Discovery Assessments

Discovery Assessments

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I would be grateful for any views on a case I intend taking to the FTT.

The client is a farmer for whom we have been making averaging claim for a number of years.

There is a 30th September year end and consequently in the 2007/2008 tax return I averaged the 2006 and 2007 Accounts. Unfortunately I overlooked the fact that the 2006 profit had been reduced to Nil by losses brought forward so I used Nil when I should have used the averaged 2006 figure.

The Return was submitted in due time as were the 2008/2009, 2009/2010 and 2011 Returns and no enquiries were raised.

On receipt of the 2011/2012 Return however the Revenue raised an enquiry in respect of let property expenses, which has been resolved with no changes, and also went back and recalculated all of the averaging figures from 2008/2009.

I have appealed and the Revenue claims that the original averaging claim was careless and they are thus entitled to reopen the earlier years.

I accept the error although I do not consider it to be a careless one and maintain that the Revenue has had in their position all of the information to enable them to have recalculated the tax liabilities in any of the intervening periods.

I believe that this may have implications for the profession hence my taking it to the FTT.

I have two questions if I may.

1 Do I have a case and

2 Would is legal assistance necessary and/or essential.

I would appreciate others views.

Replies (6)

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By michaelblake
19th Jun 2014 17:35

Discovery?

Presumably HMRC have reopened earlier years using the discovery provisions TMA 1970 Section 29)

It is difficult to see how you could argue against the raising of an assessment if there is an admitted error in the return.

The client may be able to escape a claim of negligence in completing an incorrect return, and therefore a penalty,  if he can argue that he reliefd upon you to get the return right and the negligence was yours  - see for example the HMRC commentary at 

http://www.hmrc.gov.uk/manuals/emmanual/EM5180.htm

and elsewhere. Negligence is the correct standard for a 2006 assessment. Careless behaviour is a concept introduced by FA 2007 Schedule 24 for returns filed on or after 1 April 2009. The two terms are similar but not identical and mitigation of penalties applying the pre FA 2007 standards are likely to be more generous than under the new system. 

You might want to refer the papers to a specialist for review before deciding whether to embark upon a tribunal hearing, and (assuming you have not done so already) may need to advise your PI insurers of the possibility of a claim being made against you by the client if the mistake was yours and not the clients, and there is the prospect of the client incurring a penalty.

Legal representation at a tax tribunal is not essential but may be advisable if you have not taken a case before. Taxaction.org.uk can support you on a fee paying basis by reviewing a case to see what your chances of success are likely to be at tribunal and preparing and taking the case to tribunal. There are many other firms who offer the same service.

If the client has no insurance cover for the cost of fighting HMRC (or the insurers will not cover the cost) then as always the likely costs of taking the case will have to be weighed against the amount of tax, interest and penalties in dispute, and the likelihood of success. 

 

 

 

 

 

 

 

 

   

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By brianjleach
25th Jun 2014 07:51

Many thanks for this response.

Do these provisions mean the Revenue can reopen any year where they find an error however long ago even if all the information was in their possession to correct the Return within the statutory period.

If so this seems to me to mean that no year can ever be considered as closed. Presumably if I had discovered a similar error in the client's favour there would be no opportunity to reopen.

Thanks again for the helpful response.

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Stepurhan
By stepurhan
25th Jun 2014 08:54

No they don't

Discovery means just that. It means that information came into their possession after the enquiry window has closed that, had they had it when the window was still open, would have caused them to open an enquiry.

This includes discovering an error in a later return that casts doubt on an out-of-time return. For example, if you are found to have overclaimed mileage in current returns, then they are allowed to assert this is likely to have happened in earlier returns. It would then be up to you to prove otherwise.

So the first question is, did HMRC have all the information in their possession to realise the error in time? I don't deal with farmer's averaging, but I am assuming that the brought forward figure you should have used could be obtained from the returns. The second trickier part is that presumably this has had a knock-on effect on later returns. Are the averaged profits on current returns affected by this error? If so, then this could be the "discovery" they intend to rely on.

So potentially an argument against, but I would consult a specialist on both discovery and farmer's averaging if you want to be sure.

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By michaelblake
25th Jun 2014 12:15

Too simple a view

I would not agree that a discovery in itself involves finding out something new  - see for example the cases of Scorer v Olin Energy Systems Ltd (58 TC 592), Veltema v Langham 2004 STC 544, more recently Charlton v HMRC 2013 STC 866 where the Tribunal quoting from Scorer v Olin noted that:

"In our judgement no new information, of fact or law, is required for there to be discovery. All that is required is that it has newly appeared to an Officer acting honestly and reasonably that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion,or correction of an oversight. The requirement for newness does not relate to the reason for for the conclusion reached by the Officer, but to the conclusion itself"  

You might also want to look at the 13 November 2013 article by Adam Craigs and Ebrahim Ali in Taxation Magazine at

http://www.taxation.co.uk/taxation/Articles/2013/11/13/316421/discovery-...

where some aspects of these cases and the meaning of TMA 1970 Section 29 are discussed 

 

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Replying to lionofludesch:
Stepurhan
By stepurhan
25th Jun 2014 16:18

Worrying development

michaelblake wrote:
"In our judgement no new information, of fact or law, is required for there to be discovery. All that is required is that it has newly appeared to an Officer acting honestly and reasonably that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion,or correction of an oversight. The requirement for newness does not relate to the reason for for the conclusion reached by the Officer, but to the conclusion itself"
As the Taxation article you linked to also said, this is a worrying development. If discovery is truly to be treated this way in future, it makes a mockery of the enquiry window closing. No tax return can be considered final if HMRC merely need to have a "change of view" to open any return up.

This is poor case law and I hope to see it overturned in a future hearing.

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James Reeves
By James Reeves
25th Jun 2014 12:40

HMRC had all the facts

The 2006 and 2007 forms were the old pre-Carter design but the information on the SA103 was essentially the same as the modern design.  Box 3.76 would have had the profit for the current year, 3.77 would have had any basis period adjustment (presumably none) then 3.81 would have had the averaging adjustment. This would have given the taxable profit at 3.83 (or loss at 3.84).

HMRC would therefore have had in their possession after the submission of the 2007 return:

The adjusted (averaged) profit (or loss) for 2006 (from the 2006 return)The adjusted (pre-averaged) profit for 2007The adjusted (averaged) profit from 2007 (incorrectly calculated).

They could therefore have verified at any time in the intervening 6 or 7 years that a (careless) mistake had been made in the calculation since it would have been obvious from an examination of the averaged and non-averaged profits.

Whether this precludes either a discovery assessment or a claim of carelessness I cannot say, but certainly HMRC would surely have had all the facts of the case and it could be argued that they should have spotted the mistake sooner.

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