Ramasamy Danapal v The Commissioners for HMRC

HMRC bears the burden of proving that an insufficiency of tax was brought about carelessly or deliberately before discovery assessments can rely on the extended time limits in the Taxes Management Act 1970. A tribunal must explain what evidence establishes carelessness and why that evidence supports the finding. A finding of deliberate behaviour, amounting to fraud or conduct akin to fraud, requires a properly particularised allegation and a fair opportunity to answer it. The burden remains on HMRC; it cannot be shifted by requiring the taxpayer to rebut an inference based on limited evidence. Where material errors of law undermine the findings, the Upper Tribunal may set aside and remake the decision. If the evidence does not establish the statutory conditions, the assessments are out of time and must be discharged.

Dr Danapal appealed against the First-tier Tribunal’s dismissal of his appeals concerning discovery assessments for 2006/07, 2007/08 and 2009/10. The FTT found that the condition in section 29(4) of the Taxes Management Act 1970 was satisfied and that the extended time limits in section 36 applied. It treated errors in the returns as resulting from carelessness or deliberate behaviour by Dr Danapal or his accountants.

The appeal raised issues concerning the adequacy of the FTT’s reasons, findings of deliberate behaviour relating to capital allowances and understated turnover, the burden of proof, and the construction of section 36. The Upper Tribunal also had to decide whether to set aside and remake the FTT’s decision.

1. Appeal allowed. The FTT had made material errors of law and the assessments were discharged.
2. The FTT failed to give adequate reasons for finding that Firm A had acted carelessly. It did not identify the evidence available to the accountants, what they had been told, how they prepared the returns, or why the inaccuracies demonstrated a lack of care. The duty to give reasons required an explanation of why the finding was reached, applying Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377.
3. The finding that Firm A had acted deliberately in relation to the 2007/08 capital allowance claim was impermissible. Deliberate behaviour in this statutory context is conduct amounting to fraud or akin to fraud, as explained in Tooth v HMRC [2021] STC 1049. HMRC had not pleaded or fairly put an allegation of dishonesty against Firm A. The principles of procedural fairness stated in Ingenious Games LLP v HMRC [2015] UKUT 1659 and MRH Solicitors v Apex Hire Ltd and others [2015] EWHC 1795 applied.
4. The FTT likewise erred in finding deliberate understatement of turnover. The evidence did not establish the source of the bank deposits or a pattern of deliberate omissions in earlier years. The FTT impermissibly placed the burden on Dr Danapal to rebut an inference. HMRC was required to prove deliberate behaviour, consistently with Brimheath Developments Ltd v HMRC [2016] STC 579.
5. It was unnecessary to determine the construction of section 36 because no allegation of deliberate behaviour had been proved. Under section 12 of the Tribunals, Courts & Enforcement Act 2007, the Upper Tribunal set aside the relevant parts of the FTT’s decision and remade it. The evidence did not support findings of carelessness or deliberate behaviour by Dr Danapal or Firm A. The assessments were therefore out of time and were discharged.

• Upper Tribunal (Tax and Chancery Chamber): allowed the appeal and discharged the assessments.
• First-tier Tribunal: dismissed Dr Danapal’s appeals against discovery assessments for 2006/07, 2007/08 and 2009/10. The decision was released on 8 December 2021.