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.
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.
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))
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.
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.
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”.
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.