by Mala Kapacee
As we head towards the end of the tax year (and deadlines for raising assessments), you might see an increase in discovery assessment being issued by HMRC. As such practitioners should be aware of the criteria for valid assessments. This article refers mainly to direct personal tax assessments and the criteria for other taxes may differ slightly.
In order for HMRC to raise a valid discovery assessment, the officer must have made a discovery and issued the assessment within legislative time limits to that officer’s best judgement. The criteria for valid assessments are based on a mixture of legislation and case law. Below, we address these points along with other uncertainties/common misconceptions.
This means that “the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware” that there was an under-declaration of tax/over claim of a relief (s29, TMA 1970).
If (e.g.) a whitespace disclosure was made detailing the basis of a particular transaction, then the question is whether the ‘officer’ had sufficient information to be able to determine whether the tax calculated was correct. If there was sufficient information and HMRC failed to open an enquiry in time, then the department cannot then rely on discovery provisions to raise an assessment.
The length of time between making a discovery and issuing an assessment is no longer relevant providing the assessment is made within legislative time limits (except for VAT).
Typically, HMRC has the following time limits to adhere to for issuing a valid discovery assessment:
These time limits are extended where the loss of tax relates to overseas income to up to twelve years regardless of whether the taxpayer took reasonable care or was careless. The time extensions only apply for 2013/14 onwards for careless behaviour and 2015/16 onwards for reasonable care.
The courts have found there is a difference between the assessment being made and the assessment being notified to taxpayers. Clearly this can make the time limits tricky to enforce as the taxpayer has no way of knowing that the assessment has been made unless they are notified of it.
HMRC’s (VAT) manuals state that “all assessments must have [been] notified to the taxpayer within the time limit for making the assessment in order to demonstrate that it was indeed made in time.” VAEC6080 and this is standard HMRC practice.
HMRC also cannot raise a discovery assessment if the enquiry window is still open. This point is less helpful however as once notified that the assessment is invalid, HMRC can open an enquiry or simply raise the assessment (again) once the enquiry window has closed.
A taxpayer is notified of an assessment when it is delivered to their last known address. For appeal purposes, it is useful to understand that the appeal deadline of 30 days starts from the date the decision (assessment) was issued by HMRC, not when the letter was received.
Typically and for the avoidance of any confusion, HMRC will send assessments to the taxpayer in writing. The department may also send the assessment to the taxpayer’s tax agent. However, if the assessments are only sent to a third party, you must consider whether the notification was valid i.e. whether the person to whom the assessments were issued was authorised to accept notification of assessment.
The legislation is not prescriptive in terms of the format for a discovery assessment, therefore it is crucial to understand whether the document received is a discovery assessment or not. Tax law specifically states
“An assessment...shall not be quashed or deemed to be void or voidable, for want of form, or be affected by reason of a mistake, defect or omission therein, if the same is in substance and effect in conformity with ... the Taxes Acts..” (TMA 1970, s.114(1)).
In fact, according to the TMA, a mistake in the taxpayer’s name or surname, description of any profits or property, or the amount of the tax charged will not ‘impeach’ or affect the assessment.
Although this appears to give HMRC a wide remit as to the accuracy of assessments, the substance of the assessment must still be sound and various aspects of an assessment must be correct (as determined by case law); the tax year must be correct and HMRC must state the relevant period (unless it can be clearly worked out from (e.g.) correspondence).
It must be clear to the taxpayer, what the assessments are in respect of and how much tax is assessed, whether by reference to the notice or otherwise obviously identifiable.
Case law has determined that an assessment must be raised as best judgment (for VAT, this is a legislative requirement) as expected from a common sense point of view. This means that an HMRC officer cannot raise an assessment to ‘protect HMRC’s position’ as often happens when time limits might be about to expire.
If on reviewing the assessment, you are unable to identify the basis of the assessment and HMRC is unable to provide reasonable justification, it is likely the assessment has not been made to best judgement and is therefore invalid.
*The question of whether a discovery has been made has been through the courts on a number of occasions. In Lowe v HMRC [2024] UKFTT 826 (TC), it appeared to the FTT that HMRC’s assessments had been raised on the basis of a phone call (rather than hard evidence) and that “there was simply no evidence in this case on which an HMRC officer could, subjectively or objectively, reach a justifiable conclusion that there had been an insufficiency of tax”
*In Burgess and Brimheath Developments Ltd v HMRC, [2015] UKUT 578 (TCC), the Upper Tribunal confirmed that the onus is on HMRC to demonstrate that a discovery assessment is valid. The fact that the taxpayer does not specifically argue that the assessment is invalid does not preclude the FTT from having to consider the point. Generally speaking, the courts will expect HMRC to be able to demonstrate that the assessments were raised correctly (even if the taxpayers do not specifically raise the validity of the assessments as an appeal issue).
Mala Kapacee is a Chartered Tax Adviser and non-practising Solicitor and accountant. She is Director of London Tax Network Ltd, a Tax Investigations Specialist consultancy.
