Tribunal held HMRC not entitled to carry out enquiry beyond standard enquiry period
The First Tier Tribunal held in favour of a taxpayer who had given HMRC details of a damages payment received but had omitted to declare this in his tax return, mistakenly believing the payment to be tax free.
Mr While received in excess of £354,000 as compensation and damages following his dismissal as a director from an insurance company. The High Court had declared that the amount received by Mr While was net of all taxes and the fact that the amount awarded over and above £30,000 should be subject to income tax was not addressed. Mr While had not declared the compensation and damages award on his 1998/1999 tax return. A subsequent enquiry was made by HMRC in April 2000 and the fact that Mr While had received a reward was discussed and recorded in writing. HMRC subsequently issued a discovery assessment in January 2005 in relation to the income tax on damages. The Tribunal held that HMRC were made aware of the award in April 2000 as evidenced by the meeting note and that HMRC would have had the necessary information to raise an assessment within the normal enquiry window (that is, under the rules in place at that time, no later than 31 January 2001). Therefore HMRC had not met the requirements for making a discovery assessment and Mr While had not been fraudulent or negligent in submitting his tax return.
This decision has provided some reassurance for taxpayers that disclosures made during a meeting with HMRC will be regarded as having been brought to their attention such that the disclosed information cannot subsequently form the basis for a ‘discovery’ by HMRC. Nevertheless, it remains essential that a full and clear explanation of any contentious issues are recorded on the white space notes area of a tax return, in order to avoid the risk of HMRC claiming to have made a discovery and carrying out an enquiry beyond the standard enquiry period (now, 12 months from the date the return is filed).
For further information or to discuss the issues raised, please contact John Mooney on +44 (0) 20 3051 5711.