There is some really good news about discovery assessments. For years these have represented a serious problem. The point is so important that I make no apology in repeating some of the comments made in the October 2010 bulletin.
HMRC are only entitled to raise an assessment outside the enquiry window if they discover that an assessment to tax is insufficient. There is a balance here between the taxpayers’ entitlement to finality which is the cornerstone of self assessment, and the right of HMRC to correct a possible under assessment of tax. This balance was explained by Park J in the case of Langham v Veltema as follows:
“[Self Assessment] imposed new burdens on taxpayers by requiring them to submit fuller tax returns than had previously been required …. The new burdens were balanced by new protections for taxpayers who conscientiously comply with the system, in particular by new and tighter time limits on the power of the Revenue to make further tax assessments”.
That new protection proved to be illusory. The decisions in such cases as Langham v Veltema and Hankinson v HMRC, demonstrated that there is little to prevent HMRC raising an assessment on the basis of a discovery. The test is that the inspector could not reasonably have been expected, on the basis of the information supplied to him by that time, to be aware of the insufficiency in the assessment. The information supplied to him must clearly alert the inspector to the insufficiency of the assessment.
This gives rise to the impossible conundrum that if you believe (on good grounds) that your tax return is correct you therefore do not consider there is any insufficiency, so you cannot then “clearly alert the officer to the insufficiency”. By failing to do so, the door is open to HMRC to raise the assessment on the grounds of discovery. However, if you know that your tax return is incorrect HMRC would be able to raise an assessment on the grounds that you have knowingly submitted an incorrect return.
This Catch 22 position never cut much ice with the Courts but the case of Lansdowne Partners did indicate that the taxpayer will be protected if he had given adequate information to HMRC to enable them to decide whether or not an additional assessment should be raised within the time limit. The taxpayer is entitled to say that if HMRC wanted to disagree with his self assessment, or to challenge a claim or deduction, they had all the information necessary to do so before the expiry of the enquiry window.
It is with this background that the recent decision in Charlton v HMRC TC1317 is obviously very helpful. In this case, the taxpayer made a claim for a capital loss. Full disclosure had been made by the taxpayer but HMRC had not opened an enquiry into the matter before the end of the enquiry window. Nevertheless, they sought to raise a discovery assessment later.
The tribunal dwelt extensively on the meaning of “discovery” in Section 29 (1) Taxes Management Act 1970, deciding that the old authorities on the meaning of discovery remained good – that a discovery can occur merely by the original inspector changing his mind, or a new inspector taking a different view, without any new facts having been discovered.
However, it is also necessary to consider the requirement in Section 29 (5) which is whether the inspector could reasonably have been expected to be aware, on the information provided, that there may be an insufficiency. It was this question which was fundamental to the appeal – and to the protection of taxpayers generally. Mr Charlton said that everything was perfectly clear from the full disclosures in the tax return.
HMRC argued that the statute required the taxpayer to have made it clear to the inspector that there was an actual insufficiency in the self assessment made in the returns, not that there simply might be an insufficiency. (This is manifestly absurd – it represents the Catch 22 argument that the taxpayer is only protected if he tells HMRC that his tax return is wrong when he sends it in.)
Of course facts will vary but in this case the tribunal decided that no HMRC officer could have examined the tax return without it being instantly obvious that there may be an insufficiency. This reinforces the point made in Lansdowne that if HMRC wanted to disagree with the self assessment or to challenge the loss claim, they had all the necessary information and should have so before the enquiry window closed.
An interesting additional feature in the case of Charlton concerned whether the inspector can or should make further enquiries. It has been clearly established in earlier cases that it is not enough for the taxpayer to say “you could have enquired”; that places too great a burden on HMRC. The inspector needs to be able to make the relevant judgment on the basis of information before him without any need to make further enquiries. However, in Charlton it was suggested that this concept needs to be refined.
“We consider that the ban on raising further enquiries about the facts, implicit in the Court of Appeals decision in Veltema, and indeed in Subsection 29 (6), has no bearing on how we should expect the notional officer to approach his proper task of then considering information and deciding whether or not he should raise assessments. And if it is glaringly obvious either that the relevant officer should consider the law, and possibly refer to published material or, where an SRN number is disclosed, simply send an email or make a phone call to colleagues and ask for guidance, this is precisely how we would treat the notional officer as proceeding”.
This is a clear departure from the HMRC view set out in Statement of Practice SP1/06. Furthermore the tribunal did not support the HMRC view (again in SP1/06) that the taxpayer must specifically draw attention to any divergence from the published HMRC view on a matter, to be protected from a discovery assessment.
Whilst this case brings a welcome balance to the self assessment process, it may be too much for HMRC to accept and I guess an appeal is likely.