The Charlton case on discovery assessments is to return to the Tribunal this month. Although the conclusion of the FTT in Charlton seemed correct (i.e. that a DOTAS reference in a return was sufficient to prevent HMRC opening a discovery assessment in respect of the circumstances of the scheme), the reasoning of the FTT was odd. There has been subsequent jurisprudence from the Court of Appeal in Lansdowne and the FTT in Blumenthal which, if applied in the context of Charlton, may provide a result which is clearer in its application to situations where the disclosure position is more complex.
The Charlton case will be heard by the Upper Tribunal next week. Mark Whitehouse and Kelly Stricklin-Coutinho take stock of where we are with the law on when HMRC is entitled to raise a discovery assessment.
Whether HMRC is entitled to raise a discovery assessment in respect of a tax year is an issue which is of real significance in practice. It is not uncommon, as a result of administrative oversight, for tax years to be out of time unless HMRC can rescue the position by making a discovery. In ordinary circumstances, HMRC are able to access a longer window for assessment (now four years) where at the time the enquiry period closed, the inspector could not reasonably have been expected, on the basis of information listed in the legislation, to have been aware of the insufficiency of tax which is sought to be assessed by discovery. HMRC usually argue that if the tax issue is in the slightest bit complicated nothing short of telling them precisely how they should tax a transaction will do. The courts have sought to set out the scope of the test for when an inspector is no longer sufficiently informed of the taxpayer’s circumstances and may raise a discovery assessment. There have been a number of cases on this issue recently (not least a case that the authors ran, HMRC v Lansdowne Partners Ltd Partnership [2011] EWCA Civ 1578 in the Court of Appeal). The reasoning in the case law so far is inconsistent:
The principles which apply where the tax position is complex remain uncertain but some helpful principles seem to be emerging particularly in the thorough decision of the FTT in Blumenthal. Charlton returns to the Upper Tribunal on 15 October. Whilst the decision of the FTT may well survive on appeal, it is hoped that the UT will seek to apply the decision of the Court of Appeal in Lansdowne to address some of the oddities the FTT’s reasoning throws up.
The dispute as to the discovery assessment in Lansdowne related to the disclosure of a payment to individual partners who had an interest in a company within the group, such payment being made under management agreements which allowed the management fee to be paid to a company in the group or for that fee to be
The Court of Appeal’s reasoning in this case can be considered to be the gold standard of the test to be applied in a straightforward case as to whether ‘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...’ prior to the enquiry window lapsing (thereby blocking a discovery assessment).
The Court’s reasoning was straightforward. Sir Andrew Morritt pointed out that it was plainly necessary to ‘assume an officer of reasonable knowledge and understanding’. He adopted the reasoning of Auld LJ in Langham (Insp. of Taxes) v Veltema [2004] STC 544, which said that the question boiled down to ‘whether the hypothetical inspector having before him [documents and a note of a meeting] would have been aware of an actual insufficiency’. He goes on to say that ‘I do not suggest that the hypothetical inspector is required to resolve points of law. Nor need he forecast and discount what the response of the taxpayer may be. It is enough that the information made available to him justifies the amendment to the tax return he seeks to make.’ Moses LJ went slightly further and ‘express[ed] polite disapproval of any judicial paraphrase’ of the wording of the provision. His view was that ‘awareness is a matter of perception and understanding, not of conclusion’ and that the question is ‘whether the taxpayer has provided sufficient information to an officer, with such understanding as he might reasonably be expected to have, to justify the exercise of the power to raise the assessment to make good the insufficiency’. This is a very clear statement of what the test involves both on the part of the taxpayer (that it should provide sufficient information such that a subsequent assessment is not justified) and on the part of the officer (who must justify an assessment to make good an insufficiency on the basis of the understanding he could reasonably be expected to have). We note that this setting out does not refer to a hypothetical officer, but simply to an actual officer and what he can reasonably be expected to understand.
Judge Nowlan could not have known of Moses LJ’s ‘polite disapproval’ of judicial paraphrase. Indeed, given that the FTT
Judge Nowlan gave a convoluted and slightly puzzling judgment which nevertheless reached a conclusion which seems entirely justifiable. We have no beef with his decision that a TAD reference was sufficient information for a taxpayer to provide, particularly where that scheme would have been disclosed in full to the specialist team at HMRC concerned with such schemes. However, the reasoning employed adds layers of confusion where there is no need for complication. A ‘notional average officer’ replaces an actual officer without any particular need to do so and this complication is compounded by the judgment referring to both a
The approach the FTT takes to the information that the
The case involved a capital loss planning scheme but of particular interest
The FTT made the following points:
The test applied by the Court of Appeal in Lansdowne is clear and straightforward. The issue that the Court of Appeal deliberately leaves vague is what the position would be if the tax principles at stake were more complex; how much wriggle room does the inspector have? Blumenthal attempts to fill that gap and in particular addresses the vexed question as to whether there is any obligation on the part of the taxpayer to explain why the taxpayer’s position might not be right and what HMRC might want to say in response. It is a good time therefore for the UT to explore this issue and to apply the principles in Lansdowne to the facts in Charlton. It is hoped that the decision will bring some further clarity to this area which is of great significance in practice.
The Charlton case on discovery assessments is to return to the Tribunal this month. Although the conclusion of the FTT in Charlton seemed correct (i.e. that a DOTAS reference in a return was sufficient to prevent HMRC opening a discovery assessment in respect of the circumstances of the scheme), the reasoning of the FTT was odd. There has been subsequent jurisprudence from the Court of Appeal in Lansdowne and the FTT in Blumenthal which, if applied in the context of Charlton, may provide a result which is clearer in its application to situations where the disclosure position is more complex.
The Charlton case will be heard by the Upper Tribunal next week. Mark Whitehouse and Kelly Stricklin-Coutinho take stock of where we are with the law on when HMRC is entitled to raise a discovery assessment.
Whether HMRC is entitled to raise a discovery assessment in respect of a tax year is an issue which is of real significance in practice. It is not uncommon, as a result of administrative oversight, for tax years to be out of time unless HMRC can rescue the position by making a discovery. In ordinary circumstances, HMRC are able to access a longer window for assessment (now four years) where at the time the enquiry period closed, the inspector could not reasonably have been expected, on the basis of information listed in the legislation, to have been aware of the insufficiency of tax which is sought to be assessed by discovery. HMRC usually argue that if the tax issue is in the slightest bit complicated nothing short of telling them precisely how they should tax a transaction will do. The courts have sought to set out the scope of the test for when an inspector is no longer sufficiently informed of the taxpayer’s circumstances and may raise a discovery assessment. There have been a number of cases on this issue recently (not least a case that the authors ran, HMRC v Lansdowne Partners Ltd Partnership [2011] EWCA Civ 1578 in the Court of Appeal). The reasoning in the case law so far is inconsistent:
The principles which apply where the tax position is complex remain uncertain but some helpful principles seem to be emerging particularly in the thorough decision of the FTT in Blumenthal. Charlton returns to the Upper Tribunal on 15 October. Whilst the decision of the FTT may well survive on appeal, it is hoped that the UT will seek to apply the decision of the Court of Appeal in Lansdowne to address some of the oddities the FTT’s reasoning throws up.
The dispute as to the discovery assessment in Lansdowne related to the disclosure of a payment to individual partners who had an interest in a company within the group, such payment being made under management agreements which allowed the management fee to be paid to a company in the group or for that fee to be
The Court of Appeal’s reasoning in this case can be considered to be the gold standard of the test to be applied in a straightforward case as to whether ‘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...’ prior to the enquiry window lapsing (thereby blocking a discovery assessment).
The Court’s reasoning was straightforward. Sir Andrew Morritt pointed out that it was plainly necessary to ‘assume an officer of reasonable knowledge and understanding’. He adopted the reasoning of Auld LJ in Langham (Insp. of Taxes) v Veltema [2004] STC 544, which said that the question boiled down to ‘whether the hypothetical inspector having before him [documents and a note of a meeting] would have been aware of an actual insufficiency’. He goes on to say that ‘I do not suggest that the hypothetical inspector is required to resolve points of law. Nor need he forecast and discount what the response of the taxpayer may be. It is enough that the information made available to him justifies the amendment to the tax return he seeks to make.’ Moses LJ went slightly further and ‘express[ed] polite disapproval of any judicial paraphrase’ of the wording of the provision. His view was that ‘awareness is a matter of perception and understanding, not of conclusion’ and that the question is ‘whether the taxpayer has provided sufficient information to an officer, with such understanding as he might reasonably be expected to have, to justify the exercise of the power to raise the assessment to make good the insufficiency’. This is a very clear statement of what the test involves both on the part of the taxpayer (that it should provide sufficient information such that a subsequent assessment is not justified) and on the part of the officer (who must justify an assessment to make good an insufficiency on the basis of the understanding he could reasonably be expected to have). We note that this setting out does not refer to a hypothetical officer, but simply to an actual officer and what he can reasonably be expected to understand.
Judge Nowlan could not have known of Moses LJ’s ‘polite disapproval’ of judicial paraphrase. Indeed, given that the FTT
Judge Nowlan gave a convoluted and slightly puzzling judgment which nevertheless reached a conclusion which seems entirely justifiable. We have no beef with his decision that a TAD reference was sufficient information for a taxpayer to provide, particularly where that scheme would have been disclosed in full to the specialist team at HMRC concerned with such schemes. However, the reasoning employed adds layers of confusion where there is no need for complication. A ‘notional average officer’ replaces an actual officer without any particular need to do so and this complication is compounded by the judgment referring to both a
The approach the FTT takes to the information that the
The case involved a capital loss planning scheme but of particular interest
The FTT made the following points:
The test applied by the Court of Appeal in Lansdowne is clear and straightforward. The issue that the Court of Appeal deliberately leaves vague is what the position would be if the tax principles at stake were more complex; how much wriggle room does the inspector have? Blumenthal attempts to fill that gap and in particular addresses the vexed question as to whether there is any obligation on the part of the taxpayer to explain why the taxpayer’s position might not be right and what HMRC might want to say in response. It is a good time therefore for the UT to explore this issue and to apply the principles in Lansdowne to the facts in Charlton. It is hoped that the decision will bring some further clarity to this area which is of great significance in practice.
