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For the first time under the self-assessment régime, the High Court revisits the principles of Olin. PETER PENNEYCARD speculates on the future if the Revenue succeeds in its appeal.
For the first time under the self-assessment régime, the High Court revisits the principles of Olin. PETER PENNEYCARD speculates on the future if the Revenue succeeds in its appeal. THE HIGH COURT has recently confirmed that an Inspector of Taxes is not entitled to make a discovery where a competent Inspector looking at the case previously possessed the facts to permit him to come to a correct conclusion. This principle, explained in the House of Lords' decision in Scorer v Olin Energy Systems Ltd [1982] STC 800, has been confirmed as applying under self assessment in the recent decision of the High Court in Langham v Veltema [2002] STC 1557. The introduction of self assessment placed a considerable burden on the taxpayer. This was balanced by giving the conscientious taxpayer certainty once a reasonable period for enquiry was passed. However, the Revenue regards the onus of timely enquiry as unacceptable and is seeking to have this decision overturned. More worryingly, the Revenue has made clear that it does not really accept any barrier to discovery. It appears to want the right to re-open any return at any time.
The facts
Mr Veltema was a director and controlling shareholder of a farming company. On 6 March 1998, when he was approaching retirement, the company transferred to him, for no consideration, the house in which he lived. The property was valued at £100,000 by a firm of chartered surveyors and that value was used as the basis for the following tax returns for the year 1997-98: Each of the returns was made well within the relevant time limit. Within about six weeks of receipt of his income tax return, the Inspector in King's Lynn dealing with Mr Veltema's income tax sent the taxpayer's agent a standard acknowledgement stating 'Your client's tax return for the year ended 5 April 1998 has been processed without any need for correction'. The Inspector had until 31 January 2000 to give notice of his intention to enquire into the return. Had he done so, he would have been able to make a further assessment at any time until 30 days after he completed his enquiries. When the company tax unit in Leicester reviewed the corporation tax return, it referred the matter of the property valuation to the district valuer. In discussion with the company's surveyors, this was agreed in March 2000 to be £145,000. Subsequently, although out of time for amending the income tax return, the Inspector sought to increase Mr Veltema's taxable income by £45,000. Mr Veltema appealed against the assessment and the Commissioners agreed with him.
The arguments
Mr Veltema's case was that, under the self-assessment system, there is normally a deadline after which the Revenue cannot alter an existing self assessment or make a new assessment, and the Inspector had missed that deadline. The Inspector pointed out that there are two situations in which assessments can be made after the deadline. These are contained in section 29(4) and (5), Taxes Management Act 1970. Section 29(4) reads:
'The first condition is that the [non-assessment or insufficient assessment of income] is attributable to fraudulent or negligent conduct on the part of the taxpayer or [his agent].'
The Inspector did not assert fraud and the Commissioners found no evidence of negligence. The High Court concluded that 'the Commissioners' rejection of the argument of negligence, coupled with the absence of an appeal against the rejection, is tantamount to an acceptance that there was nothing wrong with the tax return which PKF prepared and Mr Veltema submitted'. This point need not be considered further. Section 29(5) reads:
'The second condition is that at the time when an officer of the Board -
'(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment or
'(b) informed the taxpayer that he had completed his enquiries into that return,
'the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the [non-assessment or insufficient assessment of income].'
This is the key question. Could the Inspector have been reasonably expected, on the basis of information made available to him by 31 January 2000, to be aware that the self assessment was insufficient? For the purposes of this section, subsection 29(6) states that information is considered to be made available to an officer of the Board if:
- it is contained in the taxpayer's return or in any accounts, statements or documents accompanying the return;
- it is contained in any claim made by the taxpayer;
- it is contained in any document produced to an officer of the board by the taxpayer in response to an officer's enquiries into the return or related claim; or
- 'it is information the existence of which, and the relevance of which as regards the [non-assessment or insufficient assessment of income], could reasonably have been expected to be inferred by an officer of the Board from information falling within [the return and other documents referred to above]'.
The Revenue appealed, and the case came before Mr Justice Andrew Park in November 2002. In the High Court, the argument centred around subsection (6) and the limit of the information which the Inspector was regarded to have had knowledge of at 31 January 2000, the normal deadline for raising enquiries.
The Revenue argued that the information available to the Inspector, which it regarded as being limited by section 29(6) to the income tax return and documents submitted with it, was not by itself sufficient for him to know that the market value of the house was not £100,000, but a higher figure. Therefore, he was entitled under section 29(5) to raise an additional assessment.
Mr Justice Park did not agree. He pointed out:
'that section 29(5) does not refer to the Inspector being or not being reasonably expected to be aware of the insufficiency … solely from the (defined) "information made available to him". It refers to him being or not being reasonably expected to be aware of the insufficiency … "on the basis of" that information. The words "on the basis of" do not seem to me to limit the sources of information which the Inspector is assumed to have to what was in the tax return and accompanying documents to the exclusion of anything else which … he could reasonably be expected to have known or found out….'
He went on to say:
'It is reasonable to assume that the Inspector would read the return and accompanying documents (with normal care but nothing more demanding than that) and that one thing which he would be looking for was whether they disclosed anything which it was sensible for him to investigate further.'
He observed that the Inspector's Manual states:
'In all cases where land is transferred to a director or employee, an Inspector must consider whether the transfer is at full value and, if not, whether the undervalue is a profit from the directorship or employment. Where the property is in the United Kingdom, the Valuation Office must be consulted … in all cases where the transfer appears to be at less than full market value.' (Emphasis added.)
The Court could not know what the Inspector in fact did on receiving the return. However, it was relevant that an objective outside observer would have noticed income of £100,000, which could only be interpreted as an asset which had been transferred at below market value by the company to Mr Veltema, and that the amount entered could only be by reference to a judgment as to the market value. In addition, evidence before the Commissioners indicated that the position concerning the house was made clear by another document in the Inspector's possession, namely the return on form P11D made by the company.
The decision
On 10 December, Mr Justice Park handed down a very clear and comprehensive judgment. Olin was decided before the introduction of self assessment, but Mr Justice Park concluded that similar principles continue to hold. It was agreed that the Revenue could not assess Mr Veltema to the additional income of £45,000, unless it could show that the Inspector 'could not have been reasonably expected, on the basis of the information made available to him, to be aware' that the self assessment was insufficient. Mr Justice Park acknowledged that the tax return and accompanying documents are the starting point for the question of whether or not the Inspector could, 'on the basis of' them, reasonably be expected to be aware that Mr Veltema's self assessment was insufficient, but it does not stop there. Applying common sense and the normal administrative procedures to that primary source, the Inspector would have been aware of the importance of the property valuation and obtained fuller information allowing him to conclude that the self assessment was insufficient. The judge concluded that 'I am quite unable to say that, at 31 January 2000, the Inspector could not have been reasonably expected to be aware that Mr Veltema's self assessment was insufficient', and on that ground the opportunity to assess had been missed.
What next?
It would have been pleasing to conclude that the Inspector cannot make a discovery if the information supplied to him in the tax return or accompanying documents is adequate to put him on notice that there is a matter in the return that warrants further enquiry. This decision is logical and unexceptionable, but the Revenue is not happy with it and it has applied for leave to appeal to the Court of Appeal. Mr Justice Park, as is his wont, constructed a hypothetical situation and asked the Revenue what the position would be if, on a similar set of facts, the district valuer had agreed the value earlier and the company tax unit had informed the Schedule E Inspector well before 31 January 2000, but for some unknown reason the Inspector had not opened an enquiry. The Revenue's reply was that, since the information held by the Inspector did not fall within the specified items in section 29(6), it would be free to make a discovery and a further assessment after 31 January. Furthermore, the Revenue has expressed the view that the Inspector was not required to take account of the form P11D submitted by the taxpayer's employer. Does this mean that all directors and employees, who have included within their income tax return a benefit as valued by their employer in the form P11D, need to add in the 'white space' a statement to this effect - 'the sum included in respect of the motor car transferred to me is only my employer's estimate of its market value'? One can only assume that the Revenue would prefer the law to be that the Inspector is entitled to raise a further assessment in all situations where the relevant information is not comprehensively and unambiguously contained solely within the income tax return and any other documents supplied directly by the taxpayer. If the Revenue gets its way, it seems that to self assess with certainty, the taxpayer must not only complete his return and related computations, but also tell the Inspector when an enquiry should be raised. The Revenue does not appear to want to have to rely on the intelligent industry of its Inspectors. Peter Penneycard is National Director of Taxation at PKF.
