Generally a tax payer should have certainty about their tax affairs and this means that HMRC should not be able to enquire into a return after a year from the date of its submission. This default position can be overturned if HMRC make a ‘discovery assessment’ because this can extend the enquiry window to 20 years after the tax year in deliberate cases and to 6 years after the tax year in other cases. Tax payers should always seek to minimise the possibility of a discovery assessment by making good quality disclosure (often ‘white space’ disclosure) in their tax returns. This is because HMRC can only make a discovery assessment about something which they could not have not have known about from the return.
Following the Court of Appeal case of Langham v Veltema in 2004 HMRC published a statement of practice (SP/106) applying to income tax, CGT and corporation tax. The case considered the sufficiency of the information made available to a hypothetical officer for the purposes of the test in TMA 1970 s29(5).
In that case, an employer gave a house to a director who also controlled the employing company. The director’s self-assessment return was prepared on the basis that the property was worth £100,000. The return was processed without the need for correction. HMRC formed the opinion that the company’s corporation tax return should reflect the property transfer at £145,000. A discovery assessment was issued.
The Appellant argued that the property was discoverable from his return and HMRC had been aware of the possible deficiency for over 12 months and were out of time. The Court of Appeal found that TMA 1970 s 29(5) did not preclude HMRC from raising a further assessment because the taxpayer/agent had not clearly alerted HMRC to the insufficiency of the assessment. In the circumstances, the Inspector could not ‘reasonably be expected’ to infer that the assessment was incorrect based on the information given.
SP/106, which was released after the Veltema case includes examples illustrating the information that should be disclosed in the additional information space for a return to reduce the risk of a discovery assessment in certain situations:
• Who undertook a valuation (whether an independent and qualified professional);
• For exceptional items in accounts, specify details and how they have been allocated to revenue/capital;
• Where an interpretation of law is relied upon (differing to that published by HMRC) that view should be included.
In short tax payers should take a common-sense approach in explaining any points to HMRC which are open to interpretation.
When we (Forbes Dawson) advise clients on disclosures we do so very much with the above principles in mind to ensure that they can take comfort after a year that their returns have been ‘accepted’. This is how the self-assessment mechanism is meant to work and it is right that an honest taxpayer should have some certainty over their affairs after a reasonable length of time. If a discovery assessment is made then our first step is to consider whether it has been validly made, based on the disclosures in the original tax return.
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