Discovery and tax avoidance

The First-tier Tribunal (FTT) decision in the case of W Blumenthal v HMRC (TC02174, published on 28 August 2012) clarified that, from a discovery perspective, it was essential that the additional information provided on a tax return needed to alert HMRC to ‘…the need to make further enquiries’.

Mr Blumenthal exchanged some shares for loan notes in a public company and entered into two deeds of variation with the aim of converting the assets into qualifying corporate bonds.  He then redeemed the bonds and claimed a capital loss in his tax return.  HMRC reviewed the transactions and deemed that the redemption gave rise to a capital gain and raised an assessment, which was upheld by the FTT.

The FTT were also asked to consider whether the discovery assessment was valid and whether the information available to HMRC and defined by s29(5) TMA 1970 was sufficient to enable an officer of HMRC to make an informed decision as to whether the return was correct.

The case is interesting as the FTT considered the planning to be tax avoidance and artificial in nature.  The knock-on effect was that where a return involved complex transactions (i.e. tax avoidance) there is a greater burden on the taxpayer to provide sufficient information to allow HMRC to make an informed decision as to whether the return was correct.  Furthermore, it was not sufficient to make a ‘pure’ factual disclosure to HMRC – the disclosure should include an explanation of the main tax law issues and the position taken.

The FTT clarified that the main two points were:

  • Whether sufficient information was provided so that the officer could have reasonably been expected to be aware of an insufficiency (the conversion of the loans into QCBs); and
  • Whether the deeds of variation were effective.

Advisers may wish to review the quality of the disclosure made on any tax returns that include complex transactions or tax avoidance planning to minimise the risk of HMRC making a discovery under S29 TMA 1970.  Advisers therefore need to consider carefully not only whether additional information needs to be attached to the return, but also the quality of the information provided.

For further information on limiting the risk of a discovery assessment or resolving a dispute with HMRC please contact TaxDesk on 0845 4900 509 and ask for John Hood or Noel Hankinson.