Discovery Assessment – Meaning, Legislation Guidance & Examples
A “Discovery” is a power held by HMRC that allows it to reopen closed periods. In this regard, it differs from an ‘enquiry’ in that an enquiry is an investigation in to ‘open’ years.
A discovery may be made by HMRC where they believe there is an underpayment of tax. They will issue an assessment for the tax that they believe has been underpaid.
Discovery Assessment – Relevant Legislation
The relevant conditions are set out:
- For Income Tax and Capital Gains Tax: Taxes Management Act 1970, s29
- For Stamp Duty Land Tax (“SDLT”): Paragraph 30(3) of Schedule 10 of Finance Act 2003 – albeit these provisions differ to those for income tax, capital gains and corporation tax purposes; and
- Corporation tax: and Paragraph 41 of Schedule 18 of Finance Act 1998
Loss of Tax
Broadly, a discovery can be made by HMRC if they find (“discover’) an incomplete or inaccurate disclosure which has led to a loss of tax.
A loss of tax can arise in the following circumstances:
- Where tax which ought to have been assessed has not been assessed;
- An assessment has been made but it is not sufficient; or
- Excessive relief from tax has been given
Error or mistake and generally prevailing practice
If a taxpayer has delivered a tax return in respect of the income, gains or, in the case of SDLT, the land transaction, and the loss of tax is due to an ‘error or mistake’ in the return, no discovery can be made IF the return in question was prepared under the practice generally prevailing at the time.
Restrictions on the Making of a Discovery Assessment
If a taxpayer has delivered a tax return then no assessment may be made unless one of the three conditions below is satisfied.
These conditions are as follows:
- The tax loss arose as a result of the careless or deliberate behaviourof the taxpayer (or a person, such as an agent, acting on his or her behalf);
- An officer of HMRC could not have been reasonably expected to have been aware that there was a loss of tax. Note, this is taken at the time the enquiry or enquiry window closed; or
- A counteraction notice has been given in respect of a scheme or arrangement designed to increase double tax relief.
Discovery Assessment Validity – Burden of Proof
The burden of proof rests with HMRC to show that a discovery assessment it has raised has been done so was validly.
Discovery Assessment – Time Limits
|4 years||Where the incomplete disclosure is not due to careless or deliberate conduct|
|6 years||Where there is a loss of tax due to careless conduct|
|12 years||Where the non-compliance relates to an offshore matter|
|20 years||Where the loss of tax is due to:|
· a deliberate action;
· A failure to notify liability, or
· due to a notifiable tax avoidance scheme (DOTAS), and the scheme user did not notify HMRC
Presumption of Continuity (“PoC”)
Where HMRC finds something that resulted in a loss of tax and it takes the view that the same under-declaration was likely to have been made in previous years also then it may invoke a principle known as PoC.
Under this principle, it is assumed that the same loss will arise each year.
The effect is that there is a switch in the burden of proof such that the taxpayer must show that the error did not arise in earlier years.
Check HMRC has Played by the Rules
If you receive a discovery assessment then you must check that it has been validly.
It is not uncommon for HMRC to use a discovery assessment has a means of short circuiting the enquiry rules when they realise they are out of time.
For example, see HMRC v Raymond Tooth.
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.