted written representations. Decision on an application for costs [1] This was a slightly unusual application. Although HMRC had withdrawn its discovery assessment for approximately £13,000, at a very late stage in the period before the appeal was due to …Continue reading "Atkins, The Executors of v HMRCC [2011] UKFTT 468 (TC)"