A key feature of the self-assessment system is finality. The time limit for HMRC to make enquiries into information given in a return is generally linked to the date it was submitted. For personal tax returns delivered by the filing date (generally 31 January following the end of the tax year), the enquiry window closes 12 months after the delivery date. Once this date has passed, a taxpayer can usually assume that his affairs for that year are final.
However, finality of a return within the above timeframe can be jeopardised if HMRC discover a loss of tax. The term ‘loss of tax’ is widely defined to include not only tax on income or gains not returned or assessed, but also an under-assessment of tax or an excessive relief from tax. For individuals, the normal time limit for HMRC to make an assessment is four years after the end of the tax year in question, although in cases of where there has been careless or deliberate behaviour resulting in the loss of tax, the four-year window may be extended to 6 years (‘careless’) or 20 years (‘deliberate’) respectively.
Many taxpayers are not aware of HMRC’s discovery powers, but even where they are aware of the possibility of discovery outside the enquiry window, they need to be aware that the subject of disclosure is itself not entirely free from doubt and may still be in a state of evolution.
What is a ‘discovery’?
The basic condition for a discovery assessment to make good a loss of tax is that an HMRC officer discovers income or gains which have not been assessed, an insufficient assessment, or an excessive tax relief. However, this power is restricted in its application. Firstly, if the taxpayer has delivered a tax return containing an error or mistake, HMRC cannot make a discovery assessment if the return was based on the practice generally prevailing when it was made. Secondly, HMRC cannot make a discovery assessment unless one of the following conditions is satisfied:
•the loss of tax, etc was caused by careless or deliberate behaviour by the taxpayer or a person acting on his behalf; or
•when HMRC can no longer enquire into the return, the officer could not have been reasonably expected from the information previously available to be aware of the matter giving rise to the discovery.
Make it ‘available’
Information is ‘made available’ to the HMRC officer if it is contained in the relevant tax return or claim, or in any accompanying accounts, statements or documents. This condition is also satisfied if information has been provided to HMRC in compliance with an information notice (issued under FA 2008, Sch 36, Pt 1), which sets out HMRC’s powers to obtain information and documents.
Information is also made available for these purposes if an HMRC officer could reasonably be expected to infer the existence and significance of it, either from the above sources or in a written notification from the taxpayer.
In this context, reference to the taxpayer’s return includes returns submitted for either of the two immediately preceding periods and, for taxpayers in partnership, for the relevant tax year or either of the preceding periods. Information in the partnership return is deemed to form part of the taxpayer’s return.
The taxpayer has the right of appeal against a discovery assessment on the ground that neither of the above conditions has been satisfied.
Practical Tip :
Taxpayers are required to exercise their judgment in providing the necessary level of disclosure. HMRC encourage submission of the minimum necessary, yet warn that ‘Information will not be treated as being made available where, the total amount supplied is so extensive that an officer 'could not have been reasonably expected to be aware' of the significance of particular information and the officer's attention has not been drawn to it by the taxpayer or taxpayer's representative.’
In the case of returns where discovery is a possibility, taxpayers must give careful thought to the question of disclosure.