Peter Vaines looks at discovery assessments, the extension of the DOTAS regime to Inheritance Tax, and a curious case of deemed income without a source that did not end well for HMRC.
The arguments and appeal hearings about discovery assessments continue unabated, and the subject gets ever more confused as the meaning of these rules is continually refined. The angels who are dancing on section 29 TMA 1970 are having a ball. The resources which are consumed in arguments on this subject do not bear thinking about.
The recent case of Blum v HMRC TC 6404 provides some additional and important assistance in the proper interpretation of the legislation.
It is well known that section 29(5) provides that HMRC cannot raise a discovery assessment outside the time limit unless “the officer could not have been reasonably expected, on the basis of the information available to him before that time, to be aware of [the insufficiency]”
Section 29(6) provides that the information available to the officer for this purpose is confined to information provided by the taxpayer. This is a trap. The taxpayer may know full well that HMRC have been provided with all the relevant information and documents (maybe a number of times) but unless he sends them the information (again) himself, it will be disregarded. (Not wishing to get distracted here, I wonder who he sends the information to. We are looking at the information available to the hypothetical tax officer – so how does he provide the information to him?).
Anyway, moving on, the Tribunal said that this was not right. Section 29(6)(d)(i) allows information that could reasonably be expected to be inferred from the information supplied by the taxpayer, can be treated as having been made available to the hypothetical officer.
You might say this is blindingly obvious. Section 29(6)(d)(i) has always been there and we all knew this - so why am I making a big deal about it. Er, well HMRC didn’t know. They argued that because Mrs Blum did not provide the information personally, it should be ignored for section 29(5) purposes.
Another interesting aspect of this case was that because Mrs Blum was not in business, section 12B TMA 1970 requires her to keep records until the first anniversary of the 31st January next following the year of assessment. Mrs Blum said it was unreasonable that HMRC could raise an assessment within 4 years, by which time she may, quite properly, have no records to dispute the assessment.
The judge acknowledged the difficulty, but said that this was the law and there was nothing he could do.
Cor. This is seriously unfair and let’s hope that something is done about it before too long.
Source of Income
The case of Ashraf v HMRC TC 6355 has a historical significance in reinforcing the ancient rule that for income to be taxable, it must have a source. The case involved a COP9 investigation which revealed substantial deficits in Mr Ashraf’s resources, that is to say between his income and his expenditure – like £70,000. Such a discrepancy will always be something which calls for an explanation. HMRC naturally claimed that this unexplained £70,000 represented money which should have been brought into charge to tax.
Although Mr Ashraf was unable to explain the reason for this large discrepancy, the problem was that HMRC did not advance any argument regarding the source of the money. They merely brought the deficit into charge to income tax – but without saying where it came from or its source. The case therefore centred on the requirement that every receipt of income must have a source - but HMRC had not been able to identify an income source, they merely allocated it to other income in the self-assessment calculations.
The burden of proof was on HMRC to show that there was a source of income which had been omitted, and in the absence of any evidence regarding the source, an assessment to tax could not be validly made.
IHT: Disclosure of Tax Avoidance Schemes (DOTAS)
On 1st April 2018 new DOTAS regulations for IHT came into force, and everything now has to be tested against a new hallmark – in addition to the old confidentiality and premium fee hallmarks.
An arrangement is notifiable under the new regulations if an IHT advantage is expected to be a main benefit and if it is reasonable to expect an informed observer to conclude that it satisfies two conditions. (An informed observer is someone who is not an expert but has all the relevant information and has the knowledge and skill to understand the arrangements in the statutory context).
The first condition is that the main purpose of the arrangement is to obtain an inheritance tax advantage such as the avoidance (or reduction) of:
An entry charge to a trust;
A ten year or exit charge;
The gift with reservation rules;
A reduction in a person’s estate without a PET or chargeable transfer.
It is difficult to imagine any inheritance tax planning which does not fall within one of these, so everything will depend upon condition 2.
The second condition applies where the arrangements involve one or more contrived or abnormal steps.
HMRC say that normal and straightforward IHT planning will not be notifiable – but that is impossibly subjective.
What is normal for one person will be abnormal to another, and to make it the judgment of an informed observer makes it even more difficult. The Courts and Tribunals will not have a consistent view and the whole thing will be clouded in uncertainty for years. Equally unsatisfactorily, there will be loads and loads of arguments about this – adding unnecessarily to the pressure on the Courts and Tribunals.
HMRC have prepared a guidance note on these new rules which includes various examples of arrangements that they consider not to be contrived or abnormal, such as a transfer to a spouse utilising the spouse exemption, or making regular gifts out of income, potentially exempt transfers or transfers within the nil rate band. They say that these are not abnormal because they just take advantage of a statutory relief or exemption.
Unfortunately, one of their examples rather gives the game away. There is a specific relief in section 102B(4) FA 1986 to exclude the reservation of benefits rules to a gift of an undivided share in land which is occupied by the donor and the donee. HMRC say this is not abnormal because it is in accordance with the legislation but they will take a different view if the donor retains only a very small proportion of the property. This is not a condition which appears in the legislation – from which one may properly conclude that it was not intended by Parliament.
So HMRC will not really regard the use of an exemption provided by the legislation as any protection for the taxpayer. If they fancy it, they will just add a new condition of their own which is not in the legislation and say you do not satisfy it. If this were not so serious, it would be amusing.
However, it would not be right to complain too much about all this because these guidance notes are only HMRC’s view of these new regulations – and the purpose of the regulations is only to provide information for HMRC. It does not change any of the IHT rules. It is not unreasonable for HMRC to seek information about areas of potential sensitivity so that they may have the opportunity to consider them fully.