Mark McLaughlin points out that HMRC’s attempts to apportion blame simply to assess tax over extended periods can and should be resisted.
The long arm allowing HM Revenue and Customs (HMRC) to go back to previous years to charge extra tax only extends so far.
If an individual’s tax return is submitted online to HMRC within the normal time limit of 31 January following the end of the relevant tax year, HMRC may generally open an enquiry into the return up to the end of the 12-month period after the day on which the return was delivered.
Extended time limits
However, if this enquiry window has closed, HMRC may use its ‘discovery’ powers to assess closed years, within certain limits.
For income tax and capital gains tax (CGT) purposes, the ‘ordinary’ time limit for HMRC to make a discovery assessment is four years after the end of the tax year to which it relates.
Alternatively, a discovery of lost income tax or CGT brought about carelessly is assessable up to six years after the end of the tax year. For lost income tax or CGT involving an ‘offshore matter’ or ‘offshore transfer’, the assessment time limit is 12 years, and where the loss of income tax or CGT has been brought about deliberately, HMRC may make a discovery assessment up to 20 years after the end of the relevant tax year.
Careless or deliberate?
There is no statutory definition of ‘careless’ for discovery assessment purposes, although the penalties legislation states that a ‘careless’ inaccuracy is due to a failure to take ‘reasonable care’.
The discovery assessment provisions regarding a careless loss of income tax or CGT refer to the loss being brought about by the person who is the subject of the assessment or by another person acting on that person’s behalf. The same applies to a deliberate loss of tax.
What does ‘acting’ on a taxpayer’s behalf entail? HMRC’s Enquiry Manual (at EM3232) refers to the following guidance from case law: ‘Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer’.
HMRC couldn’t prove it!
It is not enough for HMRC to simply allege careless or deliberate actions where assessments would otherwise be out of time.
For example, in Danapal v Revenue and Customs [2023] UKUT 86 (TCC), on 11 March 2016, HMRC issued a discovery assessment for 2009/10 based on careless behaviour by the taxpayer’s accountant. On 2 August 2016, a discovery assessment was issued for 2006/07 and 2007/08 based on deliberate behaviour. The taxpayer appealed. The First-tier Tribunal found that the extended time limit for making assessments applied. The taxpayer appealed to the Upper Tribunal (UT), which allowed his appeal. The UT concluded that the assessments were all out of time, as HMRC had not satisfied the burden of proving that either the taxpayer or his accountants acted carelessly or deliberately in relation to the insufficiency of tax discovered by HMRC.
Practical tip
The burden rests with HMRC to prove that the taxpayer or agent acted carelessly or deliberately in relation to an insufficiency of tax etc., for an extended time limit discovery assessment to be valid. Taxpayers and advisers should be prepared to challenge HMRC on this point, if appropriate.
