Ruling has serious implications for taxpayers using self assessment

A recent Court of Appeal ruling has serious implications for taxpayers using self assessment says Tony Moorby, Director of Taxation at the Bristol office of accountants and business advisors, PKF.

The decision in the case of Langham v Veltema appears to be that the enquiry window open to the Inland Revenue to investigate self-assessment tax returns is in fact five years, not one year. This means that taxpayers caught by this ruling cannot be certain that they've paid the right amount of tax until five years after the deadline for submitting their self-assessment forms.

Commenting on the outcome Tony says: "When it was introduced, the burden of self-assessment was sold to taxpayers on the basis that after the one-year enquiry window had closed the taxpayer would have certainty. But the result of this appeal demonstrate that this is not the case."

Mr Veltema was a director and controlling shareholder of a farming company. The house in which he lived was owned by the company but was transferred to him before he retired. It was valued at £100,000 by a firm of chartered surveyors and that value was used as the benefit reported his 1997-98 tax return. Soon after submission Mr Veltema's agent received confirmation from the Inland Revenue that his tax return had been "processed without any need for correction."

However, when the company's tax return was submitted, to a different Inspector, the property valuation was referred to the District Valuer, who eventually agreed a value of £145,000 with the company's surveyors in March 2000.

By now the 12 month window for amending Mr Veltema's income tax return had closed but the Inspector still increased his taxable income by £45,000.

Mr Veltema appealed against this on the basis that the Inland Revenue were out of time and although the High Court agreed with him, the Inland Revenue appealed to the Court of Appeal who reversed the decision.

The outcome of this case is of general public importance and is likely to affect, on the Revenue's own admission, a large number of taxpayers. Practical examples may include capital gains transactions between two connected people, non-cash benefits-in-kind and to Stamp Duty Land Tax returns.

"What we want to know is - does this mean that the enquiry window in respect of such taxpayers is always five years?" says Tony.

If the Court of Appeal's ruling is correct, it seems that, to self assess with certainty, taxpayers must not only complete their returns but also tell the Inland Revenue when they should raise an enquiry.

The taxpayer is seeking leave to appeal to the House of Lords to challenge this ruling and to seek clarification for the taxpayer on this complicated issue. Tony says: "It is not our place to question the decision of the Court of Appeal but we do feel that we need to address the difficult position of taxpayers if the Courts' interpretation is correct."