< Go Back Court of Appeal now confirms that 'Discovery'Assessments cannot be made if the 'Discovery' has become 'stale' before the assessment is made Posted: Jun 11, 2019
Hot on the heels of the earlier decision by the First tier Tax Tribunal in
Hargreaves, in the Court of Appeal confirmed that HMRC's delay in raising a discovery assessment rendered it invalid. Raymond Tooth v HMRC  EWCA 826
The normal time limit for a Discovery Assessment 4 years, but this is extended to 6 years if the taxpayer was careless or 20 years if the error was deliberate (Watch out for the changes from April 2019 for offshore related matters though when the normal and careless limits are extended to 12 years).
Tooth used a tax scheme to create an employment loss in 2008/09 and this loss was then used against his 2007/08 income The loss was inadvertently included on the partnership
pages of his Return: disclosure of this fact, and the reasons, was
included on his return. Disclosures about the scheme were also included in the return, including a note that a DOTAS number had been applied for but not yet received. HMRC enquired into the 2007/08 return on 14 August 2009, but this
was under the wrong section (Sch 1A rather than s9A of TMA 1970). The tax scheme was defeated in 2012 and HMRC raised a discovery assessment in 2014 (now some six years after the tax year in question).
The First Tier Tribunal and the Upper Tier Tribunal found for the taxpayer; HMRC was allowed to appeal to the Court of Appeal.
The Court of Appeal considered the concept of staleness and then reviewed the timeline of HMRC's enquiry. It concluded that HMRC had been aware of the insufficiency on the tax
return very early on, however HMRC had not acted then and had delayed in
raising the correct type of assessment. As a consequence, when it did
eventually raise an assessment, there was no discovery, what they had found was no longer new and
this made the assessment invalid.
HMRC had also appealed on the basis that the taxpayer's behaviour was deliberate. The court divided this into three points:
(i) whether there was an inaccuracy in the return.
(ii) whether that inaccuracy was brought about deliberately.
(iii) whether the deliberate inaccuracy resulted in an insufficiency in the assessment or a loss of tax.
The Court of Appeal concluded that there was no inaccuracy on the return as, although the losses were included in the wrong place of the return, he
had fully explained what he had done and, therefore, there was no deliberate inaccuracy.
There was insufficiency in the assessment because
the entry of a figure for a partnership loss in the relevant box on the return then fed into the computerised computation of Mr Tooth's tax liability for the
relevant year, this entry did cause his
self-assessment to be insufficient but it was not brought about deliberately.
The Court of Appeal have confirmed the position previously set out in
Hargreaves. HMRC use the authority to raise 'Discovery Assessments' routinely in investigations enquiries and 'compliance checks' and they can be a powerful weapon. As this power is utilised so readily and easily by investigators in HMRC this case will have been a suprise for many in HMRC, especially those who have sat on cases and information for too long and have not made timely assessments in the mistaken belief that they have all the time in the World.
This case also demonstrates the importance of making appropriate disclosures in returns to ensure that HMRC, if they chose not to enquire, cannot rely on the hope of 'discovery' when the information needed to understand the position was presented to them long beforehand.
Dealing with a large organisation like HMRC and all of the complexities of the relevant legislation can be
daunting but sometimes HMRC don't get it right and they can can often exaggerate liabilities if unchecked. If you're having
trouble with the taxman,
contact us in complete confidence.
****************Update - See SUPREME COURT decision re TOOTH - May 2021*************