Policy paper

Discovery assessments

Published 27 October 2021

Who is likely to be affected

Individuals who incur certain tax charges (the High Income Child Benefit Charge (HICBC), those relating to Gift Aid Donations and a number of different pension charges) but fail to notify HMRC and fail to complete a Self Assessment tax return for the tax year in which the charge(s) arose. The measure confirms the longstanding basis on which HMRC can assess these charges and does not impose any additional liability.

General description of the measure

Where individuals fail to report and pay certain tax charges to HMRC, existing tax legislation provides that HMRC may issue “discovery” assessments to recover the tax owed. This measure does not change this policy but makes a technical clarification to clarify the law to provide legal certainty and maintain the status quo.

This part of the measure is introduced with retrospective effect for HICBC, Gift Aid and the pensions charges. It does not introduce any additional obligations or liabilities for customers. With prospective effect, the measure provides that discovery assessments may be used to recover any income tax or capital gains tax that ought to have been assessed but has not been assessed.

Additionally, the measure also confirms that individuals chargeable to these income tax charges need to notify HMRC. This part of the measure is introduced with prospective effect.

Policy objective

This measure is designed to provide certainty that HMRC can use discovery assessments to assess certain tax charges where an individual has failed to notify HMRC that they are liable and has failed to complete a Self Assessment tax return. This will ensure that all individuals liable for these tax charges are treated in a fair and consistent way, and that individuals who fail to notify and report their liability to these charges cannot gain an unfair advantage over those who do.

Applying the measure both retrospectively and prospectively will affirm HMRC’s long held position and provide certainty for HMRC, taxpayers, and the tribunals about HMRC’s powers to recover tax in these circumstances.

Background to the measure

HICBC

In a recent case the Upper Tribunal found that HMRC did not have the power to recover an individual’s HICBC by issuing a discovery assessment under Section 29(1)(a) of the Taxes Management Act 1970 where that individual had failed to report their HICBC to HMRC and failed to file a tax return for the relevant tax year. The tribunal accepted that the individual was still liable to HICBC, but concluded that the assessments were not validly raised.

HMRC does not believe the judgment of the Upper Tribunal was correct and is appealing the decision to the Court of Appeal. In advance of that appeal, this measure will provide certainty that HMRC may recover HICBC through the issue of a discovery assessment.

The measure will ensure that individuals who do not report their HICBC liability to HMRC will still have to pay, and they will not have an unfair advantage over compliant individuals who report their HICBC to HMRC.

Gift Aid

Charities and community amateur sports clubs can claim a repayment of the tax that is treated as having been paid on the charitable donations they receive from taxpayers. However, if the donor has paid insufficient tax in the year to cover the tax being reclaimed, then that donor will incur a tax charge.

This measure provides certainty that HMRC may recover this charge through the issue of a section 29 discovery assessment.

Pension Charges

Under Finance Act 2004, the unauthorised payments charge and surcharge arise where unauthorised payments are made by a registered pension scheme to a scheme member. The recipient of the payment is liable to the tax. Further charges to income tax are imposed in the context of registered pension schemes: the lifetime allowance charge and the annual allowance charge.

Schedule 34 to the Finance Act 2004 provides for certain tax charges that normally apply in the context of registered pension schemes to apply in certain circumstances to members of certain non-UK pension schemes that are not registered pension schemes. Those charges include the unauthorised payments charge and surcharge, the lifetime allowance charge, the annual allowance charge, the short service refund lump sum charge and the special lump sum death benefits charge.

In addition to the above, the overseas transfer charge applies to some transfers to certain overseas pension schemes.

This measure provides certainty that HMRC may recover all of these charges through section 29 discovery assessment.

Detailed proposal

Operative date

This measure will apply both prospectively and retrospectively. Although this measure applies retrospectively it does not introduce any new or additional obligations or liabilities; it simply maintains the widely accepted and understood position that existed until recent litigation called this into question.

Current law

Section 29(1)(a) of the Taxes Management Act 1970 provides that HMRC may issue discovery assessments.

Section 7 of the Taxes Management Act 1970 requires individuals to notify HMRC when they are chargeable to income tax or capital gains tax.

Section 30 of the Income Tax Act 2007 brings certain tax charges into the calculation of income tax liability.

HICBC

Section 681B of the Income Tax (Earnings and Pensions) Act 2003 provides the rules relating to liability for HICBC.

Pension Charges

The various pension charges are set out in the following legislation:

Sections 205, 206, 208, 209, 214, 227 & 244A of the Finance Act 2004; Registered Pension Schemes (Accounting and Assessment) Regulations 2005; Schedule 34 to the Finance Act 2004.

Gift Aid

Sections 424 and 520 of the Income Tax Act 2007 covers gift aid and the circumstances in which a tax charge may be due.

Proposed revisions

HMRC’s longstanding position is that the assessing provisions in Section 29(1)(a) of the Taxes Management Act 1970 may be used to recover tax charges arising on HICBC, Gift Aid, and certain pensions charges.

A recent case before the Upper Tribunal challenged HMRC’s use of that assessing provision to recover HICBC. The Upper Tribunal ruled against HMRC and that decision is subject to a further appeal by HMRC to the Court of Appeal.

The government will legislate in Finance Bill 21-22 to put beyond doubt that HMRC may use these discovery assessments to recover all of the above-mentioned tax charges.

This legislation will apply retrospectively to HICBC, Gift Aid and the pensions charges, in order to provide certainty to taxpayers and prevent unnecessary litigation costs. With prospective effect only, the measure provides that discovery assessments may be used to recover any income tax or capital gains tax that ought to have been assessed but has not been assessed.

The legislation will not apply retrospectively to those individuals who previously received a discovery assessment and:

• who submitted an appeal to HMRC, on the basis of the arguments considered by the upper tribunal, on or before 30 June 2021(the date at which the Upper Tribunal handed down its decision in the relevant case.); or
• whose appeal, made on or before 30 June 2021, has been stood over by the Tribunal pending the final outcome of the relevant litigation

These individuals will be able to pursue their appeals on the basis of the legislation as currently enacted. Those considering submitting a late appeal on the same grounds should consider if they have any prospect of success, as any new appeal would be on the basis of the legislation as retrospectively amended.

Section 7 of the Taxes Management Act 1970 will be revised, with prospective effect only, to confirm that individuals who are chargeable to the income tax charges listed in Section 30 of the Income Taxes Act 2007, need to notify chargeability to HMRC. The measure also makes a minor (prospective only) correction to the list of charges included in section 30 of the Income Tax Act 1970.

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
nil	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

There is no expected impact on individuals and liability to HICBC, pensions and Gift Aid charges is unaffected. Payment and reporting processes are not affected by the measure, which affirms the law with regard to HMRC using the assessing provisions provided in Section 29 of the Taxes Management Act 1970 to recover tax liabilities arising through the HICBC, Gift Aid, and certain pensions charges. There is expected to be no impact on family formation, stability or breakdown.

However, the retrospective legislation will not apply to a small number of individuals who either: submitted an appeal to HMRC, on the basis of the arguments considered by the Upper Tribunal, on or before the 30 June 2021; or whose appeal, made on or before 30 June 2021, has been stood over by the Tribunal pending the final outcome in the relevant case. These individuals also remain liable to the tax in question, but the validity of HMRC’s use of discovery assessments to recover that tax will be determined by the continuing litigation.

Equalities impacts

There is expected to be no impact on groups sharing protected characteristics.

Impact on business including civil society organisations

There is expected to be no impact on business or civil society organisations.

Operational impact (£m) (HMRC or other)

There is no operational impact. HMRC systems will remain unchanged. This measure is intended to affirm HMRC’s application of tax law.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from HMRC’s systems including data on assessments issued, appeals and reviews.

Further advice

If you have any questions about this change, please contact Peter Nicholls on 03000 556776 or email: peter.nicholls@hmrc.gov.uk.