Discovery Assessments and Uncommon Tax Provisions

Mon 21 Jul 2014

Adrian Salmon purchased a yacht with the plan to charter it out.  Most of his hires were secured by agencies and also most hires were bareboat (i.e. the hirer was responsible for skippering, crewing and victualing).  Occasionally Mr Salmon skippered, and levied an additional charge for doing so.

In his tax return Mr Salmon described his activity as “yacht chartering and skippering”.  The activity gave rise to a loss, mostly due to capital allowances on the purchase price.  He claimed to offset the loss against his other income. Some time after the closure of the enquiry window, HMRC raised discovery assessments denying the sideways loss relief on the basis that the trade was one of leasing. The FTT decided Mr Salmon’s activity was leasing, rather than the provision of services.   S 75 ITA 2007 deals with “trade leasing allowances” given to individuals and denies sideways loss relief if a time commitment test is not met.   As Mr Salmon did not satisfy that test, s 75 denied sideways loss relief (note that the tribunal report cites the statutory provision as FA 2007; this is incorrect).

The FTT decided that there was not enough information on Mr Salmon’s return to make the notional inspector of TMA 1970 s 29(5) aware of the possible under-statement of income. The Inspector would have to obtain further information from Mr Salmon to determine if he met the test conditions A and B in.  The FTT found that ‘the law makes it clear that the disclosed information must go further than to prompt further questions. It must reveal the facts that make the insufficiency clear provided the inspector is aware of the provisions that then occasion the under-statement’. This alone was sufficient to find for HMRC and uphold the discovery assessments.

However what makes this FTT decision of wider interest, is they considered a second issue, which is whether a notional inspector of average competence should have reached the conclusion that there was an under-statement on the basis of information provided.  Should the inspector be assumed to have been aware of the relevant provision of tax law which, in denying the sideways loss relief, rendered the amount of income disclosed to be insufficient?  The FTT proceeded to consider the outcome had Mr Salmon’s tax return contained details of the extent of his efforts to secure leases of the vessel (relevant for ITA 2007).  The FTT stated (para 20):

“… the restriction on sideways utilisation of losses, in the present context of a trade that involves plant leasing, is a feature of tax law confined to a very narrow situation, and not one that it is realistic to presume that the average inspector would be aware of.  It may not be particularly complex and difficult to understand but its relevance is confined essentially to a fairly narrow sphere of activity, and that activity is not that common. We accordingly conclude that there is no ground for saying that the average inspector should be assumed to have realised that the statutory provisions would have demonstrated an underassessment of tax, even if the Appellant had made it clear that he was wholly uninvolved with the active conduct of the relevant business.”

Whilst this is both obiter and merely a decision of the FTT, it shows that where the taxability or otherwise is dependent on the application of a little used provision it may be that even a full disclosure will not give protection from a discovery assessment.