Loan Charge Review – The Open/Closed Principle

With the loan charge review now published, attention has turned as to how the recommendations, that the Government has accepted, impact on individuals.

Open and Closed years

One of the more significant changes to the legislation is that loans between 10 December 2010 and 5 April 2016 that have been fully disclosed by the taxpayer with no enquiry opened or assessment issued, will not be subject to the loan charge.  Whilst many have speculated, truth be told none of us know what ‘full disclosure’ means and this will only become clearer when the legislation and guidance is published. However, whilst we await that guidance, those that had loans in this timeframe need to consider whether they have open or closed years.

Closed years are easy to identify, they are ones where tax returns were filed but no enquiry was opened by HMRC or discovery assessment raised.  In cases where there was an enquiry, but closed with no adjustment, then this would also be considered a closed year. Keep in mind that this scenario will very much be an exception (I have seen one case like this in the last 3 years).

Therefore, by definition an open year is one that has an enquiry or discovery assessment issued. But what is a valid enquiry notice or assessment?

Enquiry notices

Enquiry notices are issued under Section 9A Taxes Management Act 1970. They do not need to mention that section of the act but it must be in writing and clear that a check of the return is being undertaken.  From the selection of notices we have seen there are certainly some cases of ambiguity in this space, particularly where COP8 was used, and this may be one of the preliminary issues that is tested in Tribunal. They need not say why the return has been selected for enquiry.

Since 1 April 2008, when the return is received on or before the filing date, then the window for HMRC to open an enquiry is 12 months from the date of receipt.  Where it is received after the fixed filing date then the enquiry window will not close until the quarter date next following the first anniversary of receipt of the return.  Quarter dates are 31 January, 30 April, 31 July and 31 October.

The notice also needs to be received in time, not just sent in time. HMRC will normally post all letters by 2nd class mail which by case law is considered to take 4 days to be delivered. Should HMRC argue that they posted the letter by 1st class, then they are required by internal guidance to obtain the authorisation of a manager and retain evidence of such authorisation.  Recent cases in the Tax Tribunals have turned on HMRC being required to evidence the posting of a letter, not just anecdotal evidence of HMRC process, and the tax authority has come up short more than once.

Discovery assessments

Discovery Assessments can be issued when a hypothetical officer of HMRC could not have been reasonably expected, on the basis of information made available to him or her, to be aware of an under-assessment of tax when the enquiry window closed. In recent times this definition has been extended to incorporate by case law a concept of ‘staleness’, which is to ask – once the discovery of the under-assessment was made how quickly did the HMRC officer act on it? 

In general, HMRC have 4 years to make such an assessment, but where careless or deliberate behaviour leading to the under-assessment can be proved, then that is extended to 6 and 20 years respectively. Note, HMRC need to prove such behaviour took place. We expect HMRC will to try do so in many instances going forward, especially in light of the loan charge review outcome, but it will be difficult.

Seek clarity

What did they actually discover when making the assessment? When did they discover it?  How long have they had the information?  All of these are key to whether a valid assessment has been made and therefore the year being ‘open’.

We recommend, given the importance the loan charge review puts on the status of the year, that those of you who are in any doubt, have your years reviewed by a professional adviser experienced in such matters who is able to challenge HMRC where appropriate.