How To Set Aside HMRC Discovery Assessment – Digging Through The Vaults

Set Aside HMRC Discovery Assessment

The existence of Real Time Information (“RTI”) means that HMRC already may have information and be ineligible to raise a Discovery Assessment.

Overview: How To Set Aside HMRC Discovery Assessment

On the face of it the matter of Alan Loughrey v Revenue & Customs [2021] UKFTT 252 (TC) where the taxpayer appealed against an HMRC Discovery Assessment, seems like a good one to consider how to set aside an HMRC Discovery Assessment.

The taxpayer had completed a tax return voluntarily under the mistaken belief that he was entitled to a tax refund in respect of tax he had paid on income earned from his employment. He received a refund but HMRC discovered a discrepancy.

There was no dispute that a mistake had been made by the taxpayer. The matter at large here was whether or not HMRC was entitled to raise a Discovery Assessment. The Tribunal considered that HMRC was not so entitled and allowed Mr Loughrey’s appeal.

What Is A Discovery Assessment?

A Discovery Assessment is an Assessment that HMRC can raise outside of the normal timescales permitted to raise an assessment, being 12 months after filing the return. However, before HMRC can raise a Discovery Assessment two conditions must be satisfied:

1. The taxpayer’s conduct must have been careless or deliberate that gave rise to the potential tax loss to HMRC; and
2. From the information available to HMRC at the relevant time prior to the expiration of the normal 12 months tax enquiry window or closure of an HMRC tax enquiry, it could not have known about the tax loss it might suffer.

It would appear that the rationale for this restriction on an HMRC Discovery Assessment being raised would appear to be protection for the taxpayer to avoid being subjected to a potentially endless series of tax enquiries.

How To Set Aside HMRC Discovery Assessment By Having Taken Reasonable Care

In completing his HMRC tax return Mr Loughrey followed HMRC online guidance. Indeed whilst representing himself in this appeal he produced evidence of screenshots from HMRC’s website.

It is a requirement when raising an HMRC Discovery Assessment that the taxpayer has been careless or deliberate in completing a return that leads to an insufficiency. In this case, the Tribunal was persuaded, contrary to what HMRC had to say on the matter, that Mr Loughrey had taken reasonable care:

Nor do we consider that Mr Loughrey ought to have obtained advice from a tax professional or the HMRC helpline. He looked at the online guidance, and he did what the guidance told him to do. There was nothing in the guidance that suggested that he needed additional advice, or that what he was doing was particularly complicated and that he ought to have obtained additional advice beyond that in the online guidance.

The problem for HMRC was that although it said the taxpayer had been careless it had not raised an HMRC tax penalty as a result. The Tribunal held that HMRC “knew” therefore the taxpayer had not been careless.

Information Already Within HMRC’s Vaults

It appears that HMRC sought to suggest that whilst there was Real Time Information (“RTI”) provided to HMRC by the company who had employed Mr Loughrey, it was not required to go through its vaults to search for information about an insufficiency of tax. However, in referring to the case of Nicholson v Morris (H M Inspector of Taxes) 51 TC 95, the Tribunal was not satisfied that the notable comments, in that case, about ‘digging through the vaults’ were germane when it had said:

“… the Taxes Management Act throws upon the taxpayer the onus of showing that the assessments are wrong. It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body. It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean, and if he gives no evidence whatsoever he cannot be surprised if he is finally lumbered with more than he has in fact received. It is his own fault that he is so lumbered.”

The Tribunal in finding for Mr Loughrey’s ground of appeal said:

42. We disagree. The information within the scope of s29(6)(d)(i) includes information whose existence and relevance could reasonably be inferred from information contained in Mr Loughrey’s tax return. We find that RTI information is such information. The fact that: (1) HMRC’s computer systems identified a discrepancy between the amounts returned on Mr Loughrey’s tax return and the RTI data; and (2) Ms Forbes turned first to RTI data when asked to review Mr Loughrey’s tax return evidences that HMRC (and a hypothetical officer) would have been aware of the existence and relevance of RTI data from the fact that Mr Loughrey had declared UK employment income on his tax return. The information available through RTI is not of the kind discussed in Nicholson v Morris that HMRC might have discovered by going through the records relating to other taxpayers. We find that RTI data falls within s29(6)(d)(i) as its existence and relevance would be obvious to a hypothetical inspector considering UK employment income declared on a tax return.

43. We find that any insufficiency of tax would be obvious to a hypothetical officer from a comparison of the RTI information with the amount of income declared on the tax return. As indeed it was both to Ms Forbes and HMRC’s computer systems. This is not a case of the kind discussed in Langham v Veltma where the hypothetical officer would merely be on notice that further enquiries might be necessary.

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