Policy paper

Statement of Practice 8 (1991)

Published 26 July 1991

General

1. This Statement of Practice explains, in relation to Income Tax, Corporation Tax and Capital Gains Tax, the circumstances in which HM Revenue and Customs (HMRC) seek to recover tax when a person has not been assessed or has been inadequately assessed. The statement does not cover cases where there may have been fraud or negligence by or on behalf of the taxpayer.

2. The statement draws attention to the relevant statute and case law, in particular to the cases of:

• Cenlon Finance Co Ltd v Ellwood ((1962) AC 782)
• Scorer v Olin Energy Systems Ltd ((1985) BTC 181)

3. The following paragraphs should be read as subject to the general proviso that it is fundamental to the operation of the tax system that it is for the taxpayer, who is in possession of the facts, to supply them to HMRC so that his tax liability may be determined. Case law confirms that, if the relevant facts have not been accurately, fully and clearly disclosed by the taxpayer at the time, HMRC should not regard agreements reached, or action taken or omitted by its officials as binding it to accept less than the full amount of tax legally due.

4. This statement of practice applies to the following for the years specified:

• individuals - for returns for years to and including 1995 to 1996
• partnerships whose trade, profession (or) business (was) set up and commenced before 6 April 1994 - for returns for the years to and including 1996 to 1997
• for bodies within the charge to Corporation Tax - for accounting periods ending before 1 July 1999
• for periods after those referred to above, Taxes Management Act (TMA) 1970 s 29, as amended by Finance Act (FA) 1994 ss 191, applies, except for companies. In the case of companies FA 1998 Sch 18 paras 41 to 45 apply

Inspectors’ discovery powers

5. TMA 1970 s 29(3) (old version) provides that where, after an assessment has been made or a decision has been taken that an assessment is not required, an inspector discovers that any taxable profits have not been assessed, he may make an assessment in the amount he considers ought to be charged. Similarly, a further assessment may be made if an inspector discovers that an assessment is insufficient or that a relief should be withdrawn. These powers may also be exercised by the Commissioners for HMRC. There are also other discovery provisions in the Taxes Acts which empower an inspector to make assessments to recover excessive reliefs, tax unpaid and over-repayments of tax, for example TMA 1970 s 30 and Income and Corporation Taxes Act 1988 ss 252, 412(3). Normally any assessment or further assessment must be made not later than 6 years after the end of the chargeable period to which it relates (TMA 1970 s 34(1)).

6. The Courts have established that, subject to the decisions in the Cenlon and Olin cases, a change of opinion can amount to ‘discovery’; that discovery can be made by an inspector other than the one who made the first assessment; and that discovery can extend to a finding that the law has been incorrectly applied as well as the coming to light of additional facts. The word has been held to include any situation in which for any reason it newly appears to an inspector that a taxpayer has been undercharged.

The main principles

7. Two main principles are relevant in considering whether a discovery assessment may be made in any particular circumstances.

First, HMRC do not go back on a specific agreement made by an inspector on a particular point and raise a discovery assessment in respect of that point, whether or not the inspector correctly took account of current law and practice in entering into that agreement.

Second, in circumstances where it cannot be said that the particular point was the subject of a specific agreement, HMRC regards itself as bound by the inspector’s acceptance of a computation if the view of the point implicit in the computation was a tenable one.

But HMRC does not regard itself as bound by any agreement made, or considered to be made, or any decision taken by an inspector, if any of the information supplied on which that agreement or decision was founded was misleading.

The position in more detail

(i) Specific agreement: appeal cases

Cenlon

8. First, there is the case where there has been a specific agreement made by an inspector on a particular point, ie, where an issue has been raised expressly by the inspector, the taxpayer or his agent (whether orally or in writing) and agreement has been reached on the treatment of that issue for tax purposes. The decision in the Cenlon case established that, if an assessment has been determined on appeal in accordance with TMA 1970 s 54, a discovery assessment should not be made in respect of any particular point which had been specifically dealt with in the course of the determination of that appeal.

Olin

9. The decision in the Olin case gives guidance on deciding whether (in the absence of express words making the position clear) a particular point has been agreed, or could be said to have been agreed, in the course of reaching an overall agreement on a person’s tax liability for a particular period. The Olin case makes it clear that a particular point agreed may not only be an issue raised expressly by the inspector, the taxpayer, or his agent (whether orally or in writing), but also any point which was fundamental to the whole basis of the computation of the taxpayer’s liability, and so clearly and fully described in the accounts or computations that its significance for the computation of the taxpayer’s liability was clearly and immediately apparent. In these circumstances the inspector could not reasonably be regarded as having agreed the computation without having appreciated and accepted the point. In other words the inspector must have been clearly put on notice of the point.

10. The question whether a particular point is fundamental to the whole basis of the computation of the liability is one which must depend for its answer on the facts and circumstances of the particular case. At one extreme, there will be cases like Olin itself where the claim to set off the losses of the defunct trade against the profits of the continuing trade was fundamental in that it had a major impact on the computation of the liability and, moreover, was so clearly and fully described in the computations that the inspector must have appreciated what was being claimed. In the House of Lords, Lord Keith concluded that the inspector’s agreement to the computations would have led a reasonable man to believe that the inspector had decided to admit the claim. In circumstances like these, HMRC would accept that the particular point was covered by the agreement reached and could not subsequently be the subject of a discovery assessment.

11. At the other extreme, there will be cases in which a point is not fundamental to the basis of the computation, in that it does not have a major impact on the liability, or it is not so clearly and fully described in the accounts or computations that its significance is clearly and immediately apparent from the information supplied. For example, in cases where the taxpayer or his agent are claiming a particular deduction in arriving at profits, and among a multiplicity of items contained in the accounts and supporting material is a piece of information which, if the inspector had studied it in detail and thought through the implications, could have alerted him to the fact that the claim was not valid, HMRC would not accept that a discovery assessment could not be raised in respect of the particular (incorrect) deduction. Moreover, if further information were needed before the inspector could reasonably be expected to appreciate the significance of the point for the taxpayer’s liability, HMRC would not accept that the inspector should be regarded as having considered and agreed that point.

12. The treatment of cases in between these 2 extremes must be a matter of judgment, depending on the particular facts. It will be necessary to decide, taking a reasonable and commonsense view of the matter, whether a taxpayer or his adviser would consider that a competent inspector, in examining the accounts and computations, must be considered to have addressed his mind to the point at issue before signifying his agreement to the computation of the liability. This will be so only if the point was both fundamental to the whole basis of the computation, and was so clearly and fully described that its significance for the computation of the taxpayer’s liability was clearly and immediately apparent. In these circumstances the inspector could not reasonably be regarded as having agreed the computation without having appreciated and accepted the point.

(ii) Specific agreement: non-appeal cases

13. The principles established in the Cenlon and Olin cases strictly apply only where there was an appeal against an assessment or an appeal against a decision on a claim given in accordance with TMA 1970 s 42 which was subsequently determined either by the Commissioners or under TMA 1970 s 54. But, even if there was no determination of an appeal, a discovery assessment will not be made if the particular point on which the inspector takes a revised view was, or (as in the Olin case, see para 9 above) could be said to have been, the subject of the specific agreement of the final figures for assessment purposes. These circumstances may arise because the figures were agreed before an assessment was made, because the inspector decided not to make an assessment, or because the inspector’s decision on the claim was accepted.

(iii) No specific agreement: appeal and non-appeal cases

14. There will also be circumstances in which the Cenlon and Olin principles are not applicable. Thus, the particular point on which the inspector subsequently takes a revised view and considers making a discovery assessment may not have been the subject of a specific agreement or, because the point was not fundamental, cannot be said to have been the subject of a specific agreement (see para 8 above). In these circumstances, a discovery assessment will not be made, provided that the inspector’s original decision, whether on a claim or on the proper amount of an assessment, was based on a full and accurate disclosure of all the relevant facts and was a tenable view, so that the taxpayer could reasonably have believed that the inspector’s decision was correct. And it follows that if the inspector’s original decision was consistent with a view of the law and practice generally received or adopted at the time, a discovery assessment would not be made where, for example, there is a subsequent change in that practice - eg, following a court decision.

Some particular circumstances where discovery assessments will be made

15. The application in any individual case of the general principles described in the preceding paragraphs will, of course, depend on the particular facts and circumstances. But there are certain specific circumstances in which there will clearly be no grounds for an inspector not to make a discovery assessment, ie, where:

• profits or income have not earlier been charged to tax because of any form of fraudulent or negligent conduct
• the inspector has been misled or misinformed in any way about the particular matter at issue
• there is an arithmetical error in a computation which had not been spotted at the time agreement was reached, and which can be corrected by the making of an in date discovery assessment
• an error is made in accounts and computations which it cannot reasonably be alleged was correct or intended, eg, the double deduction from taxable profits of a particular item (say group relief)