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HMRC fails to trouser lost tax from Matalan founder

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10th Jul 2019
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As HMRC raised a tax assessment for John Hargreaves over 30 months after it discovered additional tax was due, the first tier tribunal found the discovery was stale and the assessment was invalid.

John Hargreaves (TC07090) is the founder and former executive chairman of Matalan. He sold a large part of his shareholding in the company in May 2000, making a significant capital gain.

He claimed to have permanently left the UK on 11 March 2000 and so was neither resident nor ordinarily resident in the UK at the time the gain arose. As a non-resident, he would avoid paying CGT of £84m on that gain.

On his 2000/01 tax return, Hargreaves declared he was non-resident, but he made no mention of disposals of shares.

Outed

On 23 March 2003, the Sunday Times referred to Hargreaves as “A Monaco tax exile who spends three days a week at Matalan’s headquarters in Skelmersdale”. It also mentioned that he “made £230m when he sold some of his shareholding in Matalan in May 2000”.

HMRC wakes up

On 16 January 2004, HMRC opened an enquiry into Hargreaves’ 2001/02 tax return (the earliest year which was not already time-barred) to examine his tax residency status.

In November 2004, HMRC officer David West became concerned that if Hargreaves had “not gone non-resident”, this would also impact upon 2000/01 – which meant there could be capital gains tax to pay.

In December 2005, Hargreaves’ advisers PwC submitted a report which included information not previously disclosed to HMRC.

In January 2006, West was still considering whether to raise discovery assessments to collect CGT for 1999/2000 and 2000/01, but he wanted to gather more information first.  

On 9 January 2007, HMRC finally issued the discovery assessment for 2000/01 under TMA 1970 s 29 for £84m.

Appeal grounds

Hargreaves appealed on the basis that the assessment was invalid.

The FTT examined four aspects of this question:

  • had there been a “discovery” and, if so, was it “stale”? (TMA 1970 s 29(1))
  • was the loss of tax due to negligent conduct by Hargreaves or his advisers? (TMA 1970 s 29(4))
  • at the time it became no longer possible to open an enquiry into Hargreaves’ return, was the HMRC officer aware – on the basis of information already made available to him – of the insufficiency of tax? (TMA 1970, s 29(5))
  • was the return made on the basis of, or in accordance with, the practice generally prevailing at the time it was made? (TMA 1970, s 29(2))

Staleness

Clearly, there was a “discovery”. HMRC was initially unaware that CGT was due, and at some stage, before January 2007 it discovered that tax should be assessed.

HMRC suggested the discovery arose in June 2006. This was when West wrote to PwC explaining why he felt Hargreaves was UK resident.

However, West confirmed at the hearing that his view on Hargreaves’ residence status had not changed since November 2004. The PwC report delivered in January 2006 served to confirm his view.

The judge concluded that West discovered the tax loss in November 2004 (if his predecessor had not already done so back in January of the same year). On that basis, there was a delay of over three years from discovery to assessment.

Thus, the discovery was stale and the tax assessment was invalidly made.

Negligence?

If the assessment had not been stale, was there negligence by Hargreaves or PwC to justify it?

During the process of planning Hargreaves’ departure from the UK, PwC had written to him explaining the steps he must fulfil in order to succeed in severing UK residence. Yet the tax return appears to have been completed and filed in January 2002 without paying too much attention to whether those recommendations had been fulfilled (they were not!).

In addition, between 2000 and January 2002 HMRC published copious additional guidance on tax residence which showed that significant scrutiny would be given to claims of non-residence.

The judge felt that there was negligence involved, but didn’t pin down fault.

Was HMRC aware?

Hargreaves’ 2000/01 tax return made no reference to his continuing involvement as Matalan’s executive chairman or to any share sales. HMRC had no way of knowing that by the end of the enquiry window in January 2003 there was an insufficiency of tax. That information only came to HMRC’s attention when the Sunday Times article was published in March 2003.

The condition in TMA 1970, s 29(5) was satisfied and HMRC was not barred from assessing.

Prevailing practice?

PwC was aware, as shown by their letter to Hargreaves, that a claim to go non-resident required a multitude of factors including a “clean break” with the UK. The judge did “not agree that Mr Hargreaves’s return was made on the basis or in accordance with the practice generally prevailing at the time it was made”.

Conclusion

The tax assessment was overturned, solely on the basis that the discovery had gone stale. But for that factor, the judge would have upheld the assessment.

In many ways, this was an own-goal for HMRC. All it needed to do was to issue a “protective” assessment when it first became apparent that Hargreaves’ claim to non-residence was weak, and that considerable tax was at stake. This could have been done in early 2004.

The notion of leisurely gathering more information to prop up a conclusion which had clearly already been formulated proved to be a bad choice for HMRC.

Replies (13)

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By C.Y.Nical
10th Jul 2019 11:14

And all the time they were making a complete mess of this big case they were sending blue frighteners and debt collectors to collect peanuts from small fry, introducing MTD for pensioners with £10k of rental income, and failing to put resources into answering the telephone quickly and competently. HMRC seems to delight in making ordinary people's lives miserable but they let the big fish swim free either by stitching up deals behind closed doors or failing to land them when they have the chance. I cannot put into polite words what I think of HMRC.

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Replying to C.Y.Nical:
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By Susan Harwood
10th Jul 2019 11:36

Totally agree with CY.
Most of the population regard HMRC as a tax haven for the wealthy! Who needs Monarco?

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Replying to C.Y.Nical:
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By flightdeck
10th Jul 2019 13:15

Completely agree. This should have been a very easy quick win for them.

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7om
By Tom 7000
10th Jul 2019 11:39

It appears Mr Hargreaves has been lucky at least twice in his life.

I wonder if you are a tax Inspector and don't put a protective assessment through if you get a P45, put in the tower of London or get a beheading dependin on what the monarch decides?

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By Justin Bryant
10th Jul 2019 12:25

Well done to Aweb for covering this interesting story. (except for The Telegraph, I did not see it publicised - other than when I mentioned it on my "interesting case" blog: https://www.accountingweb.co.uk/any-answers/how-to-avoid-ps84m-tax-whils... )

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Replying to Justin Bryant:
Tom Herbert
By Tom Herbert
10th Jul 2019 14:20

We aim to please, Justin :-)

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By lesley.barnes
10th Jul 2019 16:44

HMRC are too timid when dealing with the rich and famous, but as others said very brave when dealing with someone who owes a few hundred pounds. They need to spend money on getting a team of the best people possible to deal with cases like this. There is no point dropping a file on an inspectors desk and hoping they can deal with it along with everything else. What are they frightened of? If they have a sound case they have nothing to lose. There is too much at stake £84m is a lot of lost revenue.

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By whitevanman
10th Jul 2019 20:32

I would not seek to excuse any failing by HMRC but I do think the whole area of Discovery is a bit confused and that is not helped by the courts making up rules (like "staleness") that are nowhere in the legislation. You may say the HMRC Officer could have made an assessment earlier, but when? The tribunal decided it was 2004 without, it seems any real evidence to support that. Sure, the Officer said he suspected in 2004 that there may have been a problem. But is that enough? There are many (tribunals included it seems) who follow the view that "mere suspicion is not enough". That certainly applies when looking at whether the Officer is barred from acting on a discovery but what does it mean for making what we understand as a " protective" assessment?
I can certainly sympathise with anyone who forms the view (incorrect in my own opinion) that something more than mere suspicion is required BEFORE a discovery assessment can be made. The consequence is that the Officer waits till he has something more certain before assessing and the tribunal then decides that the discovery is "stale". A complete mess and another example of why judges should refrain from making it up and simply apply the law as written. Just a thought!

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Replying to whitevanman:
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By Justin Bryant
11th Jul 2019 09:54

Don't worry. Due to the huge money at stake here HMRC are certain to appeal this and we will eventually see full submissions from HMRC in the CoA (and possibly the SC) on DA staleness. Then, if HMRC ultimately lose that argument, you can be 100% sure to see a change in the legislation that prevents this problem (from HMRC's point of view of course).

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By whitevanman
11th Jul 2019 19:23

I feel it would be good if the case did go to the SC, whatever the outcome. At least then we would have a better idea of how the law should be applied (although they would possibly address only the question if staleness). The problem is that it will not happen for a long time yet and confusion will reign until then.

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By PennyPincher
15th Jul 2019 05:40

This is ridiculous. If he was resident at the time then the tax should be due. It shouldn’t matter about staleness, being out of time etc.

Totally appreciate rules are in place to protect everyone but the guy shouldn’t be able to get off on a technicality/the discovery rules should be thrown out the window if the tax was legally due at the time.

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By whitevanman
15th Jul 2019 13:46

I and many others might agree with some of the sentiments expressed but as you say, the rules are there to protect everyone.
That said, the problem here is not so much the rules as the judge made bit that has been applied.
I don't immediately have access to the cases but as I recall, the subject of "staleness" derives from a misinterpretation of a case in which the courts were considering the meaning of the word "discovers". One judge had said that this included circumstances in which it "newly" appeared (to the inspector) that there was an assessable amount.
The later courts interpreted the word "newly" as implying a temporal restriction to the ability of HMRC officers make an assessment following the making of a discovery.

If you consider the word "newly" in the context of what was being considered (in the case from which it derives), I don't believe the judge intended to imply a temporal restriction of any kind (which of course is not in the legislation). Rather it would be better viewed as implying simply a different conclusion.
There is (and was) widespread agreement in the courts that the word discover had a very wide meaning and would include, for example, a case in which one simply had a change of opinion (on the same facts). So to imply a temporal restriction would be contrary to all that existing case law.

It would appear that the later courts were trying to give some safeguard to the individual.
What they overlooked is that the legislation already contained (and does contain) that safeguard.
Once one makes a discovery, the next question is whether one can act on it (generally speaking, can the inspector / officer make an assessment). The protection for the individual is in the legislation itself which specifies various conditions and which sets assessing time limits. It does not matter when one makes the discovery if it is then too late to make an assessment. Converseley, if the assessment is in time, it should not matter when the discovery was made.

As stated previously, it would be far better if judges stopped trying to make the law and concentrated their minds on correctly applying that which Parliament has seen fit to legislate.

Whether HMRC can take an appeal (and, dare I say) make the correct arguments, is another matter.

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By Justin Bryant
17th Feb 2022 18:22
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