What Is An HMRC Tax Discovery Assessment?

This guide is about what is an HMRC Tax Discovery Assessment.

In this article you’ll learn about:

• When HMRC can open a tax enquiry.
• What An HMRC Discovery Assessment is.
• When An HMRC Discovery Assessment can be raised.
• Time limits for raising a Discovery Assessment by HMRC.

Let’s get discovering!

HMRC Tax Discovery Assessment Overview

An HMRC Tax Discovery Assessment is an assessment by HMRC of tax considered to be due from a taxpayer.

In the UK there is a regime known as self assessment. This means that taxpayers themselves are trusted to work out and determine (assess) the level of tax they have to hand over to HMRC.

However, whilst there is no assumption or presumption that taxpayers will not get their tax calculated correctly is it a fact of life some taxpayers make mistakes when calculating their tax and some taxpayers deliberately seek to avoid the payment of tax.

As a result to ensure that taxpayers pay over the right amount of tax to the Exchequer there are checks and balances which ensure that HMRC has powers to check a person’s tax position.

That does not however automatically trigger the powers arising under the Discovery Assessment regime available to HMRC.

Opening An HMRC Tax Enquiry

HMRC has 12 months from the date that the taxpayer submits their return to give notice and open a tax enquiry by virtue of Section 9A of the Taxes Management Act 1970.

The ability of HMRC is not unlimited in opening a tax investigation. There are strict time limits involved and notices that have to be provided to the taxpayer who is subjected to a tax enquiry.

What Is A Discovery Assessment?

A Discovery Assessment to tax by HMRC arises from Section 29 of the Taxes Management Act 1970 in the cases of individuals and in Schedule 18 of the Finance Act 1998 in the case of Corporation Tax. The basic principles are very similar. The corporation tax provisions have been updated by Schedule 39 of the Finance Act 2008.

Conditions For An HMRC Discovery Assessment

The conditions for an HMRC Tax Discovery Assessment are when HMRC discovers:

• Income and or capital gains were not disclosed by the taxpayer.
• A tax return was insufficient to disclose tax to HMRC.
• Reliefs claimed by the taxpayer were too much.
• The HMRC officer’s discovery must be reasonable more than suspicion of an insufficient tax; it does not need to be a conclusion.

In essence, a loss to HMRC resulted through one means or another.

In order to raise a Discovery Assessment two further conditions are required:

1. The conduct of the taxpayer has to be careless or deliberate.
2. If notice is not given in time then the tax inspector must not have been able to have been aware of the insufficiency.

Time Limits For Raising Discovery Assessments To HMRC Tax

The normal time limit for raising Discovery Assessments to HMRC Tax is 4 years after the end of the relevant tax period.

That position arises from Section 34 of the Taxes And Management Act 1970 for individuals and paragraph 46 of Schedule 18 of the Finance Act 1998 for companies.

Deliberate And Careless Conduct Extending Time Limits

In cases where it is considered the taxpayer’s conduct has been deliberate or careless then the normal 4 year rule does not apply.

A 6 year time limit applies to the ‘careless’ taxpayer.

A 20 year time limit can apply to the ‘deliberate’ taxpayer.

Example Of An HMRC Discovery Assessment

The case of William Aggrey v Revenue & Customs [2022] UKFTT 200 (TC) involved a Discovery Assessment.

Mr Aggrey was a teacher and had a property that he rented out for a period of time. His tax returns showed that he had rental income.

He then sold his property. As a result his tax returns unsurprisingly stopped recording rental income information but it also did not disclose information on the capital gain or losse that may have arisen.

Two flags are likely therefore to have highlighted the position for an HMRC Tax investigation to sprout right out of the ground:

1. The conspicuous absence of rental income in the tax returns over future years.
2. No capital gain or loss arising on the sale of the property when rental income stopped by shown.

Whilst we do not know precisely all the triggers for an HMRC Tax Investigation it is perfectly probable that HMRC systems will trigger the apparent inconsistency in a person’s tax return when rental income stops but no capital loss or gain on sale results. The two ought to go hand in hand.

It is of course entirely possible that HMRC systems may also trigger investigations when after a few years of rental income no such income or losses arises in subsequent years. However, the two points coming together suggest it is likely that an HMRC Tax enquiry, in this case, could have gotten out of the HMRC investigation starting blocks quite quickly due to the potential for irregularity.

Tax Tribunal’s View

In this case, the Tax Tribunal did not disturb the need for a Discovery Assessment. In relation to the disposal of the Property, it agreed with the following points made by HMRC:

(1) Mr Aggrey is an educated person, a teacher, who has lived in the UK for many years.

(2) His letter to the Leasehold Team questioning a bill for the Property showed that he was “capable of checking, questioning and challenging on financial matters”.

(3) It was not reasonable for Mr Aggrey to rely on his conveyancing solicitors and his letting agent; the reasonable person in his position would have checked whether there were any tax implications.