1993 P T D 1303

[Chancery Division]

(1993) 1 W L R 1130

Before Vinelott, J

GRAY (INSPECTOR OF TAXES)

Versus

MATHESON

Income-tax---

----Agreed assessment---First assessment settled by agreement---Inspector's subsequent discovery of undisclosed income---Whether inspector competent to re-open assessment and make additional assessment---Held, that where en agreement has been reached between a taxpayer and an inspector and it was thereafter discovered that that agreement had been based on incorrect statements by the taxpayer as to his actual profits, the inspector was not precluded from raising further assessments in respect of the same years; and that, since the profits shown on the taxpayer's returns for the relevant years had mistakenly been understated, the inspector, on discovery that fact, had been entitled to raise the further assessments for those years in respect of the profits which ought to have been assessed.

Scorer v. Olin Energy Systems Ltd. (1984)1 WLR 675, CA; (1985) AC 645; (1985) 2 WLR 668; (1985) 2 All ER 375 and 58 TC 592 HL (E) ref.

Parkin v. Cattell (1971) 48 TC 462 CA cited.

Alan Moses O.C. for the Crown.

John Tallon for the Taxpayer.

Solicitors: Solicitor of Inland Revenue; Dunham Brindley and Linn, Codsall.

JUDGMENT

This is an appeal by case stated from a decision of the General Commissioners for East Radnorshire. It raises a short but important question.

The taxpayer, Mr. William Lloyd Matheson, at the material time carried on business as the owner of a public house and garage. His accounting year ran from 12th November to 11th November in each year. Accounts for the years to 11th November, 1981 and 11th November, .1982 were at first not accepted by the local inspector, but in July 1984 revised figures for the year to 11th November, 1981 and the figures for the year to 11th November, 1982 were agreed. Later, in the absence of accounts, the. inspector made estimated as assessments for the fiscal year 1984-85, based. on the estimated profit for the year to 11th November; 1983, and for the fiscal. year 1985-86, based on the estimated profits for the year to'l1th November,. 1984.

The, taxpayer appealed. He then, submitted accounts for those years, and in November, 1985 the inspector agreed the profits shown in the accounts. The appeals were accordingly determined on the basis of the figures shown in the accounts: A further estimated assessment was made for the fiscal year 1986-87 and the taxpayer; having first -appealed, submitted accounts' for the year to 11th November ' 1985. They were accepted and the appeal was again determined on the basis of the figures shown in the-accounts.

On 5th September, 1988, the taxpayer submitted accounts for the year to 11^th November, 1986. By this time the appellant had taken over as inspector for the division in which the taxpayer's trade was carried on. He did not accept 'the accounts and carried out a review of the accounts for the years ending 11th November, 1983, 11th November, 1984; 11th November 1985 and 11th November, 1986. He came to the conclusion that the profit rate shown in the accounts for the years to 11th November, 1983 and 11th November, 1984 was disproportionately low compared with the profit rate shown in the preceding and subsequent years and made additional assessments: Pounds 2,900 for the fiscal year 1984-85 based on his, revised profit -for the year to 11th November, 1983, and' Pounds 3,300 for the fiscal year 1985-86 based on his revised profits for the year to 11th.November, 1984.

The taxpayer appealed. At the hearing before the Commissioners it was admitted by the accountant who appeared for the- taxpayer that the accounts for the years to 11th November; 1983 and 11th November, 1984 were understated to the extent of the sums I have mentioned. The only question before the Commissioners was whether the inspector was precluded by section 54 of the Taxes Management Aet,1970 from making these assessments.

Section 54 must be read in the context of the Act as a whole. Section 8(1) provides that a taxpayer may be required to make a return of his income specifying each separate source of income and the amount from each source The return must include` a declaration that the return is correct and complete to the best of the taxpayer's knowledge. Following a return an assessment is made by the inspector. If satisfied that the return affords correct and complete information concerning profits in respect of which tax is chargeable he makes an assessment accordingly. If it appears that there are profits in respect of which tax is chargeable which have not been included, or if he is otherwise dissatisfied with the return, he may make an assessment to the best of his judgment.

Section 29(3) I must read in full:

"If an inspector or the board discover---(a) that any profits which ought to have been assessed to tax have not been assessed, or (b) that an assessment to tax is or has become insufficient, or (c) that any relief which has been given is or has become excessive, the inspector, or, as the case may be, the board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged."

Section 29(6) provides that after notice has been served the assessment is not to be altered except in accordance with the express provisions of the Taxes Acts. The taxpayer has a right of appeal against an assessment.

Section 50(6) provides that if it appears to the Commissioners that the taxpayer is overcharged the assessment is to be reduced but otherwise it shall stand good. Subsection (7) provides that if it appears to the inspector that the person assessed ought to be charged an amount exceeding the amount in the assessment the assessment shall be increased.

Section 54(1)1 must read in full:

"Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the Commissioners, the inspector or other proper-officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular mariner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be."

The only authority cited to the Commissioners was the decision in Scorer v. Olin Energy Systems Ltd. (1985) A.C. 645. In that case the taxpayer carried on two trades. One consisted of chartering a vessel, the ms. Morven; the other was an engineering business carried on by what was described as the by what was described as the air breaker division. For many years interest on a loan incurred for the purchase of the vessel had been shown in the accounts as charged against the aggregate of the profits of the two trades. Any deficit was carried forward. Whilst the two trades were being carried on it made no difference as regards the deductibility of the accumulated deficit whether interest was charged first against the profits of the shipping business and the balance against the profits of the engineering business or whether the deficit was charged against the total profits. The position changed when the vessel was sold and the shipping business was discontinued. However, the accounts for the full year were drawn on the basis that the accumulated deficit could continue to be set against the profits of the engineering business. An estimated assessment was made and the taxpayer appealed. In subsequent correspondence a number of points were raised but no point was taken as to the carry-forward of the losses. The taxpayer's computation was finally agreed, and in his letter agreeing the computation the inspector stated that the appeal was determined in accordance with section 510 of the Income-tax Act, 1952. Section 510 was the predecessor of section 54 and was in the same terms. It was held in the Court of Appeal (1984) 1 WLR 675, and House of Lords (1985) AC 645 that it was not open to the Crown to contend that after the termination of the shipping trade the loss carried forward could no longer be set against the profits of the engineering trade: Fox L.J. said (1984) 1 WLR 675, 687-688:

"It is true that the actual point of law was never formulated. But I do not think that can be necessary. The section is dealing with agreements as to how an assessment shall be dealt with. It is not dealing with the formulation of points of law. We do not know why the inspector agreed the computation. He may have made an error of law or he may have misunderstood the facts or he may have failed to think about the matter at all. Subject to the question, which I mention later, as to whether the taxpayer has provided misleading information, I do not see why the circumstances that the inspector has made a mistake either of law or fact should take the - case outside section 510. Essentially, the question is not why he agreed but whether he agreed. The purpose of the section must be to give protection by producing finality, and Parliament, I would suppose, must have contemplated that the taxpayer would be protected, even though the inspector made some error in his assessment. That is a likely, if not the most likely, event in which the question of going back on the agreement would ever arise at all.

The provision of misleading information, albeit honestly, by the taxpayer may give rise to different considerations. But I do not think that question arises here. The losses were in fact incurred. The eminent accountants who advised the taxpayer company thought it proper to charge the interest against aggregate trading receipts and had carried forward from year to year any unutilised payments. What is said is that they were not in law available to be used in this way in the relevant year. But the availability of the payments was fundamental to the whole basis of the accountants' computations. The accountants were quite. plainly asserting that the amounts were available and accordingly destroyed any basis for an assessment to tax. The Inspector was squarely faced with the claim and he could have asked for further information if he wanted it."

The first paragraph of that passage was specifically approved by Lord Keith of Kinkel who gave the leading speech in the House of Lords, (1985) AC 645. He said, at pp. 657-658:

"In my opinion, there can be no doubt that[the taxpayer company's] accountants were aware that they were putting forward a claim to have the carried-forward losses of the defunct shipping division set against the profits of the airbreaker division for the year in question. They clearly knew that the brought-forward losses of Dollars 465,457 shown on the final page of their computations had arisen wholly in the shipping division. I am further of opinion that the material which they put before the inspector was sufficient to bring home to the mind of an ordinarily competent inspector in his position precisely what they were claiming. The accounts made it entirely clear that the shipping division had ceased to trade and had no profits in the year in question. The comparative figures for the year to 30th November, 1967 included therein showed a substantial compensation payment received in respect of capital loss arising on the sale of m.v. Morven, and also an item, in the shipping division profit and loss account, in respect of disposal expenses. The nature of the losses claimed was made plain by the reference to section 345 of the Act of 1952, and they were claimed in a computation separate from that relating to the airbreaker division itself. I can see no grounds for an assumption that the losses claimed related to the airbreaker division specifically. Reference to earlier accounts, which the inspector must have had in his possession, would have made it even clearer that they did not:

So, there are no grounds for the view that the accountants did not lay before the inspector material apt to cause him to appreciate the nature of their claim. The situation must b6 viewed objectively, from the point of view of whether the inspector's agreement to the relevant computation, having regard to the surrounding circumstances including all the material known to be in his possession, was such as to lead a reasonable man to the conclusion that he had decided to admit the claim which had been made. In my opinion that question falls to be answered in the affirmative. I am fortified in that conclusion by the consideration that the argument for the Inland Revenue before the special Commissioners, as recorded in the case stated, contains not the slightest hint that the inspector did not appreciate that the brought-forward losses the subject of the claim had been incurred wholly in the discontinued shipping division. The passage particularly relevant is this: `If the inspector had carried out his duties correctly, he could not possibly have accepted the proposal that losses in a trade which had ceased should be set off against (profits) of a continuing trade.' The fact of the matter is that he did agree to just that, and it is of no consequence why he did so, providedit was not due to misleading information'."

Those observations by Lord Keith are clearly reflected in and from the basis of the submissions advanced by the taxpayer at the hearing before the Commissioners. The relevant sub-paragraphs in the case stated read:

"(2) The low profit rates in the accounts for the years ended 11th November, 1983 and 1984 were evident on the face of the accounts, and would have been noticed by a reasonably competent inspector. (3) A reasonably competent inspector would be all the more likely to subject the accounts to thorough scrutiny and notice the low profit rates given the fact that the two previous years' accounts had been investigated. (4) Thus, when the inspector agreed the accounts and entered into an agreement under section 54 he must be taken to have accepted the profit rates in the accounts whether or not he in fact applied his mind to the question ....(6) As the profits rates in the accounts were as evident before as after the Submission of the accounts for the year ended 11th November, 1986 or the appellant's discussions with the accountants, no discovery was made within the meaning of section 29(3) of the Taxes Management Act, 1970. (7) For the same reason, no reasonably competent inspector would have been misled by the accounts."

The Commissioners accepted those submissions. Their decision, which is annexed to the case stated, reads as follows:

"For both the years 1984-85 and 1985-86 accounts of the business for the years ending 11th November, 1983 and 11th November, 1984 were submitted to the Inland Revenue and accepted without inquiry and the open appeals were determined under section 54 of the Taxes Management Act, 1970. The same situation applied to the tax year 1986-87, the accounts to 11th November, 1985 having been submitted, accepted without inquiry, and the open appeal for 1986-87 determined under section 54. It was not until after submission of the accounts for the year ending 11th November, -1986 in support of the 1987-88 income-tax return, that the accounts which have led to the further assessments being made, which are the subject of this appeal, were brought into question. It does not appear to us that any evidence has been submitted or any new factor having been discovered beyond what is contained in or implied by the three years' accounts which were accepted without enquiry, and accordingly as the Inland Revenue elected to accept these accounts without inquiry and to apply section 54 they cannot now raise further assessments."

In my judgment the Commissioners clearly misunderstood the decision of the House of Lords in Scorer v. Olin Energy Systems Ltd. The trading profits for the years to 11th November, 1983 and 11th November, 1984 shown in the taxpayer's returns for the years 1984-85 and 1985-86 were in fact incorrect. The inspector later discovered that there were profits which ought to have been assessed and which had not been assessed. The additional assessments could not be barred by an agreement between the taxpayer and inspector based on statements by the taxpayer as to his trading profits during the relevant period which, though innocent, were admittedly incorrect. The point can be illustrated by a simple example. Take the case of a taxpayer who carries on a small corner shop business selling cigarettes, newspapers and sundry other goods. He records his sales of cigarettes on one till and his sales of other goods on another till. When he comes to make up his accounts he arrives at his gross takings by simply adding the totals on the till rolls. In one year he innocently omits to include the till rolls recording the cigarette sales. An appeal against an assessment is later settled by an agreement within section 54. Later still the inspector is led to inquire whether the accounts are accurate. The taxpayer discovers the error and so informs the inspector. The inspector clearly must be entitled to make a further assessment based on the additional takings. Section 54 cannot bar the additional assessment because the agreement was based on the common assumption that the taxpayer had included in his tax return a complete and accurate trading account.

The position in Scorer v. Olin Energy Systems Ltd. (1985) AC 645 was quite different. There was no dispute about the figures shown in the agreed accounts. The decision of the Court of Appeal and House of Lords was that the claim that the taxpayer was entitled to set off the accumulated losses against the income of the engineering business was sufficiently made in the accounts and that it was the assessment based on those accounts which was .the subject-matter of the agreement between the taxpayer and inspector. It is in that context that the observation of Lord Keith, at p. 657, that "the material which they put before the inspector was sufficient to bring home to the mind of an ordinarily competent inspector in his position precisely what they were claiming" must be understood.

Mr. Tallon, as I understood his argument, accepted that in the hypothetical case I have outlined an additional assessment based on the discovery that the gross takings recorded on one of the trader's tills had been omitted would not be barred by section 54. He sought to distinguish the instant case on the ground that the inspector had made an inquiry into the accounts for the years to 11th November, 1981 and 11th November, 1982, in the latter of which the gross profit calculated as a percentage of gross takings was 19.1 per cent. He submitted that a reasonable and careful inspector would have noticed that the rate of gross profits for the succeeding two years had fallen to 14.8 per cent and 1458 per cent respectively. The inspector who later took over the district was led to make further inquiries as to those two years when he saw that in the year to 11th November, 1985 the rate of gross profit returned to 19.97 per cent.

Mr. Tallon submitted that there was no "discovery" when the inspector found that the gross profit rate was less in the years to 11th November, 1982 and 11th November, 1983 than in the subsequent years, that is, nothing that would not have been found from scrutiny of the accounts for those two years. I think the answer to that submission is that if confuses the discovery that the accounts for the years to 11th November, 1983 and 11th November, 1984 understated the profits for those years with the discovery that the rate of gross profit in the immediately preceding and in the immediately succeeding years was far greater than the rate of gross profit shown in the accounts for the years to 11th November, 1983 and 11th November, 1984 a discovery which led the inspector to a train of enquiry which revealed the admitted fact that the taxable profits for those two years had been understated.

In my judgment, therefore, the appeal succeeds.

Appeal allowed. No orders as to costs. Liberty to apply.

M.BA./2422/TAppeal allowed.