In a moment of Discovery

Isaac Newton was sitting in his garden when an apple fell on his head and in a stroke of brilliance, he formed his theory of gravity. Discoveries can be sudden and unexpected, or they can arise from a process of deliberate and careful planning induced by curiosity and/or necessity.

Assessment letters under Section 29 TMA 1970 fall on the doorsteps of our clients, as HMRC ramp up their attack on tax avoidance. With the sudden and unexpected emergence of ‘brown envelopes’ we need to ask if this is a result of careful planning, mal-administration or simple process following, on HMRC’s behalf.  

Discovery assessments under Section 29 TMA 1970 provide HMRC the power to assess a loss of tax arising from the fact that there has been no assessment; an inadequate assessment; or excessive relief. The authority given to HMRC is powerful but not limitless. There are vital protections for taxpayers. A condition that must exist to enable a discovery assessment is that if at the time the enquiry time limit ended, or any enquiry was closed, HMRC could not ‘reasonably be expected’ to have been aware of the understatement based on the information provided by the taxpayer at that time. This allows HMRC a 4-year assessment window. If the discovered material now in possession of HMRC was hindered due to varying degrees of ‘bad behaviour’ from taxpayers, the time limit increases to 6 years and in some instances 20 years.  

Last week’s Budget is not the first-time contractors have found themselves ‘snubbed by Hammond and May’. In amongst the mockery Hammond quietly introduced the notion to increase the time limits for HMRC discovery assessments of offshore tax non-compliance to support new global rules to force the disclosure of certain offshore structures to tax authorities. The government is to consult on this measure to extend the time limit for assessing offshore non-compliance from 4 years to 12 years, with a view to implement the new time limits in April 2019. This potential change is rather baffling. It is posed that the inadvertent or deliberate hiding of ‘new information’ is a justification to extend time limits, has been removed and instead if there is an overseas element, an arbitrary 12-year limit imposed. This hurts the taxpayer’s protections hugely. Through the Disclosure of Tax Avoidance Schemes regime, HMRC has been aware of such schemes operating for an extensive period now and therefore arguably had opportunity to act within the existing time limits for enquiry. So why did HMRC fail to act in a timely manner; perhaps resulting in this proposed change?

Many of our clients are already facing the hard hit of the looming the 2019 charge legislation passed in the Finance Bill earlier this year. These alleged tax avoiders find themselves hurt by their employers who failed to deduct sufficient tax from the arrangements they participated in, as demonstrated by the Rangers Case ruled on in Supreme Court earlier this year. Contractors are feeling undue pressure to settle with the fears of Accelerated Payment Notices and the punitive 2019 charge on the horizon. HMRC presented a settlement analysis a few weeks ago which ignored the Rangers case and left contractors unable to end the misery of tax enquiry. If this proposed change is enacted and applied to our group of clients that takes HMRC’s assessable powers all the way back to tax year 2005/06; which begs the question of will the misery of tax enquiry ever end for these individuals?

What can be done? Choices are limited. Individuals can appeal and have the tax postponed whilst negotiating a settlement amount. This is very much limited by a 30-day window and HMRC agreement. Further are three choices. One is to accept HMRC’s view of the liability – the loan payments are taxable like salaries. Thus, payment to the Trust should have been subject to deduction of income tax and the contractor carries this burden. Second is to go to Tribunal and stand a challenge to HMRC’s view. The restraints of this include the high costs of litigation which is a heavy weight to be carried by a party of one. Third is via settlement discussions, which we are ongoing for our clients in WTT Big Group. This is despite being discouraged by HMRC implementing obstacles such as ‘Disguised remuneration; detailed settlement terms’ released just weeks ago – a far from brilliant proposal which has failed to present a reasonable and sensible approach to settlement.

This leaves us questioning what’s on the horizon? Our clients are left facing the fears of further intense scrutiny and the intrusive questioning by HMRC; arguably not entirely for blunders of their own, but of their employers. We now sit awaiting an apple to fall in Government to question the necessity and consequences of this aggressive pursuit of vital individuals in our UK workforce and economy. Is a ‘Britain fit for the future’ possible without them? WTT has previously had dialogs with MPs and advisers in relation to proposed legislative changes. To date this has enabled our client’s voices to be broadcasted. We would urge you to do the same and contact your local MP – alone we can do so little, together we can do so much.