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The UK Tax System: An Introduction by Malcolm James

Malcolm James, author of ‘The UK Tax System: An Introduction’ outlines the procedures for the raising of discovery assessments by HMRC.

Introduction

Once the time limit for opening an enquiry has passed, or an enquiry has been concluded, it may not normally be re-opened. An Officer may, however, raise a discovery assessment if tax has not been assessed or has been under-assessed or excessive relief has been given because either:

• the Officer of the Board did not have full and accurate facts either due to incomplete disclosure or negligent or fraudulent conduct by the taxpayer or his agents (TMA 1970 s.29(4)); or

• an Officer at the time of making an enquiry or completing enquiries could not reasonably expected to have been aware of the loss of tax (TMA 1970 s.29(5)).

Fraud is the making of statements which are known to be false or the making of reckless statements, whereas neglect is the failure to do what a reasonable person would have done.

A discovery assessment cannot be raised if:

• the return was made in accordance with the prevailing practice at the time the return was made (TMA 1970 s.29(2)); or

• an Officer has made an error in agreeing the return or has failed to consider a point, despite being in possession of all the relevant facts and information, i.e. returns, documents and claims etc. the existence of which was known to, or could be reasonably inferred from other information by an Officer (TMA 1970 s.29(6)).

In the recent case of Langham v Veltema (2004) (STC 544), the Court of Appeal has ruled that an Officer may raise a discovery assessment where an Officer receives new information, even if the taxpayer was not negligent or fraudulent in the submission of the original return. The case involved the valuation of a property transferred from the taxpayer to a company controlled by him. For the purpose of calculating the capital gain shown on his self-assessment return, the taxpayer sought professional advice on the market value of the property, but subsequently, after the period for initiating a self-assessment enquiry had expired, a higher value was agreed (for the purposes of the company’s corporation tax self-assessment).

It was held that a discovery assessment could be raised on the grounds that the revised valuation constituted new information giving evidence that tax had been under-assessed that the Officer could not have been expected to be aware of at the time. HMRC have issued guidance that in this situation, a taxpayer can in most circumstances protect himself from the issue of a discovery assessment by stating in the space for additional information on his return that the gain has been calculated using an independent, professional valuation and giving the name of the person who carried out the valuation. The capital gains section of the tax return requires an entry to be made indicating that a valuation has been used and a copy of the valuation will be submitted. In these circumstances, a discovery assessment cannot be raised. In other situations involving judgement, such as provisions or the analysis of repairs between capital and revenue expenditure, it is normal to provide a detailed analysis with the return, but HMRC take the view that an Officer cannot be expected to know whether an assessment is insufficient without conducting an enquiry. If a taxpayer, however, states that the whole of the expenditure has been treated in a particular manner and gives reasons for this, an Officer may not raise a discovery assessment unless it transpires that this statement is untrue. If a taxpayer takes a different view from HMRC on the interpretation of a point of law and states in the space for additional information that guidance in a certain area has not been followed, a discovery assessment will not be raised provided that the point at issue is sufficiently clear.

An Officer is permitted to review the current return and the two preceding returns and to draw any reasonable inferences therefrom (TMA 1970 s.29(7)). In practice taxpayers are asked to cross‐refer information in the current return to previous returns, however a taxpayer can reasonably expect an Officer to draw inferences from information which should be contained in a permanent note without specifically bringing it to his attention. An appeal against an assessment under TMA 1970 s.29(1) may only be made on the grounds that neither of the two conditions has been complied with (TMA 1970 s.29(8)).

Action should be taken under the self‐assessment enquiry provisions (see Chapter 4.3.) before any action is taken under TMA 1970 s.29.

If HM Revenue & Customs allege fraud, they may instigate criminal proceedings, but it is rare for them to do this. A notable personality who was convicted of fraud in 1987 was the jockey Lester Piggott and in the following year the Inland Revenue attempted to prove similar charges against the comedian Ken Dodd, but Dodd was cleared by the jury. This did not mean that his tax affairs were in order. He was still certainly liable for considerable amounts of arrears of tax, interest and penalties; he was simply cleared of falsifying his tax returns fraudulently.

Time Limit for Raising Discovery Assessment

The time limit for raising a discovery assessment is:

• 5 years from the normal filing date for a return in the case of incomplete disclosure, i.e. 31 January 2012 for 2005/06 returns;

• 20 years from the normal filing date for a return in the case of fraud or neglect, i.e. 31 January 2027 for 2005/06 returns.(TMA 1970 s.36)

In the case of a partnership, lost tax may be recovered from any of the partners (TMA 1970 s.36(2)).

Malcolm James
October 2005

The above article is adapted from ‘The UK Tax System: An Introduction’ published by Spiramus Press Ltd. To order The UK Tax System: An Introduction
click here

About the author

Malcolm James is a Senior Lecturer in Accounting and Taxation at the University of Wales Institute, Cardiff and has lectured widely on the subject of taxation on both professional and undergraduate courses. He has also lectured for the Chartered Institute of Taxation and written a number of articles for their journal Tax Adviser. He also contributes regularly to CCH and Lexis Nexis tax publications. Before becoming a lecturer he worked for several large firms of accountants and also in industry.