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The taxpayer company established an employee benefit trust (an EBT) in September 1998 and paid £60,000 into it. No monies were paid out of the trust to employees. This was shown as a deduction in the accounts, but no adjustment was made to the corporation tax computation.
An enquiry into the accounts for the two following periods showed that an adjustment had not been made and HMRC made a discovery assessment under FA 1998, Sch 18 para 41. HMRC took the view that, following the House of Lords' decision in Dextra Accessories Ltd & Others v MacDonald [2005] STC 1111 (see 'Trusts 4 U?', Taxation, 18 August 2005, page 542), a deduction should have been made under FA 1989, s 43 as the payment into the trust was of 'potential emoluments' and payment out had not been made within nine months of the end of the accounting period.
The General Commissioners upheld the taxpayer's appeal, but the High Court held that Langham v Veltema [2004] STC 544 applied. Under FA 1998, Sch 18 para 44, the Inspector was not to have attributed to him further information unless and until such information was produced to him.
A discovery assessment was not precluded simply because it would have been reasonable for the Inspector, had he thought about it, to initiate an enquiry into the 1999 return. The burden was on the taxpayer to prove that FA 1998, Sch 18 para 45 (that no discovery assessment could be made if the return was made in accordance with generally prevailing practice) applied, not on HMRC to prove that it did not.
The court held that, on the facts, the Commissioners could only have concluded that Sch 18 para 45 did not apply and the case did not need to be remitted to them for reconsideration.
Judgment for HMRC.
HMRC v Household Estate Agents, Chancery Division, 12 July 2007
