The case law surrounding the grounds on which HMRC can raise Discovery assessments continues to develop, and a further case on the matter was recently heard in favour of the taxpayer. In another recent case (Smith v HMRC), the Tribunal found that HMRC could still raise a discovery where post had not been opened due to staff illness and HMRC effectively changing their minds, despite having the facts available.
A further case, M Freeman v HMRC, appears to provide taxpayers with slightly more comfort than that particular case; the tribunal perhaps looked on the taxpayer more favourably due to the lack of an avoidance motive in the latest case?
Background
In 1997 Mr Freeman exchanged shares in a trading company for loan notes, with the company having received clearance from HMRC that TCGA 1992, s.135 applied.
In 2000 HMRC opened an enquiry into the return and in the course of the enquiry, the loan note documentation was provided to HMRC. An HMRC Technical Inspector stated “I agree that the facts point to this being a non-qualifying corporate bond”.
Mr Freeman redeemed two tranches of the loan note in 1998/99 and 1999/2000. He redeemed a final tranche in 2002/03 and claimed taper relief on the basis that the loan note was a non-QCB.
In 2005, HMRC subsequently became aware that the loan notes were in fact QCBs (a fact that the taxpayer also accepted), while looking into the affairs of another taxpayer who held the same loan notes. HMRC therefore raised a discovery assessment in 2007 in relation to Mr Freeman’s 2002/03 tax return, as the enquiry window had closed.
Mr Freeman appealed against the assessment on the basis that HMRC could reasonably have been expected to be aware of an insufficiency in the tax return, based on the information provided.
Decision
The Tribunal found that, whilst the disclosure in the 2002/03 return was not complete, the provision of the loan note instrument in 2000 did constitute information provided in writing to the Board on behalf of the taxpayer. If the hypothetical officer had considered the loan note provided, he could reasonably have been expected to be aware of the insufficiency of tax.
The conditions for raising a discovery assessment were therefore not satisfied, and the taxpayer’s appeal was allowed.
It will therefore be interesting to see if this case has implications for future cases on Discovery, and could prove useful in cases where information was provided in earlier tax years.
