Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

The Bourne Agenda: Disclosure – How much is enough?

by
9th Dec 2008
Save content
Have you found this content useful? Use the button above to save it to your profile.

The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

Under the self-assessment regime, the taxpayer, whether an individual or a corporate entity, is under a legal requirement to disclose as much information as is required to make a "correct and complete" tax return. However, it is becoming increasingly unclear as to how much information is considered enough for a tax return to be agreed. Recent cases have helped to fuel the ambiguity surrounding disclosure and HMRC's power to extend the window of opportunity in which to open an enquiry.

Under corporation tax self assessment (CTSA) a company that is not 'small' has 12 months from the end of the financial year to file their return. The return may be amended at any point within 12 months of the filing date, but this will extend the period in which HMRC can raise an enquiry to 12 months from the date of the amendment. If no enquiry is opened, it is effectively 2 years from the financial year end that the taxpayer can consider the return to be agreed and closed – or is it?

For accounting periods ending after 31 March 2008, Finance Act 2007 changed the period during which HMRC can give notice of enquiry into a small company tax return. The enquiry window will close 12 months from the day on which HMRC receives the return. The change applies to most returns delivered to HMRC before the statutory filing date. This is designed to give earlier certainty to companies that file early, bringing forward the date at which they 'should' be sure their return will not be subject to enquiry.

HMRC still have powers under TMA 1970 s29 (1) to raise discovery assessments after the tax return has been “agreed”. The limitations under which the discovery assessments can be made relate to principles established in the case of Scorer v Olin Energy Systems Limited. This case provides that with the exception of cases involving fraud and negligence, HMRC will have no right to make a discovery assessment if the information that is “discovered” was in the officers possession at the time the self assessment became final. Therefore it is essential that taxpayers reduce the risk of a discovery assessment by ensuring that there is adequate information in the return to reduce the risk of a discovery assessment, through adequate disclosure. However, since the introduction of self assessment taxpayers have been trying to understand how much disclosure is enough.

HMRC have tried to provide advice on how much disclosure is appropriate and this falls into three main categories:

1. Valuation cases;
2. Other judgement issues; and
3. Taking a different view.

In respect of the preparation of tax valuations or assessments each of these areas may apply and it is essential that the “white space” at the end of the return is utilised. For example where a valuation has been made, it should be disclosed that the valuation was carried out by a named independent and suitably qualified valuer, and on an appropriate basis.

This guidance was published following the Langham v Veltema Court of Appeal case which dealt with a house that was incorrectly valued at £100,000, and later agreed to be £145,000. The inspector issued a letter stating that the return was agreed and later raised a discovery assessment even though he had the valuation within the return. This was due to the fact that he was unaware of the actual “insufficiency” of the information due to the quantity of information received. Furthermore the Revenue's statement of practice SP1/06 states that “information will not be treated as being made available where the total amount supplied is so extensive that an officer ‘could not have been reasonably expected to be aware’ of the significance of key information and where the officers attention has not been drawn to it by the taxpayer”. The point to draw from this is that it is not the quantity of the disclosure that is important but the quality of the disclosure, and the need to highlight the actual points that require the inspectors attention.

The latest case brought to attention in respect of disclosure is Corbally-Stourton v HM Revenue & Customs which was recently decided by the Special Commissioners. The case related to a trust scheme that created allowable losses to reduce capital gains. In this case Mrs Corbally-Stourton seemed to have made ample disclosure that she had entered into a scheme that would have been of interest to HMRC. However, the key issue highlighted by this case is that the actual flaws in the structure were not highlighted within the disclosure notes and therefore HMRC were able to go back and raise a discovery assessment even though the usual enquiry period had closed.

The scheme that was referred to was one that the Revenue had investigated in full at the time and several hundred tax payers had been contacted and settlements had been agreed within the enquiry period for other taxpayers. However Mrs Corbally-Stourton was apparently not one of those taxpayers due to an administrative error within HMRC, but still her reference to the structure within her disclosure notes were not enough to prevent the discovery assessment from being raised.

So taxpayers looking for certainty at the end of the enquiry window must avoid against a discovery assessment by ensuring that they themselves identify any “actual insufficiencies” - but how can this be done and the taxpayer still be in a position to sign the return as being correct? The answer it seems is in the interpretation of the term actual insufficiency which the case judgement stated could be read as “probable insufficiency”. The best example of this would be where a different view of the legislation from that taken in the revenue manuals has been taken and this reflects the guidance referred to above.

There are many instances where this may be the case within the preparation of tax valuations assessments, if only due to previous agreements, application of industry agreements not written into the manuals, or simply the application of a view where the Revenues interpretation of the legislation is thought to be incorrect.

Taxpayers should not shy away from applying what they believe to be the correct interpretation of the law, and at the same time should be prepared to stand by that interpretation by providing adequate disclosure within the return. Clearly times have moved on since the introduction of self assessment and providing clear disclosure will be expected if taxpayers want to have the comfort that returns are “agreed” once the enquiry window is closed.

Giles Downes
Bourne Business Consulting LLP

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.