HMRC Tax Discovery Assessments

The normal time limit to raise a Discovery Assessment is 4 years after the end of the tax period for the relevant tax.

For individuals, this is set out in section 34 of the Taxes Management Act 1970, and for companies in schedule 18 of the Finance Act 1998.

These time limits are extended in cases where the underpayment has arisen from careless or deliberate conduct:

• where the taxpayer has been careless, HMRC has 6 years to raise the Discovery Assessment
• where the taxpayer has deliberately underpaid tax, HMRC has 20 years to raise the Discovery Assessment

The time limit can also be extended to 12 years where the tax involves an offshore matter.

Offshore matters

The 12-year time limit to raise a Discovery Assessment applies to offshore matters involving income tax, capital gains tax and inheritance tax.

Income tax and capital gains tax are an offshore matter where the income in question has been raised from another country, such as interest or profit made on funds held outside the UK. This can also apply to changes in the value of goods held overseas and the profits made when they are disposed of.

The 12-year time limit applies to inheritance tax matters where the property being transferred as part of the deceased’s estate is situated or held outside the UK at the time of the transfer.

When deciding whether the underpayment was a result of carelessness or deliberate conduct, HMRC is entitled to consider:

• the education of the taxpayer
• any actions of the taxpayer which suggest they should have known the tax paid was incorrect
• the care and attention of the taxpayer in checking whether they had made mistakes

The factors above are likely to indicate how diligently the taxpayer considered the tax payments and whether they were acting deliberately or carelessly when making them. Carelessness does not mean a mistake; rather, carelessness refers to the care and attention of the taxpayer, and whether it was the same care and attention a reasonable person would have taken when conducting their tax affairs.

Factors which are likely to indicate that the underpayment of tax was deliberate include:

• evidence of an attempt to mislead HMRC
• failure by the taxpayer to notify HMRC of its chargeability
• the taxpayers engagement in a tax avoidance scheme

The presence of the above does not automatically mean an underpayment of tax was deliberate, nor are they the only factors which HMRC will consider. The HMRC Officers will consider all the information available to them and make a Discovery Assessment where they believe it is more likely than not that tax has been underpaid.

HMRC has the burden of proof to show that the conduct leading to an underpayment of tax was deliberate or careless.

HMRC will need to show whether the taxpayer:

• took reasonable care in creating the tax returns
• acted carelessly, for example failing to alert HMRC as soon as it became aware of an inaccuracy in its payments
• deliberately underpaid tax

The standard of proof is on the ‘balance of probabilities’. Expressed numerically, this means HMRC needs to show their assertions are more than 50% likely to be true.

There is a general expectation that, where HMRC makes more serious allegations of a deliberate failure to pay tax, the evidence it provides must be robust and definitive.

If HMRC has found an underpayment to have existed through a Discovery Assessment, it will seek to have that money paid back.

Depending on the reason for the underpayment, the action HMRC takes is likely to vary. Where HMRC believes there has been an honest mistake and that the taxpayer did not act carelessly or fraudulently, HMRC may simply seek recovery of the unpaid tax, i.e. there will be no further penalties.

Where HMRC believes that careless or deliberate conduct led to the underpayment, it may issue a penalty, which can be between 30% and 100% of the Assessment amount. This will need to be paid in addition to the underpaid tax.

Where a company is likely to enter liquidation due to the Assessment amount, penalties can be directly enforced against the company officers.

HMRC may also open a separate criminal investigation if it believes there was a serious and considered attempt to defraud it.

If HMRC believes it is entitled to raise a Discovery Assessment, it will ordinarily write to the taxpayer to explain this.

It is important that this letter is taken seriously – you should take advice immediately as there is normally a limit of 30 days to challenge the Assessment raised.

You will be able to ask for the HMRC Officer who raised the Assessment to Review their decision and put forward representations as to why the decision reached by HMRC is incorrect. The Officer will consider such representations and decide upon withdrawing, amending or maintaining the Discovery Assessment.

If you do not agree with the outcome of the Review, you can ask for an Independent Review by somebody from HMRC who is impartial and was not involved in the original Discovery Assessment.

If the Review and Independent Review outcomes are not the taxpayer’s satisfaction, the next stage is to lodge a formal Appeal in the Tax Tribunal.

We provide our clients with expert advice and guidance throughout the Review process as well as legal representation in all Appeal hearings in the Tax Tribunal.

It is crucial to the success of a case for a taxpayer to instruct an experienced tax disputes solicitor as soon as you become aware of the prospect of a Notice being issued by HMRC.

Our team can provide legal advice and guidance on the appropriate representations to make to HMRC as well as guide you through the complex review and appeal process should you wish to challenge any Tax Assessment. A strict time limit is applied to such matters by HMRC and therefore it is essential that you seek legal advice as soon as possible.