What’s HMRC up to now?
Mark McLaughlin points out that it is important to understand HMRC’s powers and their potential implications.
IT IS IMPORTANT for taxpayers and advisers to understand the possible ramifications when HMRC exercises its powers, so that they can respond in the most appropriate manner.
For example, HMRC may make a ‘discovery’ assessment after the normal ‘window’ for commencing an enquiry into an individual’s self-assessment return has closed, if certain conditions are satisfied (TMA 1970, s 29; similar rules apply to companies).
HMRC commonly uses its discovery powers if (for example) the taxpayer has undeclared income or gains, or if HMRC considers that the taxpayer’s self-assessment return understates their liability. In broad terms, HMRC may assess tax in relation to closed years within extended time limits if it discovers that the tax undeclared or under-assessed is attributable either to:
- careless or deliberate conduct of the taxpayer (or a person acting on his behalf); or
- something of which the HMRC officer could not have been reasonably expected to be aware at the time the enquiry window closed (or an enquiry closure notice was given) based on the information made available to him before that time.
A discovery assessment often involves a degree of guesswork by HMRC, and the income assessed may therefore be excessive. There is a general right of appeal against a discovery assessment, within 30 days after the date on which the assessment was issued (TMA 1970, s 31).
Discovery – or a determination?
Some taxpayers receive a notice to file a tax return from HMRC but do nothing, even where tax is due. Without a completed tax return, HMRC will not know the amount of tax payable, but still need to make some form of estimate of the tax liability.
In such circumstances, HMRC may consider making a determination of the tax liability, within three years beginning with the ‘filing date’ (i.e. normally 31 January following the end of the relevant tax year). The determination is treated as a self-assessment, but only until the taxpayer files an actual tax return within the time limits for superseding the determination.
Importantly, there is no right of appeal against a determination, because the taxpayer’s return automatically replaces the determination without the need for an appeal.
The tax charged by the determination is payable until replaced by the self-assessment return, at which point any tax overpaid can be repaid. The due date for payment of the tax charged by the determination is the due date that would have applied if the self- assessment return had been filed on time. However, the determination can only be replaced by an actual self-assessment return made within the above three-year timeframe, or if later within 12 months of the date of the determination (TMA 1970, s 28C).
To some taxpayers, a discovery assessment and a determination might seem similar. However, it is important to distinguish them.
For example, in Huntley v Revenue and Customs  UKFTT 0760 (TC), the taxpayer, a shop proprietor since 1996/97 or before, received notices to file (in the form of blank tax returns) for most years. However, the taxpayer generally did not send completed tax returns to HMRC or pay any tax. HMRC subsequently issued discovery assessments in September 2013 for the tax years 1996/97 to 2011/12. The taxpayer appealed. A statutory review upheld the assessments. The taxpayer took no further action.
In July 2016, the taxpayer submitted four tax returns for the tax years 2008/09 to 2011/12. However, HMRC did not accept them (he also submitted a tax return for 2012/13, which HMRC accepted as it was not one of the tax years assessed). In November 2016, the appellant lodged 12 tax returns with HMRC for the tax years 1996/97 to 2007/08. HMRC did not accept those returns. Thus, in effect the taxpayer filed 16 tax returns for all the years for which HMRC had raised discovery assessments.
The taxpayer applied to the First-tier Tribunal to be allowed to make a late appeal against HMRC’s refusal to accept or process his tax returns. However, the tribunal held that it had no jurisdiction over HMRC’s refusal to accept and/or process the 16 tax returns, and therefore the proceedings must be struck out.
While the tribunal had no jurisdiction over the matter, its view was that the taxpayer’s tax returns could not displace the discovery assessments. The taxpayer was apparently confused between determinations (which cannot be appealed against but can be displaced by filing returns within the statutory time limit) and discovery assessments. The tribunal pointed out that there is no statutory provision allowing a discovery assessment to be displaced by a tax return. The discovery assessments were valid and now beyond challenge as an appeal against them had been unsuccessful.
The distinction between a discovery assessment and determination was important to the taxpayer in Huntley as his returns showed significantly less tax owing than HMRC had assessed. His exposure to additional tax liabilities might have been prevented, had he taken his appeal against the discovery assessments to the tribunal within the statutory time limit.
It is perhaps surprising that HMRC issued discovery assessments as opposed to determinations. However, the tribunal perhaps hit the nail on the head when speculating that it may well have been because for most tax years they would have been too late to issue determinations.
By Mark McLaughlin