In the case of Smith v HMRC [2026] UKFTT 663 (TC), in a detailed and lengthy judgment that the FTT characterised as containing “a very large number of diffuse matters” with a “lot of moving parts”, the FTT has largely dismissed the appeals against discovery and best judgment assessments and associated penalties arising from HMRC’s decision that the appellant had continued as principal after the purported sale of his accounting practice and thus the income that had arisen following the sale was his, which he he had failed to account for the tax thereon.
INCOME TAX and VAT – Discovery and best of judgment assessments – valid and in time? – yes – involvement of appellant after sale of his accountancy practice in March 2003 – reliability of appellant’s oral and self-penned documentary evidence – self-employed subcontractor? – no – essentially carrying on as principal? – yes –was income after that date his? – yes – evidence that the assessments overcharged? – yes –tribunal view of profit and turnover –penalties – deliberate or fraudulent behaviour?– yes –HMRC behaviour towards the appellant an abuse of process – no – fair trial – yes – appeals largely dismissed – directions for recalculation of the tax and penalties to follow
The FTT summarised the relevant positions as follows:
“It is HMRC’s position, based on information obtained from banks and other third parties, that the appellant has understated his income for the relevant periods. It is their view that he carried on the business of chartered accountancy, as principal under the name of Strauss Phillips & Co (“the business”) during those periods, notwithstanding his assertion that in 2003 he sold the business and thereafter was non-UK tax resident and received employment income only from overseas employers. Prior to any such sale, he had either failed to declare, or underdeclared, his business income. Accordingly, on the basis of the information in the bank statements and other documentary evidence suggesting that the appellant was carrying on the business after 2003 and deriving the economic benefit of its trading activities, they have issued discovery assessments and best judgment assessments for the period covered by those bank statements and extrapolated backwards and forwards using the presumption of continuity for previous and later periods. They believe his behaviour to be deliberate or fraudulent and have assessed the appellant to penalties on that basis.
It is the appellant’s position that prior to selling the business he had fully disclosed his business income, and that after the sale he did not operate or control it. His involvement with the business after the sale was limited to run off work. The bank accounts on which the assessments are based reflect money paid into those accounts by individuals and organisations to whom the business had originally been sold in 2003 and who were carrying on the business thereafter. He disputes the technical legitimacy of the discovery assessments, best judgement assessments and penalty assessments. He disputes the use of the presumption of continuity as a legitimate basis for the assessments. He also submits that he is unable to receive a fair trial because of HMRC’s behaviour towards him.”
The FTT summarised its conclusions as follows:
“Drawing the strands of this lengthy and convoluted decision together, we have concluded that the discovery assessments and VAT assessments were made to best judgment on the basis of deliberate behaviour and that the extended time limits apply to both.
We have found that the appellant continued to run the business, essentially as principal, following its purported sale to Mr Dunne, on 1 March 2003, and that the sums deposited in the relevant bank accounts as evidenced by the bank statements, were beneficially owned by the appellant and were derived from that business. They consequently attracted income tax and, to the extent that the turnover exceeded the VAT threshold, VAT.
We have found that the quantum of the assessments requires adjustment given the decrease in turnover and the increase in allowable expenses that we have determined should apply.
We have found that the penalties for failing to comply with notices to file have been improperly imposed. However, we have found that the other penalties have been properly imposed.
We have found that HMRC’s behaviour has not amounted to an abuse of process as a result of which the appellant could not receive a fair trial.
REVISED ASSESSMENTS AND PENALTY ASSESSMENTS
Although we have been able to revise the income and VAT turnover figures for the years in question, we have not been able to compute replacement income tax or VAT assessments from those figures. Nor have we been able to revise the penalty amounts for those penalties for which the appellant remains liable.
We shall provide directions in relation to these matters under separate cover.
DECISION
We dismiss the appeals against the discovery assessments and the VAT assessments.
We allow the appeal against the penalties under section 93 TMA 1970 and schedule 55 FA 2008 for failure to comply with notices to file but dismiss the appeals against the other penalties.”
https://caselaw.nationalarchives.gov.uk/ukftt/tc/2026/663
Related content from Claritax Books
Discovery Assessments, by tax barrister Keith Gordon, is a detailed, clearly written guide to the law and practice in this area. Based on the author’s personal involvement in many leading cases, the book contains much practical advice explaining when and how such assessments may be challenged.
