Discovery Assessment – Tips you need to ‘discover’.
A “Discovery” is a power held by HMRC that allows it to reopen closed periods. There are conditions that apply restricting the situations in which HMRC may raise such an assessment.
Prior to initiating discovery assessment, it is essential for the taxpayer to receive written notification from HMRC.
Every year, HMRC conducts checks to verify the accuracy of the information provided. They go over 10 million self-assessment tax returns it receives
While HMRC may randomly select returns for enquiry, they retain the authority to investigate any tax return.
They may choose taxpayers based on suspicion of irregularities or when significant tax is at stake, deeming their financial affairs worthy of closer examination.
Taxpayers who fall under the purview of specialised teams like the Wealthy Team within Wealthy & Mid-Size Business Compliance can anticipate heightened scrutiny of their financial matters.
HMRC is bound by prescribed rules and procedures that include specific time limits for initiating a formal enquiry.
HMRC possesses the power to initiate a discovery assessment when they discover one of the following:
(a) Failure to assess income or chargeable gains that should have been subject to tax; or
(b) Insufficiency in a tax assessment, either current or past; or
(c) Provision of excessive tax relief.
Differentiate between a "discovery" and an "enquiry." A discovery assessment reopens closed periods, while an enquiry investigates open years.
Know the legislation applicable to various taxes, such as Taxes Management Act 1970 s.29 for Income Tax and Capital Gains Tax, Schedule 10 of Finance Act 2003 for Stamp Duty Land Tax (SDLT), and Schedule 18 of Finance Act 1998 for Corporation Tax.
Recognise situations leading to a loss of tax, such as unassessed tax, insufficient assessment, or excessive tax relief.
If an error or mistake in the tax return led to the loss of tax, no discovery assessment can be made if the return was prepared under the generally prevailing practice at the time.
Understand the conditions for making a discovery assessment, which include taxpayer's careless or deliberate behaviour, HMRC's awareness of the loss of tax, or the issuance of a counteraction notice for a double tax relief scheme.
HMRC bears the burden of proof to demonstrate the validity of a discovery assessment raised.
Be aware of the time limits for discovery assessments based on different circumstances, such as incomplete disclosure (4 years), careless conduct (6 years), offshore matters (12 years), deliberate actions or non-notifiable tax avoidance schemes (20 years).
Understand the PoC principle, where the same under-declaration of tax is presumed to have occurred in previous years unless proven otherwise by the taxpayer.
When receiving a discovery assessment, ensure it has been validly issued by HMRC, as they may sometimes use it to bypass enquiry rules.
If you receive a discovery assessment letter from HMRC, respond promptly. Consider appealing the assessment within the 30-day time limit to HMRC or, if necessary, appeal to the First Tier Tribunal.
Remember to consult an ETC Tax adviser for expert advice on specific cases or further clarification on the topic, click here to contact us. Please note that seeking advice from a tax professional or consulting HMRC's official guidelines is recommended for specific cases or further information on the subject matter.
