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Hankinson decision backs HMRC discovery powers

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6th Jan 2012
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Tax officials are entitled to investigate a tax return after the usual one-year limit has passed if their discovery assessment letter meets one of two tests, according to a recent Court of Appeal ruling that reaffirms a long-established power for the taxman.

Derek Hankinson v HM Revenue & Customs focused on whether HMRC used a section 29 of the Taxes Management Act 1970 correctly when it investigated the taxpayer’s Self Assessment return for the 1998-99 tax year – six years after it was filed.

In 2005 HMRC assessed Hankinson’s tax return for 1998-99 and concluded he owed £30m in income tax and capital gains tax for the year because he was still a resident in the UK for tax purposes, despite having moved to the Netherlands.

Hankinson lost appeals against HMRC’s assessment of his tax liabilities in the first-tier and upper-tier tribunals.

In the Court of Appeal Hankinson challenged HMRC’s use of section 29 that was used to investigate his tax return for 1998-99.

HMRC usually has one year after a Self Assessment tax return is delivered to challenge and investigate it.

Under section 29 of the Taxes Management Act 1970 (at the time of the case), however, HMRC can investigate tax returns after the one-year window by sending a discovery assessment letter if one of two conditions apply. Firstly, the full and accurate facts were not available to HMRC officers due to incomplete disclosure, negligence or fraudulent behaviour by the taxpayer or agents; secondly the HMRC officer completing an enquiry could not have reasonably been expected to have been aware of the loss of tax.

In a judgment published in December last year Lord Justice Lewison concluded that HMRC’s use of section 29 was valid.

Dhana Sabanathan, solicitor at the tax and private client department at law firm Harbottle & Lewis, said that although the Court of Appeal decision was not a surprise to tax experts, it was a useful piece of case law for accountants dealing with tax investigations to bear in mind.

HMRC has been given extra funds for tax investigators to help it reduce tax avoidance. Sabanathan said that pressure to increase tax receipts means that HMRC is likely to use section 29 more often for tax investigations. “HMRC is increasingly using its discovery powers,” she said.

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By k.gordon
09th Jan 2012 11:47

The key discovery case last month was Lansdowne Partners

The decision in Hankinson actually dealt with a very minor point - whether the "discovering" officer needs to be aware which limb of section 29 applied when raising the assessment.  It was held that s/he doesn't.

It would be a shame, though, if HMRC were to suggest that the case gives them new powers.  They have long been entitled to raise discovery assessments when they discover errors outside the normal SA enquiry timetable.

But as the Court of Appeal's decision last month in Lansdowne Partners shows (confirming the summer's FTT decision in Charlton), if a taxpayer has put HMRC on notice as to what was going on, HMRC cannot use s29(5) (insufficiency of information before the hypothetical officer) as a basis of the discovery assessment: they will have to prove careless/deliberate conduct under s29(4).

Similarly, once a return has been submitted, HMRC have no right to request information outside an enquiry unless they can show that the information sought (if subsequently given) could realistically and sensibly lead to a valid discovery assessment.  In other words, if a taxpayer has made full disclosure and HMRC miss the enquiry boat, they just cannot ask for information under their Sch 36 powers. 

But the law will not stop them asking.  And any tax adviser who gives information to which HMRC were not entitled could be subject to a negligence action if that disclosure leads to a discovery assessment.

Keith Gordon, Atlas Chambers
 

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By sirsortemout
30th Apr 2012 12:12

Got that Keith, thank you,

The devil is certainly in the detail ..

Just how and who decides if enough is enough information on a SA-TR?  HMRC believe my SA-TR was insufficient, yet a totally NON accountant like me understands and can see what is going on in mine. There were white pages between the normal SA pages, explanations of how I bought a Second Hand Investment Bond and subsequently redeemed in full for a lesser amount. explanations, eg. 'For tax purposes the surender proceeds fall to be taxed under both s.541TA(income) and s.22 TCGA 1992(capital gain). along with a further 6+ long explanations as to how the tax treatment was applied.

When a normal SA-TR has expanded from 17 to 29 pages even a blind man knows there is something going on, My SA's values were 10 X bigger than ever before .. surely a time for questions .. there were memos going from Harlow to Capital Taxes Technical Group, which indicate the Hypothetical officer understood there was something to look at, but was it seemed hadcuffed until Drummond in 2009.

My question to you Keith is how does it all work??  At the time I belive we did what was done at that prevailing time (this is in refelection as all this was handled by my accountants Kidsons of Chelmsford, now owned by Baker Tilly who wash there hands of the case past dragging old files from storage - slowly - I knew Nothing of the creation of a artifical loss, I certainly did not know the process).

 

In short, my SA-TR was/is squeeky clean, Harlow and Solihul were discussing the content of my and my ex-partners SA for 6 months and let any enquiry fall out side the window of opportunity and now HMRC are trying for another bite of the cherry. I am confident we have done all correctly, certainly nothing ilegal or neglegently and HMRC are trying to mop after there internal errrrors, expecting we public to roll-over and cough-up, I am skint so have nothing but reputation to loose. Keith please can you pull any bunnies out of your hat for me please?

 

Robert

 

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