Sunday, November 1, 2009

How much should you disclose in the 'white space' on tax returns?

Most people are keen to minimise the prospect of HMRC opening an enquiry into their tax affairs. A recent case may make this more difficult in the future.

Where, as is often the way, the tax return or the underlying accounts include the use of any judgment a question arises if there is any possibility of the taxman taking a different view: To disclose or not to disclose?

If you disclose the uncertainty - which would include details of the transactions involved in an avoidance scheme, you may feel that you are increasing the risk of an enquiry. However this would only transpire if a suitably experienced tax officer actually reads and understands the implications of your 'white space' disclosure. Surprisingly this is quite rare so as long as your disclosure is sufficiently detailed you should only have to wait until the end of the normal enquiry window to achieve 'certainty' as regards your tax position for the period covered by your tax return. In most cases this is now simply 12 months from the submission of your tax return.

If you don't disclose the uncertainty you are at risk of the taxman making a later 'discovery' - this could occur some time into the future - certainly long after the end of the normal enquiry window.

The issues relevant to this choice changed in the light of the 2004 case of Langham v Veltema. The decision in favour of HMRC caused concern in the profession. Eventually HMRC clarified the position with Statement of Practice 01/06 which is now contained in EM3261 - Reopening Earlier Years: Discovery in SA Years. In effect this set out the level of disclosure that is required to protect taxpayers from later discovery assessments.

Last month the Scottish Court of Session again found in favour of HMRC despite the taxpayer having made what appeared to be a full disclosure on his tax return. He had 'invested' in a tax avoidance scheme and wanted to deny HMRC the right to issue a section 20 discovery notice seeking disclosure of all relevant paperwork.

The taxpayer had made what he and his advisers considered to be a full disclosure of the scheme and the tax consequences using the 'white space' on his 2003/04 tax return.

The Court held that the discovery notice was valid despite the disclosures made on the tax return as to the Capital Redemption Contract, the relevant legislation and all of the steps involved in the transaction. Such disclosures had been made in a deliberate attempt to deny HMRC the facility to make a discovery assessment after the normal deadline for enquiries into 2003/04 tax returns.

The Court determined that the disclosure in the taxpayer's tax return was insufficient and that HMRC had 'discovered' the taxpayer was involved in a specific type of packaged tax avoidance scheme. The Court also determined that the tax return disclosure did not contain sufficient detailed information about the scheme to provide the hoped for protection from a discovery notice.

There is already much misunderstanding as to when HMRC are entitled to make a 'discovery' about underpayments of tax. Many people wrongly assume that they are 'safe' after a year or two. Equally HMRC have been known to attempt to make a 'discovery' and charge extra tax when they are not permitted to do so. Even so, this latest case gives HMRC more ammunition I think. R(on the application of Pattullo) v CRC


  1. Mark, this decision is subject to appeal. The point at issue is whether HMRC has to discover something new before using section 20 to go fishing (to see whether a discovery assessment may be made). The Judge said that they do but went on to hold that a fresh and more experienced pair of eyes examining the original entry and recognising what the original officer failed to recognise is something "new" for this purpose. It is hard to see how that can be, as only one disclosure was ever made - it is not new.

    Incidentally, although it amounts to much the same thing, I think it is more accurate to say that the white space disclosure was made in an attempt to ensure that the return was correct rather than "an attempt to prevent discovery". Isn't that what all properly prepared returns should prevent?

    Best wishes

  2. Thanks for this Andy.
    Not sure I agree with your final para re the rationale for the white space disclosure. Figures in boxes are either correct or not.

    Disclosure of additional info isn't part of the returned figures - it's to clarify and explain them. And is generally done so that, in the event of a late enquiry the taxpayer can claim that no discovery is permitted due to the level of disclosure in the (white space on the) return.