After you have submitted a tax return you might well be reassured that there are statutory time limits set for HMRC to query them. However the reality is that under certain conditions HMRC have considerable power to make what is known as a Discovery Assessment to see if there is additional tax owing resulting from errors in the Return for extended periods of time.
This article addresses this subject from the perspective of personal income and capital gains taxation although the rules for companies are broadly similar.
To use a Discovery Assessment HMRC must show that that the tax returns submitted have:
- Not included all income or capital gains or,
- The assessment of the amount of tax paid was incorrect or,
- Excessive reliefs against tax were given.
It is worth noting that changes in the normal accountancy practices from those prevalent at the time are not reasons for HMRC to use a discovery assessment.
The use of this legislation is dependent on the satisfaction of taxpayer safeguarding conditions:
- The loss must be caused by the return being made carelessly or deliberately; and
- HMRC officer could not have been reasonably expected, from the information made available to him before that time, to be aware of the relevant loss of tax.
Careless or Deliberate Errors
The key point to note is the difference in the time allowed between a ‘careless’ or ‘deliberate’ loss of tax. The ordinary time limit for HMRC to make income tax or capital gains tax assessments of four years after the end of the relevant tax year is extended to six years if the loss of tax was brought about carelessly, or 20 years if brought about deliberately.
The HMRC Officer could not reasonably be aware of the loss
Whilst there might be some argument between whether the error was careless or deliberate this pales into insignificance compared with the whether an HMRC officer could reasonably be expected to be aware of the tax loss.
The provisions are relatively brief and widely drawn, resulting in a considerable body of case law before the courts and tribunals over the years. All of which means, if HMRC have decided to carry out a discovery assessment on your returns then you should seek expert and experienced legal assistance as early as possible.
Some Good News
In a recent case (2107) the relevant First-tier Tribunal (FTT) decided that:
- Since a non-specialised accountant had used the on-line software as encouraged by HMRC relying on its instructions to make the return; and
- Nothing had been hidden and the return was not a complex one
Then the ‘Hypothetical Officer’ could have been reasonably expected to be aware of the errors.
Interestingly, the FTT said that the fact that HMRC’s “process first, check later” approach including the electronic processing of returns, meant it did not identify the mistake until relatively late, was irrelevant. HMRC’s current working practices are not a basis for interpreting the law in a way that is not in line with what it actually says!
Next Step
If you want to find out anything further about this topic then please feel free to call on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email vee@navigatebr.com
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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