Jonathan King v The Commissioners for HMRC

Introduction

1. The Appellant took part in a contractor loan marketed tax avoidance scheme. Consequently, HMRC issued three discovery assessments (the “Discovery Assessments”) pursuant to s29 Taxes Management Act 1970 (“TMA”). The details of the Discovery Assessments are as follows: Tax year Date of discovery assessment Amount 2008/09 31 January 2013 £2,177.60 2009/10 3 January 2014 £2,459.20 2010/11 3 January 2014 £4,441.40

2. The Appellant now appeals the Discovery Assessments on the basis that the condition in s29(5) TMA is not met. HMRC dispute this.

3. For the reasons given below we dismiss the appeal. preliminary points Documents and evidence

4. For the hearing we were provided with a hearing bundle of 1,210 pages and a supplementary authorities bundle of 295 pages.

5. The Tribunal heard oral evidence from the Appellant and Officer Rita Flynn whose written witness statements stood as evidence-in-chief and were unchallenged. Officer Flynn was cross-examined and HMRC had no questions for the Appellant. Officer Flynn answered questions in a straightforward manner and stated clearly what she did not know. We found both witnesses to be honest and credible.

6. The majority of our findings of fact are set out in ‘The Facts’ part of our decision. A significant proportion of our findings of fact are from the documents supplied or the largely unchallenged evidence of the Appellant and Officer Flynn. Consequently, most of them require no discussion as they were not in dispute. Where they were in dispute or require further discussion, we provide the reasons for our findings below. Therefore, we also incorporate the relevant evidence in our findings rather than setting it out separately.

7. HMRC provided one generic witness statement and one witness statement in relation to a different appeal. We deal separately with those in our discussion below. Parties' submissions

8. We are grateful to the Appellant and Mr Hopkins for their skeleton arguments, submissions, willingness to engage with our questions and to the witnesses for their evidence. We set out below our summary of those submissions on the law and the facts. The parties should, however, be assured that when preparing this decision, the terms of the skeletons were reread and our notes of the hearing reviewed. Because we do not deal specifically with any point it does not mean that it was not considered in the round when reaching our decision. The Appellant’s involvement in a tax avoidance scheme

9. The Appellant was anxious to explain the background to his involvement with a marketed tax avoidance scheme. In particular that he believed, based on the information provided to him, that the scheme in this instance was fully compliant with the law. We explained at the end of the hearing that, although not relevant to the outcome of the appeal, we accepted that that was his view of the scheme at that time. the facts

10. We set out the majority of our findings of fact in this section of our decision. We make some findings of fact in other parts of this decision where it is clearer to do so. HMRC’s investigations into contractor loan schemes generally

11. The Discovery Assessments were made following a much broader programme of work by HMRC regarding contractor loan schemes. Officer Lesley Stopp’s evidence

12. HMRC provided a generic witness statement from Officer Lesley Stopp about HMRC’s work on contractor loan schemes dated 14 October 2017. We understand the reason for this approach to be twofold: from 2012 Officer Stopp was clearly instrumental in HMRC’s work on contractor loan schemes dealing with thousands of taxpayers; and Officer Stopp retired in or around 2017. The Appellant in our view, sensibly, did not take an issue with this approach. Nor did he indicate any wish to challenge Officer Stopp’s evidence.

13. Officer Stopp’s witness statement explained: in general terms how contractor loan schemes purported to work; and in detail the approach that HMRC took to the contractor loan schemes.

14. In relation to how contractor loan schemes purported to work Officer Stopp explained: (1) A taxpayer (the “scheme user”) would provide services to an end user through a contract of employment with an off-shore entity. (2) The end user would pay the off-shore entity the agreed rate for the services provided by the scheme user. In turn, a modest salary would be paid to the scheme user by the off-shore entity, who had voluntarily registered with HMRC for PAYE as an off-shore employer. Sometimes the scheme users’ services would be provided through an intermediary but this was not a critical aspect in the implementation of the contractor loan schemes. (3) The remainder of the income paid to the scheme user would be contributed to an off-shore trust set up by the off-shore entity. This trust would subsequently make interest free discretionary loans to the scheme user. This would give rise to a taxable benefit in kind because it was interest-free and employment related, but the scheme users would not self assess the loans as taxable income. Concluding, that: It was very clear to me, on the basis of both my discussions with [senior technical colleagues] and my own understanding of the schemes, that the loans received by scheme users were taxable as income and there would accordingly be a loss of tax from scheme users. I came to this conclusion shortly after being told how the schemes worked and before my team even started the work of making assessments.

15. Officer Stopp developed a three-step process for making assessments against scheme users (ie taxpayers using contractor loan schemes), as follows for each of the relevant years: (1) Establishing the loan figure (“Step 1”); (2) Calculating the amount of lost tax (“Step 2”); and (3) Making the assessment (“Step 3”). Officer Stopp’s evidence also explained that only officers of HMRC of a certain grade can issue discovery assessments and so although the three steps above were not carried out by Officer Stopp (but her team) the discovery assessments were issued in Officer Stopp’s name. Officer Andy Finch’s evidence

16. HMRC provided a witness statement of Officer Andy Finch dated 3 August 2017 prepared for another taxpayer’s appeal. Again, the Appellant in our view, sensibly, did not take an issue with this approach. Nor did he indicate any wish to challenge Officer Finch’s evidence. Officer Finch’s witness statement also provides the generic detail insofar as contractor loan schemes. He also explains that HMRC had been aware of contractor loan schemes since 2006/2007. Further that as of June 2011 HMRC were considering challenging the contractor loan schemes on the basis of the transfer of assets provisions or on the basis that the loans should be taxed as employment income. HMRC’s investigations into the Appellant’s self assessment tax returns

17. The Appellant used a tax avoidance scheme (the “Scheme”). The promotor of the Scheme was Tenon Limited. The Scheme was marketed by Aston Management Ltd (“AML”) during the years 2008/09, 2009/10 and 2010/11. We refer to users of the Scheme as “Scheme Users”.

18. Officer Flynn confirmed that the Scheme was part of the work undertaken by Officer Stopp’s team. Further, that HMRC began to investigate the Scheme in 2009.

19. Officer Flynn’s evidence also explained the workings of the Scheme crucially: (1) AML was incorporated on the Isle of Man ie offshore. (2) AML and Tenon (IOM) Ltd (another Isle of Man company) established the Aston Management Limited Employee Benefit Trust (the “EBT”). (3) AML was the Scheme Users’ employer. (4) AML received payments, generally through one or more intermediaries, for the Scheme Users’ services. (5) AML registered for PAYE and made salary payments to Scheme Users. The salary was typically based on National Minimum Wage and PAYE and NICs were deducted. (6) AML would pay the balance of the Scheme Users’ fees, after their own and any intermediary fees, to the EBT. (7) The EBT provided discretionary interest free loans to the Scheme Users (the “Loans”). The Loans were said to be repayable one month after written demand by the lender. However, AML’s welcome brochure stated that whilst the Loans were repayable on demand the trustees of the EBT were required to act in the best interest of the beneficiaries/employees of AML. Therefore, it was ‘difficult to imagine a situation’ where it would be in the best interest to recall the Loans.

20. The Scheme was disclosed to HMRC on 29 March 2006 by Tenon Limited. The Scheme was assigned DOTAS SRN 43525375 (the “DOTAS SRN”).

21. The hearing bundle included a copy of the DOTAS notification which summarised the arrangements as follows (the “DOTAS Information”): Title, if any, of the arrangements Off shore employer – loan facility Under which provisions of the Tax Avoidance Schemes (Prescribed Description of Arrangements) Regulations 2004 is the proposal or are the arrangements notifiable? Regulation 2(1); Paragraph 7(1)(e) of the schedule Summary of proposal or arrangements Non-resident company is established and centrally managed and controlled in the Isle of Man. This employs specialist contractors who work in a number of different industries. Non-resident company sponsors an employee benefit trust. Services of employees of off-shore company are provided to end users. Employees receive remuneration through the payroll subject to PAYE. Loan facilities are also offered by the EBT. EBT may also be used to provide other benefits. Explanation of each element in the proposal or arrangements from which the expected tax advantage arises • Offshore company with no place of business in the UK is not subject to corporation tax. • Creation by an offshore company of an EBT whose trustees are not UK resident has no UK tax implications. • Contribution to EBT is deductible under Manx Law. • Payment of salary to UK resident employees of off-shore company is subject to PAYE and primary NIC contributions. • Benefits provided by EBT to UK resident employees are taxable in the UK under the benefits code. In particular loans provided to employees will be subject to the normal regime for employee loans. Statutory provisions relevant to those elements of the proposal or arrangements from which the expected tax advantages arises Offshore company CT status. TA 1988 s11 Taxation of employment-related loans – ITEPA 2003 ss173 -191 Taxation of employment income – ITEPA 2003 Part 2 chapters 7 and 8.

22. The Appellant was employed by AML from 23 June 2008 until 31 March 2011. The background to the Discovery Assessments The self assessment tax returns

23. HMRC did not serve the Appellant with a s8 TMA notice to file for the tax years 2008/09 and 2009/2010.

24. On 30 September 2009 the Appellant filed a self assessment tax return (“SATR”) for the year 2008/09. That SATR showed: (1) A M L T as the Appellant’s employer with PAYE reference 065/ZZ83582; (2) £8,666.22 gross pay received; (3) £243 benefits in kind (cash equivalent of ‘other benefits including interest free or low interest loans’); (4) £804.40 tax deducted; and (5) No entries in the white spaces.

25. On 8 December 2010 the Appellant filed a SATR for the year 2009/10. That SATR showed: (1) AM LTD as the Appellant’s employer with PAYE reference 065/ZZ83582; (2) £11,573 gross pay received; (3) £804 benefits in kind (cash equivalent of ‘other benefits including interest free or low interest loans’); (4) £1,125.00 tax deducted; (5) In box 17 related to tax avoidance schemes – “the scheme reference number” the DOTAS SRN; (6) In box 18 related to tax avoidance schemes – “the tax year in which the expected advantage arises” 2009.10; and (7) No entries in the white spaces.

26. On 6 April 2011 HMRC issued a ‘Notice to File’ pursuant to s8 TMA to the Appellant for the year 2010/11.

27. On 7 September 2011 the Appellant filed a SATR for the year 2010/1. That SATR showed: (1) AM Limited as the Appellant’s employer with PAYE reference 065/ZZ83582; (2) £8,690.04 gross pay received; (3) £1,443 benefits in kind (cash equivalent of ‘other benefits including interest free or low interest loans’); (4) £870 tax deducted; (5) In box 17 related to tax avoidance schemes – “the scheme reference number” the DOTAS SRN; and (6) In box 18 related to avoidance schemes – the tax year in which the expected advantage arises” 2010.11; (7) No entries in the white spaces.

28. The Appellant’s SATRs for 2008/09, 2009/10 and 2010/11 were prepared and filed on his behalf by AML.

29. HMRC’s system’s extracts of the Appellant’s P11Ds, filed by AML, show in the relevant part: Tax year Closing loan balance Cash equivalent amount 2008/09 £11,131 £243 2009/10 £24,267 £840 2010/11 £47,917 £1,443 The assessment process

30. Officers of HMRC, who were not identified during the hearing, completed Step 2 (calculating the amount of lost tax) on the following dates in relation to the following years: (1) 16 January 2013 in relation to 2008/09; (2) 29 July 2013 in relation to 2009/10; and (3) 16 September 2013 in relation to 2010/11.

31. On 31 January 2023 HMRC (Officer Stopp) issued the 2008/09 Discovery Assessment.

32. On 7 February 2013 AML Tax (IOM) Limited (“AML (IOM)”) wrote to HMRC to appeal the 2008/09 Discovery Assessment.

33. On 3 January 2014 HMRC (Officer Stopp) issued the 2009/10 and 2010/11 Discovery Assessments.

34. On 17 January 2014 AML (IOM) wrote to HMRC to appeal the 2009/10 and 2010/11 Discovery Assessments.

35. On 29 September 2022 HMRC wrote to the Appellant about his use of the Scheme. That letter enclosed HMRC’s decision to exercise their discretion under s684 (7A)(b) Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) to disapply PAYE regulations, so that the liability to pay the income tax on the Appellant’s employment became the Appellant’s.

36. On 18 December 2023 HMRC wrote to the Appellant setting out their view of the matter and rejecting the Appellant’s appeals to HMRC against the Discovery Assessments (“HMRC’s View of the Matter”).

37. The Appellant sent an undated letter to HMRC requesting a review of HMRC’s View of the Matter. The Appellant provided further representations on 12 February 2024. On 22 February 2024 HMRC sent the conclusions of their review to the Appellant upholding the Discovery Assessments.

38. The Appellant submitted his Notice of Appeal on 18 March 2024. Following various applications and correspondence between the parties and the Tribunal the Appellant provided his further and better particulars on 18 November 2024 (the “Further and Better Particulars”). the arguments The Appellant’s arguments

39. The Appellant set out a number of arguments in his Notice of Appeal and Further and Better Particulars. However, his skeleton argument only deployed one argument: that HMRC were not able to show that one particular statutory requirement for the Discovery Assessments was met ( s29(5) TMA). The Appellant was quite clear that he no longer wished to pursue the other arguments he raised and so we say nothing more about them. HMRC’s arguments

40. HMRC say that the Discovery Assessments were validly made and issued in accordance with s29 TMA. issues, burden and standard of proof

41. The Appellant conceded that the Scheme failed with the result that the Loan payments he received from the EBT as a result of his participation in the Scheme were taxable as employment income.

42. The issues that remain are: (1) Whether HMRC made a discovery, see s29(1) TMA. HMRC bear this burden of proof. (2) Whether an officer of HMRC could not have been reasonably expected, on the basis of information made available to him on or before the dates we set out below pursuant to s29(6) TMA, to be aware of the insufficiency of tax or put more simply whether the condition in s29(5) TMA has been met. HMRC bear this burden of proof.

43. The standard of proof on all issues is the balance of probabilities. the law Discovery assessments

44. At the time s29 TMA provided in relevant part: (1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment— (a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or (b) that an assessment to tax is or has become insufficient, or (c) that any relief which has been given is or has become excessive, the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. ……. (3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above— (a) in respect of the year of assessment mentioned in that subsection; and (b) in the same capacity as that in which he made and delivered the return, unless one of the two conditions mentioned below is fulfilled. (4) The first condition is that the situation mentioned in subsection (1) above was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf. (5) The second condition is that at the time when an officer of the Board— (a) ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or (b) informed the taxpayer that he had completed his enquiries into that return, the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above. (6) For the purposes of subsection (5) above, information is made available to an officer of the Board if— (a) it is contained in the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return; (b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim; (c) it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above— (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or (ii) are notified in writing by the taxpayer to an officer of the Board. (7) In subsection (6) above— (a) any reference to the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment includes— (i) a reference to any return of his under that section for either of the two immediately preceding year of assessments; ……. (ii) where the return is under section 8 and the taxpayer carries on trade, profession or business in partnership, a reference to any partnership return with respect to the partnership for the relevant year of assessment or either of those periods; and (b) any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf. ……. (9) Any reference in this section to the relevant year of assessment is a reference to— (a) in the case of the situation mentioned in paragraph (a) or (b) of subsection (1) above, the year of assessment mentioned in that subsection; and (b) in the case of the situation mentioned in paragraph (c) of that subsection, the year of assessment in respect of which the claim was made.

45. Section 29 TMA is a long section and so it is helpful to summarise the provisions: (1) s29(1) TMA provides the power to make a “discovery” assessment where there has been an insufficiency of tax arising from the reasons set out in s29(1) (a) – (c) TMA (the “insufficiency of tax”). (2) s29(3) prohibits a discovery assessment in respect of a year for which the taxpayer has delivered a self assessment tax return unless either the condition in s29(4) or s29(5) TMA is met. (3) s29(6) TMA supplements s29(5) TMA as it provides what information is made available to HMRC. (4) s29(7) TMA provides further clarification about what s29(6) TMA encompasses.

46. Section 12D TMA operates so that amongst other things, in summary, s29 TMA applies in the Appellant’s case for the year 2008/09 notwithstanding that he had not been served with a notice to file for that year.

47. Section 34 TMA provides the general rule, that applies in this case, that an assessment to income tax may be made at any time not more than 4 years after the end of the year of assessment to which it relates. Charge to tax

48. HMRC’s skeleton argument set out a summary of the relevant provisions in ITEPA. We gratefully adopt that summary:

31. Section 1 ITEPA imposes an income tax charge on “employment income”. Section 6(1) ITEPA provides that the charge to tax on employment income is a charge to tax on, inter alia, general earnings.

32. Section 7(1) ITEPA states that “employment income” means (a) earnings within Chapter 1 of Part 3 (s.62); (b) any amount treated as earnings; and (c) any amount that counts as employment income. Section 7(3) ITEPA provides that “General earnings” means, inter alia, earnings within Chapter 1 of Part 3 (s.62 ITEPA).

33. Section 9(1) and (2) ITEPA provide that the amount of general earnings charged to tax is the net taxable earnings for the year. …….

36. Section 15(1) and (2) ITEPA provide, in relation to UK resident employees, that the full amount of any general earnings which are received in a tax year is an amount of “taxable earnings” from the employment in that year.

37. Section 18 ITEPA defines the time when an amount of general earnings is received for the purposes of ITEPA. So far as relevant general earnings are received at the earliest time when payment is made of or on account of the earnings and the time when a person becomes entitled to payment of or on account of the earnings.

38. Section 62 ITEPA defines “earnings” as: (1) This section explains what is meant by “earnings” in the employment income Parts. (2) In those Parts “earnings”, in relation to an employment, means— (a) any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or (c) anything else that constitutes an emolument of the employment. (3) For the purposes of subsection (2) “money's worth” means something that is— (a) of direct monetary value to the employee, or (b) capable of being converted into money or something of direct monetary value to the employee. (4) Subsection (1) does not affect the operation of statutory provisions that provide for amounts to be treated as earnings (and see section 721(7)). DISCUSSION AND FINDINGS Taxable employment income

49. If the Loans (or equivalent amounts) are not taxable as employment income pursuant to the application of s62 ITEPA then the assessments cannot stand.

50. HMRC’s position, which the Appellant accepted, is that the Loans are in fact employment income: they are earnings which were redirected to the EBT by AML. Consequently, the Loans fall within the redirection principle set out by the Supreme Court in RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 ( “Rangers” ) at [41] and [58] – [59]. This means that a charge to income tax on employment income arose at the point at which the “salary” was redirected to the EBT. In light of our findings above we see no reason to demur from the parties’ conclusion and insofar as necessary find the points made in this paragraph as fact. The conditions for a discovery assessment Discovery – s29(1) TMA

51. Section 29(1) TMA requires a discovery of an insufficiency of tax. The requirements for a discovery were addressed in the Upper Tribunal case of Anderson v HMRC [2018] UKUT 0159 (TCC) ( “Anderson” ); see in particular [24], [28] and [30]. HMRC’s position, which the Appellant did not dispute, was that the requisite discovery was made each time Step 2 was completed in relation to the Appellant. We are satisfied and, insofar as necessary given the parties’ positions, find as fact that officers of HMRC made the requisite discoveries each time one completed Step 2 in accordance with Anderson . Discovery – s29(5) TMA The test in s29(5) TMA

52. We need to determine whether HMRC have shown that the Appellant’s disclosure is such that an officer of HMRC could not have been reasonably expected, on the basis of information made available to him pursuant to s29(6) TMA, on or before: (1) 30 September 2010 in relation to the tax year 2008/09; (2) 8 December 2011 in relation to the tax year 2009/10; (3) 7 September 2012 in relation to the tax year 2010/11; (ie the dates of the closure of the enquiry window) to be aware of the insufficiency of tax.

53. The test in s29(5) TMA has been the subject of a number of cases. HMRC took us to the following passages which summarise the principles to be derived from the relevant case law. First, the Upper Tribunal in Beagles v HMRC [2018] UKUT 380 (TCC) at [100] provides: We endeavour to summarise the principles that we derive from Patten LJ's judgment [in Sanderson v HMRC [2016] STC 638 ] as follows: (1) The test in s29(5) is applied by reference to a hypothetical HMRC officer not the actual officer in the case. The officer has the characteristics of an officer of general competence, knowledge or skill which include a reasonable knowledge and understanding of the law. (2) The test requires the court or tribunal to identify the information that is treated by s29(6) as available to the hypothetical officer at the relevant time and determine whether on the basis of that information the hypothetical officer applying that level of knowledge and skill could not have been reasonably expected to be aware of the insufficiency. (3) The hypothetical officer is expected to apply his knowledge of the law to the facts disclosed to form a view as to whether or not an insufficiency exists (Moses LJ, Lansdowne [69]; Patten LJ, Sanderson [23]). We agree therefore with Mr Firth that the test does assume that the hypothetical officer will apply the appropriate level of knowledge and skill to the information that is treated as being available before the level of awareness is tested. The test does not require that the actual insufficiency is identified on the face of the return. (4) But the question of the knowledge of the hypothetical officer cuts both ways. He or she is not expected to resolve every question of law particularly in complex cases (Patten LJ, Sanderson [23], Lansdowne [69]). In some cases, it may be that the law is so complex that the inspector could not reasonably have been expected to be aware of the insufficiency (Moses LJ, Lansdowne [69]; Patten LJ, Sanderson [17(3)]). (5) The hypothetical officer must be aware of the actual insufficiency from the information that is treated as available by s29(6) (Auld LJ, Langham v Veltema [33] [34]; Patten LJ, Sanderson [22]). The information need not be sufficient to enable HMRC to prove its case (Moses LJ, Lansdowne [69]) but it must be more than would prompt the hypothetical officer to raise an enquiry (Auld LJ, Langham v Veltema [33]; Patten LJ, Sanderson [35]). (6) As can be seen from the discussion in Sanderson (see [23]), the level of awareness is a question of judgment not a particular standard of proof (see also Moses LJ in Lansdowne [70]). The information made available must "justify" raising the additional assessment (Moses LJ, Lansdowne [69]) or be sufficient to enable HMRC to make a decision whether to raise an additional assessment (Lewison J in the High Court in Lansdowne at [48]). [2011] STC 372

54. Next the Upper Tribunal in HMRC v Hicks [2020] UKUT 0012 (TCC) at [194 – 199]:

194. In our judgment, section 29(5) requires that a taxpayer should make sufficient disclosure in order to enable an officer to make an informed decision whether an insufficiency existed sufficient to justify, in the words of Moses LJ [in Lansdowne at [69]], the exercise of the power to make an amendment to the return. We respectfully agree with Moses LJ that the possibility should remain open that mere factual disclosure may not, in some cases involving complex issues of law, be sufficient.

195. The purpose of section 29(5) is to strike a balance between the protection of the revenue, on the one hand, and the taxpayer on the other. The taxpayer is protected against a discovery assessment provided adequate disclosure has been made. The disclosure must be from the sources referred to in section 29(6) (as amplified by section 29(7) ). HMRC are protected because they can raise a discovery assessment if adequate disclosure has not been made.

196. It seems to us that section 29(5) focuses primarily on the adequacy of the disclosure by the taxpayer. What constitutes adequate disclosure for the purposes of section 29(5) will vary from case to case. It depends on the nature and tax implications of the arrangements concerned and not on the assumed knowledge (or lack of knowledge) of the hypothetical officer. The obligation is on the taxpayer to make the appropriate level of disclosure as befits a self assessment system.

197. In a relatively simple case, where the legal principles are clear, it would be sufficient for a taxpayer simply to give a full disclosure of the factual position. The return must also make clear what position the taxpayer is adopting in relation to the factual position (e.g. whether a receipt was not taxable or whether a claim for relief was being made).

198. But there may be other cases where the law and the facts (and/or the relationship between the law and the facts) are so complex that adequate disclosure may require more than pure factual disclosure: namely some adequate explanation of the main tax law issues raised by the facts and the position taken in respect of those issues.

199. Plainly, the greater the level of disclosure, the greater the officerʼs awareness can reasonably be expected to be. If a disclosure on a tax return includes all material facts and, in complex cases, an adequate explanation of the technical issues raised by those facts and the position taken in relation to those issues, it would be reasonable to expect an officer to be aware of an insufficiency. What constitutes reasonable awareness is linked to the fullness and adequacy of the disclosure – the expertise of the hypothetical officer remains that of general competence, knowledge or skill which includes a reasonable knowledge and understanding of the law. In argument before us Mr Nawbatt came close to suggesting, as we understood it, that a hypothetical officer could not be expected to understand complex or specialist areas of tax law. We disagree. If the disclosure (factual and technical) is adequate in the circumstances of the case, a hypothetical officer can reasonably be expected to be aware of an insufficiency even in a complex case or one involving specialist technical knowledge. If the disclosure is inadequate, then it is fair that a hypothetical officer could not reasonably be expected to be aware of an insufficiency in such a case. That is the balance that section 29(5) strikes. Applying s29(5) TMA to the facts – the hypothetical officer

55. The hypothetical officer is an officer of general competence, knowledge or skill with a reasonable understanding of the law. We agree with the Tribunal’s approach in Dr Pradip Kumar Sheth v HMRC [2023] UKFTT 368 (TC) (“ Sheth ”) that in the context of contractor loan schemes: (1) A general background would allow the hypothetical officer, once they knew the facts of the Scheme, to have reached the conclusion that the Loans were taxable employment income. See the final two sentences of [30]. (2) The hypothetical officer would have been aware of contractor loan schemes where, as explained at [31]: …… the principle behind them was to “convert” what would otherwise have been employment income and taxed as such, into loans which were taxed only as a benefit in kind. (3) At [32] and [33]:

32. It is also clear from Hicks that the adequacy or otherwise of the disclosure depends on the complexity of the arrangements under consideration. And this complexity can be complexity of fact and/or law. Whilst the adequacy of the disclosure will determine whether the hypothetical officer was made aware of the actual insufficiency, it is likely that in less complex cases, the disclosure needed to generate that awareness will be less detailed than in more complex cases. This seems largely common sense to us.

33. To our mind, the contractor loan scheme arrangements are simply a species of the more general arrangements whereby income otherwise payable to an employee and taxable as employment income is diverted through a third party (an EBT) and the employees rewarded by way of a loan which is not subject to employment income tax and NICs. This is very much down the shallow end of the pool of tax avoidance schemes, and in our view this was the case at the time of the closure of the enquiry windows into Dr Sheth’s tax returns in January 2012 and January 2013. Applying s29(5) TMA to the facts – the information made available – the SATRs and the DOTAS Information

56. It was common ground, and we accept and find as fact, that the information made available for the purposes of s29(5) TMA included: (1) For the year 2008/09 the SATR for that year only, see s29(6) (a) TMA. (2) For 2009/10 the SATR for that year and the DOTAS Information (by virtue of the inclusion of the DOTAS SRN in the SATR), see s29(6) (a) and s29(6) (d) TMA. (3) For 2010/11 was the SATR for that year and the DOTAS Information (by virtue of the inclusion of the DOTAS SRN in the SATR), see s29(6) (a) and s29(6) (d) TMA.

57. We also note s29(7) (a)(i) TMA includes in the information made available for the purposes of s29(5) TMA for any given year, the SATRs for the two previous years. Although we only had the SATRs for the Discovery Assessment years before us.

58. The DOTAS Information can be summarised as describing a scenario where: Scheme Users are employed by an off-shore company and provide their services indirectly to end users, and in return receive a salary subject to PAYE and relevant NICs; the off-shore company has established an employee benefit trust whose benefits include loan facilities; and the benefits under the employee benefit trust will be taxable under the UK benefits code and in particular the loans will be subject to the “normal regime for employee loans”. The statutory provisions referred to do not include s62 ITEPA specifically or by general description.

59. Turning to the 2009/10 year first. The content of the 2009/10 SATR and the DOTAS Information does not make clear: that a significant proportion of the Scheme Users’ fees are ultimately redirected to the EBT; that this significant proportion or at least a similar amount is returned to the Scheme Users by way of interest free loans; the terms of the loans; and that the receipt of the loan principal is being treated as non-taxable. Without this information the hypothetical officer would not have been aware of the facts of the Scheme. Therefore, we conclude that HMRC have shown that an officer of HMRC could not have been reasonably expected, on the basis of the information made available to him on or before 8 December 2011 pursuant to s29(6) TMA to be aware of the insufficiency of tax arising in consequence of the application of s62 ITEPA for the tax year 2009/10.

60. For the same reasons this conclusion applies equally to the: (1) combination of the 2010/11 SATR, the 2009/10 SATR and the DOTAS Information in relation to the tax year 2010/11; and (2) the 2008/09 SATR in relation to the tax year 2008/09.

61. Therefore, respectively, we conclude that HMRC have shown that an officer of HMRC could not have been reasonably expected, on the basis of the information made available to him on or before: (1) 7 September 2012 pursuant to s29(6) TMA to be aware of the insufficiency of tax arising in consequence of the application of s62 ITEPA for the tax year 2010/11; and (2) 30 September 2010 pursuant to s29(6) TMA to be aware of the insufficiency of tax arising in consequence of the application of s62 ITEPA for the tax year 2008/09. The information made available – the P11Ds

62. P11Ds are provided to employees by their employer in respect of employment benefits (such as, relevant to this case, the cash equivalent of ‘other benefits including interest free or low interest loans’). The parties’ clear positions were that in the Appellant’s case his P11Ds for the Discovery Assessment years included information that was made available for the purposes of s29(5) TMA (including before the relevant times ie the closure of the enquiry windows). The Appellant said that this was because they were submitted by AML to HMRC in time, see s29(6) (d)(ii) and s29(7) (b) TMA. Neither party elaborated further. In the absence of more detail, HMRC’s concession appeared generous but in light of it and the ease of doing so we will consider the P11Ds.

63. The P11Ds would have introduced the knowledge that the loans for each tax year were significant in relation to the amount of salary received. This would have put the hypothetical officer on notice that, borrowing from the First-tier Tribunal in Sheth again, something strange was going on. However, this does not alter our above conclusions in relation to s29(5) TMA because this information in addition to the relevant SATRs and where relevant the DOTAS Information was not sufficient to enable the hypothetical officer to understand the facts of the Scheme so that they could identify an insufficiency of tax. Consequently, as set out above more fully, we are satisfied that for each of the Discovery Assessment years HMRC have shown that the condition in s29(5) TMA is met. The information made available – Scheme marketing material and HMRC’s internal knowledge

64. Officer Flynn’s witness statement included the following paragraphs:

10. HMRC began to investigate AML in 2009, where enquires were opened into scheme users and documents and information requested on the scheme's operation.

11. HMRC’s understanding of the scheme’s operation is derived from the description of the scheme provided by the promoters in the DOTAS disclosure, the scheme documents and information obtained from users under enquiry or from the Isle of Man tax authority. …… 11.6 Scheme users would typically receive marketing information from the AML advertising the scheme. This material would describe the proposed tax advantage of the scheme, which suggested the user would receive a net take home pay in excess of 82% of the gross value of the contract with the end user [LOD Item 92 – 94]. we refer to the documents at paragraph 11.6 of Officer Flynn’s witness statements as the “Marketing Material”. The other subparagraphs of paragraph 11 explain how HMRC understood the Scheme worked by reference to the documents referred to in the opening section of paragraph 11.

65. The Appellant asked Officer Flynn when HMRC had received the Marketing Material and Officer Flynn was candid about the fact that she did not know. Officer Flynn offered to try and find out when this was although the Appellant did not accept. We understood the Appellant to be making the point that these documents provided more information about the operation of the Scheme. Therefore, if the Marketing Material was made available for the purposes of s29(5) TMA it would assist the Appellant’s case. The Appellant did not identify which provision of s29(6) TMA he sought to rely on, nor did he identify one when we asked him directly. He also did not give any evidence or seek to explain his understanding and/or position as to under what circumstances HMRC had come to be in possession of the Marketing Material. Including, for example, which written notification had explained the existence or relevance of the information (ie the Marketing Material) to HMRC with reference to the Appellant. The Appellant’s skeleton argument also referred to “HMRC’s own internal knowledge from their investigations into AML starting in 2009”. We understood the Appellant to be making the same point as in relation to the Marketing Material. Again the Appellant did not elaborate his understanding and/or position as to under what circumstances HMRC had come to be in possession of the information giving rise to its internal knowledge. We mean no criticism of the Appellant by highlighting these points but we have to be clear about what arguments were made to us.

66. On what is before us, in our view the only provision that the Appellant could be seeking to rely on in relation to the Marketing Material and information giving rise to HMRC’s internal knowledge is s29(6) (d) TMA where relevant supplemented by s29(7) (b) TMA. Without more, particularly in light of HMRC’s uncontested evidence that it came from a variety of sources, we are unable to conclude that the Marketing Material and information giving rise to HMRC’s internal knowledge was made available for the purposes of s29(5) TMA. That is before considering the relevant question of timing. Therefore, neither the Marketing Material nor the information giving rise to HMRC’s internal knowledge assist the Appellant’s case. Staleness

67. The Appellant’s skeleton argument also made reference to staleness. For completeness, we agree with HMRC that the concept of staleness was decisively rejected by the Supreme Court in HMRC v Tooth [2021] UKSC 17 at [76]. Insofar as the Appellant’s point goes to the test in s29(5) TMA, we have dealt with that above. Time limits

68. From our findings of fact above we are satisfied that that the Discovery Assessments were made in time. conclusion

69. For the reasons given above we dismiss the appeal. Right to apply for permission to appeal

70. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 13 March 2026