An important aspect of HM Revenue and Customs (HMRC) enquiries into tax returns that is sometimes underestimated is meetings between taxpayers (and their agents) and HMRC officers, and the notes taken at meetings. The taxpayer’s responses to the HMRC officer’s questions often set the course and tone for the whole enquiry.
Traditionally, the HMRC officer provides notes of the meeting to the agent afterwards, and asks for the notes to be checked (and sometimes signed) by the taxpayer. However, it will normally be sensible for the agent to take his or her own meeting notes, in case the HMRC officer’s notes are not issued for any reason, or for comparison purposes.
Preventing a discovery
An agent’s meeting notes can be used as a basis for pointing out errors in the HMRC officer’s recollection. The notes can also be used as evidence that a particular point has been disclosed, which could help in terms of preventing the subsequent issue of a discovery assessment by HMRC.
In While v HMRC  UKFTT 58 (TC), the taxpayer was awarded damages against a former employer for unfair dismissal and providing an incorrect reference. The High Court determined the award was on an ‘after tax’ basis, without taking into account that awards for loss of employment are taxable to the extent that they exceed £30,000. The Judge had said that the award was “net of all deductions”. The taxpayer therefore thought that he did not need to refer to the damages on his tax return for the relevant year (1998/99). However, the damages for wrongful dismissal should have been declared on his tax return in the normal course of events.
HMRC opened an enquiry into Mr While's return for the previous year, mainly in connection with a new business established following the termination of his employment. A meeting was held during that enquiry between the HMRC officer, Mr While and his accountant. During the meeting, when asked by the HMRC officer "did you receive anything else?" Mr While disclosed "yes, £350,000 plus for negligent referencing and interest". This disclosure was included in the HMRC officer's notes of the meeting. Reference had also been made to the damages in the HMRC officer's preparatory notes for the meeting.
However, in January 2005 HMRC issued a discovery assessment for 1998/99 in respect of the damages. The taxpayer appealed.
A valid discovery?
The tribunal first had to determine whether HMRC had made a 'discovery' (within TMA 1970, s 29(1)). It agreed with HMRC's contentions that a discovery assessment could be justified if an inspector changes his mind, or a new inspector takes a different view. In reaching this conclusion, the tribunal adopted the reasoning of the tribunal in another recent discovery case, Charlton and Others v HMRC  UKFTT 467 (TC). The tribunal next considered whether Mr While's conduct in failing to record the damages for wrongful dismissal was negligent, as HMRC contended. The tribunal was satisfied in the circumstances of the case that Mr While acted reasonably in deciding that he did not need to record those damages on his tax return and self-assess income tax on them. It was noted that the impact of the tax legislation on termination payments in what was then ICTA 1988, s 148 (now ITEPA 2003, s 403) had been overlooked by a number of professionals involved who were in full knowledge of all relevant facts, and also by the court. Mr While could not be considered negligent for failing to spot a point which those other parties had not picked up.
The tribunal concluded that there was no negligence on the part of Mr While or anyone acting on his behalf in relation to the tax return, for the purposes of the discovery condition in TMA 1970, S 29(4).
A discovery assessment could also be made if the condition in TMA 1970, s 29(5) was satisfied, i.e. that “an officer of the Board…could not have been reasonably expected, on the basis of the information made available to him” to be aware that Mr While had paid insufficient tax. The tribunal considered (inter alia) whether the HMRC officer’s notes of the meeting with Mr While represented “information made available” (within TMA 1970, s 29(6)). The meeting notes were sent to Mr While’s then accountant to review, and the tribunal considered it likely that those notes would have been returned to the HMRC officer. It was therefore accepted by HMRC that the notes should be treated as falling within s 29(6). The tribunal then considered whether the notes were such that the discovery condition in s 29(5) could be met. A ‘hypothetical’ HMRC officer would be aware that the damages payment had not been included in Mr While’s 1998/99 tax return, and also about the statement contained in the meeting notes that Mr While said he received a large sum of money (£354,000) in respect of damages for wrongful dismissal. The hypothetical officer would additionally be aware of the termination payment provisions (ICTA 1988, s 148) and that damages for wrongful dismissal are taxable (at least to the extent that they exceed £30,000).
The tribunal concluded that the hypothetical officer would have sufficient information to reasonably conclude that there was an actual insufficiency in Mr While’s tax return. The discovery condition in TMA 1970, s 29(5) had not been satisfied. The condition in s 29(4) had not been satisfied either. The discovery assessment was invalid. The taxpayer’s appeal was therefore allowed.
Checking HMRC notes
In the pressure and stress of a meeting with HMRC, the taxpayer may give ‘off the cuff’ answers to questions from HRMC, which are wrong. It is important that these answers are corrected, and that HMRC's meeting notes are amended accordingly. Failure to do so could prompt HMRC to argue that the taxpayer's conduct has been careless (or worse), and possibly allow HMRC the opportunity to make discovery assessments.
HMRC may cite Duffy v HMRC  SSCD 377, SpC 596 as a cautionary tale to encourage taxpayers and advisers to check meeting notes. In that case, HMRC opened an enquiry into the taxpayer's 2002/03 tax return. A meeting took place between an HMRC Inspector and the taxpayer in March 2005. The HMRC Inspector's meeting notes stated "Mr Duffy said he had no investments or interests in property in Spain" and also "Mr Duffy confirmed that he had held no other accounts and would be prepared to sign a statement to that effect". In fact, the taxpayer did own a property in Spain, which he sold at a loss, and also had a bank account there. He did not possess either at the date of the interview.
The Inspector subsequently issued a closure notice making an amendment to the taxpayer's tax return for 2002-03, and also made discovery assessments for the tax years 1999-2000, 2000-01, 2001-02 and 2003-04. The taxpayer appealed. Among the issues in the appeal was whether the inspector made a discovery that would justify the discovery assessments, and whether there was negligent conduct on the taxpayer's part. In confirming the closure notice and discovery assessments, the Special Commissioners held (inter alia) that the taxpayer's answers to the HMRC inspector's questions amounted to negligent conduct. They commented:
"In relation to his answers relating to the Spanish property and bank account the appellant said in evidence that he thought the inspector was asking questions about Spanish property or non-UK bank accounts as at the date of the interview, which he answered correctly that there were none. We do not accept he thought this. The context of the statement about Spanish property in the note was that 'Mr Duffy explained that he spent 3 weeks a month [in Spain] for a period of about 6 months between 2001–02. He lived with his brother who has a property there'. The statement that 'Mr Duffy said he had no investments or interest in property in Spain' in the next following sentence. The appellant cannot, in our view, have thought that the inspector was interested in knowing whether he had a property in Spain in March 2005. We consider that the statement that 'Mr Duffy confirmed that he had held no other accounts including savings or offshore accounts and would be prepared to sign a statement to that effect' was even more clearly looking at the past from the words 'had held'.
The Special Commissioners added:
"If the appellant had really thought that the question related to the present he would surely have amended the statement to refer to the present rather than the past."
Do it yourself
HMRC's meeting notes do not always seem to be issued, so it may be necessary to ask (and consider making a request under the Freedom of Information Act, if necessary).
As indicated earlier, it would be sensible for the taxpayer's adviser to take his or her detailed notes at the meeting in any event. Ideally, the adviser should ask a colleague or secretary to attend the meeting and concentrate on taking full notes. These notes can then be compared with HMRC's notes (assuming that these are issued), and any errors or omissions can be identified.