DISCOVERY ASSESSMENTS - 25.10.2021

Supreme court says discovery assessment not “stale”

Where HMRC uncovers information that a taxpayer failed to disclose, it can make a discovery assessment outside of the normal enquiry window to recover any underpayment. Why does a Supreme Court decision cut clients’ defence options down?

Long in the Tooth

The details in HMRC v Tooth [2021] UKSC 17 (see Follow up ) were complex, but can be summarised as follows:

  • Mr Tooth (T) claimed a carried back employment-related loss of over £1 million in his 2007/08 tax return (filed in 2009). The loss arose through use of the now ineffective Romangate scheme.
  • Due to software constraints, the loss generated by the scheme was claimed in the partnership pages of T’s return. A full disclosure note was included in the return, which ended with “I assume you will open an enquiry”.
  • While HMRC did open a form of enquiry into the return, it transpired that it was opened under an ineffective statutory power following a 2013 ruling from the Supreme Court.
  • After the ruling, HMRC issued a discovery assessment (and relied on a 20-year enquiry period), arguing that T had deliberately brought about an insufficiency.

At the First-tier Tribunal, Upper Tribunal, and the Court of Appeal, the tribunal/court sided with Mr Tooth, although differing conclusions were reached as to whether there had been a deliberate inaccuracy in T’s return, or whether HMRC had actually made a discovery.

Inaccuracy?

The Supreme Court found that there was no deliberate inaccuracy to be found in T’s 2007/08 tax return. The conditions to make a discovery assessment within the time limit HMRC was seeking to rely on were therefore not met. HMRC had applied a “tunnel vision” approach, which looked at whether a specific part of T’s tax return - the partnership pages - in isolation to the whole, contained an inaccuracy. While the Court of Appeal agreed with this approach, the Supreme Court rejected it, noting that there was a need to interpret the meaning of each relevant part of the tax return by reference to its place in the context of the document as a whole. However, this was not the most interesting part of the decision.

Discovery still fresh

Although the fact that T had not brought about the insufficiency deliberately was enough to dismiss the appeal, the Supreme Court went on to discuss the concept of “staleness”, i.e. situations where an assessment is made based on a discovery that was made some time previously, but remains unactioned for a significant period. The Supreme Court accepted HMRC’s position, that the question of whether there is a discovery for the purposes of s.29(1) Taxes Management Act 1970 depends upon the state of mind of the individual HMRC officer who decides to make the assessment. There is no concept of HMRC having collective knowledge such that if one officer makes a discovery that is to be regarded as a discovery made once and for all by HMRC as a whole. Therefore, there had been a valid discovery of an insufficiency of tax in T’s return by HMRC.

Pro advice. This appears to remove one string from your bow when objecting to discovery assessments issued to your clients. However, remember that the key date for the time limit HMRC has to raise the assessment runs from the end of the relevant tax year, not the date the discovery is made.

When appealing against a client’s discovery assessment, you cannot argue that the discovery has gone stale if HMRC takes significant time to act upon it. However, you should carefully check whether the statutory time limit, which runs from the end of the relevant tax year, not the date of the discovery, has been correctly observed.

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