SELF-ASSESSMENT - 22.06.2018

How can you minimise the risks associated with a return?

Delay

From a client’s point of view, the objective is for the return you file to become final and conclusive. Some clients will even settle for paying a few pounds more tax than might strictly be due as the price for knowing that there won’t be any surprises further down the line. The two things that can delay the return becoming final are enquiries and discovery assessments.

Enquiries

HMRC can enquire into any return during the enquiry window, which is usually twelve months from the date of filing. In the majority of cases, however, it doesn’t. HMRC, like the rest of us, is under pressure of time and resources: it is more likely to pick fights it thinks it can win. Enquiries can lead to the return being amended, with further tax payable.

Pro advice. The enquiry window is extended where the return is filed late per HMRC’s guidance at EM1506 (see Follow up ).

Discovery

If HMRC “discovers” that too little tax has been paid but the enquiry window has closed, it can raise an assessment to prevent a loss of tax under s.29A Taxes Management Act (TMA) 1970 . The time limit for raising a discovery assessment runs from the end of the relevant tax year, and depends on the behaviour that led to the potential loss of revenue as follows:

• for deliberate behaviour, 20 years
• for careless behaviour, six years; and
• in all other cases, four years.

Pro advice.S.29A does not give HMRC permission to open an enquiry, only to raise an assessment. Even then, it can only do this if and only if it could not have been reasonably expected, on the basis of the information made available to it before that time, to be aware of the shortfall.

The best shield for your client, for both enquiry and discovery purposes, is therefore the level of information disclosed to HMRC at the outset. Let’s take a look at the strategies you can use.

White space

Using the additional information box (colloquially known as “the white space”) offers you the possibility to influence the chance of the return being exposed to an enquiry, the complexity and length of any enquiry opened, and the risk of HMRC being able to make a discovery assessment later on.

If you feel you need to make a disclosure in the white space, a good starting point for reference is Statement of Practice 1/2006 (see Follow up ). This outlines the level of detail in the white space of a return which will protect against discovery, with particular emphasis on valuations and tax avoidance schemes.

Pro advice. Adhering to Statement of Practice 1/2006 will help defend your client against discovery, but the downside is that you could increase the probability of an enquiry into the return. A sufficient level of disclosure should prevent the enquiry from spiralling out of control.

Odd entries

HMRC scans for entries which look out of place, e.g. an unusually high figure for repairs and maintenance. Whilst it knows that most of the time there is a perfectly good explanation, it has to check just in case it’s one of the exceptions. Another instance might be entries which are suspiciously round numbers. We are aware of an enquiry opened solely because an expense looked as though it had been rounded to the nearest £1,000. In fact, the supplier’s unit price was simply £100.

Pro advice. A confusing entry on the main return may lead HMRC to open an enquiry, but if there is an explanation in the white space this can often be pre-empted. Review the return with a sceptical eye prior to filing, and add explanations where necessary.

Regrettably, the white space information is stored separately from the main numerical entries on HMRC’s computer system, so there is a risk that an enquiry may be opened anyway. If this happens the objective is to shut it down as quickly as possible. Tactically, you are on much stronger ground if you can answer HMRC’s questions with “this was fully explained in the white space of the return, namely...” and so on.

Pro advice. Whilst disclosure is advised for these entries, don’t go over the top and add excessive explanations. Just focus on the ones you think stick out more than the others, e.g. an unusually large repair bill.

Example. Your client is seeking to crystallise a capital loss on private (unquoted) company shares which have effectively become worthless. The white space needs to disclose enough of the basic facts to make it clear that the claim has validity, without unnecessary detail, e.g. “The shares in XYZ Ltd are considered to have become of negligible value by 5 April 2018. They were purchased on [date] for £X, at which time the company was profitable. XYZ Ltd (UTR 1234567890) ceased to trade on [date] and has no remaining distributable reserves.”

Estimated figures

In an ideal world no return would ever be filed with provisional figures, but we don’t live in that world. Faced with filing deadlines and the associated fixed penalties, sometimes a return has to go in based on your client’s best estimates, with the true figures being used to amend the return later on. Using estimates doesn’t necessarily mean that an enquiry will be opened, and you can reduce the chances of it happening if you use the white space to explain why accurate figures aren’t available. At the very least, this could defer the enquiry until the enquiry window end. Your disclosure should aim to reassure HMRC on the following points:

• how large is the number, i.e. how much tax is at stake
• how reliable is the estimate, i.e. how likely is it to be close to the real number
• whether the estimate has wider effects, and other entries are affected by it; and
• how likely is it that the estimate will be amended by the end of the window.

Explain the method you used to arrive at the estimate. It may even be that an estimate will be accepted as good enough if the basis on which it was reached is sufficiently well explained.

Valuations

If the return includes valuations, HMRC’s concerns will be similar to those for estimates, but will also include such worries as:

• who carried out the valuation, what level of trust can be placed on their ability and independence
• what basis was used. Is it an industry-standard one which HMRC agrees with? and
• will this valuation have an effect on other taxpayers, such as vendors, purchasers, donees, etc?

Once again, the white space may stop an enquiry from being opened or keep it short. For example, if the issue is a property valuation, noting that figures were obtained from a (named) local chartered surveyor, the valuation was in line with RICS practice, and their report is available on request is likely to result in - at worst - a very brief enquiry.

If your client has participated in an avoidance scheme, this should be disclosed, along with the DOTAS number if available. Use the white space to explain any technical argument as to why your client’s interpretation of the legislation differs from HMRC’s. Note that in this situation an enquiry is virtually certain.

HMRC guidance - EM1506

Statement of Practice 1/2006