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Peter Vaines comments on two recent tax tribunal cases dealing with discovery assessments.

Anybody reading this article will know that I cannot resist a good case on discovery assessments and
another one has just been published: Mohinder Singh v HMRC TC1544.

Discovery and Mohinder Singh v HMRC TC1544

We have thankfully moved a considerable distance from the test enunciated in Langham v Veltema and seem to be reaching a position of balance between HMRC and the taxpayer. In my previous article, I mentioned the case of Admirals Locums v HMRC where the Tribunal found that there had not been anything “newly arising” or “newly appearing” to HMRC to enable them to raise a discovery assessment and in this latest case of Mohinder Singh, the taxpayer was protected because he had made full disclosure.

Full disclosure is always a defence to a discovery assessment but the trouble is, the Langham v Veltema test has been exceptionally difficult to satisfy. HMRC are precluded from making a discovery assessment if the Inspector could not reasonably have been expected on the information supplied to him by that time, to be aware of the insufficiency in the assessment. The information supplied must clearly alert the Inspector to the insufficiency of the assessment. This means more than merely saying that the Inspector could have found out if he made some enquiries.

The facts concerning Mr Singh are of no enduring significance (it was all to do with a compensation
payment in respect of a sub postmaster), the important point being that the payment was not correctly
dealt with by Mr Singh in his accounts. The Tribunal decided that HMRC were out of time for raising a
discovery assessment because “HMRC must have been aware at the time of the self assessment return” of certain relevant facts. Furthermore, “HMRC were fully aware of the way in which the money from the Post Office had been treated in the past and should therefore have raised the matter when the return was submitted”.

Ironically, this seems to me to be going rather too far in the opposite direction. These tests do not seem to satisfy the statutory rule that the Inspector of Taxes needs to make a judgement on the basis of what he could reasonably have been aware on the basis of the information made available to him at the time by the taxpayer. It is by no means clear in this case that the taxpayer did furnish all the information on which the Tribunal expected the Inspector of Taxes to make his judgement. More importantly perhaps is the key phrase in the decision that:

“If HMRC had queried the matter at the time, they could reasonably have been expected to be aware……”

This seems to be rather overstating the position.

However, the general idea seems to be developing that if HMRC have everything they need to be able to make a judgement about whether there might be an insufficiency, they are bound by the time limits to the same extent as the taxpayer. This may not be a strong case but on this subject the taxpayer needs all the help he can get.

Discovery and Omar v HMRC TC1559

Having written the above, another such case was published only very recently in which a much stricter test was adopted: Omar v HMRC TC 1559. This case concerned the tax implications of a transfer by a company controlled by Mr Omar to a FURBS for his benefit. HMRC sought to raise a discovery assessment out of time because of inadequate disclosures by Mr Omar.

The tribunal declined to take into account the actual knowledge of the Inspector (in the sense that he had been told the information and knew the relevant facts) on the grounds that one had to look at the
objective awareness of a hypothetical Inspector – not the actual Inspector involved. (Wow – that’s tough. You cannot assume that the recipient knows anything you told him before – not even yesterday).

Furthermore, the information to be taken into account in considering the Inspector’s awareness, is
restricted by section 29(6) TMA1970 to the information provided by the taxpayer – so all the relevant
information provided by his company about the contribution to the FURBS had to be ignored.

This decision is seriously at odds with the judgment in Gilbert and they perhaps represent extreme views at different ends of the spectrum. I don’t know what the poor taxpayer is supposed to make of all this - nor how he is expected to know his obligations when faced with such divergent views.