Contingent liabilities and assets are recorded in the ‘Schedule of non-departmental contingent liabilities and contingent assets’ at the point at which the contingency is probable and can be reasonably estimated. Contingent liabilities are disclosed if it is probable that they will occur. Contingent assets are disclosed if it is probable that the benefits will be realised.
Legal proceedings and disputes - assessed
If a legal case is still not resolved at the end of the disputes process, Inland Revenue will issue an amended assessment to the customer and recognise revenue and a contingent liability. The customer is then able to file proceedings with the Taxation Review Authority or the High Court disputing the assessment.
Unclaimed monies are repaid to the entitled owner on proof of identity. Based on trends from prior years, the estimated likely amount of unclaimed monies that will be paid is recorded as a liability in the Schedule of non-departmental liabilities and the remainder is recorded as a contingent liability in the Schedule of non-departmental contingent liabilities and contingent assets.
Disputes - non-assessed
Contingent assets arise as part of the tax dispute process, for example when Inland Revenue has advised a customer of a proposed adjustment to their tax assessment through a notice of proposed adjustment (NOPA). At this point, Inland Revenue has not issued an amended assessment and no revenue has been recognised so these adjustments are recorded in the ‘Schedule of non-departmental contingent liabilities and contingent assets’ as disputes - non-assessed. The customer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue records a contingent asset based on the cash likely to be received from the disputes process, based on experience and similar prior cases, net of losses carried forward.
Contingent assets can also arise where the customer has not filed an assessment, but Inland Revenue believes they are liable for tax. In this situation, Inland Revenue will issue an assessment. Where the customer chooses to dispute the Inland Revenue-initiated assessment, the assessment is not recognised as revenue and a contingent asset is recorded in the ‘Schedule of non-departmental contingent liabilities and contingent assets’. The value of the asset is based on the likely collectable portion of the default assessment, net of losses carried forward.