Mark McLaughlin looks at whether HMRC may sometimes be too late to assess additional tax when a discovery is made.
Whether a taxpayer has been careless or deliberate can be crucial in the context of ‘discovery’ assessments by HM Revenue and Customs (HMRC). For example, if an individual has filed a tax return and their tax liability is understated, HMRC cannot make a discovery assessment outside the normal enquiry window unless one of two alternative conditions is met.
Discovery assessments
The first condition is that the loss of tax, etc. was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf (TMA 1970, s 29(4)). The alternative condition (in s 29(5)) is not addressed in this article.
If a tax loss was careless, the normal time limit for HMRC to raise a discovery assessment is extended from four years to six years after the end of the tax year to which it relates (s 36(1)). On the other hand, if the tax loss was deliberate, the discovery assessment time limit is extended to 20 years (s 36(1A)). Separate time limits apply to an ‘offshore matter’ or ‘offshore transfer’ (s 36A).
The relative brevity and lack of clarity in the discovery rules has caused disagreement between taxpayers and HMRC, resulting in numerous tribunal and court cases. One point of disagreement is whether a discovery assessment can become ‘stale’ and invalid if there is a significant period between HMRC making a discovery and raising an assessment to recover the loss of tax, etc.
Too late!
For example, in Hargreaves v Revenue and Customs [2019] UKFTT 244 (TC), the taxpayer claimed to be non-UK resident in his tax return for 2000/01. In the same tax year, he sold shares in a UK company at a large gain. HMRC did not open an enquiry into the tax return. However, on 9 January 2007, HMRC issued a discovery assessment for that year charging tax in respect of the share disposal, on the basis that the taxpayer was UK resident. The taxpayer appealed.
The First-tier Tribunal held that an HMRC officer made the discovery when he took ‘personal responsibility’ for the case in November 2004 (or possibly earlier). Thus, there was (at the very least) more than three years between the discovery and assessment. The tribunal decided that, given this delay, the discovery had become ‘stale’ (i.e. ‘lost its quality of newness’) when the assessment was made. Accordingly, the assessment could not stand.
Not the first time
Hargreaves is not the first case in which a discovery assessment was held to be invalid for similar reasons. For example, in Pattullo v Revenue and Customs [2016] UKUT 270 (TCC), the Upper Tribunal considered that a discovery would become stale ‘on any view’ after 18 months.
More recently, in Beagles v Revenue and Customs [2018] UKUT 380 (TCC), it was held that a delay of around two and a half years until assessed made HMRC’s discovery stale.
Make a challenge?
It seems likely that the question whether a discovery assessment can become ‘stale’ will eventually be decided at a higher judicial level. In the meantime, consider this point if HMRC issues a discovery assessment, and seek expert advice if necessary.
