Failing to file not deliberate for discovery purposes

In Robert Don Hunter Dougan v HMRC [2022] TC8471, the First Tier Tribunal (FTT) ruled the taxpayer had not deliberately intended to bring about a loss of tax despite failing to file tax returns on time. This meant some discovery assessments had not been validly issued. The remaining discovery assessment was upheld.

• Mr Dougan is a successful music producer having produced part of the soundtrack to the film The Matrix.
• The music production business was conducted as a sole trade which accounted for his royalty income.
• Due to concerns about the viability of his music business, he started a wine production and marketing business in partnership after purchasing a vineyard in France.
• Mr Dougan had a history of filing late tax returns and no tax returns were filed between July 2004 and May 2013. This led to Discovery Assessments, determinations and penalties being raised by HMRC for 2004/05 through to 2006/07.
• Whenever HMRC raised a determination or a demand for tax, Mr Dougan paid the amount and forwarded the paperwork to his accountants.
• Tax returns from 2004/05 to 2009/10 were filed by his accountants on 21 June 2013 and these claimed a share of Partnership Trading Losses from the wine business against sole trade income. 
• HMRC resisted applying the loss claims to reduce the amounts charged in the discovery assessments.
• Mr Dougan Appealed against the discovery assessments 

The FTT found:

• The burden of proof was on HMRC to prove that discovery assessments had been validly issued.
• Due to the dates on which the discovery assessments were issued, this depended on the taxpayer's behaviour. If Mr Dougan had acted deliberately, all the discovery assessments would have been issued in time. If he had  acted carelessly, only the discovery assessment for 2006/07 would have been validly issued.
• HMRC failed to prove that the taxpayer deliberately intended to bring about a loss of tax. The facts did not support that contention as:
  • It was not enough to establish that a late filing taxpayer prevented HMRC from raising assessments.
  • That a failure to file a return brought about a loss of tax was not enough to support a deliberate intention to bring about a loss of tax.
  • While Mr Dougan did not address his tax responsibilities, as his focus was on his wine business, young children and litigation, it was his intention to catch up with his tax return obligations at a later date, which was something he had done in the past.
  • He believed his music income from which his tax liability derived would be offset by wine business losses. This was the advice he had been given and why the trade had been structured the way it had.
• The behaviour was, however, careless and the 2006/07 discovery assessment had been validly issued as a result. It was up to the taxpayer to show that the amounts charged by the assessment were excessive.
• This relied on the partnership trade starting prior to 2007/08 which was a closed year.
• The FTT decided, on balance, that the trade started in 2007/08 and as such the 2006/07 discovery assessment was correct as:
  • The partnership trade was the promotion, marketing and sale of wine.
  • Other entities in the structure were responsible for land ownership, the growing of grapes and the production of wine.
  • Given the growing of grapes and wine production took in excess of two years, the trades of each entity in the structure did not start at the same time and the partnership trade started later when there was a product to promote and market.
• While this was sufficient to uphold the discovery assessment, the FTT also went on to consider that the consultancy fees paid by the partnership to a corporate member were not incurred wholly and exclusively for the purposes of the partnership trade:
  • The consultancy services were provided and required for the purposes of the partnership trade.
  • There was no personal benefit for Mr Dougan of the consultancy services provided to the partnership.
  • The quantum of the consultancy payments represented a significant proportion of the costs of the corporate member, which was as advised in the structuring paper prepared by Mr Dougan’s accountants.
  • There was no methodology for calculating the quantum of this payment and the full amounts did not represent reasonable payments for the services provided.

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?

Discovery Assessments: At a glance
This is a freeview 'At a glance' guide to Discovery Assessments.

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Wholly and exclusively… toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

External links

Robert Don Hunter Dougan v HMRC [2022] TC8471