Insufficient Disclosure Negates Challenge to Enquiry
It is generally considered that if HM Revenue and Customs (HMRC) raise no enquiries in relation to a tax return in the year following its submission, that is the end of the matter.
However, as a recent tax dispute shows, where HMRC make a 'discovery', that is not the case.
The dispute involved a wealthy taxpayer who claimed a loss for tax purposes in relation to a complex tax saving scheme involving derivatives contracts which were arranged to produce allowable losses for a trust.
The scheme led to an enquiry from HMRC's Special Compliance Office and Specialist Investigations. Nonetheless, when a challenge to the taxpayer's tax return for 2003 was issued, he was able to claim it was 'out of time' by virtue of Section 9 of the Taxes Management Act 1970, which for most purposes allows HMRC to start an enquiry into a tax return within a year of it being filed if it is filed within the normal time limit.
The tax saving scheme was eventually defeated by HMRC, and the trustees of the scheme then advised those who had participated in it that they should file an amended tax return.
The disclosure of the scheme on the man's original tax return was not specific enough for the tax inspector who dealt with it to be expected to raise enquiries.
The legislation governing the raising of assessments to collect unpaid tax allows HMRC to issue 'discovery' assessments in the event that:
- any income which ought to have been assessed to Income Tax or chargeable gains which ought to have been assessed to Capital Gains Tax have not been assessed; or
- an assessment to tax is or has become insufficient; or
- any relief which has been given is or has become excessive.
The taxpayer's argument was that his participation in the scheme was well known to HMRC long before he submitted his tax return and that by that time they had already concluded that the scheme was ineffective. Therefore, the tax inspector dealing with his return should have challenged it 'in time'. It could not be said that he had made a discovery when the assessment was issued as the facts were already well known.
The dispute ended up in the Court of Appeal, which rejected the taxpayer's argument, concluding that 'it would have been entirely speculative rather than a matter of inference from the return for the notional officer to have concluded that another branch of HMRC might have relevant information on the effectiveness of the Scheme. There is no basis on which the existence of such information could reasonably be expected to be inferred from the limited disclosure in the return.'