HMRC not entitled to discovery assessment

HMRC will not simply be able to open a discovery assessment if an investigation opportunity has fallen out of the 12-month window, according to an upper tribunal ruling.

Capital Allowances such as those undertake at EXACT do NOT have be disclosed to HMRC as a Tax avoidance scheme under the DOTAS mechanism, however other tax avoidance schemes do.

Tax specialists Gabelle said that Revenue V Charlton [2012] UKUT  770 (TCC), which ruled HMRC was not entitled to make an discovery assessment in the case of three appellants who declared they were part of a tax avoidance scheme in their AAg1 forms, is significant to tax advisers.

In the case, the three appellants had declared they were part of the scheme to create a capital gains loss on the white space of the tax return, under DOTAS rules, including the SRN number.

The declaration included details of the facts of the case, but not the technical arguments or statement that the tax position might differ to that of HMRC's.

Around 40 other taxpayers adopted similar tax planning, with most being notified by HMRC that they were opening enquiries within the normal 12-month enquiry window.

However, the Revenue missed these three, and looked into opening a discovery assessment as it was outside the 12-month window to open an enquiry.

The first-tier tribunal previously ruled that these were invalid, as the appellants' returns were clear that they had implemented a tax avoidance scheme.

The Revenue appealed this, but the resulting upper tier tribunal upheld the original decision, under section 29 of the Tax Management Act (TMA) 1970, which provides a two-hurdle test of when a discovery assessment can be made.  

The tribunal agreed with HMRC that an assessment can be made where the original HMRC officer changes their mind or takes a different view, rather than anything completely new being discovered.

However, it disagreed with the Revenue on the main issue of the tribunal - whether HMRC had sufficient information to enable a hypothetical officer to have been aware of the under-assessment.

The ruling said: “We are in no doubt that the existence of the form could reasonably have been expected to have been inferred by the hypothetical officer and that the physical separation of the SRN number from other relevant entries on the tax return wouldn’t have prevented an officer from making the necessary link between them so as reasonable to infer the relevance of the form AAG1 to the insufficiency.”

John Hood, a director at Gabelle, said the case is significant as it provides clarity for advisers and taxpayers where tax returns will now provide sufficient information.

“The tribunal ruled HMRC should have just said ‘fair enough’ after not discovering the issue in the first 12 months and not opened a discovery assessment.”

“It provides clarity as now information on returns should be sufficiently simple so that if HMRC review the return, it’s obvious to a hypothetical officer that there is an issue.”

Hood added that he does not expect HMRC to appeal the decision.

Published: 13th May 2013

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