A special commissioner decided that an amended income tax assessment was validly made where all the conditions under the ‘discovery’ provisions of TMA 1970, s. 29 had been satisfied, even though no notice of inquiry had been issued within the time limit provided for that purpose in s. 9A.

Facts

The taxpayer traded as a publican. In December 2001 he submitted his self-assessment tax returns for the years of assessment ended on 5 April 1999, 2000 and 2001. They were prepared from incomplete records.

He submitted his return for the year ended on 5 April2002 in November 2002. The Revenue opened enquiries into all four returns on 21 January 2003 and informed the taxpayer that the inquiries were made as a result of information provided by Customs following an enquiry into his VAT affairs which revealed poor record keeping and at the conclusion of which the taxpayer accepted he had understated his turnover in VAT returns.

The taxpayer submitted his return for 2002–03 in January 2004, i.e. before the filing date provided by TMA 1970, s. 9A(2), so that the Revenue had until 31 January 2005 in which to raise an enquiry into it.

In the year to January 2005 the Revenue requested a considerable amount of information relating to the taxpayer's return for 2002–03, but no notice of enquiry was ever raised. As the tax inspector dealing with the matter was dissatisfied with the level of response from the taxpayer's then accountant, on 3 November 2004 he informed both the taxpayer and his accountant that thereafter he would deal with the taxpayer directly. Following receipt of further information, the inspector arranged a meeting with the taxpayer on 5 January 2005 and included discussion about how the enquiries might be concluded.

Following the meeting, on 13 January 2005 the inspector wrote to the taxpayer enclosing a schedule of proposed adjustments to his self-assessment returns for the seven years of assessment ended 5 April 1997 to 2003 inclusive. The adjustments were dependent on the provision of the previous accountant's working papers.

Following receipt of those papers, on 28 January 2005 the inspector suggested that the figures proposed in his letter of 13 January 2005 be adjusted for the first four years under enquiry and be reduced in the year to 5 April 2001, but that the figures for the years ended in 2002 and 2003 be confirmed. A meeting was arranged for 4 February 2005 at which certain adjustments were agreed.

The taxpayer then instructed new accountants who sought specialist advice on the Revenue's proposals. They then argued that the taxpayer had not been notified by the Revenue that they intended to enquire into his return for that year; that the Revenue could not claim that there was discovery after 31 January 2005; and that, consequently, the Revenue were time-barred from including that year in any enquiry.

On 31 August 2005 the Revenue issued closure notices and amendments for the years of assessment 1998–99 to 2001–02; and on 1 September 2005 they raised discovery assessments for the years 1996–97 and 1997–98, all reflecting the figures discussed at the meeting of 4 February 2005. On 1 September 2005 the Revenue also raised the assessment under appeal based on the taxpayer having gross income in that year of £28,000, as declared in an application for a bank loan in July 2002. That compared with a declaration of income in his tax return of £10,654. The Revenue agreed that the taxpayer should be entitled to capital allowances in a revised figure of £2,252, so that he was assessable on an additional sum of £15,094, the additional tax and National Insurance contributions amounting to £4,377.25. The taxpayer did not dispute that figure, if he was liable for the sums assessed.

On 21 December 2005, the taxpayer made a formal offer in settlement of tax, penalties and interest for the years of assessment up to and including that of 2001–02, which was accepted. However, he made no offer in relation to the year 2002–03 and the taxpayer appealed against that assessment contending that the assessment was not valid.

Issue

Whether the amended assessment to income tax for the fiscal year 2002–03 raised on 1 September 2005 was validly made by the Revenue under the ‘discovery’ provisions of TMA 1970, s. 29 since no notice of enquiry had been given by them within the time-limit provided for that purpose in s. 9A.

Decision

The special commissioner (Mr David Demack) (dismissing the appeal) said that the first question in relation to s. 29 was whether the inspector had discovered, i.e. found out, that the taxpayer's self-assessment return of 2002–03 was, or had become, insufficient. The section itself required no time-limit for the purpose, nor did it require the Revenue to commence an enquiry into the taxpayer's affairs.

Clearly, in the taxpayer's case, the inspector did discover that his self-assessment for 2002–03 was insufficient. Thus, the inspector was entitled, subject to s. 29(2) and (3), to make an assessment in the further amount which ought to be charged to make good the loss of tax.

Subsection (2) was not in point in this case.

Subsection (3) dealt with self-assessment returns and indicated that a taxpayer was not to be assessed unless one of the two conditions in s. 29(4) and (5) was satisfied. In the present case, the condition in s. 29(4) was applicable, at least in so far as it related to negligent conduct. In all the circumstances, in making his return for 2002–03 the taxpayer in returning his income as £10,654, instead of the true figure of £28,000, did that which a reasonable person taking precautions would not have done, so that he was negligent.

Accordingly, as all the conditions contained in s. 29 for the making of an additional assessment of the loss of tax discovered were satisfied, the assessment under appeal was validly made in the correct amount.

(2007) SpC 578.
Decision released 11 January 2007.