Mark McLaughlin points out that taxpayers should consider challenging HMRC discovery assessments in appropriate circumstances.
It is not uncommon for HM Revenue and Customs (HMRC) to make ‘discovery’ assessments outside the normal ‘window’ for opening enquiries into the self-assessment returns of individual taxpayers, if certain conditions are satisfied (TMA 1970, s 29; similar rules apply to companies).
Is there a discovery?
HMRC commonly uses its discovery powers if the taxpayer has undeclared income or gains, or if HMRC considers that a self-assessment return for a ‘closed’ tax year understates the taxpayer’s liability. In such circumstances, HMRC can make discovery assessments if the tax under-assessed is attributable to:
- careless or deliberate conduct of the taxpayer (or a person acting on their behalf); or
-
something of which the HMRC officer could not have been reasonably expected to be aware when the enquiry window closed (or a closure notice was given in an enquiry) based on the information available to them before that time.
The default time limit for HMRC to make a discovery assessment is four years from the end of the tax year to which it relates. However, for a discovery within the first bullet point, the time limit is extended to six years (careless error) or 20 years (deliberate).
Four years or longer
The onus is on HMRC to prove careless or deliberate conduct before issuing an extended time limit discovery assessment. If the taxpayer can show that the understated tax arose despite reasonable care having been taken, HMRC is restricted to four years for making discovery assessments.
For example, in Loughrey v Revenue and Customs [2021] UKFTT 252 (TC), in November 2013, the taxpayer was made redundant by Symantec. Symantec provided electronic payslips, but following his redundancy the taxpayer no longer had access to them. The taxpayer had always paid income tax under PAYE and had never filed a tax return. However, he believed that too much tax had been deducted from his pay in 2013/14, so he filed a tax return in March 2016.
HMRC paid the taxpayer a tax refund of £14,043 but later established from the taxpayer’s payslip for month 12 that Symantec had deducted £30,000 for the redundancy exemption. As Symantec had allowed the £30,000 exemption from gross pay, the taxpayer should not have claimed this exemption on his return. The taxpayer had used his form P60 and redundancy agreement to complete his tax return and was unaware that the £30,000 exemption had already been deducted by Symantec. HMRC issued discovery assessments for 2013/14 to the taxpayer in April and November 2018. The taxpayer appealed.
HMRC argued that the taxpayer was careless in completing his tax return. However, the First-tier Tribunal (FTT) found that the taxpayer took reasonable care. He had followed instructions in the help function on HMRC’s online tax return system. The FTT did not consider that the taxpayer ought to have obtained advice from a tax professional or HMRC’s helpline. The taxpayer’s appeal was allowed.
Practical tip
Keep good records and an ‘audit trail’ of steps taken when completing tax returns, so that if an error is made and HMRC later seeks to make discovery assessments for tax years outside the four-year default period, it is possible to demonstrate that reasonable care was taken, if appropriate.
