One of the over-riding aims of the self-assessment system is to provide taxpayers with certainty around their tax position for the period covered by a tax return. The legislation clearly sets out the standard time limits in which HMRC can enquire into a tax return once it’ has been submitted. For individuals the enquiry window is generally twelve months from the date the return is submitted. However, the legislation also allows discovery assessments to be raised, extending the period in which HMRC can challenge a taxpayer’s self-assessment in certain circumstances.
To raise a discovery assessment HMRC needs to identify an underpayment of tax which it could not reasonably have been aware of when the enquiry window was open. The discovery window is four years from the end of the year of assessment in which the underpayment arose, extended to six years if the taxpayer acted carelessly, 12 years where the underpayment involves an offshore matter and a maximum of 20 years if the underpayment was deliberate or relates to a notifiable tax avoidance scheme.
The Supreme Court decision in the case of HMRC v Tooth has implications for both the time when HMRC must act on a discovery it makes and what constitutes a deliberate inaccuracy in a tax return . The area of discovery assessments has always been a difficult one, with several subjective elements not clearly defined in legislation. Therefore, as with many areas of tax, we must rely on case law to establish the position.
There have been many tax tribunal cases addressing the issue of discovery and more recently the concept of ‘staleness’ has emerged, which has contributed to HMRC losing several such cases. The concept of staleness contends that for HMRC to make a discovery it must discover something new that gives rise to an underpayment of tax and then act on this promptly. As such, a discovery assessment would not be considered valid if it is raised several years after HMRC found an error.
However, the Supreme Court has now quite clearly stated that, in its view, there is no concept of staleness that can be applied to the discovery provisions, and HMRC delay would not invalidate a discovery assessment if the other conditions for making such an assessment are met. This is positive news for HMRC. Less positive for HMRC though, and the reason the Tooth case was ultimately lost, is the question of what constitutes a deliberate inaccuracy.
In the Tooth case, the taxpayer, who had used a tax avoidance scheme , was unable to report losses on his return correctly, but he had included an explanatory note clarifying the position elsewhere on the return. HMRC’s argument was that the taxpayer had deliberately entered the figures in the incorrect section, so his return contained a deliberate inaccuracy. The Supreme Court judges disagreed, confirming that a deliberate inaccuracy requires a degree of conscious dishonesty in attempting to mislead HMRC.
The issues around discovery assessments are complex and there are likely to be many more cases going to the Tribunal following this latest decision. Taxpayers will therefore continue to face an element of uncertainty regarding their historic tax returns.