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 UT: Dr. Danapal was not dishonest | accountingweb
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Tribunal decides deliberate errors not infectious

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In this case, HMRC failed to show that either Dr Danapal or his accountants had acted dishonestly, having tried to argue that one deliberate error tars all other errors with the same brush.

21st Apr 2023
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A frequent theme in cases heard by the tax tribunals is whether “discovery assessments” made under TMA 1970 s29 were validly made. This, more often than not, turns on the question of whether the “extended time limits” provisions of TMA 1970 s36 have been fulfilled.

The upper tribunal (UT) heard an appeal by Harley Street consultant Dr Ramasamy Danapal ([2023] UKUT 00086) against an earlier finding by the first tier tribunal (FTT) relating to three such assessments. 

Year of assessment Amount Date made Time until assessed
2009/10 £40,439 11 March 2016 5 years 11 mths
2006/07 £13,345 2 August 2016 9 years 4 mths
2007/08 £23,253 2 August 2016 8 years 4 mths

In each case the normal four-year assessing deadline (TMA 1970 s34) had elapsed, so HMRC had to rely on the extended time limit provisions. 

The assessments for 2006/07 and 2007/08, which were made more than four years but less than 20 years after the end of the tax year, could only be valid if the case “involved” a loss of tax “brought about deliberately” by either Danapal or someone acting on his behalf (TMA 1970 s36(1A)).

For the 2009/10 assessment, which was made more than four but less than six years after the tax year, HMRC could also assess if the insufficiency of tax was “brought about carelessly” by either Danapal or someone acting on his behalf (s36(1)).

FTT decision

The FTT, on 8 December 2021, ruled that the 2009/10 assessment was valid, made since – on its findings – there had been careless behaviour by Danapal’s accountants (Firm A).

It also concluded that at least some of the deficiencies in tax for the two earlier years had been caused deliberately by either Danapal or Firm A or both.

The FTT went on to rule that “involving” in s36 implied that any non-deliberate errors in the returns for those years could also be assessed for up to 20 years as long as some of the tax shortfall had been deliberate: “the assessments for the earlier years are permitted by section 36 even though they may also consist of some errors which we have found were not shown to have been brought about deliberately.”

Grounds of appeal

The UT was faced with four grounds of appeal. The FTT, claimed Danapal, erred in law by:

  1. providing insufficient reasons to support its conclusion that the loss of tax was brought about carelessly by Firm A
  2. concluding that a loss of tax was brought about deliberately in respect of a capital allowances claim
  3. concluding that a loss of tax was brought about deliberately in respect of understated turnover
  4. “concluding that s36 TMA provides that a loss of tax brought about deliberately extents the time limit for assessing all other insufficiencies in the same tax year, even if not brought about deliberately”.

1. Insufficient reasons

The UT pointed out the Court of Appeal’s dictum (Flannery vs Halifax Estate Agencies Ltd), which makes clear the importance of giving full reasoning behind a judgment: “The duty is a function of due process, and therefore of justice. Its rationale has two principal aspects. The first is that fairness surely requires that the parties especially the losing party should be left in no doubt why they have won or lost. The second is that a requirement to give reasons concentrates the mind.”

In the present case, the FTT had failed in its duty. Not only had HMRC’s statement of case made no allegations of carelessness against Firm A, but the FTT had heard no evidence as to how it carried out its work in relation to Danapal’s tax returns. “No explanation is given as to why a failure to complete the returns accurately could be attributed to a lack of care on the part of Firm A. The FTT gave no explanation as to why it had reached the conclusion that it did, in particular, why Firm A had failed to identify what was agreed were errors in the returns.”

2. Deliberate capital allowance error

Once again the UT stated an authority (Ingenious Games LLP vs HMRC), which makes the key point: “It is not open to HMRC to put allegations of dishonesty to their witnesses, or to invite the FTT to make adverse findings of fact on such a basis, unless the relevant allegations have been pleaded and the appellants have been given a proper opportunity to respond to them.”

This is particularly important since the Supreme Court has held that “deliberate behaviour in this context is conduct that amounts to fraud or is akin to fraud”. The onus lies with HMRC to prove so serious an allegation. 

In the Danapal case, “HMRC, in its Statement of Case, made no allegation of deliberate behaviour against Firm A. That document pleaded that a loss of tax had arisen because Danapal himself had acted deliberately or carelessly in completing the returns. Likewise, in its skeleton argument before the FTT, HMRC’s submissions on deliberate behaviour were confined to making submissions of deliberate behaviour on the part of Dr Danapal.”

3. Deliberately understated turnover

The FTT had reversed the onus of proof here, saying that “it was for Dr Danapal to adduce evidence to rebut the allegation that he had acted deliberately… thereby effectively removing the requirement that HMRC prove the serious allegation of deliberate behaviour made against Dr Danapal.”

No inferences of dishonesty had been put to Danapal in cross-examination. “It was therefore clearly inappropriate for the FTT to have made that finding without the issue having been put squarely to Dr Danapal.”

4. One deliberate act equals all deliberate?

Since all three of the preceding points had been found in Danapal’s favour, the UT did not need to make a decision on this point: “In our view consideration of the point should be left to a case where it is relevant.”

Overall judgment

The FTT had erred in law, its errors were material, and its judgment must be set aside. 

The UT considered whether it should remit the case to the FTT for reconsideration in light of this judgment, but concluded that was not necessary. By using the evidence that had been adduced before the FTT, it was possible for the UT to conclude that HMRC had not discharged its burden of proof. 

The assessments were set aside.

Deliberate errors?

I look forward to the courts finding a case where the last ground for appeal can be squarely addressed. It is an important question: should the 20-year assessing window be confined to truly deliberate – in effect fraudulent – activity? Or should one deliberate error mean that all other errors in the same return, careless or even innocent, should also be subject to the longer window? Both sides have some merit.

Replies (6)

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By Justin Bryant
21st Apr 2023 14:35

See also: https://www.accountingweb.co.uk/any-answers/justins-views-about-ftt-judg...

Re your final para, I reckon Clark v. HMRC [2017] UKFTT 392 (TC) prevents that potential taxpayer DA problem. See:

Valid assessment in respect of one matter cannot include another matter in the same tax year that could not be assessed separately

https://www.procedure.tax/2-discovery-assessments

That must be right; otherwise a deliberate failing over £1 could cause an unconnected £1m innocent mistake (or a £1m simple reasonable contrary taxpayer view) in the same tax year to be validly assessed after 19 years and 364 days, which cannot be right.

Perhaps a more interesting DA question is whether a lack of any careless allegations by HMRC means a 6 year DA is objectively unreasonable and therefore invalid in the first place regardless of whether the tribunal finds carelessness (that would otherwise validate the ETL DA) or whether the objective reasonableness requirement of a DA merely goes only to quantum and other non-behaviour facts etc. and not carelessness re the ETL at the time it's issued?

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Replying to Justin Bryant:
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By Justin Bryant
20th Jun 2023 14:10

This point was also considered at para 63 et seq here: https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03767.html

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By Hugo Fair
21st Apr 2023 15:14

"I look forward to the courts finding a case where the last ground for appeal can be squarely addressed"
... so why does the headline say "Tribunal decides deliberate errors not infectious"?

As far as I can see the UT consistently rebuffed the FTT on the rather simple basis that they had made findings without first testing the evidence (in non-lawyer speak)?

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Replying to Hugo Fair:
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By Justin Bryant
21st Apr 2023 15:23

The author is making an arcane technical point re s29 (re ground 4) that I have probably answered correctly above (also if I were wrong a £1 deliberately wrong CGT filing would give HMRC free reign to assess anything else regardless up to 20 years). The UT merely rightly shot down the the FTT judge's judgment in flames re his unjustified inferences and conclusions re the facts/law i.e. it was his own incorrect "infectious" views of the facts/law that were rightly rejected, which are a separate thing of course. Had they not done that, ground 4 would have been a live point.

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Replying to Justin Bryant:
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By johnjenkins
24th Apr 2023 10:14

Customs and Excise normally use the "in all probability" phrase when dealing with unvated business at tribunal. If someone makes a deliberate action then "in all probability" that could replace "not infectious", although I understand the difference.

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Replying to johnjenkins:
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By Justin Bryant
24th Apr 2023 12:24

If you read the UT judgment you'll see this was just a case of a woefully bad FTT decision (not justified in fact or law) and so it's not really analogous to anything and is really just an example of how not to be an FTT (or other) judge.

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