Accounts disclosures prevent discovery assessment

In Ball Europe Limited v HMRC [2021] TC8010, the First Tier Tribunal (FTT) prevented HMRC from making a late £11.05 million Corporation Tax assessment in respect of a loan relationships mismatch because HMRC should have seen that there was an untaxed gain from the basic notes to the company's accounts. 

• Ball Europe Limited 'BEL' is a UK resident company, part of an international group with a US head company.
• In 2003, as a result of a complex tax planning arrangement utilising the Loan Relationships rules, an intercompany loan facility was made between the group head and a different subsidiary. The effect was a mismatch for Corporation Tax. One subsidiary claimed a tax deduction for interest on the loan, BEL received a loan note and accounted for this as a tax-unrealised gain.
• No profit was shown in BEL's P&L but a gain was shown in its Statement of Recognised Gains and Losses (STRGL).
• The gain was not included as taxable income in BEL’s Corporation Tax return for the period to 31 December 2013.
• BEL’s accounts for the relevant period included:

(a)  In the Statement of Recognised Gains and Losses (STRGL) 'Unrealised gain on a promissory note due from group undertaking 10,812,449'.

(b)  In the balance sheet 'Debtors: Amounts falling due after one year 10,812,449'.

(c)  At Note 6 (Debtors) 'Amounts falling due after one year 10,812,449'.

(d)  At Note 9 (Reserves) 'Other recognised gains 10,812,449'.

(e)  At Note 10 (Reconciliation of movement in shareholders’ funds) 'On 18 December 2003 the company made an unrealised gain by receiving a promissory note due from fellow group undertaking of £10,812,449'.

• HMRC enquired into the transaction of the other subsidiary in 2005.
• Although HMRC's officers realised that something did not add up, they failed to meet the 31 January 2006 time limit for an enquiry into BEL’s tax return for the period ending 31 December 2003 and issued a Discovery Assessment in July 2006. This charged BEL to tax on £11.05 million of 'non-trading loan relationship profits under Schedule D case III'.
• The company Appealed against HMRC's decision.

In deciding whether a discovery assessment was valid, the critical question for the Tribunal was whether a hypothetical officer would have been justified in raising an assessment on BEL as at 31 January 2006 on the information then available to the officer.

HMRC’s position was that the hypothetical officer could not reasonably have been expected to know that there had been an under-assessment on the basis of the limited information provided in BEL’s tax return, computation and accounts.

From a review of case law, the FTT agreed with the company that:

• The hypothetical officer does not need to understand the detailed specifics of the head of charge.
• The hypothetical officer does not have to resolve every question of law, particularly in complex cases.
• The information provided has to be enough to allow the hypothetical officer to make a decision that an amount is taxable, but that decision does not need to be a completely correct or absolutely certain technical analysis.  

Expert evidence given to the Tribunal revealed that the question as to whether the loan relationship credit was in fact deductible was a highly complex matter. In fact, that technical aspect was only decided in a different case in 2009. The expert also accepted that looking at BEL’s P&L would have been the natural starting point for ascertaining its profits, but added that it was 'basic accounting knowledge' that there are lots of gains and losses which appear outside the P&L saying,  “It would be a pretty limited single eye view of life just to look at the P&L to work out the gains that might be taxed in a company”.

The Tribunal found that:

• It should have been apparent from the accounts that the gain recorded in BEL’s STRGL which related to an intra-group debt instrument and had not been charged to tax.
• There was information to allow a hypothetical officer to make a decision about whether to raise an assessment on at least one of three relatively straightforward heads of charge.

The company's appeal was allowed.

Comment

Quite a harsh outcome: we will wait to see if HMRC will appeal. Legislation, which came into force on 1 January 2010, means that it is now compulsory for companies to send their Company Tax Returns online using iXBRL tagging for accounts and computations. This should assist HMRC in a case like this, assuming that all the notes to the accounts are tagged. 

Useful guides on this topic

Discovery assessment and time limits
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment? What conditions must be met for a valid discovery

How to appeal a decision of HMRC
Key steps in appealing a decision of HMRC.

Loan relationships
How are loans made to and by a company taxed? What are the rules when loans are written down? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

Penalties: Error in a return or document
How to work out penalties for different forms of inaccuracies

DOTAS: Disclosure of Tax Avoidance Schemes
Rules for declaring the use of tax schemes

External links

Ball Europe Limited v HMRC [2021] TC8010