Replies to Queries - 2 - Compulsory amendment

We act for a pre 6 April 1994 partnership, which terminated at 20 February 1997. The partnership profits were as follows:

The 1996-97 partnership return disclosed the results for the year ended 30 April 1996 and the final period 1 May 1996 to 20 February 1997, with the 1996-97 adjusted profits being declared as £135,532. The 1996-97 assessment was raised by the Revenue on this amount. The Revenue should have amended the 1994-95 and 1995-96 assessments to an actual basis under section 63(1)(b), Taxes Act 1988 but has not done so.

Readers' views are sought as to whether the Revenue could be compelled, prior to 5 April 2002, to amend the 1995-96 assessment to an actual basis resulting in a tax refund for that year. Any amendment to the 1994-95 year resulting in an additional tax liability would be challenged as being out of date.

We would not wish to associate our firm with this course of action, but the clients may pursue this matter with the Revenue unilaterally.

(Query T15,973) - Doberman.

Based on the partnership profits provided, combined with the fact that the business commenced prior to 6 April 1994 and ceased in 1996-97, then as mentioned the 'old rules' apply and the alternatively assessable figures for 1994-95 and 1995-96 on a preceding year and actual basis were:

Obviously the initial reaction would be 'go for it!'. The Revenue's Inspector's Manual under Schedule D paragraph 1304 'Discontinuance Adjustments' states: 'The adjustments on discontinuance are governed by section 63, Taxes Act 1988. Whether the adjustments are made directly under that section or by virtue of section 113, the adjustments are regarded as mandatory by reason of the word "shall" in section 62(2). This view was confirmed by the High Court in Baylis v Roberts [1989] STC 693. At local level, however, the Inspectors should make a judgment as to whether the difference between "actual" and assessed profits on the preceding year basis for either or both of the penultimate and antepenultimate years is too trifling to be assessed …'.

Therefore, even though the word 'mandatory' has been employed, one possibility, in order to hide their blushes regarding 1994-95 and the now out-of-date assessment, would be for the tax office concerned to bypass the need of having to lose out by amending the 1995-96 assessment, with the use of the get out clause. It could be stated that as per the judgment of the Inspector concerned, the overall difference was thought to be trifling. The thinking behind this is 'Good try! But if you can do it, so can we!'. - Goldstone.

Looking at the profits for 'Doberman's' client, the Inland Revenue should indeed have adjusted the 1994-95 and 1995-96 assessments to an actual basis under section 63(1)(b), Taxes Act 1988. The following calculation shows that overall additional profits of £20,638 would have been assessable which, at 40 per cent, would have resulted in an extra tax yield of £8,255.

Section 63(1)(b), Taxes Act 1988 provides that 'if the aggregate of the profits or gains of the years ending on 5 April in each of the two years preceding the year of assessment in which the discontinuance occurs exceeds:

(i) the aggregate of the amounts on which income tax has been charged for each of those two years; or

(ii) the aggregate of the amounts on which income tax would have been so charged if no deduction or set-off under section 385 had been allowed;

income tax may be charged instead, for each of those two years, but subject to any such deduction or set-off, on the amount of the profits or gains of the year ending on 5 April in that year.

The Revenue therefore look at the two years as a whole and if the overall result is an increase in assessable profits, then both years will be adjusted accordingly regardless of the fact that this may result in a tax repayment for one of the years.

The usual six-year time limit applies for adjusting the assessments to an actual basis and, for the Revenue to benefit under the section 63 provisions in 'Doberman's' case, it should have issued the adjusted assessments before 5 April 2001 as it was the adjustment to the 1994-95 assessment that would have provided the increase in tax yield.

An attempt to get the Revenue to issue an adjusted 1995-96 assessment before 5 April 2002 for the purpose of a repayment claim (which would also need to be made before 5 April) is not recommended. Doing so would alert the Inspector to the fact that a time limit is involved which in turn would lead him to realise that 1994-95 is out of time.

The section 63 adjustments are a Revenue option. In 'Doberman's' case the Inspector would decide not to make the adjustments and there are no provisions for 'Doberman's' client to appeal. - Beacon.

Extract from reply by 'JRL':

'Doberman's' cunning plan is to accept the 1995-96 reduction but then claim that the 1994-95 increase is out of time. Regretfully this is not the case. The wording of the (old rules) section 63(2), Taxes Act 1988 permits any necessary adjustments to assessments to be made. That is, the normal six-year limit does not apply.

A similar provision is contained in section 62 which permitted a taxpayer to claim such adjustments up to six years after the end of the third year of assessment; in other words up to seven years after the end of the second year of assessment, which would also get adjusted on such an election.

Accordingly 'Doberman' and his client would be ill-advised to draw the section 63 possible election to the Revenue's attention. Luckily they are under no obligation to do so.

Editorial note. All readers were sceptical about the querist's proposal but for differing reasons. My researches have not come up with any confirmation of the suggestion (1) that there is no appeal procedure (section 63(2) authorised any necessary repayment claim to be made) and (2) that there is no time limit on the making of the assessments to adjust (- so do such assessments enjoy an unlimited period time, whereas assessments to counteract fraudulent conduct are limited to a 20-year period?).

Issue: 3849 / Categories: