HMRC on discovery – and ‘new’ land
When a company faced tax on £1.2 million gain, HMRC failed to use the right remedy, and lost its right to collect the tax. Philip McNeill explains how the fish got away.
In Oriel Developments (Oriel Developments Limited TC07306) a Northern Irish company faced a £350,000 tax bill following compulsory purchase of land it owned. The company advisers were quick to notice the potential for rolling over the gain under s247 Taxation of Chargeable Gains Act (TCGA) 1992. So long as the company re-invested the £1.3 million proceeds in ‘new land’, the gain could be deferred.
Better still, a provisional declaration could be made under s247A, meaning no tax would be paid up front, and the company could re-invest within the statutory timeframe at its leisure.
The company duly submitted returns for the accounting period to 31 August 2010. In April 2012, it reinvested the entire sales proceeds in the construction of 16,000 square feet of industrial workspace, in two blocks, on land which the company-owned.
Not the end of the story
This looked like ‘job done.’ Tax-deferred. All conditions passed.
But the small print of s247 (1) (c) includes the word ‘in acquiring other land (“the new land”)’ ……
HMRC makes enquiries
By May 2014, HMRC was asking questions. In exchanges, it emerged that the reinvestment consisted of the construction of units on land already owned by the company.
Could this be ‘new land’? HMRC thought not.
In its opinion, new land cannot include ‘the cost of buildings or additions to buildings on land that is already owned’. Would this difference of opinion cost the company a lot of money?
HMRC considered that it would, and issued a closure notice in September 2015, confirming its view that the rollover claim was invalid, as the re-investment was not in ‘new land’.
HMRC also said that ‘an assessment for the period to 31 August 2010 will be raised under s153A(4) TCGA 1992’. S153A(4) relates to provisional claims for rollover relief, and the consequences of a provisional claim lapsing or ceasing to have effect.
But was HMRC making a tax assessment? HMRC was aiming to create a tax liability by amending the company’s provisional rollover relief claim. And that was part of the company’s self-assessment return. It did this in October 2015.
But was it entitled to amend a company self-assessment in this way, and what was the legal impact?
Another one along in a minute
While HMRC was considering all this, another case came to Upper Tribunal covering just this point.
In Benham (Commissioners for Her Majesty’s Revenue and Customs v Benham (Specialist Cars) Ltd  UKUT 389 (TCC)), HMRC had also decided to adjust a company self-assessment for a provisional rollover relief claim.
According to the Tribunal in Benham, the answer to the question was no. HMRC does not have a right to amend the self-assessment in respect of provisional rollover relief claims.
This case was decided by the Upper Tribunal in October 2017 and meant that the purported adjustment to Oriel’s provisional rollover claim was invalid.
It looked like HMRC was back to square one. So how to collect the money due on the capital gain?
Following Benham, HMRC realised that purporting to amend the company self-assessment was an incorrect procedure. So it tried to use a different procedure to effect recovery of the same additional liability.
It decided that, following Benham, it should raise a discovery assessment, which it did in May 2018.
But could HMRC raise a discovery assessment in 2018, when it already knew that tax was underpaid in 2015?
The Tribunal in Oriel now had two key issues to decide:
- The discovery assessment issue – was HMRC acting within its powers in issuing a discovery assessment in 2018?
- The rollover claim issue – was the company’s claim for rollover relief, which replaced the provisional claim, valid?
There was also a procedural issue as to whether HMRC was entitled to bring a new argument into the proceedings. This hinged on whether the expenditure was an ‘acquisition’. The Tribunal thought it could, without prejudice to the outcome.
As to the discovery assessment, the Tribunal had regard to the Court of Appeal decision in Tooth (The Commissioners for Her Majesty’s Revenue and Customs v Tooth  EWCA Civ 826). In Tooth, the Tribunal decided:
‘In the present case the officer must have newly discovered that an assessment to tax is insufficient ….
A discovery assessment is not validly triggered because the officer has ….. decided to invoke a different mechanism for addressing an insufficiency in an assessment …..’
Applying this reasoning to Oriel, an officer of HMRC had ‘discovered’ the insufficiency of the assessment in 2015, but had not raised a discovery assessment. A different HMRC officer raised a discovery assessment in 2018.
The assessment in 2018 could not be a valid ‘discovery’ as the only change was in HMRC’s understanding as to how the insufficiency of tax could be collected.
It had not, in 2018, ‘discovered’ the insufficiency in the tax assessment.
HMRC’s right to collect the tax had therefore lapsed and the company was off the hook.
But two issues remain. Was the rollover claim valid? And is HMRC willing to concede the point?
In fact, HMRC is not willing to concede the case and is pursuing related cases, such as Tooth, to higher courts, so there could yet be a reversal.
HMRC is unhappy with the idea that discovery can be ‘stale’. It is also unhappy about the concept of ‘corporate knowledge’ – that is to what extent a discovery made by one HMRC Officer can be precluded from being regarded as fresh by the fact that it is the same discovery previously made by another HMRC Officer.
Does ‘discovery’ entail that ‘not only must there be something new, but that it must be something new to HMRC as a whole (so far as is relevant to the taxpayer). It is not sufficient for the matter to be new to the officer making the assessment’? (Charlton and Others v The Commissioners for Her Majesty’s Revenue and Customs  STC 866).
While a finely balanced point, there is clearly a distinction between an HMRC officer new to the case reviewing a file, and becoming aware that a previous HMRC officer identified an underpayment of tax, and the second officer themselves identifying from the file a previously unrecognised underpayment of tax.
As the Tribunal said in Tooth, ‘what, however, if two different officers independently make the same discovery? In our judgment, as a matter of ordinary English, a discovery can only be made once. We accept that section 29(1) TMA is framed by reference to the subjective state of mind of an officer of the board, but what is a “discovery” is an objective term.
It seems to us that in this case, the first officer makes the discovery; the second officer simply finds out something that is new to him. In particular, if one officer is made aware of, and accepts, the conclusion of another officer it cannot be said that the first officer made a discovery.’
A fine line
A word of caution. The Upper Tribunal decision in Atherton (Atherton v The Commissioners for Her Majesty’s Revenue and Customs  UKUT 0041 (TCC)) came to the opposite conclusion, in subtly different circumstances.
In Atherton, which concerned a loss claim, HMRC initially thought that a taxpayer’s self-assessment was not insufficient, but following the decision in another case, came to the revised view that the taxpayer’s self-assessment was insufficient.
So HMRC’s view of the self-assessment changed, making a valid discovery of tax underpaid, rather than its view on how any underpayment should be collected.
As the Tribunal in Oriel noted, ‘the distinction between Tooth and Atherton demonstrates that, in discovery cases, great significance needs to be accorded to the precise nature of the realisation which has led to the discovery assessment in question’.
Oriel’s rollover claim
On the point of the validity of the rollover claim, the Tribunal concluded that the company’s claim was invalid.
‘Whilst I recognise that there is no good policy reason for limiting the relief in Section 247 of the TCGA to the acquisition of new land, it seems to me that to describe the construction of buildings on existing land as falling within the phrase “acquiring…land” would run counter to the general approach in the TCGA and to established principles of land law.
When buildings are constructed on existing land, the owner of the land does not thereby acquire a new interest in land. Instead, the owner merely enhances its existing interest in the land on which the newly-constructed buildings are situated.’
The taxpayer company got off the hook but in rather questionable circumstances.
While it seems eminently reasonable that the law ‘cuts both ways’, so that both taxpayer and HMRC are restricted by the rules, allowing claim and counter claim to be decided with certainty, and within a reasonable timeframe, the outcome here is somewhat bizarre.
It may yet be appealed by HMRC.