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Peter Vaines of Squire Sanders comments on a recent tax case where HMRC claimed "Discovery"

I never like to miss a case on discovery assessments as the rules are being refined all the time. In fact, the arguments on this subject have now become so refined that the whole purpose of the legislation is in danger of being lost. The latest such case is Boyle v HMRC TC 3103 which concerned a tax scheme involving loans in foreign currencies notably Uzbekistani Soums. (No, I didn't either).

The idea was that the employee was lent money in the foreign currency which he immediately converted to Sterling. However, he did not have to repay it until later when the Uzbekistani Soums had fallen in value. So he borrowed the equivalent of £100 today and could repay it next year in the foreign currency by which time it would be worth only £40. Nice idea - and there are some really good reasons why this difference is not taxable. (I seem to remember this being a popular idea about 25 years ago when the Turkish Lire went into decline. It got a lot less popular when the Turkish Lire recovered).

Anyway there were various aspects of Mr Boyle's arrangements which caused the Tribunal to find that it was taxable as earnings.

The interesting issue was whether HMRC could raise a discovery assessment - and as usual it came down to the information Mr Boyle had provided. The Tribunal drew attention to the fact that there was no information contained on Mr Boyle's tax returns regarding the various loans and they had little hesitation in declaring the discovery assessment valid. However, the reasoning looks a little extreme – not least because it relies on passages from Langham v Veltema without any of the modifications which have been placed on that decision by the courts in subsequent cases.

The taxpayer must provide the necessary information to HMRC so that a hypothetical tax officer will have sufficient awareness of the position. But the Tribunal said that information provided by the taxpayer or on his behalf is only within TMA 1970 s 29(6) if it is provided for the purposes of an enquiry into the return and not if it is provided for some other purposes. Furthermore, there is no obligation on the hypothetical tax officer to see what information has been provided to the actual officer who has been dealing with the matter. We already know that information provided by others to HMRC does not count either.

This is getting silly. The taxpayer may have provided absolutely comprehensive information about the arrangements and HMRC may be wholly aware of every relevant fact and implication - but HMRC are apparently entitled to disregard all of this unless he sends it all to them again.

If that is not bad enough - who does he send it to? Obviously he cannot send it to the hypothetical officer because he does not exist but if he sends it to the real officer, the hypothetical officer is under no obligation to find out about it. It is time this absurdity was sorted out to restore some common sense - and to provide the proper protection for both HMRC and the taxpayer for which the legislation was intended.