Replies to Queries - Open or shut case?

A client company had a PAYE visit on 9 November 2001. A director's overdrawn loan account was queried for 1999-2000, 2000-01 and 2001-02. The Revenue took no action to collect tax on the notional interest due. On 30 November 2004, the Revenue wrote 'as you know the company has been the subject of a PAYE/NIC review for some time now. As there are no further issues outstanding, the review is now complete'.
However, on 24 September 2004 the director's tax office (a different one to the PAYE office and unaware of the PAYE review) issued a notice under TMA 1970, s 9A in respect of his 2002-03 tax return. We answered all the questions and agreed the tax liability on the director's loan account interest for 2002-03 and thought that the inquiry would then be closed.
The Revenue then wrote to us and said 'It appears likely that a similar situation has occurred in earlier years, in view of the fact that the loan account was overdrawn at 6 April 2002. It is therefore my intention to inquire into 1999-00, 2000-01 and 2001-02 under the discovery provisions set out in TMA 1970, s 29'.
We replied that as these years had already been reviewed and completed, the Revenue was unable to reopen them. Needless to say the Revenue's response quoted Langham v Veltema and said that an Inspector could not be expected to know what information was held in other files. We think this is irrelevant.
Our argument is that the Revenue failed to deal with this at the correct time and should not therefore be able to review the same matter again.
Our belief is not based on the Revenue only having one option to review a self assessment return, but more on the fact that if we are told that a case has been completed and it is re-opened later, how do we and the taxpayer ever know where we are?
Advice or comments from readers would be appreciated.
Query T16,605 — Overdraft.

Reply by 'Edmund'

I fear that all that can be offered to Overdraft is sympathy. Following Langham v Veltema [2004] STC 544, the Revenue can extract tax from a taxpayer even if the enquiry window has closed or no enquiry is open. In Veltema, a 'discovery assessment' was made even though the Inspector had confirmed that the return had been processed with no need for correction.
In Overdraft's case, the Inspector has raised an enquiry under TMA 1970, s 9A in respect of the 2002-03 return and then has extended this to earlier years under the discovery provisions of TMA 1970, s 29. There is no doubt that these earlier returns were erroneous; so much is admitted. Before a discovery assessment can be made, either fraudulent or negligent conduct must be present or the officer (of the Inland Revenue) could not have been reasonably expected, on the basis of the information made available to him, to be aware of the situation (insufficient assessment, etc.) before the end of the normal enquiry period.
The decision in the Veltema case is that the condition in s 29(5), 'on the basis of', etc. was concerned not with what an Inspector could reasonably have been expected to do, but what he could reasonably have been expected to be aware of. The amount of knowledge which the Inspector could be expected to be aware of is to be interpreted solely to the information made available to him in connection with that tax return and can not be expanded to include other information which may have been included in other returns.
This appears to declare open season for the Revenue to start enquiries in almost any case where it can be shown that insufficient information was included in the return to enable the Inspector to realise inside the enquiry period that the self assessment was insufficient.
As a result of meetings held with the profession in December 2004, the Revenue issued guidance which sets out how the Veltema case will affect discovery proceedings. Overdraft should study this together with a background note issued at the same time. This imposes some limits to the Revenue's use of the discovery procedures, particularly in relation to valuation cases, or other judgmental issues. In the case of valuations, a statement in the white spaces that a valuation has been used, by whom it has been carried out, the name of the independent valuer and his qualifications, and the basis used, will enable the taxpayer to rely on protection from a future enquiry, provided the statements are true. If this value is disputed and found insufficient in another related tax return, i.e. that of another party to the same transaction, the Revenue will be able to open a discovery assessment on the original tax return.
Does this part of the Revenue's guidance offer any help to Overdraft's client? I fear not. An earlier PAYE compliance visit does not amount to a self assessment enquiry, and it is the taxpayer's self assessment return that is subject to the self assessment procedures. In any event, it seems likely that 'negligence' may have been committed, in which case the Revenue would be able to proceed with a discovery assessment either pre or post-Veltema.
This office has had experience where a discovery assessment has been raised despite what was adequate disclosure, by the standards of the time, having been made on the taxpayer's self assessment return. Only as a result of separate enquiries elsewhere and several years later, did it become clear that the losses being claimed were not valid. Counsel's opinion was that, post-Veltema, the Revenue's discovery was in fact valid, and the disclosure made at the time could not be relied upon.
As stated earlier, only sympathy can be offered. Post-Veltema, the Revenue holds most, if not all, of the cards.

Issue: 4007 / Categories: