[2010] UKFTT 473 (TC)

TC00735
Appeal numbers: SC 3228/2008,
SC 3229/2008 and SC 3230/2008

Income tax – trusts receiving special dividends – trust capital or trust income? – discovery assessment on life tenant – s 29 TMA - whether a “discovery” – whether trust tax return was information made available – ss 29(5), (6) – whether negligent conduct of adviser within s 29(4)

FIRST-TIER TRIBUNAL
TAX 

(1)	TRUSTEES OF THE BESSIE TAUBE DISCRETIONARY SETTLEMENT TRUST
(2)	TRUSTEES OF THE RAYMOND TAUBE  DISCRETIONARY SETTLEMENT TRUST
(3)	RAYMOND TAUBE		Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JUDGE ROGER BERNER
				MRS LESLEY STALKER CTA (Member)									
					
Sitting in public at 45 Bedford Square, London WC1 on 14 – 16 September 2010

Alun James, instructed by BDO Stoy Hayward LLP, for the Appellants

David Ewart QC and David Yates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This case concerns the Appellants’ appeals against the following:
(1)	As regards the Trustees of the Bessie Taube 1991 Discretionary Settlement (“the Bessie Taube Trust”), the amendment dated 29 September 2004 by HMRC to the Trust and Estate tax return for 2000/01;
(2)	As regards the Trustees of the Raymond Taube 1991 Discretionary Settlement (“the Raymond Taube Trust”), the amendment dated 29 September 2004 by HMRC to the Trust and Estate tax return for 2000/01; and
(3)	As regards Raymond Taube (“Mr Taube”), a notice of assessment dated 6 December 2004.
2.	In the case of the appeal by the Bessie Taube Trust, it had been agreed by the parties that, irrespective of the outcome of the substantive issue, no tax would arise in any event.  This is because, even if, as HMRC claim, the dividend received by the Bessie Taube Trust is trust income, that income would be taxable, under s 1A of the Income and Corporation Taxes Act 1988 (“TA”), as applicable at the relevant time, at the Schedule F ordinary rate of 10%, and that liability would be entirely franked or offset by the tax credit attaching to the dividend.  There had been no withdrawal of HMRC’s case in this respect, and so it was accepted by the parties that the proper course was for the Tribunal to allow that appeal.  We therefore allow the appeal by the Bessie Taube Trust, and reduce the amendment to the trustees’ self-assessment to nil.
3.	The remainder of this decision accordingly relates to the appeals by the Raymond Taube Trust and by Mr Taube himself.  It appeared during the hearing that there was an issue on the figures in respect of both the amendment to the self-assessment of the Raymond Taube Trust and the assessment on Mr Taube.  However, those issues were resolved and agreed between the parties.  We are accordingly required only to determine the substantive issues of principle, and then, on the basis of that determination, to decide upon the appropriate reductions or increases, as the case may be, to the amended self-assessment of the trustees and/or the assessment on Mr Taube.
4.	In essence, the dispute concerns the tax treatment of a special dividend received by each of the Bessie Taube Trust and the Raymond Taube Trust from a family company, Michael Taube Limited (“the Company”), following a reorganisation of its share capital.  The Bessie Taube Trust received a dividend of £777,600, which if it is trust income and not trust capital will belong to Mr Taube as the person with an interest in possession in that trust, and be taxable on him accordingly.  The Raymond Taube Trust received a dividend of £240,000, which if it is trust income and not capital will be subject to tax at the then applicable Schedule F trust rate of 25%, which at the relevant time applied to accumulation and discretionary trusts, subject to the tax credit on the dividend (s 686 TA).  
5.	The Appellants were represented by Alun James.  David Ewart QC and David Yates appeared for HMRC.
The facts
6.	We had a statement of agreed facts, which we reproduce below (subject to some minor alterations of our own in square brackets), and two witness statements from Mr Michael Dawson, who is a chartered accountant and tax adviser and currently a partner in BDO LLP in Manchester and who was, at the time as a member of Cooper Lancaster Brewers, instructed in connection with the transaction in question in this appeal.  Mr Dawson gave oral evidence and was cross-examined by Mr Ewart.  In addition we had an agreed bundle of documents and received a number of supplementary documents during the course of the hearing.
Statement of agreed facts
1.	On 20 April 2000 the trustees of the Bessie Taube Settlement exercised their discretion to appoint an interest in possession to Mr Raymond Taube, the son of the settlor.
2.	On 25 April 2000, Michael Taube Limited passed a resolution which reclassified the shares [owned] by the trustees of the Bessie Taube Settlement and also the Raymond Taube Settlement into A ordinary shares.  
3.	On 26 April 2000, the trustees were paid a dividend of £2,400 per ‘A’ share which equates to the entire value of the ‘A’ shares and, having taken professional advice, treated the receipt as trust capital.  
4.	On 15 January 2002, Mr Raymond Taube signed his personal return for the year ended 5 April 2001, which was submitted prior to 31 January 2002.  At box 23.6 of the tax return the additional information disclosed contained the agent’s name and address (Crawfords) as well as 
“UK DIVIDENDS – (Southern Land Securities Ltd) 
General notes: 
No dividend paid by Southern Land in 2000/2001.” 
At box 7.32 the additional information disclosed is:
“UK Trusts:
Bessie Taube Life Int Settlement.”
At box 8.22 the additional information disclosed is:
“Shares gifted to Raymond Taube on 10.04.2000 from his wife, Mrs Ruth Taube. Shares sold to Raymond Taube Discretionary Settlement on 20.04.2000 using quarter-up method.”
5.	On 25 January 2002 the trust return for the Bessie Taube 1991 Discretionary Settlement for the year ended 5 April 2001 was signed by Mr Raymond Taube in his capacity as trustee.  This was submitted to the Inland Revenue prior to the due date of 31 January 2002.

6.	The trust tax return made the following disclosure in the additional information box:
“1.	The trustees appointed an interest in possession to Mr Raymond Taube on 20 April 2000.  No income was received in the trust in the period from 5 April 2000 to 20 April 2000.  
Following a share reorganisation, the trustees received a special dividend of £777,600, equivalent to the current value of their shareholding in Michael Taube Limited on 26 April 2000.  Having taking professional advice, the trustees regard the receipt as trust capital which is not available for distribution.”
7.	The tax return for another family settlement, the Raymond Taube 1991 Discretionary Settlement, was also submitted to the Revenue prior to 31 January 2002.  This return made a disclosure in the additional information box as follows:
“1. Following a share reorganisation, the trustees received a special dividend of £240,000, equivalent to the current value of their shareholding in Michael Taube Limited on 26 April 2000.  Having received professional advice, the trustees regard the receipt as trust capital, which is not available for distribution.”
2. Quoted shares were purchased from the settlor at their open market value (quarter up basis) amounting to £237,268 in April 2000. Full details of the disposals are reported on Mr Taube’s tax return.
The Trust made a capital gain on disposal of quoted shares during the year of £520 (proceeds “£2,127)”
8.	On 4 July 2002, the Revenue opened an enquiry into the Raymond Taube 1991 Discretionary Settlement.  The taxpayer’s agents, Crawfords, responded on 24 July 2002 to confirm that the trustees had received a cash distribution and that the trustees had received advice that it should be treated as trust capital.
9.	By letters issued on 6 December 2002, the Revenue opened an enquiry into the Bessie Taube 1991 Settlement.  This letter asked for further information including:
•	Copies of the statements relating to the account represented by interest at box 9.2.
•	Copies of statements for the accounts represented by box 9.12.
•	Copies of the trust Deed.
•	A request to see the professional advice, referred to in the disclosure.
•	Exact circumstances of the receipt of [£777,600].  
10.	On 31 January 2003, the enquiry window for the 2000/01 tax returns both for the trustees and for Mr Raymond Taube personally expired.  
11.	On 7 February 2003 the Revenue sent a reminder letter requesting a response to their letter of 6 December 2002 requesting additional information.  
12.	On 30 April 2003 the Revenue issued a formal notice requiring documents and other information.  
13.	On 19 May 2003 Crawfords responded to the information request of 6 December 2002. Crawfords responded to [the] initial information request, and confirmed that the dividend was not a company buyback of shares.  Their letter enclosed:
•	A copy of the 23 April 1991 Deed and Deed of Appointment of 20 April 2000.
•	Advice letter dated 20 April 2000 from Pannone & Partners.
•	Michael Taube Limited’s resolutions in relation to the special dividend passed on 25 April 2000 and the Company’s Articles of Association.
14.	On 3 June 2003 the Revenue acknowledged receipt and replied to [the] letter dated 19 May 2003.
15.	On 25 November 2003 Numerica sent a letter to the Revenue disagreeing with the Revenue’s arguments in their letter dated 21 October 2003.  
16.	On 22 April 2004 Numerica responded to the Revenue’s letter dated 31 March 2004 advising the Revenue that [the] letter dated 25 November 2003 headed Bessie Taube 1991 Discretionary Settlement was intended to apply equally to the Raymond Taube 1991 Settlement.  
17.	On 2 June 2004 Numerica responded regarding the Bessie Taube 1991 Discretionary Settlement and put forward arguments.
18.	On 8 June 2004 the Revenue acknowledged receipt of Numerica’s contentions.
19.	On or around the 16 September 2004, the trust cases were transferred from Manchester to Nottingham.
20.	On 24 September 2004, an internal Inland Revenue email was sent from Nottingham to Bootle which suggested that the beneficiary’s district be asked to raise an assessment. Ms Burns confirmed that this should be done.
21.	On 27 September 2004, the Revenue trusts office in Nottingham wrote to Manchester Area Office to ask them to raise an assessment on Mr Raymond Taube personally.
22.	On 29 September 2004 Mrs S Richardson of Revenue trusts office in Nottingham issued letters to Numerica Business Services Limited and Mr Raymond Taube amending both the trust tax returns.  
23.	Numerica lodged formal notices of appeal against the amendments to the self assessment returns for both trusts on 12 October 2004.
24.	On 22 October 2004 the Revenue acknowledged receipt of appeal against the amendments.
25.	On 6 December 2004 Manchester Area Office raised an assessment on Raymond Taube for £174,960. The letter stated that this related to “an additional liability omitted from your tax return and discovered, or disclosed, following the expiry of the enquiry period”.
26.	On 17 December 2004 Numerica made a formal appeal against the personal assessment made on Mr Raymond Taube. 

Further findings of fact
7.	In or around March 2000, Crawfords, who were acting as the tax agents for the settlements and Mr Taube, instructed Mr Dawson’s firm to advise the trustees on possible ways of extracting capital from Michael Taube Limited to finance a new house purchase for the benefit of Mr Taube and his family.  In his first witness statement Mr Dawson used the expression “extraction of capital”, but the contemporaneous evidence, in the form of Mr Dawson’s instructions to tax counsel of 11 April 2000, is that the intention was not specifically related to extraction of capital, but the extraction of “funds”, and we so find.
8.	The proposal for the re-classification of the shares in the Company held by the two settlements into A shares, and to pay out the special dividend, was made by Mr Dawson in his instructions to tax counsel.  Those instructions, which were exhibited to Mr Dawson’s second witness statement, set out original proposals for the settlements to sell their entire holdings in the Company to the Company itself.  In the case of the Bessie Taube Trust the funds realised, after tax, would be lent to Mr Taube; in the case of the Raymond Taube Trust the funds so generated would be applied in the purchase of quoted shares from Mr Taube.  It had been recognised that a straightforward own-share purchase would give rise to an income tax liability in each of the settlements at an effective rate of 16.67% (under s 686A TA).  The aim of the proposal that the shares in the Company held by the settlements be reorganised into A shares and that a dividend be paid to leave only their nominal value outstanding was to avoid a charge to income tax, by eliminating the purchase by the Company of its own shares, but by making the distribution in a way that could validly be treated by the trustees as capital.
9.	From the note of the conference with tax counsel on 25 April 2000, prepared by Mr Dawson and settled by counsel on 10 May 2000, counsel confirmed that it was possible that a charge under both s 686 and s 686A TA could be avoided if a distribution from the Company were to be made that was properly treated as capital in the trustees’ hands, but did not involve a share buy-in.  However, counsel did not advise whether the special dividend would be treated as capital or income; instead he advised that legal advice be sought from a “qualified Trust lawyer”.  At the same time, although primarily advised as a means of obviating a 10-year charge for inheritance tax purposes on the Bessie Taube Trust, the proposal that an immediate life interest in that settlement be appointed to Mr Taube was in part designed to make the question whether the special dividend was capital or income an important one for the trustees.
10.	The firm of Pannone & Partners, solicitors, had been instructed to assist with the corporate transactions, and also to advise on the trust income and capital question.  Advice was given to both sets of trustees, in separate letters dated 20 April 2000.  In those letters the author, Mr H A S Jones, says that, after having discussed the proposed special dividend with Mr Dawson and having reviewed current trust law, he was satisfied that, although the payment would be in the form of a dividend, nevertheless, in the hands of the trustees, “there is a strong argument for the monies received to be treated as capital and not income”.  In the case of the Bessie Taube Trust, in which on that date there had been appointed an interest in possession in favour of Mr Taube, the advice goes on to say “… not income due to the life tenant Raymond Taube”.  In each case it is explained that the reason is that the monies received will represent the value of a capital asset, namely the shares, and that accordingly the trustees would be obliged to use the funds received to replace the capital lost and not to enhance the income.  Each of Mr Jones’ letters concludes that he could go into more technical detail if the trustees were to wish, but that, at that time, the main point was to reassure the trustees of their position under trust law.
11.	We heard no evidence from Mr Jones or any other representative of Pannone & Partners.  However, we were shown a copy of a letter from Mr Jones to HMRC of 1 December 2005 in which he set out the reasons why he had advised the trustees that the special dividend was capable of being treated as capital in the hands of the trustees.  In this letter, which was the subject of considerable criticism by Mr Ewart, Mr Jones explains that he had regard to the case of Sinclair v Lee [1993] Ch 497, which we shall discuss in detail below, and to the proposition that the duty of the trustees to be equitable, in the sense of not unfairly benefiting one class over another, required them to look at the reality of the payment over its technical form.  He considered that were the trustees not to do this they would be in breach of their duty as trustees.
12.	On the question of the capital or income treatment of the special dividend, we find that the only advice given was that of Pannone & Partners.  No advice on this was given by Mr Dawson or his firm, by tax counsel or by Crawfords.
13.	We were shown the Trust Deeds whereby each of the settlements were established as discretionary trusts, in the case of the Bessie Taube Trust on 23 April 1991, and in the case of the Raymond Taube Trust on 11 September 1991.  Neither Trust Deed contains any provision for the treatment of a distribution of the nature of the special dividend as capital or income, or any provision enabling the trustees to designate receipts as capital or income.
14.	The capital reorganisation was effected by a board meeting of the Company held on 25 April 2000 and written resolutions of the members that were effective from that date.  At the board meeting the audited accounts for the period ended 31 July 1999 were produced along with a letter from Crawfords, as the Company’s auditors, commenting on the then current market value of the ordinary shares, from which it was noted that the proposed special dividend of £2,400 represented the approximate current market value per share.  (This was on the basis of a pro rata per share valuation based on the net asset value of the Company as a whole.)  It was confirmed that, following the capital reorganisation, the total special dividend of £1,017,600 to be paid on the A shares (into which the ordinary shares owned by the settlements were to be converted) would be paid out of distributable profits and the Company had sufficient retained distributable profits to declare such a dividend.
15.	By the written resolution new Articles of Association of the Company were adopted.  These set out the rights attaching to the A shares, which can be summarised as follows:
(1)	Special dividend.  A fixed special dividend was payable on each A share in the sum of £2,400 per share (exclusive of any tax credit).  This special dividend was payable at the option of the Company within 14 days of the meeting at which the special dividend was declared.
(2)	Future dividends.  The rights of the A shares to dividends subsequent to the special dividend were deferred.  All such dividends had to be paid in priority to holders of the ordinary shares until the total dividends received on those ordinary shares reached an amount equal to the special dividend, effectively indexed at a rate of 2% over base.  Only after the priority dividends had been paid would the A shares participate in future dividends pro rata with the ordinary shares.
(3)	Return of capital.  A similar deferral of the rights of the A shares applied to the application of surplus assets on a return of capital on a winding up or otherwise.  Effectively the ordinary shares had priority on capital returns until those shares had received repayment of paid up capital and amounts of dividends and capital equal to the indexed special dividend.  After that any surplus was to be distributed rateably on the ordinary shares and the A shares.
(4)	Voting.  The A shares retained full voting rights except on the declaration of dividends other than the special dividend.
16.	We find as a fact that after the special dividend the A shares were not cancelled but retained rights, including rights to dividends and a right to a return of capital on a winding up, albeit that such rights were deferred to the rights of the ordinary shares.  Furthermore, the transaction in question did not involve any repayment of share capital attributable to the A shares.
17.	We were shown the valuation produced by Crawfords giving a net asset value for the Company at 28 February 2000 of £4,753,433.  We also saw a calculation, which Mr Dawson confirmed had been done by his firm, that showed, taking the net asset value as the starting point, that the pro rata value per share of the ordinary shares, prior to the reorganisation and payment of the dividend, was £2,438 and that after payment of the special dividend the aggregate pro rata value of the A shares was £15,967.  Given the deferral of the rights of the A shares, the value of the A shares at that time was put at £1 per share.  Neither valuation was disputed, and we accept both as a matter of fact.
18.	After the trust tax returns for each settlement were filed, and at the same time that an enquiry was opened by HMRC into the Raymond Taube Trust, Mr G J Swires, an Inspector of Taxes, wrote, on 4 July 2002, an internal memo to Graham Nelson, the Inspector responsible for both settlements.  He referred to the Bessie Taube Trust, and stated:
“The Bessie Taube case is an IIP from 20 April 2000 and again a distribution was made to the trustees of £777,600.  If my arguments prevail in R Taube and they accept that it is chargeable as income then the £777,600 will be chargeable on the beneficiary.  The beneficiary cannot have declared the distribution because the trustees maintain that it is trust capital not available for distribution.  There will be a ‘discovery’ position on the beneficiary.
If the beneficiary needs to be opened do we do it or the GCD [accepted to mean the General Claims District]? …”
Against the reference to the discovery position was written in manuscript “Wait”.  We infer that this was an entry made by an HMRC officer.
19.	On 30 July 2002 Mr Nelson wrote to Marian Burns, an HMRC technical adviser in IR Trusts (Liverpool), concerning the Raymond Taube Trust, seeking guidance on proceeding.  There was then a delay, but on 2 December 2002 Ms Burns replied, saying that on the face of it she failed to see how a cash dividend could be anything other than income, and querying the basis on which it was said that the dividend was capital in the trustees’ hands.  Ms Burns makes the point that whether this particular special dividend was caught by any deeming provision would depend on its exact nature.  She says: “So far all we know is that they received the special dividend, ‘equivalent to the current value of their shareholding in Michael Taube Limited’”.  She then refers to s 686A TA, and concludes: “I think we need to know: what were the exact circumstances of the receipt of the £240,000?  What was the sequence of the transactions, and the reasons behind them?  Is it effectively a company buyback of shares?”  With specific reference to the Bessie Taube Trust Ms Burns then goes on to request that the same information be required in that respect.  Following this, on 6 December 2002, the enquiry was opened into the Bessie Taube Trust.
20.	Following the receipt of further information provided by Crawfords on 19 May 2003 in response to the section 19A notice of 30 April 2003, and referring to HMRC’s letter of 6 December 2002 in relation to the Bessie Taube Trust, Mr Nelson wrote to Crawfords on 21 October 2003.  Included in this response is a summary of the view taken that cash dividends are, according to the general trust law position, income in the trustees’ hands, and are accordingly income that belongs to the life tenant, taxable on Mr Taube.
21.	On 25 November 2003, Numerica Business Services Limited (“Numerica”), acting as specialist tax advisers to Crawfords, replied to Mr Nelson to say that they did not accept the views expressed in his letter, and putting forward counter-arguments.  This correspondence was passed to Marian Burns.  On 18 February 2004 Ms Burns wrote to Mr Nelson with a draft response to Numerica which, after referring to Lewin on Trusts, re-iterated the HMRC view that the cash dividend was trust income and that Mr Taube was taxable on it.  The response also asked for an explanation why the view expressed in Lewin was not accepted.  Mr Nelson wrote to Crawfords in these terms on 24 February 2004.  Numerica replied with technical arguments in their letter of 2 June 2004.
22.	On 16 August 2004 Mr Nelson wrote to Ms Burns, in response to a memo from her of 29 July 2004.  In that memo Ms Burns referred to the possibility of appeals being referred to the Special Commissioners, and asked for a calculation of tax at the trustees’ Schedule F trust rate and at Mr Taube’s marginal rate.  In his reply, Mr Nelson refers to the tax calculations on the basis of “Mr Swire’s original arguments in correspondence”.  This was a reference to Mr Swires’ original memo of 4 July 2002.
23.	After the settlements’ cases had been transferred to IR Trusts Nottingham on 16 September 2004, Mrs S Richardson, Revenue officer in Nottingham dealing with the Bessie Taube Trust wrote to Manchester Area (Service) in relation to Mr Taube on 27 September 2004 to say:
“Your taxpayer is the life tenant of my Trust and I have been instructed by Marian Burns of IR Directors Office, Bootle, to ask you to bring into charge an additional £777,600 for the 2000-01 year.  This is in respect of Dividend Income and is chargeable at 32.5% in the hands of the beneficiary, but carries a 10% tax credit.
If you receive an appeal, as we suspect you will, please notify Marian Burns … She is considering taking the case to the Special Commissioners.
If you have any queries about this please contact the Inspector dealing with the case, namely, Mrs E M Milliken …”
24.	The amendments to the self assessments for both settlements and the discovery assessment on Mr Taube followed, and the appeals with which we are here concerned were made.
Trust Capital or Trust Income?
25.	It was common ground that the substantive question as to the liability to income tax of both the trustees of the Raymond Taube Trust and Mr Taube himself, as life tenant of the Bessie Taube Trust, depends on whether the special dividend is to be treated as trust capital or trust income.
26.	Although, regardless of the trust law position, the Raymond Taube Trust is liable to income tax on the special dividend at the Schedule F ordinary rate under s 20 TA, that liability is fully offset by the tax credit attaching to that dividend by virtue of s 231 TA.  A liability to income tax in this respect can accordingly only arise if the special dividend is income falling within s 686 TA.  If, as a matter of trust law, the trustees of the Raymond Taube Trust are required to treat the special dividend as trust capital, that dividend will not be chargeable under section 686.
27.	As regards Mr Taube, the position is straightforward.  He is liable to income tax on the special dividend only if, as a matter of trust law, he is entitled to the dividend that was received by the Bessie Taube Trust.  He will be so entitled if that dividend is trust income.
28.	As a general rule profits of a company that are distributed by the company by way of dividend are received by trustees as trust income.  If there is an interest in possession in the trust, such income belongs to the life tenant.  Payments made by the company as capital, or which are appropriated to the capital of the company, are capital and belong to the trust as such or to those interested in the trust capital.  This is the rule in Bouch v Sproule (1887) 12 App Cas 385.  The essence of the rule is encapsulated in the following passage from the judgment of Fry L J in the Court of Appeal, which was cited with approval by Lord Herschell (at pp 397 - 398):
“When a testator or settlor directs or permits the subject of his disposition to remain as shares or stocks in a company which has the power either of distributing its profits as dividend or of converting them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under the testator or settlor in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid by the company to the shareholder as capital, or appropriated as an increase in the capital stock in the concern, enures to the benefit of all who are interested in the capital.”
29.	The classification of payments made by a company was considered further in the appeal from the Supreme Court of New South Wales to the Privy Council in Hill v Permanent Trustee Company of New South Wales, Limited [1930] AC 720.  The principles to be derived from that case, where a dividend was paid out of capital profits, were summarised by Lord Russell in the following terms (at pp 730 – 732):
“(1.) A limited company when it parts with moneys available for distribution among its shareholders is not concerned with the fate of those moneys in the hands of any shareholder.  The company does not know and does not care whether a shareholder is a trustee of his shares or not. It is of no concern to a company which is parting with moneys to a shareholder whether that shareholder (if he be a trustee) will hold them as trustee for A. absolutely or as trustee for A. for life only. 
(2.) A limited company not in liquidation can make no payment by way of return of capital to its shareholders except as a step in an authorized reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by way of dividing profits. Whether the payment is called ‘dividend’ or ‘bonus’, or any other name, it still must remain a payment on division of profits.
(3.) Moneys so paid to a shareholder will (if he be a trustee) prima facie belong to the person beneficially entitled to the income of the trust estate. If such moneys or any part thereof are to be treated as part of the corpus of the trust estate there must be some provision in the trust deed which brings about that result. No statement by the company or its officers that moneys which are being paid away to shareholders out of profits are capital, or are to be treated as capital, can have any effect upon the rights of the beneficiaries under a trust instrument which comprises shares in the company.
(4.) Other considerations arise when a limited company with power to increase its capital and possessing a fund of undivided profits, so deals with it that no part of it leaves the possession of the company, but the whole is applied in paying up new shares which are issued and allotted proportionately to the shareholders, who would have been entitled to receive the fund had it been, in fact, divided and paid away as dividend.
(5.) The result of such a dealing is obviously wholly different from the result of paying away the profits to the shareholders. In the latter case the amount of cash distributed disappears on both sides of the company's balance sheet. It is lost to the company. The fund of undistributed profits which has been divided ceases to figure among the company's liabilities; the cash necessary to provide the dividend is raised and paid away, the company's assets being reduced by that amount. In the former case the assets of the company remain undiminished, but on the liabilities' side of the balance sheet (although the total remains unchanged) the item representing undivided profits disappears, its place being taken by a corresponding increase of liability in respect of issued share capital. In other words, moneys which had been capable of division by the company as profits among its shareholders have ceased for all time to be so divisible, and can never be paid to the shareholders except upon a reduction of capital or in a winding up. The fully paid shares representing them and received by the trustees are therefore received by them as corpus and not as income.”
30.	These principles were expressly approved and applied by the Court of Appeal in Re Doughty, Burridge v Doughty [1947] Ch 263, where the articles of association of a company authorised the distribution of capital profits by way of capital distribution.  It was held that the relevant article did not purport to fix the character of the profits distributed as between a life tenant and remainderman and that accordingly the sums received by way of such a distribution must be treated as income and paid to the life tenant.
31.	In this case, following a capital reorganisation, a cash dividend has been paid on the A shares out of distributable profits of the Company.  There has been no capitalisation of those profits.  There is nothing in either Trust deed that can impress the special dividend with the character of capital.  In these circumstances, unless this case can be distinguished from what is formidable authority, we are bound, through their approval in Re Doughty, by the principles enunciated in Hill v Permanent Trustee.  Moneys paid to the trustees of each of the Raymond Taube Trust and the Bessie Taube Trust by way of the special dividend will prima facie be trust income.
32.	We now turn to Mr James’ arguments.  Whilst recognising the existence of the general rule in Bouch v Sproule, and the principles established by Hill v Permanent Trustee, he argued that nevertheless it remained clear that the rule and those principles only gave rise to a prima facie conclusion that a dividend would be regarded as trust income and not as trust capital.  He submitted that such a conclusion could be negatived by examination of the circumstances of a particular case, or the substance of the particular transaction.
33.	On this basis Mr James argued that the special dividend was emphatically capital, as properly understood.  The dividends were exceptional in terms of amount and they diminished the value of the shares as an investment, since the dividend was (more or less) equal to the then current market value of the shares.  Based upon the presumed intention of the settlor in such a case this, he argued, was itself sufficient to justify the conclusion that the special dividends were capital.  However, this factor should also be considered in conjunction with the change in the Articles of the Company and the consequent rights that were attached to the A shares.  These ensured that the dividend, once declared, significantly eroded the capital participation rights thereafter of the shares in any further return of capital or on a winding-up.  This, submitted Mr James, emphatically put the dividend, taken in the round, on a par with a return of capital requiring capital treatment in the hands of the trustees, and represented an essential exception to the rule in Bouch v Sproule.  He submitted further that the conversion of the Trust’s ordinary shares into A shares, when combined with the special dividend, rendered the transaction economically equivalent to a purchase by the Company of its own shares.  Such a purchase (and the concomitant sale) would be a capital transaction for the trustees, and it was accordingly in substance right that the special dividend, in its context, should be treated in the same way.
34.	In support of his arguments, Mr James placed considerable reliance on the judgment of the Vice-Chancellor, Sir Donald Nicholls, in Sinclair v Lee [1993] Ch 497.  That case concerned the demerger whereby ICI plc spun-off its subsidiary, Zeneca Ltd, to the ICI shareholders.  This was achieved by what is known as an indirect demerger, whereby the shares in Zeneca Ltd were transferred, not directly to the ICI shareholders, but to a new company, Zeneca Group plc, and the shares in Zeneca Group plc were issued to the ICI shareholders.  This transaction was effected by way of a dividend declared by ICI plc as payable to its shareholders, satisfied by the allotment and issue of the Zeneca Group plc shares, credited as fully paid, to those ICI shareholders.
35.	In this context, the question before the High Court was whether in the hands of trustee shareholders the new Zeneca Group plc shares fell to be treated as capital or income.  Having reviewed the authorities, including Bouch v Sproule, Hill v Permanent Trustee and Re Doughty, and the particular factors present in the demerger, the Vice-Chancellor held that, unless constrained by binding authority (which he decided he was not), the ICI transaction was to be characterised as a capital reconstruction, with two capital assets (shares in ICI plc and Zeneca Group plc) in the trustees’ hands replacing one existing capital asset (shares in ICI plc).
36.	In considering Hill v Permanent Trustee, the Vice-Chancellor noted the difficulties inherent in applying company law principles to determine questions of income and capital treatment in trusts.  The principle of company law prohibiting unauthorised returns of capital is concerned with the protection of creditors and others dealing with the company, which is far removed from holding a fair balance between income and capital beneficiaries.  From the company’s perspective no distinction is drawn between trading profits and capital profits when a dividend is distributed, but that distinction is important to trustees.  The Vice-Chancellor also referred to the different investment conditions applicable at the time of Hill v Permanent Trustee.  He said (at p 512):
“The principles set out in Hill's case equate corporate profits with trust income, so that any division of those profits will belong to the tenant for life. In modern investment conditions this is unreal. Investment philosophy is very different now from what it was in 1930. The cult of the equity, to borrow Staughton L.J.'s expression from Nestle v. National Westminster Bank Plc. [1993] 1 W.L.R. 1260, 1276, did not really begin until the mid or late 1950s. There was then a spate of applications by trustees to the court, under the Variation of Trusts Act 1958, to extend their investment powers, until the Trustee Investments Act 1961gave trustees a limited statutory power to invest in equities. In practice one of the reasons why trustees invest in equities is as a hedge against inflation. As already noted, well-run companies plough back profits. This enables them to ensure a reliable and increasing dividend stream for the future. This benefits the tenant for life. It also benefits those interested in capital because the market value of such equities can be expected to rise. Any principle, concerned with the division today of trustees' receipts between capital and income, which fails to take full account of these matters would be out of touch with reality.”
37.	Despite these criticisms, the Vice-Chancellor acknowledged that Hill v Permanent Trustee, having been approved by the Court of appeal in Re Doughty, was binding on him as to the income character for trust purposes of all cash distributions (not by way of reduction of capital or in the course of winding-up), whatever their scale or description or source.  He accepted further that this would equally apply to a distribution of a company’s property in specie, such as shares in another company, as to a payment in cash.  In this connection he referred to Re Sechiari [1950] 1 All ER 417 and Re Kleinwort’s Settlements [1951] Ch 860, in which the distribution in 1949 by Thomas Tilling & Co Ltd of British Transport stock to its shareholders by way of dividend as part of the nationalisation of its road transport and road haulage undertaking had been held to be trust income, and not capital.
38.	What the Vice-Chancellor found, and why he was not constrained to follow Hill v Permanent Trustee, was that the ICI transaction was to be characterised, not as a distribution at all (which, whether in cash or in specie, he would have been bound to hold was income), but as a company reconstruction resulting in a single capital asset in the trustees’ hands being replaced by two such assets.  The factors examined by the Vice-Chancellor in reaching this conclusion were summarised by him as follows (at pp 513-4):
“(1) The transfer by I.C.I. of shares in Zeneca Ltd. to Zeneca Group, and the allotment and issue of Zeneca Group shares to I.C.I. shareholders, are part of one single indivisible transaction. The demerger agreement is conditional upon the passing of the demerger resolution. I.C.I. itself will never become entitled to receive any property in exchange for the Zeneca Ltd. shares.
(2) The commercial purpose of this tripartite transaction is not that I.C.I. shall part with some of its assets to its shareholders. The purpose is to replace a single head company with two head companies. A larger trading entity will be divided into two smaller trading entities, in which the I.C.I. shareholders will have the same proportionate interest as they had prior to the reconstruction.
(3) This division will take place on terms whereby the capital of the companies will be increased, and the reserves distributable as profits decreased, in a manner analogous to the issue of bonus shares. Indeed, the reserves distributable as profits will be diminished by an amount (£464·6m.) in excess of the new share capital issued as paid up pursuant to the dividend declaration.
(4) So far as the I.C.I. shareholders are concerned, they will be no nearer the underlying assets than before. There will be only two differences in their position. First, instead of holding shares in one company owning one undertaking, they will hold equivalent shares in two companies each owning a separate part of what previously had been a single undertaking. Secondly, to the extent of £464·6m., reserves currently distributable to shareholders as profits will cease to be so distributable either by I.C.I. or Zeneca Group. I.C.I. will part with assets having a book value of that amount. They will be transferred to Zeneca Group but, to the extent of £464·6m., they will not become available for distribution as profits of Zeneca Group. In the hands of Zeneca Group, this amount will represent in part paid up share capital and in part a merger reserve which will not be distributable as profits save in exceptional circumstances.
(5) As to I.C.I., the company declaring the dividend, it parts with assets of value: its shares in Zeneca Ltd. In that respect the transaction is not a classic capitalisation case. In the classic case the company retains its assets intact and issues shares of its own in exchange for hitherto distributable profits.
(6) Nor, however, is this a classic case of a distribution by way of a dividend in specie. I.C.I. owns, and parts with, shares in Zeneca Ltd., but these do not reach the I.C.I. shareholders. The shareholders receive shares in Zeneca Group. I.C.I. never has any entitlement to these shares.
(7) Thus the transaction is something of a hybrid. It has features both of a capitalisation and of a distribution of a dividend in specie.
(8) Non-receipt of the Zeneca Group shares by I.C.I. is not an attractive basis on which to place any reliance. It is highly formalistic. But it is no more formalistic than to distinguish between a distribution in cash (income), and a distribution of debentures redeemable in six years or six months or, for that matter, six weeks (capital).”

39.	Having taken account of those factors the Vice-Chancellor expressed the view that to regard the ICI transaction as a distribution of profits, akin to a payment of a dividend in specie and hence income would be “to exalt company form over commercial substance to an unacceptable extent”.  He continued (at p 514):
“In the last analysis, the rationale underlying the general principles enunciated in Hill's case [1930] A.C. 720 is an endeavour by the law to give effect to the assumed intention of the testator or settlor in respect of a particular distribution to shareholders. When the inflexible application of these principles would produce a result manifestly inconsistent with the presumed intention of the testator or settlor, the court should not be required to apply them slavishly. In origin they were guidelines. They should not be applied in circumstances, or in a manner, which would defeat the very purpose they are designed to achieve.”
Furthermore (at p 515) he held that “an application of existing principles in their full width would produce a result in this case which would, frankly, be nothing short of absurd”.
40.	Mr James referred us to a number of other authorities which, he submitted, were examples of where, as in Sinclair v Lee, the courts had found there to be exceptions to the general rule.  Bouch v Sproule can itself be regarded in this light.  There, in the case of a bonus dividend that was applied in part payment for shares in the company, it was held that in the circumstances the real nature of the transaction was that the company did not intend to pay out any sum as a dividend, but effectively intended to capitalise profits and increase the company’s capital.  Accordingly the receipt was capital.
41.	We have referred to the 1949 distribution by Thomas Tilling & Co Ltd of British Transport stock in the context of the road transport and road haulage nationalisation, and to cases which held that, in principle, such distributions were of an income character.  Mr James referred us to MacLaren’s Settlement Trusts [1951] 2 All ER 414, in the High Court where, in the context of that same distribution, Harman J decided that, on the particular facts, the transaction amounted to the purchase by the trustees with capital moneys of the British Transport stock as a capital investment.  There Thomas Tilling had announced that it was going to distribute some of its British Transport stock to shareholders.  The trust decided to acquire shares in Thomas Tilling in the light of this, intending that the British Transport stock when distributed should be part of the capital of the trust fund.  This occurred and in the event both the shares in the company and the British Transport stock were sold by the trustees and a house was bought for the occupation of the tenant for life.  The life tenant argued that, on the basis of Re Sechiari, the receipt of the stock was income belonging to the tenant for life, and claimed an equitable charge on the house or its proceeds of sale.  In rejecting that claim, Harman J said (at pp 417-8):
“In these circumstances, I ask myself what equity there can be in the tenant for life that he should be given a charge on this property.  He consented to the whole transaction on the footing that it was a capital transaction, well knowing that the trustees would never have embarked on it if they had appreciated its possible results, and, in my judgment, the short answer is that he has no claim to this charge or to be recouped the value of the transport stock, even though in other circumstances it may be (and I decide nothing about this) that he might properly claim it as income.  This rests, not on an estoppel, because the elements of estoppel are not here present, but on the fact that the transaction was in substance the purchase with capital monies of British Transport stock as a capital investment”
42.	In the same way as in Sinclair v Lee, the decision in Re MacLaren’s Settlement is not presented as an exception to the rule in Bouch v Sproule.  Although referred to as such by Mr James, and indeed by the Law Commission in its consultation paper on “Capital and Income in Trusts: Classification and Apportionment” (12 July 2004) [2004] EWLC 175(2) (at para 2.18), we agree with Mr Ewart that these cases are properly regarded not as exceptions to that rule, but as circumstances where the transactions in question, in their own circumstances, have been held to be something other than distributions, so that, on an application of the rule, the receipt is properly treated as a capital, and not an income, receipt.  What we have to determine is whether in this case the special dividend is not a distribution, but something else such that, applying the proper legal principles, it amounts to capital in the Trusts.
43.	Mr James submitted that the special dividends were a division of part of the capital value of the Company on a par with a reduction of capital or a purchase of own shares, as a matter of effect, if not of company law.  Those dividends took capital value from the shares by dint of materially diminishing the capital participation rights following the declaration and payment of the dividend, a result, he argued, that was undiminished by the fact that the shares in question retained some residual rights.  In such circumstances, echoing the Vice-Chancellor in Sinclair v Lee, it would be manifestly absurd and unfair as a matter of general principle if the trustees were to treat the receipt as income for trust purposes, as this would be contrary to the presumed intention of the settlor in such circumstances.  He argued further that the particular facts of this case support an exception to the general rule, especially given that the trustees of each Trust voted in favour of the special dividend assuming it would be capital, and that the trustees of the Bessie Taube Trust had appointed the interest in possession to Mr Taube on the same assumption, with Mr Taube himself in complete acquiescence.
44.	In rejecting Mr James’ submissions, we ought first to say something about the presumed intention of the settlor.  As explained by the Vice-Chancellor in Sinclair v Lee, the rationale for the general principles of Hill v Permanent Trustee is an endeavour by the law to give effect to that presumed intention.  It is necessary for the law to do this because, absent any indication of the actual intention of the settlor in the trust deed itself, that intention cannot be determined, but must always be presumed.  In Re Doughty (at p 273) Morton J declined to assume that the testator had used the word “income” in some special sense in his will.  In the view of the learned Lord Justice, if the testator in question had thought of the relevant provision in the company’s articles in that case and had intended that such payments should be treated as capital of his estate and not as income he would have inserted a special provision in his will.  In general therefore the court will not seek to enquire as to what the settlor would have intended in any given circumstance; the gap created by the absence of stated intention is filled not by conjecture, but by the principles established for that purpose by the law.
45.	What Sinclair v Lee makes clear is that the general rule, the purpose of which is to give effect to the presumed intention of the settlor as regards the interests of income and capital beneficiaries, should not be applied in a way so as to defeat that objective.  This would potentially be the case, in given circumstances (such as those of the ICI demerger in Sinclair v Lee itself), if the mere fact that the transaction were effected, as a matter of company law mechanics, by means of a dividend were allowed to be the determining factor.  But, as a review of the authorities demonstrates, that has never been the case.  Where the substance of the transaction is something other than a distribution, the courts have consistently made that finding and, applying the rule to such circumstances, have determined that the receipts of such transactions should be treated as capital.  This can be seen from Bouch v Sproule itself, and from Re MacLaren’s Settlement and Sinclair v Lee.
46.	Mr James sought to urge upon us that we should find it self-evident that the presumed intention of the settlor in a case such as this is that the special dividend should not belong to the life tenant but to the capital beneficiaries.  We do not find it so.  There is in our view nothing in the circumstances of this case to take it outside the normal position where dividends are paid on shares out of accumulated profits.  We were invited by Mr James to consider what the Vice-Chancellor said in Sinclair v Lee about what ordinary testators and settlors would envisage when considering the purchase of equity stocks the price of which reflects accumulated earnings, and exceptional distributions being regarded by them as in the nature of a capital receipt.  However, as Mr Ewart pointed out, this was a description of the difficulty in determining where, and how, the line as to the settlor’s presumed intention should be drawn.  The law has nevertheless drawn that line, and despite his comments on modern investment philosophy and “the cult of the equity” in the context of the Hill v Permanent Trustee principles, the Vice-Chancellor nevertheless confirmed that he was bound by those principles, as of course are we.
47.	Accordingly, in this case we consider that we are bound to find that the special dividend is trust income unless in substance the transactions amount to something other than a distribution.  We are unable so to find.  The special dividend was a cash dividend; it was not a capitalisation as in Bouch v Sproule, nor did it have the features of a capitalisation that were present in Sinclair v Lee.  There was no increase of capital of the Company analogous to the issue of bonus shares.  In contrast to the position in Bouch v Sproule, money did pass from the Company to its shareholders.  The amount of the special dividend was paid in cash to the Trusts and did not remain in their hands as paid up capital.
48.	We do not consider that the conversion of the ordinary shares of the Trusts into A shares, and the effect of the special dividend upon the future rights attaching to those shares, can result in the transaction being treated otherwise than as a distribution.  Although there was a very substantial diminution in the value of the A shares as a consequence, there was no reduction or return of capital, and we reject the argument that the transaction can be regarded as equivalent to a purchase by the Company of its own shares, and thus as a sale of capital assets by the trustees.  Economic equivalence requires more than that the same amount of money is received and that the value of a share, having regard to its future rights, is substantially diminished.  An own-share purchase involves both a sale and purchase of shares as a matter of substance, and necessarily entails a cancellation of the shares, and an elimination of all rights including rights to share capital itself.
49.	The capital reorganisation in this case is very far from the nature of capital reconstruction in Sinclair v Lee.  In these circumstances we find that the substance of the transactions with which we are here concerned was a cash dividend, and the transaction is not to be characterised as anything else.  Whereas in Bouch v Sproule and Sinclair v Lee a transaction was not treated as a distribution notwithstanding that a dividend was employed as a means to the corporate end, and in Re MacLaren’s Settlement the same conclusion was reached because of the substance of the transaction determined upon by the trustees and life tenant in that case, even though the company effected the transfer of the relevant stock as a dividend, in this case we find that the special dividend was itself the end and the substance of the transaction.  Furthermore, the fact that the trustees and Mr Taube, as the life tenant of the Bessie Taube Trust, were, according to our finding, wrongly advised as to the proper treatment of the special dividend, and assumed that the dividend would be capital when they acted as they did, cannot affect the legal analysis itself.  The position here is very different from that in Re MacLaren’s Settlement, where the intentions of both the trustees and the life tenant went to the substance of the transaction, and not simply to the legal characterisation of the dividend.  Accordingly, we find, in accordance with Re Doughty and Hill v Permanent Trustee, that the special dividends were in each case trust income.
50.	We should, for completeness, refer to two further arguments advanced by Mr James.  The first related to Hill v Permanent Trustee, not as decided by the Privy Council, but subsequently when, pursuant to leave of the Privy Council, the capital beneficiaries claimed in an action in the Court of New South Wales (reported at (1933) 33 SRNSW 527) that there was an equity as between them and the tenants for life to treat the proceeds of realisation of a dividend out of profits arising on the sale of capital assets as capital monies in the hands of the trustees as between the tenants for life and the remaindermen.  The distribution had been capable of being made only after the trustees had voted in favour of an alteration to the relevant power in the articles of association of the company.  It was held that where the reasons for the vote were based on a mistake of law by the trustees, that mistake could be rectified.  Accordingly the court could treat the distributions as capital in the hands of the trustees, and a declaration was made to that effect.
51.	In our view this case cannot assist the Appellants before this tribunal.  Its premise is that the trustees were mistaken as to the effect, as a matter of law, of the distribution, which the Privy Council had held was income and not capital.  The declaration reversed the effect of that mistake, but it did so on the basis of a rectification, and not as a contrary finding as to the law, or as to the substance of the transaction itself.  The substance was a cash dividend and the law, as we have described, was as stated by the Privy Council.
52.	The second point concerns the decision reached by one of us in First Nationwide v Revenue and Customs Commissioners [2010] SFTD 408.  The issue there (amongst others) concerned whether a dividend paid out of distributable share premium account of a Cayman Islands company was an income dividend chargeable to tax under Case V of Schedule D.  It was there argued on behalf of the Crown that the dividends were of a capital nature, and that the receipt was therefore one of capital and not income.  The tribunal considered Sinclair v Lee and held, on the basis of Hill v Permanent Trustee, that the dividends were cash distributions that were not in the course of a winding-up nor were they, in the circumstances of that case, reductions of capital.  Accordingly it was held that the dividends were of an income character.  Mr Ewart supported the expression of that finding in para [64] of that decision.  We agree, however, with Mr James that First Nationwide itself has no bearing on our decision in this appeal.  We refer to it only to record that Mr James reserved the right to argue that it was wrong in this respect on any further appeal in this case.
Discovery assessment: Mr Taube
53.	Our decision that the special dividend received by the Raymond Taube Trust is to be treated as trust income determines the appeal by that settlement.  But in relation to Mr Taube’s individual appeal there is a further issue that we must address, namely whether the assessment made on Mr Taube is a valid assessment within s 29 of the Taxes Management Act (“TMA”).
54.	Mr Taube’s individual tax return for 2000/01 was received by HMRC on 28 January 2002, before the filing date (31 January 2002) referred to in s 8 TMA.  Accordingly, under s 9A TMA HMRC could have opened an enquiry into that return at any time up to 31 January 2003.  Had they done so, an amendment could have been made by closure notice under s 28A TMA on closure of the enquiry.  In the case of Mr Taube’s 2000/01 return, however, no such enquiry was opened.  The trust income to which, as we have found, Mr Taube became entitled as life tenant of the Bessie Taube Trust, was therefore capable of being brought into charge to tax only by means of a discovery assessment under s 29 TMA.  Such an assessment was made on 6 December 2004, and it is that assessment that Mr James, for Mr Taube, argues is invalid.
The law
55.	Discovery assessments are provided for by s 29 TMA, the material parts of which are:
“29 Assessment where loss of tax discovered
(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—
   
(a)     that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains 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 officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.
…
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above—
(a)     in respect of the year of assessment mentioned in that subsection; and
(b)    in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—
 (a)     ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b)     informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if—
(a)     it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;
 (b)     it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;
(c)     it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or
 (d)     it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above—
(i)     could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii)     are notified in writing by the taxpayer to an officer of the Board.
(7) In subsection (6) above—
(a)     any reference to the taxpayer's return under section 8 or 8A]of this Act in respect of the relevant year of assessment includes—
…
(ii)     where the return is under section 8 and the taxpayer carries on a trade, profession or business in partnership, a reference to any partnership return with respect to the partnership for the relevant year of assessment or either of those periods; and
 (b)     any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.
(8) An objection to the making of an assessment under this section on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the assessment.”
56.	Section 29 does not contain any time limit on the making of a discovery assessment.  That time limit is prescribed by s 34 TMA, which provides that an assessment to income tax or capital gains tax may be made at any time not later than five years after the 31st January next following the year of assessment to which it relates.  There is no dispute that the discovery assessment, if validly made, was made within this time limit.
57.	Section 29(3) refers to the making by the taxpayer of a return.  Mr Taube’s return was made and delivered under s 8 TMA.  The trustees of the Bessie Taube Trust also made a return, in that case under section 8A.  Section 8A(1) TMA provides as follows:
“(1) For the purpose of establishing the amounts in which the relevant trustees of a settlement, and the settlors and beneficiaries, are chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, an officer of the Board may by a notice given to any relevant trustee require the trustee—
(a)     to make and deliver to the officer, on or before the day mentioned in subsection (1A) below, a return containing such information as may reasonably be required in pursuance of the notice, and
(b)     to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required;
and a notice may be given to any one trustee or separate notices may be given to each trustee or to such trustees as the officer thinks fit.”
Discussion
Information made available
58.	With what we think can fairly be described as their principal argument, HMRC say that, at the time an officer of HMRC ceased to be entitled to open an enquiry into Mr Taube’s return (31 January 2003), the officer could not have been reasonably expected, on the basis of the information available to him before that time, being information supplied by the taxpayer or his representatives within s 29(6), to have been aware of the insufficiency in Mr Taube’s self assessment consequent upon the failure to return the special dividend as income.  They say that therefore the condition in s 29(5) is fulfilled, and the discovery assessment on Mr Taube is valid.
59.	Section 29 was considered by the Court of Appeal in Langham v Veltema [2004] STC 544.  In that case a company gave to its sole director, the taxpayer, the house in which the taxpayer and his wife lived.  There was no consideration for the transfer, and a form P11D return was sent by the company to its inspector of taxes showing the transfer at a value of £100,000.  The taxpayer’s own return included the transfer at the same value.  On considering the company’s corporation tax return its inspector referred the matter to the district valuer who valued the house at £160,000.  A valuation was eventually agreed between the company and its inspector at £145,000.  Later, after the power to initiate an enquiry into the taxpayer’s return had expired, his inspector made an additional assessment on the taxpayer under s 29 TMA for the extra £45,000.  The Revenue based this assessment on a discovery that the assessment was or had become insufficient and on the fact that, they alleged, they could not reasonably have been expected, on the basis of the information made available, to have been aware of the insufficiency.
60.	The leading judgment was given by Auld L J, with whom Chadwick L J and Arden L J agreed, whilst adding certain observations of their own.  After referring to the self assessment scheme, Auld L J makes the point that if within 12 months of the filing date HMRC have made no enquiry, and the taxpayer has not amended his return, the self assessment return becomes final, subject only to the possibility of making a discovery assessment under s 29 TMA.  He then refers to the discovery procedure in these terms (at [5]):
“The discovery procedure in s 29 has its origin in earlier tax statutes and may apply where, after normal finality of an assessment, some new fact comes to light or incorrect application of the law (subject to s 29(2)) or where, for any reason, it newly appears that the taxpayer has been undercharged; see Cenlon Finance Co Ltd v Ellwood (Inspector of Taxes) [1962] AC 782 at 794, 40 TC 176 at 203–204, per Viscount Simonds. Section 29 enables the Revenue, where it discovers an insufficient assessment, subject to one or other of two conditions, to make an assessment in the amount or further amount necessary to make good the loss of tax (s 29(1) and (3) of the 1970 Act).”
61.	At [31] Auld LJ considers the underlying purpose of the self assessment scheme:
“It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer. This is subject to the exercise by the Revenue of: (1) whatever routine or random checks that it sees fit to make as a form of 'light monitoring' of self-assessment returns; (2) its statutory power of enquiry under s 9A where it considers it appropriate; and (3) in the absence of fraud or negligent conduct, subject to further scrutiny thereafter only in the event of newly discovered information and/or reasonably drawn inferences therefrom that the self-assessment was insufficient resulting in loss of tax.”
62.	Subsequently, when discussing the source of the information referred to as being made available under s 29(5), to which we shall return, Auld L J says (at [36]):
“… the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under the section only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a s 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question. If that other information when seen by the Inspector does cause him to question the assessment, he has the option of making a s 9A enquiry before the discovery provisions of s 29(5) come into play.”
63.	In construing s 29(5), the learned Lord Justice held that it was plain from the wording of the statutory test that it was concerned, not with what an inspector could reasonably have been expected to do, but with what he could reasonably be expected to be aware of.  It speaks of an inspector’s objective awareness, from the information made available to him by the taxpayer or by a person acting on behalf of the taxpayer, of “the situation” mentioned in s 29(1), namely “an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency” (at [33]). 
64.	This reference to an actual insufficiency, and the meaning of discovery in general, was considered by a special commissioner (Charles Hellier) in Corbally-Stourton v Revenue and Customs Commissioners [2008] STC (SCD) 907.  Having reviewed the authorities the special commissioner concluded that there was no requirement that the inspector be certain beyond all doubt that there is an insufficiency.  What is required, essentially, is that the inspector comes to a conclusion that it is probable that there is an insufficiency.  In particular, Auld L J’s reference to “actual insufficiency” does not require absolute certainty.  The special commissioner summarised his conclusion thus (at para 59):
“In summary it seems to me that I must approach s 29(1) and (5) thus:
The inspector may raise an assessment under s 29 only if:
(i) he newly comes to the conclusion that it is probable that there was an insufficiency; and
(ii) at the relevant time an officer of the Board could not reasonably have been expected, taking into account the general knowledge and skill that might reasonably be attributed to him, and on the basis only of the s 29(6) information, to have concluded that it was probable that there was an insufficiency.
And I note that the test is objective awareness of 'an officer of the Board' not the objective awareness of the inspector who made the assessment.”
65.	This two-step process was approved by Lord Bannatyne in the Outer House of the Court of Session in R (on the application of Pattullo) v Revenue and Customs Commissioners [2009] CSOH 137, [2010] STC 107.  He explained his view in the following terms (at [102]):
“In my opinion the test has to be a two-stage one to fit in with the underlying purpose of the scheme. The officer has to discover something new otherwise the underlying purpose of early finality of assessment would be defeated. His assertion of the newly discovered insufficiency is then tested against the adequacy of the disclosure by the taxpayer. It is only if the taxpayer has made a return which has clearly alerted the officer to the insufficiency that it will be considered adequate and will shut out a s 29 discovery assessment.”
However, in rejecting the submission for the petitioner taxpayer that the discovery of something new, in the sense of some new information, was a necessary pre-condition for the exercise of the s 29 power, Lord Bannatyne went on to describe the proper approach to the two-step test (at [104]):
“It seems to me that on a proper construction the first preliminary part of the test is no more than an assertion by the officer of a newly discovered insufficiency. The heart of the test I judge is clearly contained in part (II) of the test. On a proper understanding a discovery assessment can only be foreclosed if the taxpayer has clearly alerted in his return the officer to the insufficiency of tax which the officer has asserted he has newly discovered, thus rendering it not a new discovery but rather something on the information provided by the taxpayer that the officer should have been aware of during the enquiry window. In my judgment on a proper construction the section clearly places the emphasis on the adequacy of the disclosure by the taxpayer. That fits in with the underlying purpose of the scheme. Thus the taxpayer is given the right of early finality. However, there is a corresponding duty on the taxpayer to clearly alert the officer to the insufficiency. If he does not the officer can newly discover an insufficiency. Accordingly I broadly accept counsel for the respondents' argument that in terms of the section it is for the taxpayer (once a newly discovered insufficiency is asserted) to prove that he has clearly alerted the officer to the insufficiency.”
66.	Mr James submitted that a discovery, in the sense of something new, is necessary under s 29(1) and only then could it be asked whether an assessment is prevented in any event because neither condition in s 29(4) or (5) is satisfied.  We do not agree.  This is not the way in which s 29(1) has been construed.  In our view, on the authorities, for there to be a discovery it is only necessary that the inspector has newly arrived at the conclusion that there is a probable insufficiency.  A mere suspicion is not enough.  Furthermore, there must be a basis for the conclusion reached.  It must not be mere conjecture.  This is the newly-discovered insufficiency to which Lord Bannatyne referred in Pattullo.
67.	In our view this approach accords with the authorities and with the scheme of s 29 itself.  Although not cited to us, in the recent tribunal decision in Hankinson v Commissioners of Revenue and Customs [2009] UKFTT 384 (TC); TC00319 the tribunal came to the same view.  The tribunal there rejected the argument put on behalf of HMRC that the special commissioner in Corbally-Stourton had gone further than permitted by the authorities.  The tribunal referred to the need for evidential basis as we have described, and the requirement for a conclusion that, on balance, there is an insufficiency; a need for probability, rather than mere possibility or suspicion.  Hankinson has been upheld in the Upper Tribunal (Tax and Chancery) (see FTC/14/2010), but there was no argument before the Upper Tribunal on the First-tier Tribunal’s decision that there had been a discovery, or on the approach adopted by that tribunal.
68.	As Patullo shows, once the conclusion that there is a newly-discovered insufficiency has been asserted, the question becomes, in a s 29(5) context, one of whether the taxpayer has alerted HMRC to the insufficiency.  If the taxpayer has not done so, HMRC can newly discover the insufficiency.  A discovery is of something “new” only in the sense that it has not been informed by information provided by the taxpayer.  It is clear that it is not necessary for any new fact to have arisen to give rise to a discovery.  As Viscount Simonds said in Cenlon Finance Co Ltd v Ellwood 40 TC 176 (at p 204):
“I can see no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered.  The words are apt to include any case in which for any reason it newly appears that the taxpayer has been undercharged …”
69.	Mr James argued that to be a “discovery” within s 29(1) there has to be a discovery of something new outside the enquiry window.  It is for HMRC to establish that they made a discovery.  On the facts, Mr James submitted, HMRC, through the Trust’s return, were seized of the issue prior to the end of the enquiry window, and that the request that was made on 27 September 2004 (to Mr Taube’s inspector to bring the special dividend into charge as his income) is not evidence of a discovery.  There is, he argued, no evidence that something had been newly-discovered either at that time or previously outside the enquiry window.
70.	We do not accept this submission.  There is nothing in s 29 to merit such a restrictive construction of section 29(1).  We agree with Mr Ewart that, although in a normal case it might be expected that, if HMRC come to the conclusion that there is a probable insufficiency, an enquiry would be opened, there is no requirement, or pre-condition, that this be done.  We do not consider that the reference by Auld L J in Langham v Veltema (at [36]) to the inspector’s option of making a s 9A enquiry before the discovery provisions of s 29(5) come into play establishes any principle that discovery can be made only after the enquiry window is closed.  In that passage Lord Justice Auld was giving a general description of the scheme and not addressing any question of timing.  His reference to s 29(5) in this context shows that what he had in mind was the time at which the taxpayer information was provided, and not the timing of the discovery itself.
71.	In our view the statutory rules permit a discovery either before or after the time for opening an enquiry has expired, the only timing constraint being the time limit for the making of the assessment in section 34.  Failure on the part of HMRC to open an enquiry on the basis of an insufficiency discovered prior to the end of the enquiry window cannot shut HMRC out from raising a discovery assessment, unless the taxpayer has alerted HMRC to the insufficiency before that time.  The taxpayer has all the protection he needs by being able to provide, before the enquiry window closes, an honest and complete return.  If he does so, and provided he has not been fraudulent or negligent, he will be entitled to finality at the end of the enquiry window.
72.	For these reasons we conclude that the assessment on Mr Taube was an assertion of a newly-discovered insufficiency in his self assessment, and was accordingly a discovery within the meaning of section 29(1).  We should add that if, contrary to our own view, it were to have been necessary for HMRC to show that the assessment was based on something newly discovered outside the enquiry window, we would have had no hesitation in finding on the facts of this case that there was such a discovery.  Although the original Trust return had given rise to questions as to the nature of the receipt of the special dividend, and HMRC had considered the consequences for Mr Taube as life tenant were it to have been established that the proper treatment was as trust income, it is clear that up to the end of the enquiry window on 31 January 2003 HMRC were seeking to establish the basis on which it had been claimed by the Bessie Taube Trust that the receipt was of capital.  Further information was requested in the letter of 6 December 2002, in the reminder letter of 7 February 2003 and finally in the section 19A information notice issued on 30 April 2003.  It is abundantly clear that the view of HMRC that there was a probable insufficiency in Mr Taube’s self assessment (as distinct from a mere suspicion or possible insufficiency) crystallised only after receipt of that information and after the legal analysis had been the subject of debate with the Trust’s advisers.  We have no doubt therefore that even if it were correct that there must be a discovery after the end of the enquiry window (which we do not accept for the reasons we have given), on the facts of this case that test would comfortably have been passed.
73.	We now turn to consider whether the condition in s 29(5) is fulfilled.  If it is, then the assessment will have been validly made.  In the circumstances of this case what we have to determine is whether, at the time when an officer of HMRC ceased to be entitled to enquire into Mr Taube’s individual return (31 January 2003), that officer could not have been reasonably expected, on the basis of the information available to him before that time, to have been aware of the insufficiency in Mr Taube’s self assessment, on account of the omission of the trust income.
74.	As Mr James recognised, in normal circumstances the fact that no information was included in Mr Taube’s return in respect of the special dividend would be fatal to Mr Taube’s case.  It is clear from s 29(6) following Langham v Veltema that the information in question must emanate from the taxpayer or someone acting on the taxpayer’s behalf.  The list of categories of information in s 29(6) is exhaustive.  In particular, s 29(6)(d)(i) does not attribute to the inspector information which is not reasonably to be inferred from information within s 29(6)(a) to (c).  The matters set out in those paragraphs are all categories of information actually supplied by the taxpayer or his agent.  The only information provided by Mr Taube or anyone acting on his behalf was his return, which omitted any reference to the special dividend.  There was no possibility that information regarding the payment of the special dividend could have been inferred from Mr Taube’s return.
75.	Whilst recognising the difficulty presented by the plain words of s 29(6), as construed by the Court of Appeal in Langham v Veltema, Mr James argued that the situation of a trust receipt is a very particular one that necessarily falls outside the normal rule, and that this case ought therefore to be distinguished from Langham v Veltema.  He argued, pointing to s 8A TMA, that it is the trustees’ return which must return all income for the purpose of establishing the amounts  in which not only the trustees, but also the settlor and, crucially, the beneficiaries are chargeable to income tax and capital gains tax.  If a receipt is income, it is trust income and is returnable as such.
76.	In support of his argument Mr James referred to Mr Taube’s tax return for 2000/01.  in that return Question 7 asked: “Did you receive or are you deemed to have income from a trust [or] settlement …?”  In the Notes on Trusts accompanying a return for that period the following instructions were given: “Fill in the Trusts etc Pages if you received any income in 2000 - 2001 from a trust [or] settlement …?  In the same Notes under Beneficiaries the instructions included the following:
“If you had an absolute right to income but not capital from a trust or settlement:
…
•	Enter in boxes 7.10 to 7.12 income which has a tax credit at the dividend (10%) rate.  Enter in box 7.10 the actual income to which you are entitled, in box 7.11 the tax credit, and in box 7.12 the income before tax (the ‘taxable amount’).
The trustee will be able to tell you which types of income have been received on your behalf.”
Mr James sought to argue that the return required by an individual with an interest in possession operated at the relevant time not by reference to entitlement to income (and here he contrasted language in the 2010 return and accompanying notes) but by reference to income “received” or, at the very least, notified by the trustees to the beneficiary.
77.	We reject Mr James’ submissions in this regard.  None of the materials referred  to by him in this connection can support his argument.  It is quite evident on the face of these materials that even in 2000/01 an individual income beneficiary was required to render a return based on entitlement to income and not on mere receipt or notification.  That at all events was (and remains) the law, irrespective of any guidance that might have been given.  Mr Taube was himself required to make a return of his income, including the trust income to which he was entitled, under s 8 TMA, and to include in that return a self assessment to income tax.  This he was obliged to do notwithstanding the concurrent responsibility on the part of the trustees of the Bessie Taube Trust to make a trustee’s return under section 8A.  The fact that this concurrent trustee’s return is for the purpose of establishing the chargeability of the beneficiaries (as well as the trustees and the settlor) does not affect the construction of section 29(6).  That provision is, as was clearly decided in Langham v Veltema, exhaustive, and there is no warrant for extending its meaning on account of s 8A to include returns made by or on behalf of the trustees as well as those made by or on behalf of the individual himself.  If Parliament had wished to include trust returns as part of the information relevant to the making of a discovery assessment on an individual beneficiary, not only could they have done so, in our view they would have done so, as they did in relation to taxpayers carrying on a trade, profession or business in partnership where it is provided by s 29(7)(a)(ii) that the references in s 29(6) to the taxpayer’s return includes a reference to the relevant partnership return.
78.	Mr James argued further that it was the settlement’s own tax district that responsibility for the case; the only communication with Mr Taube’s inspector was a request to raise an assessment.  This, he argued, was effectively an instruction required for administrative reasons.  He referred us to s 113(1B) TMA, which provides that where an officer of HMRC has decided upon an assessment and its amount, completion of an assessment procedure may be entrusted to another HMRC officer.  He argued that it is the trustees’ inspector that has the responsibility for administration of the trust return and therefore the matters set out in s 8A, including the chargeability of a beneficiary as regards trust income.  That responsibility moves to the beneficiary and the beneficiary’s tax district only as regards trust income received by the beneficiary or in respect of which the trustees have notified the beneficiary.  In consequence, as Mr James put it, amounts retained by trustees as capital are investigated by the trust’s inspector, and this, he submitted, is entirely logical.  If trustees decide that something that ought properly to be treated as income is in their view trust capital, an income beneficiary will not receive it and may well not be notified at all of the circumstances.  Furthermore, trust issues are, argued Mr James, most appropriately dealt with by specialist HMRC officers, as was the case here.  The Trust’s inspector was therefore, according to the argument, the decision-maker and Mr Taube’s inspector merely provided the mechanism through which the assessment was made.  On this basis, Mr James submitted that it is the Trust’s inspector who must be considered when applying section 29.
79.	We do not consider that any of these arguments can assist Mr Taube.  As we have explained, we do not accept the premise that responsibility of the beneficiary, and likewise responsibility of the beneficiary’s inspector, arises only as regards income received by or notified to the beneficiary.  Section 29 is concerned with the assessment of the taxpayer, in these circumstances the beneficiary, and the sufficiency or otherwise of the taxpayer’s self assessment.  Section 29(5) is directed at the taxpayer’s assessment, and s 29(6) relates only to information provided by the taxpayer or on the taxpayer’s behalf.  The Trust’s return and the role of the Trust’s inspector, in our view, can have no part to play in determining whether a valid discovery assessment has been made in the circumstances of this case.
80.	Nor do we accept in any event that in this case it was as a matter of fact the Trust’s inspector that had the responsibility for making the assessment.  In our view s 113(1B) TMA has no relevance; it is purely an administrative provision.  As Mr Ewart argued, and we concur, it could only have been Mr Taube’s inspector who could calculate the amount of the assessment, as only Mr Taube’s inspector would have the necessary information as to Mr Taube’s other income and gains.
81.	Our conclusions in these respects are in our view entirely consistent with the scheme of self assessment.  If a beneficiary does not receive and is not informed of income for any reason, including a mistaken belief on the part of the trustees that the receipt is trust capital, he cannot himself be criticised for not including that income in his return.  But if nevertheless he is in fact entitled to that income, he will also in principle be chargeable to tax on it, subject to his personal circumstances.  If the beneficiary has made no relevant entry in his return, it cannot be expected that his inspector will have cause to open an enquiry in that respect, nor can it be right that HMRC could be shut out from making a discovery and issuing an assessment within the statutory time limits.  It is clear from Langham v Veltema that the condition in s 29(5) will only fail to have been met where the taxpayer or his representative, in making an honest and accurate return or (which is not relevant here) in replying to an enquiry, have prior to the closing of the enquiry window already alerted HMRC to the insufficiency of the self assessment.  Subject to questions of fraudulent or negligent conduct, the reason why the taxpayer has failed to make the information available at the relevant time is immaterial; it is the fact that sufficient information is not then available that causes the s 29(5) condition to be fulfilled.  We have no doubt that, despite the strenuous efforts of Mr James to persuade us to the contrary, in this case the s 29(5) test was satisfied and that Mr Taube was properly assessed under section 29(1). 
82.	Because we heard argument on the point, we ought also to consider whether, had we decided that the information in the Trust’s tax return was information available to the HMRC officer for s 29(5) purposes, that information was such that on the basis of it the officer could reasonably have been aware of the insufficiency.
83.	Mr Ewart argued in this connection that, on the footing of Corbally-Stourton (see para 55), what must be found, objectively, to be apparent from the return to the hypothetical officer is a probable insufficiency as opposed to mere suspicion or curiosity which might lead to an enquiry being opened.  He submitted that not even the Trust’s Office of HMRC, with its technical knowledge in the area, could have come to any view at all until they had sight of the documents supplied to HMRC on 19 May 2003.
84.	Mr James argued that, although the documents supplied on 19 May 2003 might arguably have been necessary in order to conclude that there was a definite underdeclaration, they were not necessary in order that the relevant HMRC officer could conclude that there was probably an insufficiency.  He pointed in this context to the example given by the special commissioner in Corbally-Stourton of a taxpayer indicating in relation to a particular figure that he had adopted a view of the law with which he knew HMRC disagreed.  Mr James submitted that the Trust had made a clear disclosure designed to ensure that HMRC were alerted to the issue.  HMRC were, by means of the entry in the Trust return, informed of the nature of the dividend and its amount, of the existence of Mr Taube’s interest in possession and of the view taken that the receipt was trust capital and not available for distribution.  He argued that this could be demonstrated by what happened in point of fact.  HMRC were, as a result of the Trust return, aware of the issue, as demonstrated in particular by Mr Swires’ memo of 4 July 2002.
85.	We agree with Mr Ewart.  In our view the disclosure made by the trustees of the Bessie Taube Trust fell far short of what was required by s 29(5) to alert HMRC to the insufficiency in Mr Taube’s self assessment.  The Trust return disclosed the special dividend in its barest outline and the fact of the advice that it was trust capital, but with no explanation of the basis for that assertion.  An inspector reasonably versed in tax law applicable to trusts would have been expected to question such a proposition, and to enquire into the circumstances that had led the trustees to that conclusion.  But absent further explanation as to the background and reasoning behind the assertion that the receipt was one of trust capital, such an inspector could not, in our view, reasonably have been expected, on the basis of what was in the return, to conclude that there was a probable insufficiency.  On the basis of the information provided in the return the most that could reasonably be expected is that the inspector would have reason to enquire further into the Trust’s asserted position.
86.	With respect to Mr James’ arguments, this is very different from a clear disclosure of a view of the law contrary to a known view of HMRC.  In Corbally-Stourton the special commissioner did not suggest that such a disclosure of itself would be sufficient; he coupled this with the provision of sufficient details to enable the inspector to reach at least an estimate of a different figure.  Until the basis of the Trust’s assertion that the receipt of the dividend was properly regarded as trust capital was explained more fully, the inspector could not have had sufficient information to enable him to conclude that the assertion was probably wrong, and consequently to arrive at an estimate of a probable insufficiency.  Any estimate of a figure for a further assessment on Mr Taube – which, subject to Mr Taube’s personal tax position generally, would simply be a matter of arithmetic in these circumstances – would have to have been based at that stage on mere suspicion or conjecture as to the nature of the receipt.  The possibility that such an arithmetical calculation could have been made is not sufficient to support a finding that an inspector could have been reasonably expected to have been aware of the insufficiency.
87.	Nor in our view does the evidence suggest that HMRC had the required level of awareness.  The memo of Mr Swires of 4 July 2002 merely shows that Mr Swires himself was aware that an assertion that a dividend was trust capital was questionable, and that enquiries should be raised.  Mr Swires’ comments on the position of Mr Taube as the income beneficiary of the Bessie Taube Trust show a proper regard for the issue and its potential implications, but they are not in any sense definitive, nor do they point to any probability that Mr Taube should be chargeable to tax as the beneficiary with an interest in possession.  They merely, and we should add quite properly, point to the logic of a conclusion dependent upon the outcome of the enquiry.  Furthermore, the subsequent internal HMRC correspondence serves only to confirm that, up to the time the further information was ultimately received by HMRC in May 2003, and indeed beyond, HMRC had not reached any conclusion as to a probable insufficiency but were engaged in seeking to ascertain the basis upon which it had been asserted that the receipt was trust capital.
88.	For these reasons, we conclude in this respect, firstly, that HMRC discovered as regards Mr Taube that the income arising as a result of the special dividend, which ought to have been assessed to income tax, had not been assessed, secondly that no information was made available to HMRC within the meaning of sections 29(5) and 29(6) TMA, and finally, that if the information in the Trust return had been found to have been information that was made available to an HMRC officer, the officer could not have been reasonably expected, on the basis of that information, to have been aware of the insufficiency in Mr Taube’s self assessment.  Accordingly we find that the condition in s 29(5) was fulfilled, and that Mr Taube has been validly assessed under section 29(1).
Negligent conduct
89.	Our finding that the condition in s 29(5) is satisfied is sufficient for us to dismiss Mr Taube’s appeal.  However, HMRC also argued that s 29(4) was satisfied.  The condition in s 29(4) is fulfilled if the insufficiency in Mr Taube’s return is attributable to fraudulent or negligent conduct on the part of Mr Taube or a person acting on his behalf.
90.	It was no part of HMRC’s case that any conduct was fraudulent.  Nor was it alleged that any of Mr Taube, his tax agents, Crawfords, or his tax advisers, Cooper Lancaster Brewers, were negligent.  HMRC’s case proceeded solely on the footing that the advice given by Pannone & Partners as to the classification of the special dividend as trust capital was negligent, and that the failure by Mr Taube to make a self assessment of the dividend as income was attributable to that negligent conduct.
91.	As negligence on the part of Mr Taube, the taxpayer, is not alleged, it is first of all necessary for HMRC to satisfy us that Pannone & Partners was a “person acting on [Mr Taube’s] behalf”.  In this connection Mr Ewart invited us to adopt the approach of the special commissioner (Dr Nuala Brice) in Employee v Revenue and Customs Commissioners [2008] STC (SCD) 688, where (at para 61) she said:
“… the question whether the appellant or his advisers engaged in negligent conduct is a question of fact having regard to all the circumstances and the facts of this appeal.”
Mr Ewart referred us also to what the special commissioner said at para 59:
“In considering the arguments of the parties I first note that, in the context of s 29(4), there has to be negligent conduct either by the taxpayer or by a person acting on his behalf. That means that negligent conduct by the appellant's advisers would be sufficient.”
92.	As Mr Ewart rightly acknowledged, Employee was not itself concerned with the meaning of “person acting on [the taxpayer’s] behalf”, and so cannot be regarded as establishing any principle (albeit non-binding) regarding the breadth of construction to be afforded to that term.  The adviser in question in Employee was a firm of financial advisers who drafted the taxpayer’s return and submitted it on behalf of the taxpayer to HMRC.  The position was therefore factually different from that in the present case, where Pannone & Partners merely provided advice to the trustees, including Mr Taube.  Mr Ewart submitted, however, that it would be right to have regard to the evident purpose for extending the possible conduct in question, and not limiting it to that of the taxpayer.  Absent such provision, he argued, a taxpayer could rely on negligent advice, and escape the consequences of s 29(4).  He argued further that there was no basis, as submitted by Mr James, for construing s 29(4) to cover only agents or those completing and submitting the taxpayer’s return.
93.	On this question we agree with Mr James.  In our view, the expression “person acting on … behalf” is not apt to describe a mere adviser who only provides advice to the taxpayer or to someone who is acting on the taxpayer’s behalf.  In our judgement the expression connotes a person who takes steps that the taxpayer himself could take, or would otherwise be responsible for taking.  Such steps will commonly include steps involving third parties, but will not necessarily do so.  Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer.  The person must represent, and not merely provide advice to, the taxpayer.
94.	Accordingly, in our view, in this case Pannone & Partners was not a person acting on behalf of Mr Taube for the purposes of section 29(4).  The condition in s 29(4) was not therefore fulfilled.
95.	In these circumstances it is not necessary for us to examine in detail the criticisms levelled by Mr Ewart at the advice given by Pannone & Partners, in particular in respect of the explanation given by Mr Jones in his letter to HMRC of 1 December 2005.  As Mr Ewart acknowledged, the burden of proof is on HMRC to demonstrate negligent conduct.  We have considered the submissions made by Mr Ewart in this respect.  We have concluded that this burden has not been discharged.  The giving of wrong advice is not necessarily negligent.  Except in the clearest of cases such a finding could only be made – as it was in Employee – on the basis of a full examination of not only the advice itself, but the whole background to the advice and the circumstances in which it was prepared and given.  We do not consider that a finding of negligent conduct can be justified solely on the basis of criticism of the conclusions drawn by Mr Jones, or the reasoning behind those conclusions.  The benefit of the doubt in these circumstances is to be given to the appellant (see King v Walden [2001] STC 822, per Jacob J at [54]).  Accordingly, were it necessary for us to have done so, we would have found that HMRC had failed to establish that there was negligent conduct on the part of Pannone & Partners, and that the condition in s 29(4) was not for that reason fulfilled.
Decision
96.	For the reasons we have given we determine these appeals as follows:
(1)	We allow the appeal of the trustees of the Bessie Taube Trust , and reduce the assessment to nil.
(2)	We dismiss the appeal of the trustees of the Raymond Taube Trust.  As regards the amount charged by the self assessment, the amendment made by HMRC was to increase the amount charged by the self assessment by £59,999.99.  It was agreed between the parties at the hearing that, subject to the trustees’ appeal, the correct increase to the assessment is £40,000.  We reduce the assessment accordingly.
(3)	We dismiss Mr Taube’s appeal.  As regards the assessment on Mr Taube, it was also agreed between the parties that, subject to Mr Taube’s appeal, the amount of the assessment should be £194,400 and not £174,960 as originally assessed.  We increase the amount assessed accordingly.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 7 October 2010

Amended pursuant to rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 on 21 November 2010