Are HMRC’s conclusions reasonable?

HMRC v Sukhdev Mattu [2021] UKUT 0245 (TCC) is a recent application by HMRC to apply a tax-related penalty on Mr Mattu for alleged failure to comply with an information notice (essentially a power HMRC has to try to compel taxpayers to provide information to HMRC about their affairs).

As part of the application, the Upper Tribunal had to consider whether HMRC’s interpretation of the law in estimating Mr Mattu’s possible tax liability was reasonable. The Upper Tribunal agreed with all of HMRC’s arguments. The following three are particularly important.

• When HMRC make a discovery assessment against a taxpayer and the taxpayer did not originally claim the benefit of the remittance basis for the chargeable period in question, the taxpayer cannot subsequently claim the benefit of the remittance basis. This is because the rules that allow a taxpayer to benefit from the usual reliefs and allowances in the context of a discovery assessment do not apply to the remittance basis.
• The Settlements Code (Chapter 5 Part V ITTOIA 2005) applies to income of a settlement. For these purposes, income of a settlement can include income directly and indirectly received by the settlement. This means that the Settlements Code can apply both to trust-level income and income of underlying companies that the trustees own.
• It is reasonable to infer that individuals with “considerable ties” to the UK but who are not yet UK resident would have been motivated by UK tax considerations when creating non-UK resident trusts. Therefore, they should not benefit from the motive defence for the purposes of the Transfer of Assets Abroad Regime (Chapter 2 Part XIII ITA 2007).

The Upper Tribunal’s decision is not binding. They simply ruled that the HMRC officer was reasonable to take the views set out above, not that they were necessarily correct, which may be a question that the First Tier Tax Tribunal has to answer in due course. In addition, the application has to be seen in the wider context of a taxpayer for whom the Upper Tribunal had little sympathy. Even so, some of the conclusions reached may surprise practitioners.