HMRC Enquiry - profits - in which year should these be taxed?

HMRC Enquiry - profits - in which year should...

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The first accounts for a client were for 13 months from 01/05/2001 to 31/05/2002. The Tax Return for 2001/02 showed provisional profits of £16500. The accounts and tax computations were submitted with the 2002/03 Tax Return and showed the profits for 2001/02 as £22000, 2002/03 as £24000 and overlap profit as £20000. Tax Calculations were issued by HMRC based on amounts shown in Tax Returns- 2001/02 profits £16500 and 2002/03 profits £24000. The 2001/02 Tax Calculation was not revised to show profits of £22000.

There was a change of accounting date and 2 sets of accounts were prepared for 22 months from 01/06/2004 to 31/03/2006 showing profits of £66000. The 2005/06 Tax Return showed profits of £66000 and claimed overlap relief of £20000.

The Inspector started an aspect enquiry into the 2005/06 Tax Return and asked how the overlap relief was calculated. An explanation was provided that all the calculations were submitted with the 2002/03 Tax Return. The Inspector has accepted that they failed to identify and process the information relating to the 2002 Return that was filed with the 2003 Return - the adjustment to the 2002 Return had not been processed.

The Inspector has stated: " Whilst this situation is regrettable, the fact remains that your client's liability for 2001/02 was calculated on provisional profits of £16500. As a result the only overlap profits subjected to tax that took place was for £14500 so consequenty I can only give relief for this sum."

Client was basic rate taxpayer in 2001/02 and higher rate taxpayer in 2005/06. The Inspector wants to tax the untaxed profits of £5500 in 2001/02 in 2005/06 by only allowing a reduced overlap relief.

Any comments will be appreciated.
Appellant

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By AnonymousUser
25th Oct 2007 11:10

HMRC Enquiry
Taken in isolation, the 2005/06 Tax Return (and its calculation of overlap relief of £20,000) is technically correct as it’s based on the known actual figures. So in theory the relief should be given in full.

However, this does open a can of worms in respect of the 2001/02 Return.

It’s not clear exactly how you ‘notified’ the Inspector of the understated profits in the 2001/02 SA Return but it sounds like you simply submitted the 2002/03 Return and left it for him to notice the difference.
I’m assuming you didn’t draw his attention to the fact that 2001/02 had not been amended before the Inspector opened his enquiry and queried the calculations.

When you submitted the 2002/03 Return, did you enter anything on the Additional Notes space of the Return to draw his attention to the differences between the original and revised 2001/02 figures ?

If not, the Inspector could always go down the route of making a discovery and I think the guidance in Statement of Practice SP01/06 would back him up on this.

So if he did this, your client may well get the full relief in 2005/06 but would have an increased Self Assessment for 2001/02 plus interest & penalties.

I suspect the Inspector knows this and may well be simply trying to save himself a bit of work here.

Hope this helps. If you need any more advice, get in touch.

Tony Willetts

www.taxenquiry.co.uk

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By User deleted
25th Oct 2007 12:07

A discovery assessment does not appear possible.
Tony - Thank you for your response.

A discovery assessment does not appear possible.When the 2001/02 Return was submitted the relevant boxes ( 3.93 and 23.2 ) were ticked to indicate that the figures were provisional and additional information was given in the white space ( 23.5 ) that the final figures were to be included in the next Return ( in accordance with the Tax Return Guide ) .

The Inspector's records show that the paperwork attached to the 2003 Return was reviewed in response to a call I made regarding a correction to the profit figure shown on the Return.The attached paperwork consisted of the first accounts and tax computations for 2001/02 and 2002/03.

The Inspector has accepted that they failed to identify and process the information relating to the 2002 Return that was filed with the 2003 Return in December 2003 - the adjustment to the 2002 Return had not been processed.

Given that the paperwork was reviewed by someone in the Tax Office ( February 2004 ) a discovery assessment does not appear possible.

Is there a way for the Inspector to either issue a revised Tax Calculation for 2001/02 showing profits of £22000 or to issue an assessment for 2001/02 in the sum of £5500 without charging interest and penalties?


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By AnonymousUser
25th Oct 2007 16:42

HMRC Enquiry
For the Inspector to make a discovery, he'd have to show that he could not be expected, on the basis of the information made available to him, to be aware of the underassessment when the enquiry window closed.

The filing deadline for the 2001/02 SA Return was 31/1/03 so the Enquiry window was 31/1/04. The first time that the Inspector was provided with actual figures was Dec 03 (when the following years 2002/03 SA Return was submitted) and this was eventually reviewed in Feb 04 (i.e. after the Enquiry Window had passed).

So was the Inspector provided with information on time and could he then made good use of it?

Clearly nothing was actually ‘made available’ with the actual 2001/02 Return - i.e. a ‘provisional’ Return tells the Inspector nothing that he can make use of – the reality is that the Inspector was only actually provided with sufficient information a month before the Enquiry window closed (Dec 03 when the 2003 was sent in).

So technically, yes you provided him with the information in time - albeit with only a limited amount of time to do anything with it. And clearly from what you say he didn’t do anything with the information when you alerted him to the point.

One option open to you now is to stand your ground and insist that the 2005/06 Return is correct, whilst also insisting that a discovery assessment cannot be made re the 2001/02 Return and it must stand as it is. You may be lucky with this approach and the Inspector may decide not to argue the point and your client gets away with it.

However, the Inspector could view this as ‘having your cake and eating it’ so the only avenue open to him if he wants to ‘balance things up’ would be to make a discovery assessment re 2001/02. Although he is on slightly dodgy ground technically due to his failings to deal with things correctly once it was brought to his attention, he could still do this and leave it up to you to appeal against it. You would then be forced down the Commissioners route and given the facts as they are, they may agree that you can’t have it both ways.

From the final paragraph of your reply it seems that you and your client are not trying to ‘have your cake and eat it’ and would be happy to pay the additional liability that was due re 2001/02.
The answer here then would be to simply approach the Inspector and put this to him. This would then give him the option to raise an discovery assessment (with your agreement) in order to correct things. I would guess that in view of the Inspectors failings in this case (i.e. not amending the 2001/02 return at the relevant time) he would be more than happy to reach a favourable conclusion with you.

The overriding factor that I would consider here is that irrespective of who is at fault, your client clearly has not paid all the liability that should have been paid…… this may well be the factor that dictates the attitude of HMRC in this case.

Tony Willetts
www.taxenquiry.co.uk

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By User deleted
01st Nov 2007 09:24

HMRC Enquiry
Tony- Thank you once again for your response.

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