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R Atherton v HMRC

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In R Atherton v HMRC [2017] UKFTT 831 (16 December 2016), the FTT found that a discovery assessment was valid; the taxpayer had been careless when completing his return and HMRC had made a discovery following Cotter [2013] STC 2480.

Mr Atherton had implemented a scheme (Romangate) in 2007/08 and claimed an employment loss in his return, reducing his income to nil. FA 2009 s 68 (1) rendered the scheme ineffective with retrospective effect.

The appellant accepted that he was not entitled to the relief but he contended that the discovery assessment raised by HMRC to recover the unpaid tax was procedurally wrong (under TMA 1970 s 29) and therefore ineffective.

The first issue was whether the taxpayer had been careless when completing his tax return as he had claimed a relief, to which, in retrospect, he was not entitled. The FTT noted that the Box 20 entry was prima facie careless for two reasons; the loss related to year 2 but Box 20 related to year 1, the loss was an employment loss but Box 20 related to partnership losses. This was an objective test.

The appellant contended that any carelessness with regard to Box 20 was counter-acted by the white box disclosure. The FTT robustly rejected this argument, noting that the disclosure was a generic disclosure recommended by the taxpayer’s advisers to all of their clients, which related to Box 3. HMRC’s attention was not drawn to Box 20 and ‘this was not the action of a reasonable taxpayer mindful of his obligation to make a correct return.’ The FTT added that the taxpayer had also made a standalone claim for the same loss in Box 3. Again, the FTT considered that a reasonable taxpayer would have known that he was not entitled to the same relief twice; once as a deduction from his self-assessment and once as a stand-alone claim.

Finally, the FTT found that Mr Atherton should not simply have followed the advice of his advisers to make an entry in Box 20 as the advice to do so without including an explanation was ‘obviously wrong’. The FTT concluded that the Box 20 entry had been made carelessly.

The appellant also contended that HMRC knew in 2009 that he had implemented Romangate, and from the date of the retrospective legislation in 2009, knew that he was not entitled to the loss claimed on his tax return. HMRC could therefore not have made a discovery in early 2014.

The FTT found however that HMRC had treated the claim as a standalone claim from the start, ignoring the Box 20 entry. HMRC only realised that the self-assessment was insufficient following the decision in Cotter when it was made plain that a claim for carried back losses which was included in a self-assessment was not a standalone claim, but simply an invalid claim leading to an insufficient self-assessment. HMRC had therefore discovered the insufficiency in early 2014.

Read the decision.

Why it matters: The FTT found that the Box 20 entry in the appellant’s return was careless and therefore was misleading. It was irrelevant that it did not actually mislead HMRC. The FTT also thought that although HMRC’s view on carry back loss relief claims had ultimately been shown to be wrong, HMRC’s view up to Cotter, had not been unreasonable.

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