Were HMRC’s assessments issued in time?

Discovery assessments

Before digging into the case it’s worth setting out the tax rules at the centre of the dispute between HMRC and Mr Dougan (D). They relate to so-called discovery assessments and allow HMRC to demand tax for earlier years where it believes a taxpayer has underpaid because of an error or omission in their tax returns. If it occurred despite the taxpayer taking reasonable steps necessary to avoid it HMRC can go back four years, if the error occurred because the taxpayer was careless the time limit is six years and if the error was deliberate it can go back 20 years. In this case HMRC was gunning for the maximum time limit.

Case background

D had a history of managing his tax affairs badly and was frequently late submitting his tax returns. In response HMRC issued “determinations”. These are a tax demand based on its guess at the taxpayer’s liability. D paid the determinations. HMRC upped the ante by increasing the demands. D again paid up. Trap.  There’s no right of appeal against determinations. The only way to overturn them is to submit the outstanding tax returns to which they relate.

Returns submitted

Some years later HMRC decided to up the ante once more. It concluded that if D had the money to pay the determinations, he must have significant income to fund this. This “discovery” prompted it to issue stiff assessments going back four to eight earlier years. This got D’s attention. With the help of his accountant the overdue tax returns were submitted with additional claims refuting the discovery assessment. One assessment was cancelled and appeals were accepted for the others and eventually considered by the Tribunal.

Deliberate or not?

Because of the time limits we’ve already explained, two of the discovery assessments could only stand if D’s delay in submitting his tax returns was a deliberate omission resulting in underpayments of tax. For the remaining assessment to stand HMRC only had to show that D had acted carelessly. For the years concerned D’s tax affairs were complicated, involving two businesses, one making good profits the other losses. At the time D took advice from his accountant regarding the profits and losses and decided he did not owe any tax. This turned out not to be entirely correct.

Tribunal decision

The judges concluded that D had been careless but had not made deliberate omissions. Filing the tax returns late was not deliberate tax avoidance because D genuinely (albeit mistakenly) believed he didn’t owe any tax based on his knowledge of his finances and advice from his accountants. As a result, two of the assessments were invalid as they were issued later than the time limit (six years) allowed for careless errors. The other stood but was amended to reflect D’s actual income.

Our view. Sticking your head in the sand only works for so long. HMRC will keep increasing the pressure until it receives a response. D will no doubt have incurred significant extra accountants’ fees for fighting his case compared to those he would have paid had he stayed on top of his tax affairs. A lesson for us all!