Understanding Careless or Deliberate Behaviour & Discovery Assessments
As we have seen from the article setting out the requirements for a discovery assessment to be validly raised, a valid discovery may be made if:
- There is an underassessment of tax; and
- It was brought about carelessly or deliberately by the taxpayer (or an agent)
As such, if sufficient disclosures are made on the return, HMRC need to show that the understatement of tax was a result of behaviour on the part of the taxpayer being either:
- Careless behaviour; or
- Deliberate behaviour
The legislation elaborates on the nature of careless behaviour, stating:
“For the purposes of this Act a loss of tax or a situation is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss or situation.”
In old money, this is referring to ‘negligent’ behaviour.
The test of negligence in this context was set out by Judge Berner in Anderson v HMRC:
“The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.”
As such, this is an objective test. This means we are left to consider what a reasonable person would have done under the circumstances.
It should be noted that careless behaviour by either the taxpayer or their agentcan be taken into account.
In the case of Tooth, the Upper Tax Tribunal (“UTT”) held that taking a different, albeit arguable, view to HMRC did not constitute an inaccuracy. This remained the case even if that contrary view was defeated in the courts further down the line.
The FTT has held that a taxpayer is not careless where he has relied on professional advice regarding the effects of the transactions in to which he had entered. (See Hicks)
The consequence of their being careless behaviour is that it extends discovery time limit or window to 6 years.
Carelessness by Agents
As stated above, the carelessness of an agent will suffice.
For example, the FTT held in Ritchie, that an agent was careless because:
- The agent did not consider HMRC’s guidance in relation to the CGT pages of the return;
- The agent did not accompany the client to see a specialist and relied on the client to ensure all relevant information was shared
In Cook v HMRC a small firm of accountants were unaware that their tax software did not follow a relevant double tax treaty resulting in too much tax relief being claimed. Here, the FTT held that this did not satisfy the conditions for valid discovery.
In order for their to be ‘deliberate behaviour’, the taxpayer (or his adviser) must have not believed the tax return to be correct.
For example, the FTT has held that a taxpayer who had sold UK properties previously must have been aware that he needed to consider the tax implications of UK property transactions. In not doing so had acted deliberately when he failed to declare a gain on a property disposal.
The consequence of deliberate behaviour is that it extends the discovery time limit or window to 20 years.
If you receive a letter from HMRC where they say they are raising a discovery assessment then you must take action immediately. In the first instance you may look at appeal this discovery assessment and normally the time limit for doing so to HMRC is 30 days. Late appeals may be accepted by HMRC but, if not, you will need to appeal to the First Tier Tribunal.
We would recommend that if you receive such an assessment from HMRC that you speak to a specialist adviser without delay.
For more articles on discovery assessment please visit our signpost document.
If you, or your clients, have received a discovery assessment or have any queries about discovery assessment, then please do not hesitate to get in touch.