TC09555 - [2025] UKFTT 00748 (TC)

Again there was little disagreement between the parties as to the relevant legal test to be applied when determining whether the conditions for a discovery assessment are met. The parties agreed that pursuant to paragraph 41 Sch 18 FA98 HMRC must first discover that as regards an accounting period for a company that an amount which ought to have been assessed has not been assessed or an assessment to tax is, or has become, insufficient. As explained in the Upper Tribunal judgment in Anderson v HMRC [2018] UKUT 159 (TCC) a discovery will be made where the assessing officer subjectively and personally believes there to have been an under declaration of tax and that subjective belief is one which is objectively reasonable on the evidence. The Upper Tribunal goes on to indicate that a subjective belief must be more than a suspicion of an insufficiency.

3KH referred to the Supreme Court judgment in HMRC v Raymond Tooth [2021] SC 17 at paragraphs 81 and 82 as endorsing that whilst the concept of a discovery is broad such that a failure by one officer to identify or appreciate an insufficiency or under declaration does not preclude a discovery by a second officer that second officer must pick up the file, review the documents and satisfy themselves as to the insufficiency through the “exercise of re-evaluation” of the evidence available.

We were also referred by 3KH to the recent First-tier Tribunal judgment in BJ Shere Khan Star City Limited v HMRC [2024] UJFTT 639 (TC) (Shere Khan). That case concerned a restaurant run by members of MJ and MB’s wider family. HMRC contended, as here, that sales had been suppressed for both VAT and income tax purposes and that trading from a second restaurant was that of the taxpayer. There were also aspects of the assessments to VAT in respect of over declared zero rated sales and over claimed input tax.

In that appeal, and on the evidence, that Tribunal considered that HMRC’s VAT assessments were made to best judgment but on the basis of the evidence considered that there was insufficient evidence of suppression to uphold the assessments in that regard. The zero rating and input tax assessments were however upheld. However, as regards the discovery assessment, and applying the Anderson test, rather than the test for best judgment, there was insufficient evidence on which to form a reasonable belief that there had been suppression of sales and that the second restaurant was not operated by the appealing taxpayer. It accepted that there may have been a suspicion of suppression but no more. Thus the appeal failed on its facts.

Despite making that finding the Tribunal went on to conclude in that case that the officer raising the discovery assessment could not reasonably have formed a subjective belief of an insufficiency because they had formed the view entirely reliant on the findings and analysis of the VAT assessing officer. The Tribunal considered it unreasonable to have acted in this way. This finding is one which does not form part of the reasoning by which the Shere Khan case was decided. As that is the case, we do not consider that we need to apply the principle of comity as recently described by the Upper Tribunal in Suterwalla v HMRC [2024] UKUT 188 (TCC):

“Of course, the decision of one FTT is strictly not binding on another FTT as a matter of precedent, but the principle of judicial comity, or horizontal stare decisis, requires that a FTT should follow the decision of a previous tribunal of co-ordinate jurisdiction unless 'convinced' or 'satisfied' (there is no practical difference between the two) that the earlier decision was wrong (see Gilchrist v HMRC [2014] UKUT 169 (TCC) at [91] to [94]). There are good reasons for this practice: it promotes consistency in judicial decisions and predictability of outcomes thereby avoiding re-litigation of identical legal issues, and it builds public confidence in the appeals process by ensuring that similar cases are treated similarly over time. If a later FTT considers that a previous decision of the FTT on materially identical facts and/or law was wrong, then it should set out why. It need not do so at great length but simply stating, as the FTT did in this case, that other decisions not on the same point are preferred leaves the reader in the dark. We consider that, where a FTT decides not to follow the decision of another FTT on the same or a materially similar point, it should explain why it has taken a contrary view.

In the event we are wrong to have so concluded we respectfully consider the Tribunal in Shere Khan to be wrong in law that an officer cannot be said to have acted reasonably without undertaking their own investigation of primary documents before adopting the analysis and conclusions of another officer as whether there is evidence that takings had been suppressed and/or otherwise under declared. We do not agree that there can be a blanket obligation for there to be a second investigation of the evidence before forming a reasonable belief that there was an insufficiency in assessment for income/corporation tax purposes.

In this context and by reference to paragraphs 81 and 82 in Tooth we consider that it is perfectly permissible for an officer considering an income/corporation tax insufficiency to take as their starting point that VAT assessments have been or are to be issued. In the ordinary course, and unless there is something obviously untoward, the officer is entitled to assume that the VAT assessments have been issued to best judgment in accordance with the principles identified and summarised in Sintra such that there is evidence to support a conclusion that the VAT returns are incorrect.

Plainly the officer considering the income/corporation tax position must then be satisfied that the amount of turnover assessed to VAT has not been declared for income tax purposes by reference to the accounting profit and tax calculations. In that context the officer will also need to consider the net of VAT position and the declared and tax-deductible expenditure. However, provided these additional steps are taken there is nothing to oblige the income tax officer to verify the VAT officer’s decision by reference to the underlying primary documents in order to make a discovery,