In the case of Albermarle 4 LLP v Revenue and Customs Commissioners (TC/2011/02843, published on 3 May 2013) the First-tier Tribunal considered, inter alia, whether a discovery amendment could be made where losses arose.
The key facts were these:
- Albermarle 4 LLP (“the Partnership”) was formed in December 2002.
- Vacant commercial properties were acquired in April 2005 with a view to finding tenants, with the intention to selling on at a profit.
- No suitable tenants were found and the properties were subsequently sold at a loss.
- The 2005/06 partnership return included a trading loss of £252,751 while the balance sheet included the properties as fixed assets.
- The description of the trade was given as ‘property investment’.
- HMRC raised a discovery amendment to reclassify the loss as a rental loss (following a similar conclusion after enquiries into the returns for 2006/07 and 2007/08).
- In their correspondence HMRC did not give a statutory provision for the discovery but had previously referred to s29 TMA 1970.
- The Partnership appealed to the FTT.
In their appeal, the Partnership contended that there was no statutory basis for the discovery amendment – ether under s29 TMA 1970 or, alternatively, s30B TMA 1970.
They argued that s29, as put forward by HMRC, was not in point as it only related to returns for individuals or trusts (not partnerships). HMRC did not counter this.
The Partnership also drew attention to s30B which did allow discoveries relating to partnership statements but only in three specific circumstances:
(a) undeclared profits;
(b) understated profits; or
(c) excessive allowances or reliefs.
As there were no ‘profits’ and reliefs etc. were not in point, they argued that none of the three circumstances applied.
HMRC argued that ‘profit’ included ‘negative figures’ so that either the first or second circumstance applied.
The FTT concluded in favour of the Partnership that the discovery amendment was ineffective and so the appeal was allowed. The arguments of the Partnership were held to be consistent with the intention and wording of the legislation with regard to losses. In reaching their conclusion the FTT commented that provisions relating to the submission of partnership returns and statements referred to ‘income or loss’ but that such explicit reference to ‘loss’ was missing from s30B. If the intention had been to include loss situations, the legislation would have been explicit in this regard.
The FTT further commented that the heading of s30B referred to ‘loss of tax’. This, they noted, was in contrast to the wider powers relating to enquiries into partnership statements, which simply refer to ‘corrections’. In terms of profits, the wording of the heading indicated an intention for the section to apply only where there were undeclared or understated profits.
This case raises a notable point relating to discovery as it applies to partnership statements. It will be very helpful in resisting attempts by HMRC to raise discovery amendments where losses have arisen, including situations where an enquiry into the partnership statement would have been successful. Where it will not help is in circumstances where reliefs or allowances are excessive (the third circumstance noted above).
What is not clear is whether attempts will be made to amend s30B to include references to both profits and losses, so watch this space …
For further information and advice on issues arising from this case please contact the TaxDesk on 0845 4900 509 and ask for Lawrence Adair in the first instance.