Appeal court to decide on HMRC discovery powers

THE COURTS have granted leave for a taxpayer to appeal a decision that could have ramifications for investigations into past tax returns.

The Court of Appeal has said it will hear the case of Derek Hankinson, who lost a tribunal based on his residency status. The first tier tribunal found that Hankinson was resident in the UK for the year 1998/1999 in a case worth £30m. Hankinson appealed this decision based on the fact that HM Revenue & Customs made a discovery assessment about his residency status six years after the tax year in question ended.

Under HMRC’s discovery powers, officers can make an assessment on previous years provided it fulfils one of two criteria – that the officer could not have reasonably expected to have been aware of the discovery when the tax return was first submitted or that there was negligence or fraud involved in the original submission.

Hankinson argued that the changes in self assessment have placed a greater burden on taxpayers, which should result in a greater burden on HMRC. Because of this, he said officers must prove that the discovery assessments must fulfil both criteria before carrying out investigations. Furthermore, any evidence produced after the discovery assessment was announced should be inadmissible in court, he said.

The upper tribunal found against him, and said that he could not take this to the Court of Appeal. However, the Court of Appeal has said that there is a point of principle or practice to the case, so has agreed to hear it.

Andrew Watters, a director at Berwin Leighton Paisner, said: “This is a very important principle for the Revenue because the reality is making a discovery assessment starts off an enquiry process, which gathers new information. If you are drawing a line and saying the court can only consider evidence in point at the time of the discovery assessment, all the new evidence would be inadmissible.”

Adam Craggs, a tax disputes resolution partner at Reynolds Porter Chamberlain, said that this is even more important as “HMRC appear increasingly to be relying on their discovery powers to raise assessments”.

 Heather Self, a partner at McGrigors, said the appeal was unlikely to be successful. “Tt is a clear finding of fact by two experienced tribunal judges so it will be hard for the taxpayer to overturn,” she said.

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