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October 31, 2013

Discovery & Disclosure - Recent Tax Cases

When preparing a tax return, it is important to provide a requisite level of information in order to protect against HMRC raising a discovery assessment if they have not opened an enquiry within the normal 'enquiry window' (currently 12 months from the date of submitting the return)

The level of information that must be provided in order to afford protection against discovery was recently tested in two cases in interesting circumstances;

- Charlton, Corfield & Corfield v HMRC (UKFTT 770), and

- Smith v HMRC (UKFTT 368)

The taxpayers in both cases had undertaken tax avoidance schemes of the same nature, Second Hand Insurance Policies (known as SHIPS).

Both taxpayers made "white space disclosures" about the transactions undertaken and in both cases HMRC did not open an enquiry within the normal enquiry window.

The case of Drummond heard at a later date than the closure of the "windows" meant that the schemes, which the taxpayers had entered into, did not achieve their objectives.

However, one in one case the taxpayers (Charlton and Corfield) successfully resisted a discovery assessment in the Upper Tribunal, whilst the other taxpayer (Smith) succumbed in the First Tier Tribunal and HMRC successfully raised a discovery assessment.

The key to each case was whether each Inspector, dealing with the cases, could have been reasonably expected to be aware of the unassessed gains on the basis of the information available to him as at the time of the closure of the enquiry window.  It was confirmed that the only information that can be considered relevant was that provided by the taxpayers with their returns.

Charlton - Taxpayer Successful

The white space disclosure included some explanation of the tax treatment adopted.  Also a DOTAS number was quoted in the return and the scheme had been presented to HMRC by the provider.

The Upper Tribunal confirmed that the DOTAS number provided information that the Inspector should have been aware about.  Also the explanation of the numbers (which were in essence uneconomical and looked too good to be true) and tax treatment meant that the Inspector should have been reasonably expected to be aware of unassessed gains.

Smith - Taxpayer Defeated

The transaction occurred prior to the implementation of the DOTAS rules and therefore a scheme number was not provided.

The white space disclosure did set out the rules that tax return relied on and relevant numbers.  However, in essence the Tribunal found because the scheme was very complicated with difficult legal implications that a hypothetical Inspector could not have been reasonably expected to be aware of unassessed gains, purely on the basis of the disclosures on the tax return.  Hence a discovery could be made.


It is vital for white space disclosure to detail the steps of the transaction and to provide a tax analysis of the treatment.  It may even be sensible to outline weaknesses in the treatment but to say why the treatment is adopted despite them.

View our recent roundup of tax news http://wp.me/p3gayI-5v


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