Mark McLaughlin highlights a case on whether a ‘discovery’ by HMRC may become ‘stale’ if it delays taking action.
HM Revenue and Customs (HMRC) may make a ‘discovery’ assessment outside the normal ‘window’ for opening an enquiry into an individual’s self-assessment return if certain conditions are satisfied (TMA 1970, s 29; similar rules apply to companies).
HMRC commonly uses these discovery powers if the taxpayer has not declared income or gains, or if HMRC considers that the tax return understates the taxpayer’s liability.
How long is too long?
The discovery provisions are relatively brief. Disagreements between taxpayers and HMRC about how the rules should be interpreted and applied have resulted in numerous tax cases before the courts and tribunals. For example, how long should HMRC be allowed in order to make a discovery assessment? Case law currently indicates that this should be done while the discovery is ‘fresh’. So how long before the discovery becomes ‘stale’ and, therefore, invalid?
In Beagles v Revenue and Customs [2018] UKUT 380 (TCC), the taxpayer entered into a tax avoidance scheme promoted by KPMG. The taxpayer’s self-assessment return for the tax year 2001/02 disclosed a loss (£1,093,474) and included details of the transactions resulting in the loss. HMRC did not open an enquiry into the tax return. However, on 1 August 2005, HMRC wrote to notify KPMG that HMRC intended challenging the scheme before the courts.
On 16 January 2007, HMRC completed enquiries into tax returns of two other taxpayers and denied losses arising from the same tax avoidance scheme. The Court of Appeal subsequently held that the scheme was unsuccessful (Astall & Anor v Revenue and Customs [2009] EWCA Civ 1010). Permission to appeal to the Supreme Court was refused on 3 February 2010.
Too late!
HMRC issued a discovery assessment on 15 January 2008. The taxpayer appealed. The First-tier Tribunal (FTT) ([2017] UKFTT 462 (TC)) dismissed the taxpayer’s appeal. The taxpayer appealed to the Upper Tribunal (UT). The UT considered that HMRC had clearly made a discovery of the insufficiency in the taxpayer’s return by 1 August 2005 at the very latest. The UT held that the FTT made an error of law in concluding that the discovery was made after the decision of the Special Commissioners in Astall, which was released on 14 August 2007.
The taxpayer also challenged the FTT’s decision that even if HMRC had made a discovery at an earlier stage (which the UT held it did), the discovery would still not have been ‘stale’ by the time the assessment was made. The UT noted that there had been a delay of nearly two and a half years between HMRC making the discovery by 1 August 2005 and the assessment being issued in January 2008. The UT concluded that the discovery had lost its quality of ‘newness’ by the time of issue of the assessment, so the assessment was not valid. The taxpayer’s appeal was allowed.
Has it gone ‘stale’?
Eventually, the question of whether discovery assessments can become ‘stale’ will probably be answered by a higher court. In the meantime, always check how long HMRC takes between a discovery and assessment.
