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SELF ASSESSMENT HAS been extraordinarily successful, certainly as far as HMRC and the Government are concerned. As with the pay-as-you-earn system, the department has managed to hand over the tax filing, assessment and payment functions to the taxpayer who, if he does not comply with the strict time limit and other obligations, pays penalties and interest as well as the tax due.
Of course, one of the main features of self assessment is the need for HMRC to embrace computerisation of tax functions. In the case of tax returns this has been achieved by obligating taxpayers to fill in numerical figures in the various boxes of the self-assessment tax return. On the whole, taxpayers are discouraged from submitting additional hard copy information such as accounts, computations and dividend vouchers, etc.
However, many annual accounts and tax returns need additional explanation of entries, particularly in order to avoid tax enquiry and investigation, and in the past this was achieved by means of a letter. Under the self assessment system apparently the only safe way of achieving this is for the taxpayer to include additional information in the 'white spaces' in the tax return.
A continuing problem
Anecdotal evidence suggests that the provision of additional information in the white spaces of the return document is not reaching the HMRC member of staff who reviews the return. A recent query on the AccountingWeb Internet site highlights this situation. One subscriber commented that he had been told by an HMRC official that no one ever read the white space entries! Daron Gunson had a client who endured a nine-month enquiry, although the matters under review had been fully explained in the white space of a return already submitted.
The legal requirement
Under TMA 1970, ss 8 and 9, a taxpayer is obliged to submit a tax return and to file his or her self assessment. It is understood that, when tax returns are received by HMRC, they are dealt with at a receiving centre and the numerical entries in the various boxes are then processed by the staff of that office, not by Inspectors. Additional hard copy information provided is likely to be detached from the return and put into a 'shoebox'.
What is not at all clear is whether the white space entries and hard copy documents all reach the Inspector reviewing the return, and in what form. There appears to be an advantage with electronic filers, as every part of the return is transcribed onto the personal file of the taxpayer. There is also the prospect of the redesigned 'MTR' or main tax return (to distinguish it from the short tax return) being issued in 2007-08.
Box 23.7 on the self assessment personal return and box 3.116 regarding self-employment are both headed 'Additional Information' and this may be vital for the purposes of avoiding discovery and indeed of avoiding a tax enquiry or investigation. Without it, the Officer dealing with the return has little chance of appreciating the full position of the taxpayer unless he raises at least an aspect enquiry and possibly a full enquiry.
Disclosure and discovery
The act of disclosure is extremely important because of TMA 1970, ss 29(3) to 29(5), which talk about discovery. The normal time limit for HMRC to make an enquiry into a return is twelve months following 31 January after the end of the tax year for which the return is filed. Therefore, for a return for the year ended 5 April 2005, the normal time limit for making an enquiry is 31 January 2007. This is subject to the fact that, if fraudulent or negligent conduct on the part of the taxpayer is proved, then an enquiry can be put into place in any case based on extended time-limits.
However, the honest taxpayer has the protection that he or she will not be assessed under the discovery provisions if the Officer dealing with the return could have been reasonably expected, on the basis of the information made available to him or her before the normal time-limit, to be aware of any matter that might otherwise raise the spectre of discovery. In other words, if the taxpayer submits the return and explains unusual transactions in the white space of the return and perhaps in accompanying documents, then HMRC have no grounds for instituting an enquiry unless they do so within the strict time limits set out.
Langham v Veltema
The whole issue was highlighted further by the Court of Appeal decision in Langham v Veltema [2004] STC 544.
This was a case involving a benefit in kind and a valuation situation. Full details of the transaction were supplied with the tax return, but the Court of Appeal held that the later requirement for a valuation of the property triggered the discovery provisions. Kevin Slevin explained this well in his article in Taxation, 'Certainty? What Certainty?' (19 August 2004, page 517) when he made the following comment.
'Put simply, the Court of Appeal found by unanimous decision that when considering section 29(5) one interprets the wording thereof literally by focusing solely on the Inspector's knowledge of the facts as presented to him by the taxpayer in his self-assessment return and the facts presented in supporting documentation, etc. (see section 29(6)). It is not possible for the taxpayer to argue that any competent officer of the Revenue examining the appeal would have referred the case to the District Valuer for advice and that, as a consequence of the officer's failure, the valuation figure has become final. In short, the only way to get complete certainty in a case involving a valuation is to ensure the matter is referred to the appropriate valuation office of the Revenue (and of course ensuring all material information is made available too).'
HMRC pronouncements
This still leaves the question of procedure and finality where white space entries have correctly been made by the taxpayer and have apparently not been picked up by the Inspector when reviewing the return. Generally speaking, there is a lack of any comment on this issue on the HMRC website except for one paragraph in a document entitled Self Assessment (SA) Online Filing for Agents. In answer to the question 'How can I send additional information such as computations with the return?', the following reply is given.
'We would recommend you use the “white space” boxes on the return to provide any additional information. This data is captured automatically on receipt and is immediately available to our staff'.
'Where the tax return guidance asks for documents to be sent with the return or the “white space” is not suitable, you can submit the return online and post the paper documents to the relevant tax office separately no later than one month after the return is filed.'
That comment is fair enough, but it still does not confirm that entries in the white spaces will reach the appropriate person in the HMRC office. This issue has been so important that it is understood to have been discussed at Working Together groups and certainly, at one time, a 'white space group' met, comprising representatives from both the professions and HMRC, and including such luminaries as Robert Maas and Nigel Powell of Digita.
Commentators' advice
The whole issue of what or what not to put in the white space and also whether or not to submit hard copy accounts and computations with the tax return has been the subject of debate from time to time. Some commentators have suggested that hard copy information should not be submitted with the return and others have suggested the opposite. I have certainly heard Robert Maas, when lecturing, suggest that everything possible should be provided to HMRC in order to make sure that Inspectors could not contend lack of disclosure and make a discovery assessment.
Personally, I include additional information in the white spaces of my personal return, as well as submitting accounts and tax computations in hard copy when appropriate. I feel that it is important to ensure that the information gets to the right person at the other end by some means or other.
Action required
It is clear that the issue of white space entries has not been resolved. There may be an advantage for electronic filers, as every part of the return is transcribed onto the personal file. However, the many others are in an invidious position.
What taxpayers and their advisers need is an undertaking from HMRC that all white space additional information supplied will reach the taxpayer's personal file and the Officer reviewing the return. If not, the tax return should be redesigned in such a way that such information can be provided efficiently and easily and in a way which is guaranteed to reach the recipient. At present, and bearing in mind that it is ten years since self assessment was introduced, it is scandalous that this situation still exists and steps must be taken to correct it.
John Newth FCA, FTII, FIIT, ATT, a former deputy editor and consultant editor of Taxation magazine, is now a freelance tax writer. He was the winner of the LexisNexis Tax Writer of the year 2005 at the UK Tax Awards.
