EM3253 - Discovery: issuing discovery assessments: examples of where discovery assessments may and may not be made
In all of the examples below, one of the conditions set out in s29(3) (or Paragraph 42) must be met, see EM3232 and EM3233.
Example 1 - Pre-enquiry years
A taxpayer has not submitted a return for 2017 but information suggests that they have untaxed rental income. The taxpayer delivers a return for 2018, which declares the rental income. The enquiry window for 2018 has closed.
HMRC can use information powers to obtain additional information to confirm the suspicions for the tax period 2017 and then make a discovery assessment if the conditions have been satisfied.
Where penalties are appropriate, settlement can be sought through a contract offer if it is less administratively burdensome.
Example 2 - Post-enquiry years
An enquiry is opened into 2017 and shows that a trader has diverted sales into a Building Society account. The amounts shown in the passbook are agreed as the basis of settlement.
The 2018 return has been received and the enquiry window is still open. As the diversions into the Building Society passbook are already known and will be the basis of settlement for this year, HMRC should normally seek to include this year in the contract settlement instead of opening an enquiry.
However, if the enquiry window for the 2018 return is nearing closure HMRC should open an enquiry to protect HMRC’s position, rather than make a discovery assessment.
If the enquiry window for the 2018 return has closed, then HMRC should make a discovery assessment if the conditions have been satisfied.
Example 3 - Additional assessments
A discovery assessment was made for the year 2017 with regards to omitted rental income. A year later further information is obtained showing that there was also omitted trading income for that year.
A further discovery assessment can be made for the year 2017 with regards to the omitted trading income.
Example 4 - Partial closure notice
During a full enquiry HMRC issue a partial closure notice (PCN) which covers matters relating solely to a taxpayer’s employment income.
As HMRC’s enquiries continue, further information comes to light which shows the amendments reflected in the previous partial closure notice were insufficient.
As HMRC are not permitted to reopen the enquiry into the matters covered by the PCN relating to the taxpayer’s employment, under S9A TMA70, HMRC may instead make a discovery assessment.
Example 5 – A notice to file has not been issued within normal time limits
A taxpayer was the sole director of a limited company. Following investigation, HMRC decide to transfer liability from the company to the taxpayer.
HMRC are still within the normal time limits to issue a return.
Normally, HMRC should issue the taxpayer with a return, however there may be instances where it is appropriate to make discovery assessments instead.
In this scenario HMRC should weigh up the facts of the case and decide which route is more appropriate. For example, HMRC may have an accurate measure of omission and decide that discovery assessments are the best course of action.