HMRC attempts to conceal a plethora of internal documents in key EBT case
An interesting case is being heard before the First Tier Tax Tribunal that may form a test case for thousands of similar cases involving the use of Employment Benefit Trusts in the years leading up to Finance Act 2011.
Janet Addo used AML’s EBT scheme between 2009-11. She disclosed her use of the scheme on the relevant tax returns under the DOTAS regime.
Under section 9A of the Taxes Management Act (TMA) 1970, HMRC usually have 12 months from the submission of a tax return to open an enquiry. In Ms Addo’s case, HMRC accepted the tax returns and did not open a s9A TMA enquiry.
TMA 1970 provides for closed tax years to be reopened if a “discovery” is made of an underpayment of tax. These discovery assessments are subject to rules laid out at section 29 of TMA 1970.
According to HMRC’s own manual: “Unless the loss of tax has been brought about carelessly or deliberately, if the information ‘discovered’ was already in the officer’s possession when the self assessment became final, HMRC have no right to make a discovery assessment.
“These rules ensure that a taxpayer who has made a full disclosure in the tax return has absolute finality once the time allowed for opening an enquiry has passed. This is the case even if the tax return is subsequently found to be incorrect, unless it was incorrect because of careless or deliberate conduct. In any case where there was incomplete disclosure or careless or deliberate conduct HMRC have the power to remedy any loss of tax.”
In Ms Addo’s case the court has determined that there was no careless or deliberate attempt to conceal her use of AML’s scheme. Indeed, her disclosure under DOTAS provided HMRC with all the information needed to open an enquiry, if they saw fit.
In 2013, HMRC determined that the AML scheme was potentially subject to a tax charge under the Transfer of Assets Abroad provisions of Income Tax Act 2007. Interestingly, however, they did not try to make any claim that the EBT loans were employment income. They then issued Ms Addo with discovery assessments under s29 TMA 1970 accordingly.
Ms Addo contests the validity of the discovery assessments. It is accepted by the court that the tax return was not incorrect due to carelessness or deliberate conduct, so HMRC need to show that the HMRC officer who processed the original return could not have been reasonably expected to have been aware of the additional tax due.
Ms Addo argues that the relevant HMRC officer, Andrew Finch, was in charge of HMRC’s investigation into contractor loan schemes at the time and therefore would be expected to have been aware of the underpayment of tax at the time the tax return was submitted.
In order to further her case, certain documents were requested to be disclosed to the court.
- Correspondence between HMRC’s specialist Transfer of Assets Abroad unit and Specialist Investigation teams in late 2010 and early 2011,
- Material relating to a decision made in April 2012 by the Transfer of Assets Abroad unit that 3 non-AML contractor loan schemes were taxable under the Transfer of Assets Abroad provisions,
- A report by an Independent Review Panel in 2012 that laid out a strategy for tackling contractor loan schemes,
- Documents relating to a “handling strategy” that HMRC developed from the above report,
- Notes of an internal discussion about whether discovery assessments could be lawfully raised under s29 TMA 1970.
HMRC refused to disclose the documents on the grounds that they were “sensitive”, but the Tribunal ruled against this decision on several counts, requesting full disclosure of the documents in points 2, 3 and 5 and requesting enough information from point 1 to determine at what point the HMRC officer knew there was an underpayment of tax.
So what does this mean? Well, if HMRC can be shown to have known that there was an underpayment of tax at the time the tax return went in, and did not raise an enquiry under s9A TMA, then the subsequent discovery assessments will be considered unlawful and the underpayment of tax uncollectable.
This could have implications for thousands of contractor loan scheme users that have since received discovery assessments from HMRC, and does beg the question as to why HMRC have attempted to conceal information in this case. HMRC will now have to provide the documents to the court and a decision will be made based on their contents, with many contractors closely watching the developments.
Of course, under the current proposals, any loans made to Ms Addo from her EBT will likely fall under the Loan Charge due to take effect on 6th April 2019, which can apply income tax and National Insurance to loans issued up to 20 years ago.
13th December 2018.
Sources:
http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j10667/TC06700.pdf
http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j9394/TC05514.pdf
https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework/salf409
