UK and International Tax news
Supreme Court Rules On Discovery Assessment Case
Thursday 27th May 2021
The Supreme Court has recently had to consider whether HMRC had justification for a discovery assessment and whether delay prevented an assessment.
In R&C Commrs v Tooth [2021 UKSC 17], the SC had to consider two main issues, firstly, whether an insufficiency of tax had been caused deliberately by the taxpayer which could justify a discovery assessment by HMRC made within the extended 20 year time limit, and secondly whether the discovery assessment was ‘stale’ and therefore invalid.
Generally, where HMRC are not content with the accuracy of the taxpayer’s self-assessment to income tax (and capital gains tax), HMRC may open an enquiry into the return and amend the assessment. The enquiry must be opened within one year of the filing of a timely return. If HMRC “discover” that an assessment is or has become insufficient, then subject to satisfying one or other of two conditions, they may make a fresh assessment (a “discovery assessment”) in the amount which they think will be sufficient to make good to the Crown the loss of tax.
The standard time limit for the making of an assessment by HMRC, including a discovery assessment, is four years from the end of the year of assessment to which it relates. If the insufficiency is brought about by carelessness, the time limit is extended to six years. If it is brought about deliberately by the taxpayer it is extended to 20 years.
In this case, the taxpayer had participated in a tax avoidance scheme in 2008/09 [‘Romangate’] which was designed to produce an employment related loss which could be carried back to 2007/08. There was however a technical issue with the tax return software which resulted in a wrong entry inserted into a box on the electronic form reserved for partnership losses rather than the taxpayer’s own SA return. The taxpayer did include an explanation of this in the white space of the partnership return.
HMRC did not protect their position by opening an enquiry into the taxpayer’s return but issued a discovery assessment only in 2014 alleging that the insufficiency in the return had been brought about deliberately, relying on the 20-year period within which to make the assessment.
The taxpayer appealed to the FTT which held that HMRC had made a discovery but the assessment was invalid because the insufficiency of tax had not been brought about by a deliberate inaccuracy and therefore the 20 year time limit for making a discovery assessment did not apply.
HMRC appealed to the UT which found that HMRC had not made a discovery in 2014 and there was no inaccuracy in the return viewed as a whole. HMRC then appealed to the Court of Appeal which agreed with the UT that HMRC had not made a qualifying discovery and dismissed the appeal although it would have considered that there had been a deliberate inaccuracy in the return.
The SC unanimously dismissed HMRC’s appeal, agreeing with the FTT that there had been a discovery by HMRC but the tax return was neither inaccurate nor deliberately inaccurate. The alleged inaccuracy had to be looked at in the context of the tax return as a whole and not just in part. However, the SC found that the concept of ‘staleness’ does not exist in the context of discovery assessments, contrary to several recent Tribunal decisions. The decision is likely to have significant implications across all taxes.
If you would like further information on this case, please contact Keith Rushen on 0207 486 2378.
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