Discovery assessments valid, inaccurate loss claims deliberate

In Anthony Outram & Ross Outram v HMRC [2021] TC8107, the First Tier Tribunal (FTT) dismissed appeals against discovery assessments relating to a tax avoidance trading loss scheme. The taxpayers were not trading, deliberately filed inaccurate returns and the discovery assessments were valid.

The appellants, two brothers whose appeals were joined as they were identical, had participated in an undisclosed tax avoidance scheme. HMRC became aware of their involvement following a raid in 2010 on the scheme provider, Montpelier Tax Planning, as part of a criminal investigation.

• They had claimed relief for self-employed trading losses arising from options trading for 2005/06.
  • The losses were Set off against other income, then carried back to earlier years.
  • Most of the losses came from one contract with a Seychelles company, Pendulum Investment Corporation. The other trades made were small in amount and volume.
  • Under the planning, this other trading activity should have commenced first before the Pendulum contracts were entered into. It actually came after.
  • The Pendulum contracts were funded by loans on non-commercial terms.
  • The brothers did not take any advice before entering into the Pendulum contracts saying they relied on Montpelier for everything and needed to check almost nothing.
• HMRC opened a COP9 enquiry on the grounds of suspected fraud arising from the submission of incorrect tax returns containing loss claims believed to be knowingly incorrect.
• HMRC gave the appellants the chance to make a Contractual disclosure which they declined.
• HMRC issued Schedule 36 information notices followed, in February 2015 by Discovery Assessments, on the grounds of Deliberate behaviour. The assessments disallowed the losses on the Pendulum contracts.

The FTT dismissed the taxpayers’ appeals against the assessments. The judge said the brothers were "less than compelling witnesses" even allowing for the fact the events took place 16 years ago.

• The appellants were not carrying on a trade on a Commercial basis with a view to a profit and few of the Badges of trade were present. They did not use a trading platform which would have been the logical thing to do if they intended to make a profit, instead they signed a contract for tax planning services with an offshore company. The non-Pendulum contracts were simply window dressing to give the impression of trading.
• They had knowingly entered into a tax avoidance scheme and their only aim was to create a significant loss and claim substantial repayments of tax. They had suffered no economic loss.
• The taxpayer is responsible for submitting an accurate Self Assessment (SA) return. The appellants knew when they filed their SA returns that they were not carrying on a trade that entitled them to make a claim for loss relief. In claiming non-existent losses they had acted deliberately, the Extended time limits for discovery applied and the Discovery assessments were validly issued under s.29(4) TMA 1970.

Useful guides on this topic

Badges of Trade: Are you trading or not?
Are you trading, running a business, or just buying and selling investments? The 'Badges of Trade' are a set of indicators, built up over time by the courts, to decide when an activity is a trading or investment activity.

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?

Losses (sideways): Restriction for uncommercial trades
What are the restrictions to sideways loss relief? When do they apply? What is an uncommercial trade?

How to appeal a decision of HMRC
Key steps in appealing a decision of HMRC.

Discovery assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences? Case law tracker.

Discovery assessment and time limits
FREEVIEW: How far HMRC can go back?

Penalties: Error in a return or document
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Penalties: Deliberate Behaviour
There is no definition of 'Deliberate Behaviour' in the tax legislation. This guide considers case law to determine how the courts might view certain behaviours and whether they are deliberate or not.

Schedule 36 information notices
What are HMRC's powers to obtain information about taxpayers?

External link

Anthony Outram & Ross Outram v HMRC [2021] TC8107