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The importance of disclosure notes on tax returns

Ordinarily HMRC will enquire into tax returns within the statutory enquiry window of 12 months from the date of submission.

However, there are times, mainly due to information sharing with other financial institutions and tax jurisdictions under the Common Reporting Standard (CRS), where HMRC receive income and capital gains data for the year in question long after the enquiry window has closed.

Where HMRC is unable to open a tax enquiry under normal enquiry provisions, they will look to fall back on their discovery provisions.

If HMRC consider that they have made a discovery, they then might write with a list of queries and threaten to issue an assessment if their requests are not complied with.

Alternatively, they might issue a formal information notice, which comes with the threat of immediate financial penalties for non-compliance with the accompanying request for information and records.

HMRC’s discovery assessment

Essentially HMRC can only make a discovery assessment where one of the following two provisions is present;

  • either there has been an underpayment due to careless or deliberate behaviour of the taxpayer or persons acting on their behalf or
  • the hypothetical officer could not have reasonably been expected to be made aware of the insufficiency in the assessment from the information made available to them

‘Made available’ relates to anything contained within the return or any accompanying accounts, schedules or documents.

The first provision is rarely offered up by HMRC from the outset and grounds for pushing back against allegations of careless or deliberate behaviour should be explored if that is what HMRC allege, as in such circumstances HMRC will no doubt be considering penalties on top of recovering any apparent underpayment of tax.

The second provision is often offered up as the sole reason for HMRC utilising their discovery provisions and is therefore very important as it essentially relates back to the quality of the disclosure on the tax return.

What you can do – making a disclosure note

Where the filing position is uncertain or perhaps complex, you should make a fulsome disclosure in support of the filing position you have taken. This should be in the form of a note, or schedule to accompany the return itself, if it cannot be set out clearly and comprehensively within the white space notes section on the return itself.

Consider also enclosing any relevant supporting schedules if this will help set out the position with greater clarity.

In the recent case of Timothy and Alison Johnson v HMRC [2022] TC08483 decided at First Tier Tribunal (FTT), HMRC’s discovery assessments were valid due to the careless actions of the agent acting.

Compensation payments had been received however the agent incorrectly considered the receipts as non-taxable. Entries were made to this effect within the white space notes on the clients’ returns.

However, while this might counter HMRC’s discovery position as regards information being ‘made available’ this does not affect HMRC’s ability to raise assessments by virtue of underpaid tax due to carelessness of taxpayer or persons acting on their behalf.

While the outcome was not positive for the taxpayer in this case, it should be noted that HMRC have to demonstrate carelessness in order for their assessments to be valid and in this instance HMRC reduced their tax geared penalties to £nil prior to the FTT hearing.

Impact on discovery actions

Where no notes have been made at all, it is extremely difficult to counter HMRC discovery actions. However, any note is better than nothing at all. A detailed note with reasoning is better still. If HMRC cannot get an allegation of carelessness to stick, then we can (and have) successfully persuade HMRC to drop their discovery actions on the basis that the information was made available to the hypothetical officer within the return submitted.

Impact on penalties

With a note in place on the return in question, this can often assist greatly when it comes to negotiations over the amount of any tax geared penalty HMRC might consider due. The contents of notes can even be used to convince HMRC to drop the penalties altogether, reduce them to £nil or agree conditions to suspend penalties for careless behaviour.

If you have any queries about anything in this article, or any action being undertaken by HMRC, please do get in touch.

Dave joined PKF Francis Clark in October 2018 after a 27 year career working for HMRC. Working as part of the tax advisory investigations team,… read more
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