Stephen John Mullens v The Commissioners for HMRC

Where HMRC makes a discovery assessment under Taxes Management Act 1970 section 29(4), and relies on deliberate or careless conduct, discharge of that condition also satisfies the corresponding substantive requirement for the extended time limit in section 36. HMRC need only show that the assessment was made within the applicable six- or 20-year period. It need not additionally prove the precise taxable source, character, or accounting period of every receipt.

Where section 29(4) is not engaged, the extended-time-limit burden requires a prima facie case that culpable conduct caused some tax to go unpaid. Once that is established, section 50(6) places the burden of displacing the assessment on the taxpayer. A tax assessment which stands good also establishes the inaccuracy and understatement required for the associated penalty.

The appellant challenged the First-tier Tribunal’s decision, [2021] UKFTT 131 (TC), which upheld discovery assessments and penalty assessments concerning six substantial payments received between 1999/00 and 2012/13. The FTT found that the payments were income received for services to the Ecclestone family interests and that the appellant had deliberately failed to declare them.

The appeal concerned, first, discovery assessments for Payments 1 to 4 made outside the ordinary four-year period. The appellant contended that, under section 36 of the Taxes Management Act 1970, HMRC had to prove an actual tax loss in each assessed year, including the taxable source, income character and period of the payments. Secondly, he challenged penalties for Payments 5 and 6 on the basis that HMRC had to prove afresh that tax was lost after the substantive assessments had been upheld.

1. Appeal dismissed. The FTT did not err in its approach to the burden of proof for the extended-time-limit discovery assessments.

2. Under section 29(4) of the Taxes Management Act 1970, HMRC must establish objectively that the fact of the undercharge was brought about by the taxpayer’s careless or deliberate conduct. Where HMRC has done so, the materially identical language of section 36(1) or (1A) means that it need not establish anything further to invoke the extended time limit, apart from proving that the assessment was made within the relevant six- or 20-year period.

3. Section 36 is, in that setting, a time-limit provision. It does not impose an additional burden to prove the particular taxable source, whether a receipt was income rather than capital, or the precise year in which every receipt was chargeable. Those are matters by which the taxpayer may seek under section 50(6) to displace the assessment in whole or in part.

4. The Tribunal explained that the approach in Hurley v Taylor [1999] STC 1 remains applicable where HMRC does not have to establish section 29(4), such as where section 29(5) is relied upon. HMRC must then show a prima facie case that culpable conduct caused some tax to remain unpaid, but need not prove every constituent of the ultimate liability. Once that burden is met, the taxpayer bears the burden of showing that the assessment is wrong.

5. On the unchallengeable FTT findings, Payments 1 to 4 were consideration for services and were deliberately omitted from returns. That was a clear prima facie case and was sufficient to satisfy any applicable section 36 burden.

6. For Payments 5 and 6, the assessments and closure notices stood good under section 50(6). The returns therefore contained inaccuracies which understated liability, satisfying paragraph 1(2) of Schedule 24 to the Finance Act 2007. As deliberate conduct was not challenged, paragraph 1(3) was also met and the penalties were valid.

• Upper Tribunal (Tax and Chancery Chamber): Appeal dismissed: [2023] UKUT 244 (TCC).

• First-tier Tribunal (Tax Chamber): Upheld the discovery assessments, closure notice and penalties: [2021] UKFTT 131 (TC).