Enquiries into Tax Returns: discovery assessments
HMRC has the power to make ‘discovery assessments’, under TMA70/S29 (1), to prevent a loss of tax.
TMA70/S29 provides general rules for HMRC assessments to prevent any loss of tax, but the rules limit the right to make a discovery assessment for any period if a self assessment has already been made by the taxpayer for that period.
The rules that apply where a self assessment has already been made embody the principles established in case law and in particular in the case of Scorer v Olin Energy Systems Limited [58 TC p592]. Unless the loss of tax has been brought about carelessly or deliberately, if the information ‘discovered’ was already in the officer’s possession when the self assessment became final, HMRC have no right to make a discovery assessment.
These rules ensure that a taxpayer who has made a full disclosure in the tax return has absolute finality once the time allowed for opening an enquiry has passed. This is the case even if the tax return is subsequently found to be incorrect, unless it was incorrect because of careless or deliberate conduct. In any case where there was incomplete disclosure or careless or deliberate conduct HMRC have the power to remedy any loss of tax.
General circumstances in which discovery assessments can be made
Subject to the conditions considered below an officer of the Board (or the Board itself) is able to make a discovery assessment for a tax year if it is discovered that:
- there is income or chargeable gains which ought to have been assessed, but have not been assessed, or
- an assessment (including any self assessment) is, or has become insufficient, or
- any relief that has been given is, or has become, excessive.
The assessment will be in the amount (or the further amount) which the officer (or the Board) believes will make good to the Crown the loss of tax.
An officer of the Board may also make a discovery assessment to recover any repayment of tax that should not have been made.
Restrictions on right to make discovery assessments where a self assessment has already been made for the relevant period
In any case in which a self assessment has already been made for the relevant period a discovery assessment will not be made where:
- the loss of tax arose out of an error or mistake concerning the basis on which the returned tax liability was calculated, and
- that basis was the generally prevailing practice at the time the tax return was made.
So, HMRC are not able to raise discovery assessments simply because they have changed their practice in relation to the treatment of some particular item.
Section 29(3) to (5)
Where the taxpayer has already delivered a tax return for the year a discovery assessment cannot be made unless either:
- the loss of tax was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf, or
- when the time limit for issuing a notice of enquiry into the return passed, or the enquiries were completed, the officer of the Board could not have reasonably been expected, on the basis of the information made available to him, to be aware of the situation mentioned in the first paragraph under this sub-heading above.
Definition of ‘made available’
Section 29(6) & (7)
Information is treated as having been made available to the officer if:
- it is contained in the tax return for the relevant period (or the two preceding periods) or in any of the accounts, statements or documents supplied with the tax return, or
- it is contained in any claim made for the relevant period (or the two preceding periods), or in any of the accounts, statements or documents supplied with the claim, or
- it is contained in any documents, accounts or particulars supplied in connection with an enquiry into a tax return or claim, or
- it is information which could reasonably be expected to be inferred from any of the above, or
- it is information that was notified to the officer in writing by the taxpayer.
So a change of opinion on information that has previously been made available to HMRC is not grounds for a discovery.
The definitions of ‘made available’ must be considered in the context of the ‘reasonably expected’ condition of Section 29(5). There is clearly an onus on the taxpayer to draw attention to any important information relevant to a tax liability, particularly if there is some doubt as to the interpretation that can be placed on that information. It is not sufficient just to provide that information if it is hidden away or obscure.