Many taxpayers and agents take the precaution of including as much additional information as possible when filing tax returns, with a view to reducing the possibility of HM Revenue and Customs (HMRC) making a discovery assessment outside the normal time limit for them to make an enquiry into the return. However, a recent Upper-tier tribunal decision would seem to indicate that this approach is not necessarily effective in itself.
In Moore v CRC [2011] UKUT 239 (TCC), HMRC enquired into the taxpayer’s 2003-04 tax return and found that he had incorrectly been deducting capital losses on his investments from bank interest paid to him. The taxpayer had done this on the basis of informal advice given at a social occasion by an accountant. However, he sent with each of his tax returns a sheet of paper setting out exactly how he had calculated the figures. The taxpayer did not follow the HMRC guidance provided with the returns, or use the working sheet attached to the returns.
No protection
HMRC’s ‘discovery’ had been made when they received interest details from the bank, which showed higher amounts of interest than those shown on the taxpayer’s returns.
The first-tier tribunal had dismissed the taxpayer’s initial appeal, but found that the sheets of paper sent with his tax returns had contained sufficient explanation of what he had done that HMRC could not rely on the discovery rule in TMA 1970, s 29(5). This broadly provides that HMRC can make a discovery if an officer “… could not have been reasonably expected, on the basis of the information made available to him before that time” to have been aware of an under-assessment etc. However, the first-tier tribunal had held that the taxpayer was guilty of ‘negligent’ conduct within s 29(4), and dismissed the taxpayer’s appeal against the discovery assessments.
The Upper-tier tax tribunal judge commented that the taxpayer’s self-assessments were not based upon what he wrote in the additional sheets, but on what he entered in the boxes.
Despite finding the taxpayer’s arguments “attractive”, the Upper-tier tribunal held that the first-tier tribunal’s conclusion about what the ‘duty of care’ entailed was right. The additional information supplied on the sheets of paper would have given Mr Moore protection against one of the conditions for discovery (i.e. TMA 1970, s 29(5)), but not the other condition in s 29(4). A discovery assessment was valid if either condition was satisfied. The taxpayer’s appeal was dismissed.
Discovery conditions
The alternative discovery conditions in s 29(4), (5) are presently as follows:
“(4) The first condition is that the situation mentioned in subsection (1) above was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board—
(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.”
The legislation for the relevant tax year in the Moore case referred to fraudulent or negligent conduct. However, HMRC generally seems to equate “careless” behaviour to “negligent” conduct.
Conclusion
The decision in the Moore case is a cause for concern, for at least two reasons:
1. The Upper-tier tribunal judge considered that a tax return is based on what is entered in the boxes on the return, not on what is contained in sheets submitted with the return, no matter how much additional information is included on those sheets. On that basis, it would seem to make no difference if a taxpayer includes additional information in the white space on the return, rather than in additional sheets (assuming that ‘boxes’ means those in which the figures are entered on the return).
2. It was noted that the taxpayer did not follow the HMRC guidance provided on completing the tax return.
It was also inferred that the taxpayer would not have made the error if he had done so. Does this mean that a taxpayer who makes an error on the tax return will be careless (formerly negligent) if HMRC’s guidance was not used when completing it?
Of course, HMRC now produces toolkits to help taxpayers when completing tax returns etc. These toolkits, like HMRC’s tax return guidance, do not carry the force of law. Nevertheless, it would probably do the taxpayer no harm to use them where applicable, and to be able to demonstrate having done so, if necessary.
Finally, in another recent case in which discovery assessments were challenged (Charlton & Ors v Revenue & Customs [2011] UKFTT 467 (TC)), the taxpayers fared rather more successfully. A transcript of the Charlton case can be downloaded from the British and Irish Legal Information website: www.bailii.org/uk/cases/UKFTT/TC/2011/TC01317.html.
The above article is reproduced from ‘Practice Update’ (September / October 2011), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.