General – How to Prevent a Discovery Assessment
One of the requirements for their to be a discovery, absent any careless or deliberate behaviour by the taxpayer or agent, is that a hypothetical officer of HMRC could not have been expected, based on the information made available to him, to be aware of the under-declaration when the enquiry window closed.
As such, a discovery can be prevented, or repelled, on the proper disclosure of information to HMRC such that the HMRC officer should have been aware of any under-declaration.
Discovery Assessment – Proper Disclosure
In order to make a proper disclosure that protects one from a discovery assessment then the disclosure must be made in:
- The relevant tax return (including any of its supporting documents);
- Any claim in relation to that tax year;
- Any documents provided to HMRC under enquiry;
- Any information that could be inferred from the above; or
- Any information that the taxpayer has provided to HMRC in writing.
It should be noted that the requirement is that a hypothetical HMRC officer would have been aware of the under-declaration. As such, it is irrelevant whether the information was known of by an actual officer of HMRC or HMRC as a whole.See HMRC v Lansdowne Partners Limited Partnership & DS Sanderson v HMRC.
Must Draw HMRC’s Attention
However, the bar is high for a taxpayer to meet the disclosure requirements. He cannot merely set out the position but must also draw HMRC’s attention to any areas that could arise to an under-declaration. For example, including wording such as “HMRC may take a different view of the law”.
Where a taxpayer has used a DOTAS scheme then they (usually) should have been provided with a DOTAS scheme reference number. This should be included on the tax return. Where this has happened then this is sufficient disclosure of the taxpayer’s participation in scheme (See Charlton).
Where HMRC has opened an enquiry in to the matter
Where HMRC has opened an enquiry into the matters subject to the discovery then this is prima facie evidence that they did hold sufficient information (see Tooth).
Discovery Assessment Prevailing Practice
As we have seen in other articles, a valid discovery assessment cannotbe raised if:
- the taxpayer has delivered a tax return; and
- the error or mistake was made on the basis or in accordance with the practice generally prevailaing at the time it was made
What is Prevailing Practice?
Of course, it is key to understand what ‘prevailing practice’ actually means.
In order for there to be a ‘prevailing practice’ then there has to be a practice, agreement or acceptance by HMRC over a certain treatment in particular circumstances, over a long period of time (See Rafferty v HMRC).
The First Tier Tax Tribunal (“FTT”) laid out some suggested requirements for there to be a ‘prevailing practice’ in the case of Boyer Allan Investment services Limited v HMRC. Their suggestions were that the practice must be:
- readily ascertainable;
- relatively long-standing;
- capable of being identified by taxpayers when making their returns
- Adopted by HMRC and, in general at least, by taxpayers
Burden of proof – prevailing practice
It should be noted that the burden of proof is borne by the taxpayer. He or she must be able to show that the relevant tax return was made in accordance with prevailing practice.
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.
How to prevent a discovery assessment was last updated on 12 November 2019