FTT made significant errors of law

In Ramasamy Danapal v HMRC [2023] UKUT 00086, the Upper Tribunal (UT) found that the First Tier Tribunal (FTT) had made significant errors of law in concluding that a taxpayer and his accountant had acted carelessly and deliberately. This meant that HMRC’s discovery assessments were in fact out of time. 

• Dr Danapal worked for the NHS as a full-time A&E consultant while running a private clinic in Harley Street.
• In 2013, HMRC opened enquiries into Dr Danapal’s tax returns for 2010-11 and 2011-12.
• Dr Danapal’s accountants, ‘Firm A’, agreed that there were inaccuracies in the 2010-11 return and that profits should be increased by disallowing various expenses.
  • HMRC argued that similar additions were due in respect of earlier years, under the Presumption of continuity.
• HMRC also:
  • Enquired into Capital allowances claimed on an asset costing £171,000, where the first claim was made in 2007-08.
  • Contended that amounts had been omitted in the calculation of turnover.
• In 2016, HMRC raised discovery assessments totalling £77,000 for 2006-07, 2007-08 and 2009-10, in respect of the above points.

Dr Danapal Appealed to the First Tier Tribunal (FTT), which upheld HMRC’s assessments. A subsequent appeal was made to the Upper Tribunal (UT) on four separate grounds.

The UT found that:

• The FTT made an error of law in not giving adequate reasons for its finding of Carelessness on the part of Firm A.
  • The FTT gave no explanation as to why a Failure to complete the returns accurately could be attributed to a lack of care on the part of Firm A.
  • HMRC’s Statement of Case made no allegation of carelessness on the part of Firm A as opposed to Dr Danapal himself.
  • The FTT’s decision did not consider or address:
    • What material was before Firm A when it completed the return.
    • What Firm A was told by Dr Danapal or his practice manager about that material.
    • How it was that Firm A came to complete the return inaccurately.
  • Firm A gave no evidence and was therefore not cross-examined as to how it carried out its work.
  • While Dr Danapal’s practice manager handled the maintenance of the accounting records and Dr Danapal Relied entirely on his appropriately qualified accountants to complete the returns correctly, these findings did not explain why Firm A was careless in completing the returns.
• The FTT made an error of law in concluding that Firm A had acted Deliberately in relation to the capital allowance claim inaccuracy in 2007-08.
  • As noted in Tooth, deliberate behaviour in this context is conduct that amounts to fraud or is akin to fraud.
  • In HMRC’s Statement of Case, no allegation of deliberate behaviour against Firm A was made. HMRC had simply submitted that a loss of tax had arisen because Dr Danapal himself had acted deliberately or carelessly in completing the returns. No direct allegations were made against Firm A.
  • It was 'clearly wrong' for the FTT to have found dishonesty on the part of Firm A, which was given no opportunity to refute them.
• The FTT made an error of law in concluding that a loss of tax was brought about deliberately by the understated turnover in 2010-11 and earlier years.
  • No allegation of deliberate behaviour against Firm A was made by HMRC.
  • The understated turnover added to 2010-11 was reduced following discussions between HMRC and Firm A.
    • This gave doubt as to whether the figures HMRC relied on actually represented turnover. The FTT undertook no analysis as to why HMRC had agreed that the figure could be reduced.
    • HMRC’s inability to identify the correct understatement of turnover at the first attempt demonstrated that it was not simply a matter of adding up deposits. Further analysis of the source of the payments was required.
  • The FTT’s conclusion that it was for Dr Danapal to rebut the suggestion of a pattern of behaviour based on one year of limited evidence was an incorrect approach to the burden of proof.
    • It was not for Dr Danapal to provide evidence to rebut the allegation that he had acted deliberately.
    • The FTT had effectively removed the requirement for HMRC to prove deliberate behaviour.
  • There was no record that Dr Danapal had been cross-examined on the inference of deliberate behaviour.

The errors of law made by the FTT were material. The UT therefore set aside the earlier decision and remade it.  

As HMRC had not proven that either Dr Danapal or Firm A had acted carelessly or deliberately in relation to the insufficiency of tax which was discovered, the discovery assessments were made out of time and the taxpayer’s appeal was allowed.

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?

Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? Is there a penalty if you fail to tell HMRC about an under-assessment? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Grounds for Appeal: Reliance on an adviser or third party
When can a taxpayer appeal a penalty for late filing, late payment or for error or mistake? What are the grounds on which they can appeal?

Investigations: the presumption of continuity
What is the Presumption of Continuity? When does it apply?

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?

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?

Penalties: Deliberate Behaviour
What penalties apply to deliberate behaviour? What is deliberate behaviour?

External link

Ramasamy Danapal v HMRC [2023] UKUT 00086