The case of Gillian Rockall v HMRC (TC03767, decided on 1 July 2014) concerned whether certain business expenses were incurred ‘in the performance of an employee’s duties’. However, the case also involved a discussion of the validity of discovery assessments.
Gillian Rockall and her husband were the directors and controlling shareholders of two companies, WHL and ML, both of which owned and ran conference centres and hotels holding residential courses.
The expenses issue concerned the purchase of yachts, jewellery and expensive antique clocks and whether the costs incurred by Mr and Mrs Rockall on these items were deductible under ITEPA 2003 S365. The test applied under this section is whether the expenditure had been incurred ‘wholly, exclusively and necessarily’ in the performance of an employee’s duties and the First-tier Tribunal found that while the costs associated with the yachts were allowable on this basis, the same did not apply for the jewellery or the clocks. The yachts were used for chartering and networking purposes whereas the other items were purchased with a view to convening ‘the right image’ to clients. The Tribunal differentiated between expenses incurred in the performance of an employee’s duties and those incurred to put an employee in a position to better perform those duties, the latter not qualifying as deductible expenditure.
In September 2010 assessments were raised in relation to the benefits in kind for the years 2000-01 to 2008-09. Mr and Mrs Rockall argued that HMRC were not entitled to raise assessments in respect of the years prior to 2006/07 as this was outside the ‘normal’ four year time limit.
The Tribunal decision on the validity of the discovery assessments rested on two points:
- That is it not necessary for there to be new facts or a changed view of the law for there to be discovery.
- An error brought about carelessly by a person acting on behalf of Mr and Mrs Rockalls was sufficient to meet the condition in S29(4) TMA 1970 concerning careless or deliberate behaviour.
The decision made reference to Cenlon Finance Co Ltd v Ellwood 40 TC 176, [1961]in which Lord Denning said:
Mr Shelbourne said that “discovery” means finding out something new about the facts. It does not mean a change of mind about the law. He said that everyone is presumed to know the law, even an inspector of taxes. I am afraid I cannot agree with Mr Shelbourne about this. It is a mistake to say that everyone is presumed to know the law. The true proposition is that no one is to be excused from doing his duty by pleading that he did not know the law. Every lawyer who, in his researches in the books, finds out that he was mistaken about the law, makes a discovery. So also does an inspector of taxes.
The Tribunal therefore found that while the inspector may have had sufficient evidence regarding the yachts, clocks and jewellery to reach a conclusion that there was insufficiency to tax sooner than she did, this did not preclude her from reaching that conclusion and making a discovery at a later date. This decision draws the discovery lines wider still and suggests that even where all the relevant information has been provided to HMRC and an insufficiency to tax made clear, there is still no guarantee of protection from a discovery assessment.
Turning to the issue of careless behaviour, the Tribunal were advised that Mr and Mrs Rockall had instructed professional advisors, PFK, to prepare tax returns for both themselves and the two companies. Judge Brooks referred to the Special Commissioners in AB (a firm) v HMRC:
We are of the view that the question whether a taxpayer has engaged in negligent conduct is a question of fact in each case. We should take the words of the statute as we find them and not try to articulate principles which could restrict the application of the statutory words. However, we accept that negligent conduct amounts to more than just being wrong or taking a different view from the Revenue. We also accept that a taxpayer who takes proper and appropriate professional advice with a view to ensuring that his tax return is correct, and acts in accordance with that advice (if it is not obviously wrong), would not have engaged in negligent conduct.
However, an accounting error on the part of PFK resulted in £974,000 of work undertaken on Mr and Mrs Rockall’s private residence being treated as an asset of ML rather than an addition to Mr Rockall’s director’s loan account. It was considered that this ‘error arose as a result of a failure to meet the standards of a prudent taxpayer and as such was brought about carelessly by a person acting on behalf of Mr and Mrs Rockall’.
The Tribunal dismissed the contention that it was necessary for HMRC to make a separate discovery in respect of each of the assets concerned rather than relying solely on the error concerning the misallocation of the home improvement costs.
The decisions made in this case relating to discovery are of concern to those hoping for any degree of closure on previous tax returns. It appears that there is little protection even where appropriate professional advice has been taken.
Isobel Clift is a Senior Tax Investigations Consultant at Gabelle LLP. She can be contacted at [email protected] or via TaxDesk on 0845 4900 509.
John Hood is a Partner and Head of Tax Investigations at Gabelle LLP. He can be contacted at [email protected] or via TaxDesk on 0845 4900 509.
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