No safe (white) space?

Tax return entries sometimes require explanation. For example, the correct tax treatment of a receipt may be uncertain, and the taxpayer might wish to protect their tax position from ‘discovery’ assessments by HM Revenue and Customs (HMRC) outside the normal tax return enquiry ‘window’.

Protect yourself!

The ‘discovery’ rules can be difficult when it comes to deciding on a sufficient disclosure in the additional information (‘white space’) section of the return to protect the taxpayer from such adverse tax consequences.

An important case on discovery and using the white space in tax returns is Revenue and Customs v Tooth [2021] UKSC 17. The Supreme Court (SC) considered whether the taxpayer (T) had made a ‘deliberate inaccuracy’ in his tax return. In January 2009, T entered into a tax avoidance scheme to enable an employment-related loss to be generated for 2008/09, which could be carried back to 2007/08. When T’s accountant prepared his tax return for 2007/08 using commercial software, they were unable to access a box on the return to enter the income loss. Following advice from the software firm, the employment-related loss was included on another part of the return instead (i.e., the partnership pages) and an explanation was included in the white space.

In October 2014, HMRC raised a discovery assessment to withdraw the loss claim on the basis that T included on the partnership pages of his tax return a claim for a partnership loss, which was actually an employment loss. HMRC considered that T’s actions in making this claim were deliberate. However, the SC disagreed. The SC concluded there was no inaccuracy in the document; and even if there had been, it was not deliberate as T did his best with an “intractable online form”.

Not enough protection

The white space should be used judiciously; it does not always provide the protection that taxpayers might be seeking.

For example, in Johnson v Revenue and Customs [2022] UKFTT 156 (TC), the taxpayers’ self-assessment returns for 2013/14 were prepared by their agents. Each tax return included a white space disclosure stating: “a compensation payment of GBP 43,218 was received during the year from NatWest in respect of Interest Rate Hedging Products which is not considered to be taxable.” In January 2018, HMRC opened enquiries into the tax returns, resulting in tax assessments relating to the redress payments.

The First-tier Tribunal (FTT) noted that a letter from NatWest in January 2014 stated: “You should include the gross interest and tax deducted figures together with the remaining balance of the redress payment in the accounts of your business and report this information to [HMRC] in either your own or your business’ tax return as appropriate.” In addition, HMRC had made guidance available on the gov.uk website, which indicated that redress payments were taxable as business income because tax relief would have been claimed for the payments under the interest rate hedging product as an allowable business deduction.

The taxpayers’ agent argued that the white space disclosures on the tax returns contained precise details of the amount of payment and its source, and that if HMRC had read the white space disclosure and enquired into the return, the position would have been resolved. However, The FTT held that the taxpayers’ agent failed to take reasonable care. The FTT pointed out HMRC’s guidance had made it very clear that the redress payment should be treated as business income where tax relief for the payments had been claimed.

Practical point

HMRC has published guidance on finality and discovery in Statement of Practice 1/06 (tinyurl.com/HMRC-SP1-06). Taxpayers and agents should carefully consider the level and nature of disclosures of additional information to HMRC.

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The above article was first published in Tax Insider (February 2023).

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