EM3220 - Discovery: legislation and time limits: HMRC’s interpretation of the legislation

Definition of discovery

A discovery occurs when an officer of HMRC reaches a conclusion or forms an opinion that there is an insufficiency of tax. This conclusion/opinion must be a reasonable belief.

Making an assessment

Making an assessment means taking a decision to assess. This is distinct from the issuing of a notice of assessment, which may either be carried out by the assessing officer or entrusted to another officer of HMRC.

The notice of assessment does not need to be issued within the relevant time limit. It should be issued shortly after making an assessment. This can be after the time limit to make an assessment has expired, but it must be within reason with no significant delay.

Careless behaviour

Where a taxpayer has submitted a return, one of the two qualifying conditions that will permit an officer to make a discovery assessment is found at S29(4) TMA 7: the loss was “brought about carelessly or deliberately.” ‘Brought about carelessly’ has the same meaning as at s36(1) TMA 70, see s118(5) TMA 70 and CH53400 for the statutory definition of ‘brought about carelessly’ and the effect on assessing time limits of a loss being brought about carelessly.

The insufficiency of tax must relate to the relevant act of carelessness. This includes the situation where a person provides information to HMRC and later discovers that the information was inaccurate but fails to take reasonable steps to inform HMRC of that inaccuracy.

Deliberate behaviour

The S29(4) condition can also apply to a loss ‘brought about deliberately’.

Deliberate behaviour occurs when a taxpayer knowingly or intentionally does something or fails to do something they know they should do, which results in a loss of tax. This includes a situation that arises because of a deliberate inaccuracy in a document given to HMRC, and there is a deliberate intention to mislead HMRC. See CH53700 for further information on ‘brought about deliberately’ and the effect on assessing time limits of a loss being brought about deliberately.

Time Limits

Normal Time Limit

The normal time limit for making a discovery assessment is 4 years after the end of the relevant tax period.

The normal time limit also applies to discovery amendments made under s30B(1) TMA 1970. S30B(2) TMA 1970 does not have a time limit to make the consequential amendments to the partners return.

Extended Time Limits

The time limit is extended to 6 years where the discovery assessment behaviour linked to the loss of tax was caused by carelessness by the taxpayer or a person acting on their behalf.

The time limit is extended to 12 years for income tax, capital gains tax, and inheritance tax involving offshore matters or offshore transfers.

The 12 year time limit only applies where the lost tax involves an

  • offshore matter, see CH53520, or
  • offshore transfer which makes the loss of tax significantly harder for HMRC to identify, see CH53530 and CH53540.

The time limit is extended to 20 years if the assessment involves a loss of tax

  • brought about deliberately by the taxpayer or a person acting on their behalf, with a deliberate intention to mislead, or
  • attributable to a failure by the taxpayer to notify chargeability, or
  • attributable to an avoidance scheme where the person has not provided the information required by Section 309, 310 or 313 of FA04.
  • attributable to arrangements which were expected to give rise to a tax advantage in respect of which the person was under an obligation to notify the Commissioners for Her Majesty’s Revenue and Customs under section 253 of the Finance Act 2014 (duty to notify Commissioners of promoter reference number) but failed to do so.

For Failure to Notify only, for either

  • ITSA discovery assessments where the year of assessment is 2008-2009 or earlier, or
  • CTSA discovery assessments where the end of the accounting period to which the assessment relates is before 1 April 2010

HMRC must be able to show that the loss of tax was attributable to negligent conduct, not carelessness. Also, there must be a direct link between the act of failing to notify and the resulting loss of tax.

These time limits also apply to discovery amendments made under s30B(1) TMA 1970. The amendment must be done before the end of the relevant time limit. S30B(2) TMA 1970 does not have a time limit to make the consequential amendments to the partners return.

Wherever possible, you should also try to make the amendments to the partners’ returns during this time limit.