FTT clarifies the position on time limits applying to “unsolicited” returns

The First-tier Tribunal decision in Farhana Weerasinghe ((TC02542) published 28 February 2013), dealt with two issues.  First, the time limits that apply to an “unsolicited” tax return filed.  Secondly, the reliability of HMRC’s basis of calculating an amendment to a tax return where no prime documents are available.

Mrs Weerasinghe (hereinafter Mrs W) began trading on 27 February 2007. Her then advisers submitted an unsolicited 2007 tax return on 11 February 2008 which showed a small profit. Following a change in advisers, Mrs W submitted a second 2007 return declaring a loss.  This was received by HMRC on 13 January 2011.  On the same date, Mrs W’s new advisers submitted the 2008 return, which HMRC decided should be subject to an enquiry under s.9A TMA 1970.

The new advisers used estimated figures for both the 2007 and 2008 tax returns as the previous advisers had lost Mrs W’s paperwork.  The matter was further complicated as the new advisers were not aware a tax return for 2007 had already been submitted.

Towards the end of the s.9A enquiry, HMRC issued a closure notice estimating that there was £31,811.20 of tax to pay.  In addition, HMRC refused to allow Mrs W to carry forward the 2007 losses on the basis the second return in which they were claimed was filed outside the time limit for amending the return.  Mrs W appealed on both counts.

HMRC argued that the initial tax return for 2007 should be considered as filed in response to a notice under s8 TMA 1970.  The FTT disagreed and ruled that as Mrs W was not issued with a notice, the original 2007 tax return should be treated as voluntary and as a notice of chargeability under s7 TMA 1970.

The FTT also agreed that s8 TMA 1970 did not apply to the return and that the time limits for amending the return were not applicable.  The Tribunal concluded that the second return should be treated as a claim under s42 TMA 1970 with the result that s43 TMA 1970 applied and the second return, and therefore the loss claim, was filed within the prescribed time frame.

The FTT then reviewed HMRC’s method of calculating the amended profit figures.  HMRC had conducted a survey of 1,000 self-assessment returns for 2008 looking at similar trades and applied a net profit rate of 20% to Mrs W’s turnover.

Mrs W asserted that a different method should be used to calculate the net profit and challenged the accuracy of HMRC’s business economics exercise. The FTT heard how Mrs W’s estimated figures were based on the 2010 figures of a similar trade, NL Management Limited of which she was a director, operating a single service station and convenience store in a similar geographic location. The Tribunal determined that Mrs W’s figures were “more reliable than the basis of calculation of the figures in the HMRC closure notice” and no amendment was required to the reported profit figure.

The decision on the losses claimed for 2007 demonstrates that HMRC do not always get it right the first or the second time. In fact, in this case, it took an appeal to the FTT to determine the claim was valid.

With regard to the 2008 year and the amended tax liability; the FTT ruled that Mrs W’s figures were more reliable, which highlights that the term ‘garbage in, garbage out’ can apply to the statistical data used by HMRC.

Advisers should always critically analyse the basis of HMRC’s enquiry amendments, as the officer involved may not have considered all of the relevant facts in coming to a conclusion or not used the right information in the first place.

Gabelle specialises in advising professionals and their clients in dispute with HMRC and can assist in all aspects and types of HMRC enquiries. Please contact TaxDesk 0845 490 0509 and ask for John Hood.