Wilkes was a PAYE TaxPayer earning in excess of £50,000 and his wife received child benefit. As a result, he was liable to the HICBC, although he was unaware of the fact.
HMRC readily accepted that he had a reasonable excuse for failing to notify chargeability under s7 TMA 1970, and chose to collect the liability (which spanned the three tax years 2014/15 to 2016/17) by issuing discovery assessments under s29 TMA 1970.
As the law stood at the time, it was unclear that the use of such assessments was appropriate for that particular purpose, and Wilkes appealed to the first tier tribunal (FTT), which decided that the assessments were invalid. HMRC appealed to the UT, which on 30 June 2021 agreed with the FTT.
Not adequately assessed
Discovery assessments applied, said the UT, to instances where income that should have been assessed to tax had not been adequately assessed. The tax due under the HICBC was expressly not a tax assessed on Wilkes’s income – it was a free-standing charge derived from the clawback of a benefit paid to his wife.
Stung by this rebuff, HMRC asked Parliament to amend the law to extend the scope of discovery assessments so that it unambiguously included free-standing tax charges such as HICBC. The result was s97 FA 2022, which was given retroactive effect other than in respect of appeals that had been lodged on or before 30 June 2021.
Wilkes’s appeal was protected from s97, so HMRC’s choices boiled down to:
- Graciously accept its inability to collect this particular £4,244, with the consolation of knowing that its failure had led to a valuable clarification of the law going forward, or
- Double down on its losses and seek its pound of flesh by putting to the Court of Appeal the exact same arguments that had failed to convince the tribunals.
Anyone who guessed option 1 has clearly never dealt with HMRC!
Issues for the court
Lord Justice Newey set out the three issues that the court needed to consider:
- A purposive approach: did “income which ought to have been assessed to income tax” encompass any “amount which ought to have been assessed to income tax”?
- Should all of Wilkes’s income have been the subject of a self assessment and so “ought to have been assessed to income tax” but had “not been assessed”?
- Should the [pre-2022] legislation be “rectified” as failing to achieve Parliament’s clear intention?
Purposive approach
Counsel for HMRC argued that s29 was intended as a “back-up, enabling HMRC to remedy a loss of… tax… The reference to ‘income’… was not used to restrict HMRC’s assessment powers but intended to ensure that HMRC’s powers of assessment covered everything liable to income tax”.
Counsel for Wilkes pointed out that, when rewriting the law at HMRC’s instigation, Parliament had not simply substituted “amount” for “income”, which strongly suggests that the two are not equivalent.
On balance, the court agreed with Wilkes.
Reading “income” as “amount” in section 29(1)(a) would not suffice for HMRC’s purposes. “Not only is outstanding HICBC not ‘income which ought to have been assessed to income tax’ but it is not [even] an ‘amount which ought to have been assessed to income tax’. HICBC is not an ‘amount assessed to income tax’ but is an extra charge to income tax”.
Assessing all his income
The s29 condition for making an assessment was HMRC’s discovery that “income which ought to have been assessed to income tax … [has] not been assessed”. But what comes next?
Counsel for HMRC argued that once a discovery has been made, HMRC can “make an assessment to make good any loss of any income tax which should have been taken into account in the relevant self-assessment”.
Not so, the court concluded. Where the condition is met, s29 “allows HMRC to make an assessment only in respect of the loss of tax and, where what has been discovered is that there has been a failure to assess income to income tax, any assessment under section 29 must be designed to address the income tax lost on that income… The assessments on Mr Wilkes did not perform that function”.
HMRC had learned that Wilkes’s income should have been the subject of self assessment (and he did have a responsibility under s7 TMA to disclose this). However, “that did not mean that any more income tax was payable on the income… HMRC had no reason to think that the fact that Mr Wilkes had not delivered returns for the material years had occasioned any ‘loss of tax’ on ‘his income’”.
Rectification of legislation
The courts do possess a very limited power to “rectify” legislation, but this is limited to cases where the court is “abundantly sure” of three matters:
- the intended purpose of the statute or provision in question
- that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question
- the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.
The courts are rightly reluctant to act outwith these three matters, since the result would be “judicial legislation, rather than the correction of an obvious drafting error”.
In the present case, the court was not abundantly sure that the wording of s29 as it stood failed to give effect to the “intended purpose” of the legislation.
While the legislation that introduced HICBC “provided for an amendment to be made to section 7 of TMA 1970, it said nothing at all about section 29”.
Even if the court were to decide that s29 as it stood failed to give effect to Parliament’s purpose, how could it be “abundantly sure” of what Parliament should have said? The court could not be “abundantly sure of even the ‘gist or substance’ of what would have been enacted”.
“In short… were we to ‘rectify’ section 29 of TMA 1970 as HMRC propose, we would be engaging in judicial legislation, not discharging our interpretative function.”
The appeal was dismissed.
Move on
Sometimes, HMRC needs to accept that it is wrong. Following FA 2022, no one else is going to benefit from this loophole. The tax at stake is small: move on.
The discovery assessments had not been HMRC’s only available approach. A s8 notice could have been issued and, if necessary, followed up with a determination under s28C and for one of the three years a simple assessment could have been issued under s28H. Had either of these (arguably better) choices been made, none of this costly litigation would have been necessary.
Sadly, HMRC’s attitude on discovery assessments is that they are a panacea, a one-size-fits-all solution. As the proverb tells us, if you have a hammer, everything becomes a nail.