Under TMA 1970, s 29, HMRC can raise an assessment where it ‘discovers’ that:
- income or gains should have been assessed to tax but have not been; or
- an assessment to tax is or has become insufficient; or
- any relief given is or has become excessive.
It may then assess the insufficiency provided it stays within the overall time limits for raising assessments (4 years, 6 years or 20 years, depending on the circumstances).
Where taxpayers have submitted a self-assessment return, a discovery assessment for a tax year can only be made after the enquiry window has closed or any enquiry raised by HMRC has been concluded, and one of two conditions must be fulfilled:
- the insufficiency must have been brought about carelessly or deliberately by the taxpayer or someone acting on their behalf; or
- at the time when the enquiry window closed or any enquiry into the return was concluded, the HMRC officer could not reasonably be expected to have been aware of the insufficiency on the basis of the information made available to them before that time.
The requirement for newness
Those are the statutory rules on when discovery assessments can lawfully be raised. However, the courts have developed another principle which is well set out in the following quote from Corbally-Stourton v HMRC Commrs  UKSPC SpC 00692:
‘A “discovery” is something newly arising, not something stale and old. The conclusion that it is probable that there is an insufficiency must be one which newly arises (from fresh facts or a new view of the law or otherwise).’
In other words, for there to be a discovery, there must be something new.
In Charlton & others v HMRC  UKUT 770 (TCC), the Upper Tribunal explained this concept of newness (at para. 37):
‘All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight.
The requirement for newness does not relate to the reason for the conclusion reached by the officer but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment.’
Those passages were approved by the Court of Appeal in HMRC v Tooth  EWCA Civ 826, which I wrote about on this blog in September 2019. In that case, HMRC sought to remove the taxpayer’s loss relief claim by opening an enquiry. However, it proceeded under the wrong statutory provision, so when it realised that the enquiry was invalid, it raised a discovery assessment instead.
In the Court of Appeal, Floyd LJ addressed the question whether HMRC had ‘discovered’ the insufficiency. Floyd LJ said that, for a discovery assessment to be valid, HMRC had to have newly discovered that an assessment was insufficient, not that the wrong mechanism had been used to address the insufficiency. He said (at para. 61):
‘It is [the officer’s] new conclusion that the assessment is insufficient which can trigger a discovery assessment. A discovery assessment is not validly triggered because the officer has found a new reason for contending that an assessment is insufficient, or because he or she has decided to invoke a different mechanism for addressing an insufficiency in an assessment which he or she has previously concluded is present.’
On the other hand, in the earlier case of Pattullo v HMRC Commrs  UKUT 270 (TC), the officer investigating a tax avoidance scheme used by the taxpayer made a valid discovery when he concluded, on the basis of the decision of the Court of Appeal in another case, that the scheme did not work. When the Court of Appeal made its decision, it ‘newly appeared’ to the officer that an insufficiency of tax had indeed arisen, and that change of view amounted to a discovery.
Staleness, in the context of a discovery, is not to be confused with the statutory time limit for raising an assessment (Pattullo). That said, once a discovery is made, if HMRC delays too long in issuing an assessment, that could bring the question of staleness back into play. In Beagles v HMRC  UKUT 380 (TC), HMRC did not raise a discovery assessment until two and a half years after the date on which it had made the discovery that an avoidance scheme in which the taxpayer had participated did not work.
HMRC still does not accept that discovery assessments must be new and not stale (see HMRC Commrs v Hicks  UKUT 12 (TCC)), despite the Upper Tribunal in Beagles and the Court of Appeal in Tooth having come firmly down in favour. HMRC’s argument is based upon the absence of any statutory authority for the principle.
In Jafari v HMRC  UKFTT 692 (TC), the taxpayer was unrepresented and HMRC did not even mention the principle of staleness in the course of the proceedings. The tribunal was highly critical: in not even drawing the tribunal’s attention to the principle, HMRC ‘did not act with the necessary candour’; indeed, HMRC ‘failed to meet its obligation to “help the Tribunal to further the overriding objective” of dealing with cases fairly and justly under Rule 2(4)(a) of the Rules’.
In effect, HMRC tried to dispense with the need even to argue against the principle by not referring to it at all, hoping that the tribunal would let it pass by default. When recalling his early days at the bar, the Lord Chancellor in Gilbert and Sullivan’s Iolanthe, sang:
‘I will never throw dust in a juryman’s eye
(Said I to myself – said I)
Nor hoodwink a judge who is not over-wise
(Said I to myself – said I)’.
Happily the tribunal judiciary in Jafari were not hoodwinked.
Watch our YouTube video where David Wright and Mark McLaughlin discuss discovery assessments upheld due to careless advice; a case that was recently reported in the current awareness section of the Bloomsbury Tax Online service.