Jennifer Adams reviews a recent tax case where the taxpayer relied on the new 'pre-population' of tax returns as the basis of an appeal against a discovery assessment issued by HMRC.
Under the government’s 'making tax digital' initiative, HMRC receives information from specific data providers (e.g., employers and pension providers through PAYE) and automatically adds (‘pre-populates’) the details into a taxpayer’s records and tax return.
Where this happens, there is no need for a taxpayer to complete every box on the annual tax return. Instead, they are asked to check the data in the pre-filled return and, if wrong, only then to make any necessary changes. Furthermore, as this method of completing a return is expanded, it would be very easy for a taxpayer to assume that the pre-populated figures are correct and that HMRC had all the information they required to calculate the correct tax due.
This was the stance that a taxpayer, Mr Scoggins, recently took when appealing to the tax tribunal against HMRC's discovery assessment. He argued that HMRC could not take advantage of the discovery assessment rules because at the time the 12-month enquiry window closed, HMRC must have had full details of his income.
Discovery assessment deadlines
The statutory time limit for HMRC to issue an enquiry into a taxpayer’s tax return is twelve months after the filing date; or if the return was made late, the deadline is the quarter day next following the first anniversary of the day on which the return was submitted. However, if HMRC discovers that there has been an underpayment of tax for a prior year, they can potentially re-open that earlier year under the discovery assessment rules.
This power is restricted to specific situations where an HMRC officer discovers an underpayment of tax and that the underpayment was the result of the taxpayer (or someone acting on their behalf) being careless or as a result of a deliberate action.
Alternatively, a discovery assessment can be raised if an underpayment is discovered and it can be shown that at the time when the enquiry window for a return had closed, or a closure notice had been issued, that HMRC 'could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of' the under-assessment.
Scoggins v HMRC
In Mr Scoggins’ case, HMRC agreed that no careless or deliberate behaviour had occurred and, in issuing the assessment, relied on the fact it did not have sufficient information to make the assessment at the time the enquiry window closed. Mr Scoggins said that the undeclared pension amounts should have been pre-populated on the return in the same way as for his employment. If this had been done, no underpayment would have arisen, and as such, there was nothing to discover.
Unfortunately for Mr Scoggins, the judge ruled that even though a third party (the pension provider in this case) had submitted correct information, an officer could have checked the system at the time of receiving the return, but there was nothing on the return to alert to such a check.
The judge decided that, at the time the enquiry window closed, HMRC could not have been reasonably expected to be aware of the underpayment based upon information provided by Mr Scoggins.
Practical tip
This tax case underlines the importance of using the 'white space' for 'additional information' on page TR7 of the tax return. If Mr Scoggins had made an entry about his pension income on that page, he could have said that HMRC had been made aware of the additional source of income ‘on the basis of the information made available’.
