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KEY POINTS
- Discovery assessments made under TMA 1970, s 29.
- Impact of Langham v Veltema.
- Records supplied to HMRC by a third party.
- Information disclosed on the tax return.
- Keep evidence.
The courts at various levels have decided a number of cases concerning discovery assessments recently. As readers will know, discovery assessments can be issued under TMA 1970, s 29 headed ‘Assessment where loss of tax discovered’.
The relevant parts of s 29 provide that if an officer of the board discovers, as regards any person, that any income or gains which ought to have been assessed have not been assessed, or that an assessment has become insufficient or a relief has become excessive, then that officer may make an assessment to make good the loss of tax.
However, this is subject to exceptions. Where the loss of tax arises from an error in the taxpayer’s return, but that return was made in accordance with the practice generally prevailing at the time, then the taxpayer shall not be assessed.
The second exception is that a taxpayer who has delivered a return for the year in dispute shall not be assessed under s 29 unless one of two conditions are fulfilled:
- either the situation whereby there is a loss of tax was brought about carelessly or negligently by the taxpayer; or
- at the time where an officer of the board could no longer open an enquiry into the return, or had completed enquiries into that return, that officer could not have been reasonably expected, on the basis of information available to him at that time, to be aware of the loss of tax.
Before considering the recent decisions in this area it may be helpful to set the scene with a brief look at three older cases: Langham v Veltema [2004] STC 544, Corbally-Stourton (SpC 692) and Anderson (TC206).
Langham v Veltema
The starting point for many in a consideration of s 29 has been Langham v Veltema. In his tax return, Mr Veltema had declared the receipt of a benefit, valued at £100,000, from his employer.
In the employer’s P11D, there was a declaration of the transfer of a property, worth £100,000 to Mr Veltema. It was later agreed that the value of the property was £145,000. The officer raised a s 29 assessment on Mr Veltema.
Although his appeal was successful before the General Commissioners and the High Court, Mr Veltema was unsuccessful on HMRC’s appeal to the Court of Appeal.
The Court of Appeal held that the Revenue officer could not reasonably have been aware of the insufficiency of tax from the information made available in Mr Veltema’s return. Lord Justice Auld said:
'It seems to me that the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under the section only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a section 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question.'
Following the Court of Appeal’s decision in Langham v Veltema, HMRC issued statement of practice 1/06, outlining the circumstances in which HMRC might accept that a taxpayer had made sufficient disclosure to prevent a subsequent discovery assessment.
In that statement, taxpayers were encouraged to ‘submit the minimum necessary to make disclosure of an insufficiency’, with HMRC stating that they would not consider there had been disclosure where there was so much material provided that they could not be expected to be aware of the significance of particular information.
Corbally-Stourton
In Corbally-Stourton, an officer had attempted to open an enquiry into the return of Mrs Corbally-Stourton but, through administrative error, no enquiry was opened before the enquiry window closed. HMRC accepted this was the case but, three years later, a discovery assessment was raised.
On appeal, the Special Commissioner decided that to raise an assessment, the officer must conclude that it is probable that there is an insufficiency of tax, and that this is a newly arisen conclusion, either from fresh facts or from a new view of the law.
A discovery assessment could not be raised if, during the time that the enquiry window was open, it could reasonably be expected that an officer would conclude that it was probable that there was an insufficiency of tax. On the facts, a discovery assessment could be raised.
Anderson (decd)
A little over a year later, the First-tier Tribunal issued its decision in Anderson (dec’d). In this case, Miss Anderson had completed a return which was inaccurate in respect of an offshore investment bond.
A chargeable event certificate, which revealed the inaccuracy, had been provided to HMRC by the offshore bond provider, and this had been provided within the enquiry window.
HMRC had not, however, issued its discovery assessment until three years after the enquiry window had closed. The sole issue to be decided was whether the assessment was properly made under s 29.
The First-tier Tribunal held that s 29(6) contained a list of the information that was treated as being made available and was the basis on which the awareness of the officer was objectively tested.
The list was exhaustive. The chargeable event certificate had not been provided by Miss Anderson or her advisers, and could not be inferred from the return, and so did not fall within s 29(6).
Therefore, even if Miss Anderson had not been negligent in her return, HMRC would have been entitled to issue the discovery assessment.
Following the Corbally-Storton and Anderson decisions, it was reasonably clear to taxpayers what the position was. Once the enquiry window had closed an officer must conclude – and this must be a new conclusion on either fresh facts or a fresh view of the law – that there probably was an insufficiency of tax (i.e. it was more likely than not).
A taxpayer who wished to argue that HMRC had had the relevant information during the enquiry window could not rely on records or information supplied to the department by a third party.
Decisions this year
In recent months there have been three decisions, with mixed success for the taxpayer.
In Smith (TC403), Mr Smith’s returns were prepared by his accountant, but on an accounting basis which was not in accordance with generally accepted practice. The HMRC officer subsequently discovered inconsistencies and so raised discovery assessments.
The First-tier Tribunal concluded that use of such an accounting practice did constitute negligence in the preparation of a return, and upheld the discovery assessments for the years for which that accountant had prepared the returns.
However, the tribunal allowed Mr Smith’s appeal in respect of earlier years when he had used a different accountant. There was nothing in those returns to suggest negligence and the officer had not made a discovery of an insufficiency of tax in respect of them.
In Hankinson v HMRC [2010] STC 2640, the Upper Tribunal considered the appeal of Mr Hankinson from the decision of the First-tier Tribunal. HMRC had issued what was described as a ‘protective assessment’ under s 29 for income and capital gains amounting to just over £30 million.
Mr Hankinson challenged the underlying technical case at first instance, but on appeal confined himself to the issue of whether the assessment had been validly raised.
It was not disputed that the HMRC officer had discovered a loss of tax but, it was argued, as self assessment had made many changes to the machinery of assessment, s 29 should now be understood as requiring a two-stage process.
This was said to be first the discovery of the loss of tax, then consideration of whether either of the conditions which would allow assessment had been fulfilled.
Mr Hankinson argued that there must be evidence that the officer had taken into account both stages and, if there was not, then the assessment could not be upheld. To decide otherwise was to ignore the safeguards introduced upon the introduction of self assessment.
The taxpayer argued that, applying that principle to his facts, the assessment was invalid as the officer had not looked into whether either of the conditions which would allow assessment had been fulfilled as the assessment was described as protective.
A suggestion that Mr Hankinson was negligent in allowing the loss of tax to come about was raised only after the assessment had been raised.
The Revenue argued that the conditions were to protect taxpayers, and while an officer might normally consider whether they applied, there was no requirement to do so before an assessment could be issued.
In dismissing Mr Hankinson’s appeal, the Upper Tribunal concluded that the appropriate stages were that an officer must make a discovery.
Once that had occurred he could raise an assessment. If the conditions were not subsequently found to have been fulfilled then that assessment would be invalid. The question of whether the conditions were fulfilled was an objective test, and so the officer’s subjective view of whether they had been fulfilled, or whether the officer had considered them at all, was irrelevant.
The tribunal added that if evidence came to light subsequent to the making of the assessment, for example that the loss of tax had arisen through fraud rather than by negligence, it would be acceptable for HMRC to rely on that evidence when resisting an appeal.
Barely three weeks later, the High Court delivered its judgment in HMRC v Lansdowne Partners [2011] STC 372, HMRC’s appeal against the decision of the (now defunct) General Commissioners. In this case, HMRC were out of time to raise an enquiry and so amended the partnership return, relying on s 29.
The General Commissioners were asked to decide if the conditions were met for raising a discovery assessment. The taxpayer argued that HMRC had been provided with enough information prior to the closing of the enquiry window and so no discovery had been made.
In deciding in favour of the taxpayer, the General Commissioners asked themselves the question: did the department in fact know enough, before the enquiry window closed, to enable it to decide whether to raise an additional assessment?
On appeal, Mr Justice Lewison surveyed the authorities, held that the General Commissioners had not asked themselves the wrong question, and that the conclusion which they had reached was one which was open to them on the facts.
Conclusion
Readers may conclude, from the number of unsuccessful challenges, that there are now only very limited chances of bringing a successful challenge to a discovery assessment. This is not necessarily the case: the answer, as always, is to pick your case wisely and keep the evidence to prove it.
If information is likely to be provided to HMRC by a third party, make sure that information is also provided by the taxpayer so it can be relied upon. If it is known at the return stage that there is a possibility of an insufficiency, then the cautious approach would be to provide enough information to alert the inspector to this possibility.
Lansdowne Partners provides helpful guidance on how much should be disclosed in a return. It is also a good example of a taxpayer success in this field, demonstrating that in an appropriate case it is still possible to argue successfully that HMRC have been provided with sufficient information and are precluded from making an assessment under s 29.
Jonathan Levy is a partner at Reynolds Porter Chamberlain LLP and a former HMRC prosecutor. He can be contacted by email.
