Dishonest agent prevents valid discovery assessments

In Stuart A Cormack v HMRC [2021] TC08289, the First Tier Tribunal (FTT) struck out the appeal in part, finding that SEIS and EIS had been incorrectly claimed but in light of alleged agent fraud, HMRC had failed to prove that the discovery assessments issued were valid.

• Mr Cormack's Self Assessment returns for 2014-15 and 2015-16 includes claims for Seed Enterprise Investment Scheme (SEIS) and Enterprise Incentive Scheme (EIS) relief. Tax repayments of £13,064 and £7,706.82 respectively were made.
• HMRC opened an enquiry into the returns and the issued Discovery assessments in March 2019 as the claims were held not to be valid.
• On appealing the assessments, Mr Cormack's agents explained that a third party had submitted the returns on Mr Cormack's behalf and he had not approved them. The third party had fraudulently made the claims and kept part of the payments. Mr Cormack believed that the agent had been claiming a Reimbursement of travel costs and that he had been the victim of fraud.
• The Review of HMRC's decision was upheld and Mr Cormack appealed to the FTT on the following grounds:
  • The discovery assessments were wrong in law as he had been the victim of fraud.
  • HMRC were aware that the third party was making fraudulent claims.
• He also raised queries over:
  • Whether a taxpayer can be responsible for the fraudulent behaviour of a Dishonest tax agent.
  • Whether HMRC were responsible for granting the third party agent status.
  • Whether a review should have been undertaken of that status.
  • Whether the returns were valid in light of the fraud.
  • Had HMRC made a discovery and were the assessments time-barred?
• HMRC applied to have the proceedings struck out as the Tribunal had no jurisdiction in any other matter than whether the correct amount had been assessed. There was no mechanism in law to put the liability onto another person and the management of agents was an operational matter not subject to the FTT's jurisdiction.
• HMRC also claimed Mr Cormack had no reasonable prospect of success in his appeal as he accepted that the claims had been submitted and that they were not valid and on that basis the appeal should be struck out.
• HMRC argued that Mr Cormack's behaviour was, at the very least, Careless and an officer could not have been expected to be aware of the incorrect claims within the enquiry window. This allowed for the extended time-limits of discovery to apply.

The FTT found that it did not have jurisdiction to consider public law concepts within the boundaries of the appeal's circumstances and so could not make a ruling based on who was responsible for the incorrect returns or the behaviour of HMRC in relation to dishonest tax agents.

It was only able to decide whether the claims were valid or not and they were not. On those grounds, the appeal was struck out.

The court then considered whether the discovery assessments were valid and found:

• HMRC had provided no basis for assuming that Mr Cormack had been careless or that the agent was acting on MrCormack's behalf in light of the allegations of fraud.
• HMRC had also failed to provide a reason as to why an officer could not have reasonably been expected to be aware of the invalid claim within the usual enquiry window.

On these grounds, the FTT found that as the burden of proof lay with HMRC. It had not been met and the assessments were not valid.

Useful guides on this topic

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?

Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?

External link

Stuart A Cormack v HMRC [2021] TC08289