The Upper Tribunal confirms the extent of the section 36 (extended time limit) burden on HMRC

The Upper Tribunal (UT) has confirmed that s.36 Taxes Management Act 1970 (TMA), which extends the time limit for making an assessment to income tax, places a burden on HMRC to demonstrate that an undercharge was brought about by careless or deliberate conduct, but there is no further burden on HMRC to establish a “loss of tax”.

This appeal concerned a challenge to an FTT decision which found that several payments amounting to nearly £40 million received by Stephen Mullens, a solicitor and adviser for Bernie Ecclestone, Slavica Ecclestone and their family interests, was taxable as his income.

As discovery assessments for four of the payments were raised outside the ordinary time limit, HMRC bore the burden of proving that the requirements of ss. 29 (4), 36 (1) and 36 (1A) TMA were satisfied.

Section 29 (4) TMA, enables HMRC to assess tax by way of discovery assessment where the taxpayer had delivered a self-assessment and HMRC could demonstrate the loss of tax was brought about carelessly or deliberately.

Sections 36 (1) and (1A) are extended time limit (ETL) provisions that empower HMRC to raise discovery assessments up to 6 years after the end of the year of assessment to which it relates for careless conduct, or 20 years for deliberate conduct in cases involving a loss of income tax.

The Appellant contended that in addition to proving culpable conduct from the taxpayer, s. 36 placed a significant additional burden on HMRC to prove:

  • The taxable source of the payments;
  • The status of the payments as income rather than capital;
  • That the payments were taxable in the years specified by the ETL assessments (Constituents i to iii).

The UT disagreed. The language of ss. 29 (4), 36 (1) and 36 (1A) was similar. It it clear that s. 29 (4) only asks whether the ‘fact of the undercharge’ was brought about by a taxpayer’s careless or deliberate conduct and does not require HMRC to prove Constituents i to iii. The taxpayer did not dispute this and did not contend that HMRC had failed to meet the s. 29 (4) burden in this case.

The UT concluded that the s. 36 and s. 29 (4) burdens were identical, save that under s.36 HMRC also needed to demonstrate that the ETL assessment was made within 6 or 20 years, as specified in ss. 36 (1) and (1A) respectively. Neither provision required HMRC to prove Constituents i to iii.

The significance of Hurley v Taylor

The taxpayer had relied on Hurley v Taylor for his contention that under s. 36, HMRC was required to demonstrate culpable conduct and separately a loss of tax attributable to it (i.e. Constituents i to iii). The UT rejected that submission:

  • First, at the time of the Hurley decision, s. 29 TMA contained no analogue of the s. 29 (4) burden and so Hurley could provide no binding guidance on the relationship between the s. 29 (4) and s. 36 burdens, which were both relevant in Mr Mullens’ appeal.
  • Secondly, where HMRC do not need to discharge a s. 29 (4) burden (e.g. where reliance is placed on s. 29 (5)), Hurley still remains relevant. The taxpayer’s emphasis on ‘loss of tax’ in Hurley was misplaced. When reading Hurley as a whole (and the relevant pre and post-Hurley authorities) it was clear that under s. 36, HMRC could discharge its burden by presenting a prima facie case of income tax not being paid as a result of careless or deliberate conduct, that was sufficient for HMRC to discharge its burden; the burden would then shift to the taxpayer to show why the assessment was incorrect.

The UT found that this was a paradigm case where the s. 36 burden was met. There was no dispute that the s. 29 (4) burden was met and, given the absence of any dispute as to when the assessments were made, HMRC did not need to show anything more to meet the s. 36 burden. Further, there was ample evidence before the Tribunal that HMRC had established that the relevant payments were consideration for services provided by Mr Mullens, that he knew they should have been disclosed on his tax returns and that he made a conscious and deliberate decision not to disclose them.

A copy of the decision can be found here.

Akash Nawbatt KC, Christopher Stone and Bayo Randle were instructed by HMRC.

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