Understanding the time limits for discovery assessments.
The legislation that gives the power to HMRC to make a discovery assessment is section 29 Tax Management Act (TMA) 1970.
Requirements for a discovery assessment
HMRC cannot generally raise a discovery assessment if the taxpayer has filed a tax return unless HMRC has evidence to suggest that there is a loss of tax due to careless or deliberate errors (s29(4)).
Please note that HMRC has the right to make a formal ‘enquiry’ into every tax return submitted to them under section 9A of TMA 1970. The time limit for commencing an enquiry is 12 months after the day on which the return is delivered. As the period for enquiry is quite short, the other option is a discovery assessment.
A discovery assessment can only be raised if:
There is an incorrect or incomplete return due to fraudulent or negligent conduct that resulted in: – income or gains which have not been assessed; or – a tax assessment which has become insufficient; or – excessive relief having been given.
The notice to enquiry window under s9A (12 months from the filling date) has passed but, based on the information provided in the tax return, an HMRC officer could not have been expected to realise that the return was incomplete or incorrect.
The only requirement appears to be that if a ‘new’ HMRC officer, acting honestly and reasonably, arrives at the conclusion that there was an insufficiency in an assessment of tax, a discovery assessment can be raised to recover the tax lost. Such a view of the provisions (of a hypothetical ‘new’ HMRC officer) is almost undefeatable and follows the Court of Appeal’s judgement in Langham v Veltema (2004).
In theory, discovery can be avoided by including suitable disclosures and making available all the relevant information in either the return and/or the ‘white space’.
The discovery assessment discussion was recently highlighted in the Commissioners for HMRC v RaymondTooth:  UKUT0038 (TCC). It concerned if a discovery assessment was valid and taxpayers' actions had resulted in a deliberate inaccuracy. HMRC had raised the assessment on the basis that:
An officer of the Board or the Board had discovered, as regards Mr Tooth and the year of assessment 2007-2008, that an assessment to tax was or had become insufficient within section 29(1)(b) TMA.
Mr Tooth had made and delivered a return within section 29(3) which satisfied the condition within section 29(4) TMA, namely that the insufficiency of the assessment had been brought about deliberately by Mr Tooth or a person acting on his behalf.
Mr Tooth contended that these requirements of section 29 TMA were not met in two regards:
First, because there had been no 'discovery' within the meaning of section 29(1) TMA.
Secondly, because the situation within section 29(1) TMA (ie that the assessment to tax was or had become insufficient) had not been brought about deliberately by Mr Tooth or a person acting on his behalf.
The FTT found that the situation had ‘not been brought about deliberately so that section 29(4) TMA was not satisfied’; accordingly the section 29 assessment was not valid. HMRC appealed.
The Commissioners when considering the appeal focused on a number of areas. In paragraph 66 it is stated that ‘The mere insertion of a figure into a document that is inaccurate may be a deliberate act, but it is not, necessarily, a deliberate inaccuracy. In this case, we do not consider that the inaccuracies alleged by HMRC can be said to be deliberate, because Mr Tooth took steps to draw the (putative) inaccuracies to the attention of HMRC.’
It was then stated that ‘accordingly, we find that Mr Tooth did not act deliberately within the meaning of section 29(4) TMA (as elucidated by section 118(7) TMA), and that HMRC’s appeal must fail on this ground also. There is no evidence of any intent on the part of Mr Tooth to bring about an insufficient assessment of tax or give to HMRC a deliberately inaccurate document. (Obviously, Mr Tooth wished to pay as little tax as was legally permissible, but that is not paying an insufficient amount of tax). HMRC contended that the FTT had wrongly distinguished the decision in Moore v HMRC UKUT 239 (TCC). We disagree with HMRC’s contention and agree with the reasoning of the FTT for, essentially, the reason given by the FTT. Moore was concerned with an alleged negligent insufficiency of tax which, we consider, involves very different considerations to where the insufficiency is said to have been brought about deliberately.’
The Commissioners concluded that the ‘burden of showing that the requirements of section 29 TMA are met is on HMRC. We consider that there is no sufficient basis – given the facts found by the FTT – to justify the conclusion that there was, properly speaking, a discovery. Had this been the only point in issue, we would have allowed the appeal, and remitted the matter for further evidence and argument to the FTT. As it is, given our conclusions on the question of deliberate inaccuracy, this course is unnecessary.’
Information is treated as having been made available to the officer if:
it is contained in the tax return for the relevant period (or the two preceding periods) or in any of the accounts, statements or documents supplied with the tax return, or
it is contained in any claim made for the relevant period (or the two preceding periods) or in any of the accounts, statements or documents supplied with the claim, or
it is contained in any documents, accounts or particulars supplied in connection with an enquiry into a tax return or claim, or
it is information which could reasonably be expected to be inferred from any of the above, or
it is information that was notified to the officer in writing by the taxpayer.
So, a change of opinion on information that has previously been made available to HMRC is not grounds for a discovery.
There is clearly an onus on the taxpayer to draw HMRC’s attention to any important information relevant to a tax liability, particularly if there is some doubt as to the interpretation that can be placed on that information. It is not sufficient just to provide that information if it is hidden away or obscure.
Time limits for discovery assessments
In any case of incomplete disclosure without careless or deliberate conduct, the time limit for a discovery assessment is not later than four years after the end of the tax year to which it relates.
Section 36(1) and (1A)
In any case involving a loss of tax brought about carelessly, the time limit for making a discovery assessment is not later than six years after the end of tax year to which the assessment relates.
The time limit for making a discovery assessment is not later than 20 years after the end of the tax year to which it relates where the loss of tax is:
brought about deliberately by the person
attributable to a failure to notify liability under section 7 of TMA 1970, or
attributable to a tax avoidance scheme which is a notifiable arrangement or a listed or hallmarked scheme and the user of the scheme failed to disclose details to HMRC at the proper time.
Payment of tax
The due date for tax charged by a discovery assessment is 30 days after the notice of the assessment is given (delivered).