Discovery assessment valid and relief for footballer development activity losses not allowable

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Summary

A discovery assessment was validly made, and losses claimed in respect of developing footballers were not allowable.

Background

The appellant, a football agent, was introduced to a soccer academy (‘Bafana’) in South Africa. Bafana was financed by external individuals such as the appellant who were given the opportunity, in return for providing finance, to pick players who were being trained at Bafana, and to secure an interest in any future transfer fees made by Bafana from the players picked.

The appellant put funds into Bafana and picked three players in July 2009 from the academy. His investment was financed through a loan. The appellant’s tax return for 2008/09 included a claim for losses in relation to Bafana and a business of football development. HM Revenue and Customs (HMRC) identified the football academy as the ‘Bafana scheme’, and raised a discovery assessment (under TMA 1970, s 29) in May 2012, disallowing the losses claimed. The appellant appealed. The First-tier Tribunal ([2016] UKFTT 565 (TC)) dismissed his appeal. 

The appellant appealed to the Upper Tribunal (UT). There were essentially two issues in the appellant’s appeal: (1) on the validity of the discovery assessment, he argued that the FTT erred in law in deciding that there had been a ‘discovery’ by HMRC as required by TMA 1970, s 29(1) and that the discovery assessment had been validly made; (2) the FTT made errors of law in determining that the appellant was not carrying on a trade and was otherwise precluded from claiming the losses against his general income and gains.

Decision

On appeal issue (1), the UT considered the meaning of ‘discover’. It was not disputed that the concept of a ‘discovery’ by an HMRC officer involved the application of a subjective test as to the officer’s state of mind and an objective test as to whether it was open to an officer to have that state of mind.

It was clear to the UT from the evidence that the HMRC officer believed there was an insufficiency of tax, which went beyond mere suspicion. Applying the subjective test (i.e. whether the HMRC officer believed that the information available to her pointed in the direction of there being an insufficiency of tax), the UT concluded that this test was satisfied.

The FTT had asked itself whether the HMRC officer’s belief that there had been an insufficiency of tax was a reasonable belief. It appeared to the UT that the FTT applied a wholly objective test as to whether her belief was reasonable. The UT considered that the FTT applied a stricter test than necessary (i.e. the correct test of belief in the UT’s view was that of a ‘reasonable person’) but concluded that it was open to the FTT to make that finding. There was also no issue of ‘staleness’ of the discovery. The appellant’s appeal on issue (1) was dismissed.

On issue (2), the UT noted the FTT’s consideration of the appellant’s activities by reference to the ‘badges of trade’, and that the FTT was concerned to assess the overall circumstances of the activities being carried on. The UT concluded that (subject to an error of no significance to the overall conclusion) the FTT was entitled to take the view it did as to the significance of the various indicators, and to conclude as it did having regard to the circumstances of the appellant’s activities as a whole.

The UT could find no error of law in the FTT’s approach to the commercial basis and view to or realistic expectation of profit loss relief restrictions in ITA 2007, ss 66 and 74, so the FTT’s conclusions could not be disturbed. The UT could also find no error of law in the FTT’s conclusion that ITA 2007, s 74B operated to preclude the appellant’s relief claim in any event, and that the obtaining of ‘sideways’ relief and/or capital gains tax relief was one of the main purposes of the arrangements. The appeal on both issues was dismissed. 

Comment

The UT’s judgment includes some helpful analysis on the difficult subject of discovery, and also the application of the badges of trade in considering whether a trade is being carried on. 

Anderson v Revenue and Customs [2018] UKUT 159 (TCC)

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