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Peter Vaines of Squire Sanders comments on a recent "discovery assessment" case and HM Revenue & Customs' powers to request information.

Introduction

I suppose I ought to make some comment on the regrettably ill informed furore over the payment of taxes. I will make only a short point. I think the rule of law is rather important. Whatever view one takes of tax schemes there is something rather misguided about describing people who go to (extreme) lengths to obey the law, as "morally repugnant".

The alternative is for tax to be charged (i.e., for the State to take away your money) on the basis of what somebody thinks is "morally right". No idea what this means - and of course there could be no appeal. For Mr Cameron or Mr Milliband simply to say: I think you should pay £X (or maybe £Y - because they would never agree on the same figure) without regard to the law, might not be widely
accepted as such a good idea.

This would be a regime where the politicians are able to confiscate the property of the citizens without regard to any rule of law. There are regimes like that - but I don’t think anybody really wants
the UK to be one of them.

Discovery Assessments

I am always on the lookout for developments relating to discovery and have made frequent references in earlier Bulletins to various cases which have eased the harsh approach enunciated in Langham v Veltema. It would be boring to go through all those points again – but the recent case of While v HMRC TC 1755 is interesting.

The facts of this case do not raise any particular point of principle but they do highlight one aspect of the information requirement in TMA 1970 s 29 (5) which may be of wider application. The issue was whether TMA 1970 s 29 (5) had been satisfied – that is to say whether the Inspector of Taxes could have been reasonably expected, on the basis of the information made available to him, to be aware of an insufficiency in the assessment.

Section 29 (6) sets out the information which can be taken into account for this purpose. The information does not have to be submitted to the particular Inspector dealing with the issue. The test in Section 29 is submission to a hypothetical officer, not to any officer in particular. However, in the case of While, the Tribunal said that:

“It cannot have been in the contemplation of Parliament that Section 29(6) will be satisfied by a taxpayer based in Devon sending information to an HMRC officer in the Highlands of Scotland.”

Whilst this is of course an extreme example, one has to ask why not. The information has to be submitted to HMRC – not to any particular officer and although it would seem rather perverse to send it to some far distant officer, it is difficult to see where one can draw the line. If Scotland is too far, what about Manchester – or an Inspector in the office next door? With modern communications, I cannot see that it should (or can) make any difference.

The Tribunal also suggested that the taxpayer should have notified HMRC of the relevance of the information to his affairs. We know that this is the view of HMRC (and what they would like the rule to be) because they say so in SP1/06, but this requirement has been rejected by the Tribunal before. In any event, it defies common sense to say that the lay taxpayer must, as a condition of providing the information, explain the relevance of the information to acknowledged experts. What if the taxpayer notified the Inspector that it was relevant to a particular point in dispute and he was mistaken; it was not relevant to that point at all but extremely relevant to a separate point. Would this be adequate notification?

The Tribunal justifies this by saying that the statute requires the taxpayer, when providing information, to notify HMRC not just of the existence of the information but also of its relevance to the insufficiency for the period in question. With all due respect, this is not what the statute requires.

Section 29 (6)(d) refers to the information the existence of which, and the relevance of which, could reasonably be expected to be inferred by an officer of the Board from the information falling within the earlier paragraphs – or is notified by the taxpayer to the officer. If it is evident to an ordinarily competent Inspector of Taxes, there is no requirement for the taxpayer to notify HMRC of the relevance of the information provided.

We do not seem to be getting any nearer to a consistent or comprehensible code for Discovery – which is a pity having regard to the fundamental importance of this subject to the protection of the
taxpayer.

Information Powers

While on the subject of discovery, some reference ought to be made to the new HMRC information powers in FA 2008 Sch 36. This is intended to be a comprehensive set of information gathering powers covering all taxes which can apply even before a tax return is filed.

HMRC can issue a notice requiring documents to be provided or information to be supplied for the purposes of checking the tax position of the taxpayer. It can be directed to the taxpayer or to those parties in respect of any “past, present and future liability to pay any tax”. This is incredibly wide – but perhaps not wide enough to involve transactions which have not even taken place which has sometimes been suggested. There must be a liability – not just the possibility of a liability, otherwise they do not need Schedule 36. They would just have to say “HMRC can require anything from anybody for any purpose at any time”.

A concern has been raised about the effect of these provisions on the ability of HMRC to make a discovery assessment. However, I cannot see that the rights of HMRC to obtain information affect the position. There is nothing in Schedule 36 which affects the meaning of “discovery” and if the taxpayer is claiming that the Inspector could reasonably be expected to be aware of an insufficiency on the basis of information provided, he is only protected if he provides information himself. Information obtained by HMRC under their Schedule 36 powers would not help him.

HMRC may be able to obtain information outside the enquiry window by the use of these powers, but that is not going to make any difference to their ability to make a discovery assessment if a full disclosure has been made.