Two recent First Tier Tribunal decisions have contributed towards a shift in favour of the taxpayer in relation to ‘discovery’. Many of the cases preceding these have been settled in favour of HMRC, although the tide was turned somewhat with the decision made in the case of Charlton last year (http://www.gabelletax.com/tax-news/discovery-assessments-harder-than-hmrc-hoped/), a case considered by many to be a landmark decision in terms of summarising what is meant by ‘discovery’ and ‘information made available’.
The new case of Nijjair Dairies Ltd v HMRC (TC02828 – 30 August 2013) concerns a company which submitted a return showing a loss in 2005. The loss was subsequently challenged by HMRC on the basis that the expenses claimed were not considered to be wholly and exclusively for the purposes of the trade.
In December 2011 HMRC wrote to the company advising that ‘protective discovery assessments’ had been made in relation to the loss and that certain expenses had been disallowed. An appeal was lodged on the basis that no discovery determination had been raised and therefore the loss was still allowable. In June 2012 HMRC wrote again, and on this occasion the letter was headed ‘Notice of Determination’ to resolve any doubt.
The First Tier Tribunal allowed the taxpayer’s appeal against this notice on the grounds that HMRC were outside the statutory time limit. HMRC contended that the letter sent in December 2011 constituted a valid discovery determination and the required notice had therefore been issued before the time limit expired. The FTT Judge rejected this on the basis that the letter sent by HMRC in December 2011…
…did not have the appearance of an official record of a decision to make a determination in relation to a taxpayer but appeared to be part of the ongoing correspondence between HMRC and [the] accountant in relation to the tax dispute. The only decision that the letter clearly recorded was the decision to issue protective assessments.
The broader implication of this case is the importance of taking the time to carefully review all correspondence received from HMRC. Particular attention should be paid to whether reference is made to the appropriate legislation and the correct time limits adhered to.
In the second case, Michael Freeman (TC 02885 – 2013), the taxpayer claimed taper relief in his 2002/03 return in respect of a capital gain arising on the redemption of loan notes (these had been received in 1997 in exchange for shares in a company co-founded by him). In the white space disclosure the taxpayer stated that the loan notes were non-qualifying corporate bonds, as he had understood them to be at the time. It subsequently emerged, following an enquiry, that the supposed non QCBs were in fact QCBs, and a discovery assessment was issued in 2007.
The Tribunal allowed the taxpayer’s appeal against the assessment on the grounds that while the white space disclosure itself was insufficient in terms of enabling an officer to identify an underassessment of tax, the papers provided during the course of an earlier enquiry provided the sufficient level of detail. The assessment was subsequently discharged.
This case highlights the issues involved when attempting to protect against potential discovery assessments and the necessary level of detail and supporting documentation required in both the white space and elsewhere to achieve this.