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Discovery assessments and Hague: too vague?

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In many ways, the facts in the case of Hague v HMRC [2024] UKFTT 139 (TC) were no different from the sort of thing that HMRC and advisers deal with daily all over the country. HMRC investigate a person’s affairs; can’t reconcile deposits to bank accounts with declared income and gains; purport to ‘discover’ undeclared income or gains; make assessments accordingly. But there were one or two more interesting features which make it worth examining.

UK law taxes income from particular sources: employment income, trading income, dividend income and so on. Unless income can be identified as arising from a source, it’s not taxable. An assessment made on vague unspecified ‘income’ won’t wash.

In many cases, that presents no problem to HMRC. For example, if a cash trader is banking more cash than can be reconciled with declared profits, HMRC are likely to seek to attribute the excess to additional trading profit and to assess accordingly. Whether HMRC are correct in the attribution is of course a matter on which an appeal may be made.

If HMRC can’t or don’t put forward any source for the supposed income, any assessment made on the basis that ‘it must have come from somewhere, so we’ll treat it as being from some taxable source we don’t know about’ is invalid. That was explained by the FTT as long ago as 2018 in Ashraf [2018] UKFTT 97 (TC).

It follows that for HMRC to make a ‘discovery’ assessment, it is not sufficient for an officer merely to conclude that something about the taxpayer’s affairs looks distinctly dodgy, leaving the exact nature of the dodginess to be investigated and determined during the course of the ensuing enquiry. No: a discovery assessment can be made only once the officer, acting reasonably, has concluded that there are grounds for believing that there is undeclared income from some specific source. In other words, HMRC must nail their colours to the mast at the time the assessment is made.

In the case of Hague, HMRC did that. They issued assessments for the nine years from 2007/08 to 2015/16. Since those assessments charged Class 4 NICs as well as income tax, they can only have been made in respect of profits from a trade, profession or vocation.

Before the FTT, HMRC’s case centred around showing that there was no credible explanation for much of the money paid into Mr Hague’s bank account but was at best vague as to the source of the alleged undeclared income. There was a pub involved, but the FTT records that it was owned by Mr Hague’s brother and managed by his father until 2013 and, despite the assessments, HMRC made no express allegation that Mr Hague was the proprietor. On the contrary, both HMRC’s arguments and the FTT decision are replete with references to Mr Hague’s ‘wages’, ‘working at the pub’ and ‘earnings’. And HMRC justified the amount assessed as ‘a reasonable amount of income that a person would be expected to earn from a pub, based on the fact that the Appellant has admitted that he has worked at the pub [note: not ‘run the pub’] for several years prior to the period covered by HMRC’s investigation’.

The nature of the allegedly omitted income doesn’t seem to have been addressed by the FTT. It satisfied itself that the officer in question ‘must believe that the information available to her points in the direction of there being an insufficiency of tax’ and that the belief was objectively reasonable; and on that basis upheld the discovery assessments. However, the FTT doesn’t seem to have considered whether it was correct to uphold an assessment on trading income, despite the fact that HMRC’s argued case appears to have been that Mr Hague had failed to declare employment income. Or, if the assessment could in principle be upheld, whether that also applied to the NIC element.

It is true that the law provides that an assessment is not invalidated ‘by reason of a mistake therein as to ... the description of any profits’. That would certainly mean that a plumber couldn’t successfully appeal against an assessment on the grounds that it misdescribed him as an electrician or even an accountant. But that’s a different matter from repurposing an assessment on trading profits to collect tax on employment income.

Issue: 1659
Categories: In brief