New 4 year tax enquiry window

Is this what we are now faced with?

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We, like many other firms, recently received a letter from HMRC asking for information regarding a client's dividends for 2014.

The reason for the query is that the client's share of the dividend in the company accounts to July 2013 did not match the figure on their 2013/14 tax return.

The letter did not seek to enforce HMRC's rights under discovery but stated that the request would be made legal if we did not comply.

In this instance, the reason for the discrepancy was twofold.  The first being that the dividends had been voted quarterly and some related to the previous tax year.

There was also a waiver in one quarter but we successfully argued that this was purely for commerical reasons and, as the dividend would have been taxed at the same rate in the hands of either shareholder in any event, HMRC have stated that they will not be taking it further.

The part I am unhappy about is that this scenario shows that there was no 'discovery' and that it was nothing more than a fishing expedition by HMRC.

This case clearly demonstrates that there can be numerous legitimate explanations for what HMRC deems to be a discrepancy of this kind.

As far as I can tell, the 'discovery' only arises when you mention the word waiver, for example, and then give them the opportunity to challenge it.  What would happen if we simply stated that the dividend declared on the tax return was correct.  Can they then ask the company itself to provide an explanation as to why that shareholder's dividends were lower than expected in a given tax year and, again, would the company be obliged to provide the information?

Granted, there will undoubtedly be many cases where HMRC could attack an inappropriate waiver or the dividends have been underdeclared but surely they have to be certain before opening a formal enquiry.  I suppose my question, therefore, is if we do not provide the information requested by HMRC, would they have grounds to open an enquiry of force us to provide the information in some other way?

If so then surely what we have is effectively a 4 year enquiry window.  Taking it to extremes, could they soon be asking why gross profit margin was 40% lower in 2014 than in the preceding and subsequent years and ask for an explanation with said explanation then providing the 'discovery' they need to open a formal enquiry.

Where HMRC have the power to open an enquiry under 'discovery' then they never seem to shy away from using it so I cannot help but think that the reason they don't here is that they have no right to and this approach is simply an attempt to trip the taxpayer/agent up and get them to say something which does give them that power.

I would be grateful to hear the opinions of others out there on the subject.  If I am legally obliged to provide information to HMRC then, of course, I always would but here I am not ashamed to admit that I have no idea as to where we stand.

Replies (3)

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By SteveHa
09th Jun 2017 12:12

I suggest that you read S.29 TMA 1970. HMRC's powers of discovery are not without limit, and on the basis of your post I suspect the conditions were not met in this case.

Thanks (1)
Replying to SteveHa:
By dhughes1975
09th Jun 2017 12:24

Thanks Ste. They did not actually use their power's of discovery here but threatened to do so if the requested information was not provided. In this case the requested information proved there was no issue and meant the end of the matter. Had the dividend waiver been between husband and wife, however, then they may have challenged further and, in light of that evidence, proceeded under powers of 'discovery'. Would they have the right in that scenario? Are we obliged to provide information that could lead to a 'discovery' and, in the absence of any reponse, can HMRC assume you are therefore guilty as charged and raise assessments as they are threatening to do so in these letters?

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09th Jun 2017 13:36

HMRC have to have a reason to believe the tax return submitted may be wrong to raise a discovery assessment.

My view is that there are a myriad of reasons why dividends on a tax return may not match the apparent dividends in a set of accounts - especially where the company year end is not 31st March. So any difference could not be a justification for making a discovery.

HMRC may take a different view and, so far as I'm aware, this point hasn't been tested at tribunal.

So, if there's nothing sinister / wrong I guess I would take the easy route and explain the difference, even if it is not required. But I would always make the point in correspondence that HMRC had no entitlement.

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