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HMRC loses discovery cases at tribunal

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22nd Aug 2011
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A recent blog post from ICAS director of tax Derek Allen highlighted a brace of tribunal cases where HMRC came up short in its approach to discovery assessments.

The first case, Michael Charlton, Barbara Corfield & John Corfield v HMRC [2011] UKFTT 467 turned on the precedent established in the Langham v Veltema Court of Appeal decision concerning the certainty and protection due to an honest taxpayer who has made full disclosure.

The three appellants took part in a second hand insurance policy scheme promoted by Tenon where losses on selling the policies would be set against large capital gains they had made. Charlton and the Corfields submitted returns for 2006-7 disclosing the nature of the scheme and its reference number under the DOTAS rules.

The Appellants knew when they submitted their returns that HMRC had challenged the scheme and the Special Commissioners had ruled that it did not work Drummond v HMRC [2007] STC (SCD) 682 - but this did not set a precedent. Although the enquiry window on their 2006-7 tax returns closed on 31 January 2009, HMRC waited until the Court of Appeal confirmed the scheme failed in June 2009 before it raised discovery assessments. 

“The task for us was simply to decide, in principle, whether those discovery assessments were valid or not,” commented the tribunal judges. “Our decision is that they were not valid.”

The decision continued: “HMRC has effectively conceded that it was only through various administrative slip-ups that no enquiries were in fact opened.  It was significant that when the discovery assessment was made, no HMRC officer had actually obtained any further information from the appellants, or indeed Tenon, in relation to the scheme undertaken by the Appellants, and that without any such further information or admissions about “insufficiencies”, HMRC had felt able to make the discovery assessments…

“In this case the taxpayer has disclosed, with perfect accuracy, the essential features of the scheme, such that we understood immediately precisely what was involved.  The notional officer might have been slightly slower in reaching such a conclusion, but could not have doubted that a very artificial scheme had been implemented.  Equally clearly that scheme had been disclosed to HMRC under the DOTAS rules.  When the taxpayer has given information that reveals these facts, it would be extraordinary if the protection of subsection 29(5) was not to apply,” the tribunal judges decided.

“The good news on discovery continues,” wrote Allen concerning the case of The Executors of David Atkins deceased v HMRC [2011] UKFTT 468.

In this instance HMRC had withdrawn a discovery assessment for approximately £13,000 just before an appeal was due to be heard.  The late taxpayer, Mr Atkins, had been a Lloyds name and some £29,878.14 was retained by his syndicate after his death in a special reserve account to cover losses in the year before his death.

His executors sought costs from HMRC, but they could only be awarded if the tribunal judged HMRC had “acted unreasonably in bringing, defending or conducting the proceedings”.

The usual practice in these situations is for the executors to file a return based on the taxpayer’s accounts for the year in question, and for HMRC to then open an enquiry into the return and leave it open until the fate of the amounts held in reserve was resolved. The accountant acting for the executors even wrote HMRC in 2008 before the enquiry window closed reminding it to open an enquiry. 

“The problem in this case results entirely from the way in which HMRC have failed to act in accordance with their own guidelines in failing to open an enquiry into the relevant return,” noted tribunal judge Howard Nowlan, who awarded costs due to HMRC’s procedural lapse and the costs it imposed on the taxpayers.

“It is all too common for HMRC to be responsible for serious delays and as a result to be seeking information about earlier years If a discovery assessment is competent, they have the power to obtain information from paragraph 21(6), schedule 36 FA 2008 but that condition is critical,” noted Allen.

“Taxpayers are entitled to certainty if they have made an honest and complete return so the two decisions reviewed here are important and persuasive authority that discovery assessments are not available if HMRC has delayed using information of has made an administrative error.”

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By david5541
22nd Aug 2011 13:25

recent cases on discovery assessments referred to by derek allen

if I think these cases

strengthen our appeals against 2001/2002 &2002/2003 sch d discovery assessments raised last year on the grounds explained above who can help me to "quote the book" at the inspector?

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Replying to geoffemtacs:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
22nd Aug 2011 18:34

I'm no tax lawyer, but...

I'd point out the fact that first tier tribunal decisions do not in themselves set legal precedents. You can certainly scrutinise the arguments presented and the judge's decisions in these cases - and you could find that they might convince an inspector to back down.

However, as Anne Fairpo (who is a tax barrister) commented on our Reasonalbe Excuse Scorecard, "“HMRC staff are under increasing pressure with fewer resources and so will not have time to check what previous internal decisions on a topic have been, so staff are taking their own view... It's probably easier under pressure to err on the side of caution. Within government, that's not usually on the side of the taxpayer.”

For my sins, I went back to the Inspector of Taxes (Langham) v Veltama case cited by the tribunal judge in Charlton, Corfield & Corfield v HMRC above. Ironically the taxman won the case at the Court of Appeal, but there is an important principle stated in paragraph 31 of the judges' decision: "It may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer. This is subject to the exercise by the Inland Revenue of: 1) whatever routine or random checks that it sees fit to make as a form of "light monitoring" of self-assessment returns; 2) its statutory power of enquiry under section 9A where it considers it appropriate; and 3) in the absence of fraud or negligent conduct, subject to further scrutiny thereafter only in the event of newly discovered information and/or reasonably drawn inferences therefrom that the self-assessment was insufficient resulting in loss of tax."

In the Vetlama case, however, the taxpayer has made an inaccurate self-assessment, but without any fraud or negligence on his part. For Lord Justice Auld, it would frustrate the aims of simplicity and early finality of Self Assessment to to interpret section 29(5) as putting an obligation on tax inspectors to conduct an intermediate and possibly time consuming scrutiny, whether or not in the form of an enquiry under section 9A, of self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it."

I'm afraid the Veltama decisions hung on bewildering legal interpretations of s29(5) of the Taxes Management Act 1970 whether an inspector "could not have been reasonably expected … to be aware of the situation". But the point of the latest tribunal cases is that the returns in question were accurate at the time they were submitted, and should have been entitled to the principle of finality under Veltama.

Be warned - this is entirely a lay interpretation. I'll see if I can find someone better qualified to help with your query.

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Replying to geoffemtacs:
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By Anne Fairpo
23rd Aug 2011 09:57

Need more information …

The two cases quoted are rather different, so it's a bit difficult to set out how to "quote the book" at the inspector: the connection between the two is that enough information was provided to HMRC that they were effectively blocked from raising discovery assessments after the normal enquiry window had closed.  

To be able to raise such a discovery assessment, s29 TMA 1970 means that HMRC have to be able to show that the information provided in the tax return was not sufficient on its own to make it clear to HMRC (acting reasonably) that insufficient tax had been paid. The Veltema decision "clarified" this by deciding that this means that the information provided should be sufficient for a reasonable inspector, on reading the return, to be able to realise that the tax paid was insufficient - in the Veltema case, the necessary information was in two separate returns (tax return and P11D) and the Commissioners held that this was not sufficient even though the two returns contained all the information.

A more recent case, Pattullo ([2010] STC 107), added some guidance to this: the taxpayer had used a tax-saving scheme and the tax return white space disclosed the steps taken as part of the transaction, and set out the law which created the tax saving. HMRC won, on the basis that although the white space disclosure set out the transaction, it did not make any reference to the fact that it involved a scheme and an interpretation of the law which was contrary to HMRC's.

Veltema effectively makes it clear that you have spell things out to HMRC; Pattullo shows in just how much detail the information has to be spelt out although it should be noted that the scheme being used in Pattullo was not one which was likely to be obvious to the average inspector - the decision might have been different with a well-known scheme.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
31st Aug 2011 11:00

The view from ACCA

Thanks Ann, the two recent cases raise interesting points relating to discovery - as does your additional reference to Pattullo v HMRC.

However, I feel that I may have misattributed the original source of the analysis. On closer inspection, I notice that ACCA technical officer Jason Piper blogged about the two cases on 8 August - a week before ICAS's Derek Allen.

Piper was also somewhat more pointed in his conclusions, commenting: "HMRC needs to sharpen up its act, and pronto. The image portrayed by these cases is one of an arm of government which is not simply failing on the basics, but then trying to fix things by misusing its powers. Two wrongs don’t make a right. By allowing these cases to reach public tribunals, HMRC is losing more than a few cases; it is losing the trust and respect of taxpayers and their agents."

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