HMRC not entitled to discovery assessment

HMRC will not simply be able to open a discovery assessment if an investigation opportunity has fallen out of the 12-month window, according to an upper tribunal ruling.

Tax specialists Gabelle said that Revenue V Charlton [2012] UKUT  770 (TCC), which ruled HMRC was not entitled to make an discovery assessment in the case of three appellants who declared they were part of a tax avoidance scheme in their AAg1 forms, is significant to tax advisers.

In the case, the three appellants had declared they were part of the scheme to create a capital gains loss on the white space of the tax return, under DOTAS rules, including the SRN number.

The declaration included details of the facts of the case, but not...

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Comments

Won't they change their minds every time?

chatman | | Permalink

"The tribunal agreed with HMRC that an assessment can be made where the original HMRC officer changes their mind or takes a different view, rather than anything completely new being discovered."

Have I misunderstood this? If this is the case, what is to stop HMRC saying "the original officer changed his mind" every time they want to make a discovery assessment.

carnmores's picture

One presumes that the justifciation

carnmores | | Permalink

for so doing would be quite acute. As you say its a get out, once again provided by the Judges ( and other similar style professionals) who seem to be making the law according their own individual moral and ethical principles rather than what Parliament intended.

Change of mind    2 thanks

Paulsoper | | Permalink

A change of mind is sufficient to justify a discovery assessment UNLESS the information shown on the return is sufficient - the reason why this is significant is because when the original decision of the Court of Appeal in Valtema v Langham was handed down there was no provision in the return to disclose the use of schemes registered under the DOTAS regulations - this is one of the first cases following the DOTAS disclosure rules.  However, although it is suggested that HMRC won't appeal this would be to avoid creating a precedent limiting the Valtema v Langham principle I suspect, rather than because HMRC accept that the decision is right.

Change of mind

chatman | | Permalink

So is this not just telling us what we already knew? If there was insufficient information provided, HMRC can change their minds about not opening an enquiry. If sufficient information was provided at the time, they cannot.

johnjenkins's picture

So HMRC computers

johnjenkins | | Permalink

will now be told to flag every DOTAS disclosure so that an enquiry can be made within the 12 month period.

Seems stupid that they aren't already picking this up.

Discovery assessments require two hurdles to be overcome by HMRC    3 thanks

k.gordon | | Permalink

It is important to be clear about (1) what constitutes a discovery and (2) when a discovery assessment may be made.

In Charlton, the Upper Tribunal decided that an officer can be said to have made a discovery in a wide range of circumstances including merely changing his/her mind as to a taxpayer's liability to tax.

However, that does not necessarily mean that the officer can proceed to issue a discovery assessment.  Leaving aside time limits (eg ss34 and 36 TMA), section 29(3) provides that at least one of two additional conditions needs to be met in cases where a return has been made by the taxpayer.  The first relates to what is now "careless or deliberate conduct", the second considers the quality of any prior disclosure.

The recent case law on discovery assessments (Langham v Veltema, Charlton etc)  focuses mainly on this latter test and many tax advisers/HMRC officials refer to the statutory condition (i.e. insufficiency of disclosure) as equivalent to HMRC making a discovery.  In practice, this makes sense.  But, strictly, the terminology is incorrect.

Therefore, to answer Chatman's question: "what is to stop HMRC saying "the original officer changed his mind" every time they want to make a discovery assessment?"

A change of mind appears to be sufficient to amount to making a discovery.  However, if the conditions referred to in s29(3) are not met, then HMRC's newly found discovery will be worthless as they won't be able to follow that up with an assessment.  (From experience, however, that won't stop HMRC following up their discovery with an assessment - as a result it is for the taxpayer to raise a challenge.)

Keith Gordon

Atlas Tax Chambers

tribunal case

david5541 | | Permalink

its now more than 6 months since we heard from the inspector on a case we threatened to take to tribunal then-they have gone totally quite-its quite clear where there is incomplete process and an old style inspector they will shy away from the case if you threaten to take it back to tribunal.