Discovery Provisions TMA1970/S29

[DonkeyAccountant]

The Inland Revenue (originally) challenged Mr A's (a client) tax returns from the tax year 2001/2002 onwards (2001/2002 - 2008/2009) (which we filed recently) and asked us to send them all the relevant documents (including bank statements and credit card statements) related to those tax years. We instead sent them all the bank statements and credit card statements (with some missing statements) dated back to the tax year 1996/1997 (we did not have to). The Inland Revenue now challenge Mr A's tax returns for 1998/1999, 1999/2000 and 2000/2001 (which Mr A previous accountant filed almost eight years ago apart from the last one which had never been filed) using the discovery provisions of S29 TMA 1970 and ask Mr A to complete P85 and P86 in order to establish his residency status.

I guess the reason for the review is that while Mr A apparently adopted split year treatment on 1998/1999 tax return, declared to be non-resident on 1999/2000 return and did not submit a tax return for 2000/2001, his bank statements and credit card statements for the period 1998-2001 suggest that he might be a UK tax resident (he was in the UK for approximately 95, 75 and 170 days in tax years 1998/1999, 1999/2000 and 2000/2001 respectively, the 91-day average limit may be exceeded), judging from the number of days he withdrew cash from cash machines in the UK during that period. The Inland Revenue Officer also enclosed a spreadsheet summarising when, where and for how much he withdrew cash during that period.

Below are my questions:
(1)Are the Inland Revenue right in challenging (Do they have the power to challenge) Mr A's 1998/1999, 1999/2000 and 2000/2001 tax returns? The six-year limit has already passed and the 20-year limit may not apply here (can you argue Mr A or his previous accountant was acting negligently?).
(2)Can they use the information contained in the bank and credit card statements for the period 1998-2001 as a reason for the review of the tax returns for these three tax years? Bear in mind that their "original" enquiry only related to the tax year 2001/2002 and the subsequent years and the bank and credit card statements for 1998-2001 (which we did not have to provide) do not relate to their "original" enquiry.
(3)Were we "wrong" (or acting insensibly) in providing more information than the Inland Revenue needed for their "original" enquiry? (We did not have to provide them bank and credit card statement for 1998-2001 as they were not related to the Inland Revenue's "original" enquiry)
(4)Is the fact that we were not the accountants doing Mr A's 1998/1999, 1999/2000 and 2000/2001 tax returns relevant at all?
(5)Finally, what should we do next? Ignore the letter as it does not seem to have any statutory power? Complete P85 and P86 and hope for the best? What is the best strategy of dealing with the Inland Revenue in this situation?

[wamstax]

It was a bit negligent providing information to HMRC that you clearly did not review before sending them in. Of course they have discovery if you provided them with the information that enabled them to come to the conclusion that - prima facie - your client must have been at least negligent in providing information that was incorrect or potentially negligent in failing to properly address the number of days that he was in the UK. Inevitably if you do not proceed with dealing with HMRC then their only solution would be to make their tax determinations (and if appealed proceed to deal with the appeals by establishing if the facts seen on the statements was misleading or incorrect) I can see various ways in which their conclusions could be incorrect and unfortunately it would be necessary to closely consider matters with the client before sticking your head in the noose. I answer your questions below
Below are my questions:
(1)Are the Inland Revenue right in challenging (Do they have the power to challenge) Mr A's 1998/1999, 1999/2000 and 2000/2001 tax returns? The six-year limit has already passed and the 20-year limit may not apply here (can you argue Mr A or his previous accountant was acting negligently?). WAMS- Clearly if you have provided them with information that enables them to come to the conclusion that previous years returns/assessments were incorrect they would prima facie have discovery and HMRC would argue that on the basis of the evidence provided your client would appear to have been negligent by either deliberately providing wrong information or failing to point out to his accountant that any days entered on the residence pages was incorrect.

(2)Can they use the information contained in the bank and credit card statements for the period 1998-2001 as a reason for the review of the tax returns for these three tax years? Bear in mind that their "original" enquiry only related to the tax year 2001/2002 and the subsequent years and the bank and credit card statements for 1998-2001 (which we did not have to provide) do not relate to their "original" enquiry. WAMS - Unfortunately I think that the client isn't going to be too happy whatever way it turns out as clearly even if it is proved that HMRC's conclusions are incorrect the work and suspicions have been caused by your providing information that you were not asked for.This might even be the case even if it was evident that HMRC were going to question residency for earlier years. I think that you would have to watch that your client doesn't decide to get somebody else on board as they might not be as tactful about it as I am here - although a damage limitation review might be helpful.

[wamstax]

Question and answers continued -

(3)Were we "wrong" (or acting insensibly) in providing more information than the Inland Revenue needed for their "original" enquiry? (We did not have to provide them bank and credit card statement for 1998-2001 as they were not related to the Inland Revenue's "original" enquiry) - WAMS Yes I am afraid you may have caused your client unecessary stress (and fees unless you pick up the tab). There might have been other requirements on you if you had discovered such "tax evasion" - e.g. SOCA report however unless your client had instructed you to make such a disclosure you were in my view wrong in doing what you did - Sorry


(4)Is the fact that we were not the accountants doing Mr A's 1998/1999, 1999/2000 and 2000/2001 tax returns relevant at all? -WAMS I am afraid that where the courts have considered discovery in previous cases the origin of the information (legally come by) isn't relevant to the test for discovery and as long as they can "prove" negligence they could go back the 20 years.

(5)Finally, what should we do next? WAMS Clearly unless you can examine matters urgently and come to a different (and sustainable ) conclusion you are between the devil and deep blue sea. If you cannot see a possible inappropriate conclusion by HMRC (and there could be loads of reasons for their figures being wrong - even the treatment of days under what would be IR20 at that time and not HMRC6- ) I am afraid that my first action would be to call the client in for a meeting to explain what has happened and to see if there are blatant flaws in HMRC's approach (unless you have been able to find from your own review that the situation is defendable without landing yourself or your client further in the mire).
Ignore the letter as it does not seem to have any statutory power? WAMSIgnoring the letter should probably result in HMRC making large assessments on your client and you would not want these to come as a surprise would you?

[wamstax]

Continued: again
Complete P85 and P86 and hope for the best? -WAMS They could issue a Schedule 36 notice to enable them to get information and of course they are within their rights to pursue matters into the years for which returns were submitted late under the negligence procedures (unless your client had a reasonable excuse for the late submission) now that you have laid it on their desk

What is the best strategy of dealing with the Inland Revenue in this situation? -WAMS In my view ignoring the HMRC in this situation is merely going to add to your problems. Do you for example know what was actually shown in the earlier years returns and could you (from reviewing matters) and using the IR20 guidance as it existed for these years destroy the HMRC stance being taken. It could of course simply be that he/she had a partner who was drawing cash from the ATMs HOWEVER you would have to be sure that you are not landing your client in more deep water if there was possibly a home available in the UK for his/her use all the time etc etc.

The first thing I would do is GET THOSE BLOOMING STATEMENTS BACK - on the basis that you need them to consider their letter and at least that will give you some breathing space to get to grips with it - or get somebody that knows what they are doing e.g. who is to say that the cash drawing day wasn't the day they went out or day they came in and would not feature on an IR20 day count. Equally you would want to ensure that HMRC haven't drawn assumptions that could be evidentially incorrect so that you need to fully review matters before panicking.

Basically if you are not up to fully reviewing all matters (and coming up with a comprehensive and sustainable defence at the outset) then I would suggest that you engage the services of a suitably qualified tax investigation specialist who could possibly either take the stress off you or potentially come up with an out of the box thinking and plan to frustrate HMRC (if they are possible wrong). Into the bargain you also need to consider how all this will affect the "valid" later years enquiries.

If you would like to chat about it on a proper client /adviser basis feel free to contact me direct

[wamstax]

I trust that you may have a Professional Negligence policy and you may well have to notify them of the present situation (assuming that the position is not fully recoverable immediately)

[wamstax]

You might find it helpful to read an article I did (prior to the new Schedule 36 provisions coming on song which effectively enables HMRC to test matters out by asking simple AND REASONABLE questions ) where my personal views on the dangers of providing items that HMRC would not be entitled to was provided. The following link would get you there http://www.wamstaxltd.com/Dont_let_them_bully_you.html but remember I cannot be held responsible for any actions that anyone decides to take from reading such personal views without a proper client adviser relationship being started so that all relevant matters can be considered.

Lastly I am sorry for the length of the reply but did feel that it required a comprehensive sort of response with a couple of tips that might help in considering the HMRC workings. Its not the first time I have found trained Inspectors using the HMRC6 guidance when it should be IR20 etc etc.