HMRC is continually changing. No surprise in this but I feel that a sea change has already occurred. HMRC as a department retains little, if any, of its historic day-to-day contact or relationship with either local firms of accountants or taxpayers. This will probably not be helped if all of the Enquiry Centres are closed! As a former Inspector of Taxes, half of my job in the Revenue used to be helping people and firms - it was about paying the correct amount of tax. Now money talks.
Helplines are an oxymoron. The training of all levels of staff used to be a strength of HMRC - now the lack of it is the opposite. Effectively, what we are moving to is the US IRS way of doing things - there is little or no customer service but if you get any unsolicited contact from HMRC it:
- is unlikely to be good news; and
- is increasingly likely to have hit the tax issue on the head.
Don't get me wrong, I have no problem pursuing tax cheats aggressively. I do not think that anyone who has fiddled money offshore should be given any special treatment other than the full 20 years and huge penalties. However, the system must be transparent and fairly operated and that leads me on to the point that I wanted to make.
When I joined what was the Inland Revenue the rules on enquiries were somewhat different. I had to justify an enquiry year on year but it was not too difficult to be dissatisfied. Of course, if I made discovery I could delve into earlier years - six years for incomplete disclosure, 20 years for fraud or neglect.
Then self assessment came along. It created a formal right to enquire into a return by way of a formal (written) notice but put a time limit on this, which was generally one year after the fixed filing date. The legislation on discovery remained unchanged.
Time limit and legislative changes
These rules changed for 2007/08 tax years onwards. The enquiry window generally runs for 12 months from the date of submission of the relevant tax return, apparently to stop people submitting returns late in the profile to reduce HMRC's window for enquiry!
From 1 April 2010, HMRC are still able to raise assessments outside the new normal time limit - four years for incomplete disclosure, six years for carelessness and 20 years for deliberate errors. The legislation on discovery remains unchanged.
So why am I so agitated?
As can be seen, there has been no real change in the discovery legislation for many years. What has changed is how HMRC interpret what an incomplete disclosure is and how the case law has developed. It all revolves around what s29 TMA 1970 means, particularly s29(5) TMA 1970:
'...that the [HMRC] officer could...have been reasonably expected (at the point when the enquiry window closed) to be aware of the situation mentioned in sub-section (1) above...'
i.e. that there was some 'insufficiency' in the tax that ought to have been assessed.
In the good old days tax returns were reviewed by a human being soon after receipt and questions then raised. If I missed something, then it was my (and the Revenue's) bad luck. Self assessment processes now and checks at some stage in the future.
Things really started to change with the case of Veltema in 2005. This involved the transfer of property out of a company to the shareholder. This is clearly not an arm's length transaction and needs the valuation checked, standard practice in pre-self assessment days. The taxpayer's return showed the value of the asset received in the correct box and no enquiry was raised within the one year time limit. The corporate return showed the gain on the disposal and a switched-on Inspector spotted this, got a valuation and increased the gain. He then tried to amend the taxpayer's return as well, even though this was outside the year time limit, and succeeded. Apparently, there was nothing on the personal return to alert the Inspector to a potential loss of tax!
What Veltema showed was that tax returns are not fit for purpose - you can fill in all the boxes correctly and yet HMRC are not limited to one year from the date of submission, it is four years after the end of the year of assessment. This means that most clients have no finality in their affairs for many years, a fact which many do not appreciate. HMRC then issued SP1/06 to try and explain the state of play but things have moved on another step since then.
How much disclosure needs to be made?
The case of Corbally-Stourton v R&C Commrs (SpC 692) involved a lady who entered into a loss buying scheme. In 1998/99 the taxpayer made substantial capital gains but on her tax return declared that she had made a capital loss. HMRC subsequently discovered that this alleged loss was attributable to a scheme suggested by the taxpayer's bank in which several hundred taxpayers had participated.
The return included the following comments:
'I am entitled to the loss of £1,003,994.08 by virtue of the provisions of TCGA 1992 s.71(2). The loss is part of a loss of £1,000,000,000 which accrued to the Trustees of Castle Trust on 8 April 1997 on the [disposal] of a European Average Rate Option (Trade No.82831) relating to the shares in Deutche Telecom. On 24 November 1998, I purchased for a fee of £77,625.00 (part of which is contingent) from the Trustees of Charter Trust 1.250% of their beneficial interest in the Trust Fund of the Castle Trust. That interest deter-mined on 25 November 1998, when I became absolutely entitled to receive from the Trustees of the Castle Trust the sum of £8.82.'
HMRC argued that the disclosure was not sufficient to prevent a discovery and the Commissioners agreed:
'It seems to me that an inspector equipped with a reasonable knowledge of tax law could reasonably be expected to conclude from the Appellant's disclosure that something was going on, and that Mrs Corbally-Stourton had participated in a tax scheme. It would be reasonable to expect him to wish to question the workings of the scheme and the genesis and existence of the remarkable £1 billion loss. But he would also be aware that some tax schemes work and deliver the benefits claimed. There is nothing...in the disclosure to suggest that this scheme did not work. In my judgment an inspector could not reasonably be expected to conclude from the clear hints that there was a scheme that it was unlikely that it would work.'
The wording in the white space was not enough to prevent HMRC going back what would now be four years.
In the recent Charlton case (R&C Commrs v Charlton and others), despite a disclosure similar to the above in the white space and a Scheme Reference Number (SRN) on the return indicating that HMRC were aware of the scheme and held more information about it, HMRC still tried to argue lack of disclosure. They lost, fundamentally due to the fact that the SRN clearly alerted HMRC to the use of a scheme (and so the potential loss of tax), not the words in the white space.
Most taxpayers do not use schemes, so the point regarding the SRN is not relevant. However, most taxpayers do not put anything on the return other than filling in the boxes. This means that the default enquiry window will be four years, like shelling peas. It is worth bearing in mind that a discovery can include a change of mind and does not have to include anything new, so the dice are loaded in HMRC's favour.
Serious thought should therefore be given to exactly what information needs to be sent to HMRC to fulfil this requirement. The onus is squarely on the shoulders of the taxpayer to highlight possible areas of contention, etc.
It is about time that HMRC were up front and say that they have fundamentally changed their approach in this area.
So what to do?
When self assessment started HMRC were at pains to state that they did not want accompanying information. I even heard comments that some districts were shredding such information! However, times have changed. Many practitioners used to send in covering letters with accounts each year, laying out unusual items and attempting to explain what had happened. I suggest exactly the same approach but via pdf attachment. What HMRC do with it is unknown.
Clients have to understand this point as well, which leaves them with three possibilities:
- say nothing but keep their fingers crossed for four years;
- send accompanying information highlighting the relevant point;
- use any possible 'clearance' routes e.g. CG34, Business Clearance, etc. before the return is submitted.
Times they are a-changing
It is clear that things are not going to get any easier - it has been a gradual process over the last decade but compliance is in. Please think of the old days when you submit returns and consider sending in something more than the return demands, otherwise a nasty shock could be in store.
Mark Morton is Head of Tax at Mercia Group Ltd, one of the UK's largest providers of training and support services to the accountancy profession. He can be contacted on 0116 258 1200 or at email@example.com
The views expressed in this article are entirely his own.