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. 

(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'.

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:

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:

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


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