Discovery assessments allow HMRC to recover underpaid tax after the ordinary enquiry window has closed, but an assessment is not valid merely because HMRC later disagrees with a return. The officer must make a genuine discovery of an insufficiency and satisfy the statutory conditions that permit an assessment for a year in which a return was filed.
A central issue is often whether the return and accompanying information gave HMRC enough detail to be aware of the actual tax insufficiency before the enquiry window expired.
When Discovery Assessments Can Be Issued
A discovery occurs when an HMRC officer reaches a reasonable conclusion that income, gains or tax have been omitted, an assessment is insufficient or excessive relief has been given. The officer who makes the assessment must first examine the evidence and form that view; a speculative or merely protective assessment does not remove the statutory requirements.
Where the taxpayer filed a return, one of two principal conditions must normally be met. The insufficiency must have been brought about carelessly or deliberately by the taxpayer or someone acting on their behalf, or the information available when the enquiry window closed must have been insufficient for a hypothetical HMRC officer to be reasonably expected to recognise the actual insufficiency.
The statutory conditions for discovery assessments also protect a return prepared in accordance with generally prevailing practice where the issue is a mistake about the basis on which the liability should have been computed.
Discovery Assessments and the Hypothetical Officer Test
The hypothetical officer is assumed to have the general competence, knowledge and skills needed to understand the return and relevant published material. The question is not whether the particular officer dealing with the taxpayer actually noticed the issue.
Information is treated as made available where it appears in the return, accompanying accounts or statements, a relevant claim, documents supplied during an enquiry, or a written notification whose existence and relevance can reasonably be inferred. Relevant returns can include the return for the year under consideration and the two immediately preceding years.
The information-made-available test requires enough disclosure to make the hypothetical officer aware of the actual insufficiency. It is not necessarily sufficient to disclose facts that merely suggest HMRC should ask further questions.
Discovery Assessments and White-Space Disclosures
A white-space note can help establish that HMRC was alerted to a disputed treatment, but only where it identifies the relevant transaction, amount and tax issue with sufficient clarity. A vague statement that “professional advice has been taken” or that “figures may be subject to adjustment” does not explain the potential insufficiency.
A stronger disclosure might identify the receipt, the amount excluded, the legal treatment adopted and the point on which that treatment depends. Where the return follows a position that HMRC may dispute, the disclosure should state enough for a competent officer to understand what tax would be at stake if the treatment were wrong.
Sending unrelated correspondence to HMRC does not necessarily make the information available for discovery purposes. The communication should be in writing, connected with the relevant tax position and sufficiently clear about its relevance.
Carelessness Creates an Alternative Route
Even where the return contained enough information to alert HMRC, an assessment may still be possible if the loss of tax was brought about carelessly or deliberately. Behaviour must therefore be considered separately from disclosure.
For example, a taxpayer may provide no meaningful explanation for an omitted income source and also fail to take reasonable care. HMRC may rely on the behaviour condition. Conversely, where the taxpayer took reasonable care but did not disclose enough to reveal the insufficiency, HMRC may rely on the hypothetical-officer condition within the applicable time limit.
The burden rests on HMRC to establish the conditions validating the assessment, although the taxpayer must still demonstrate why the amount assessed is excessive when challenging the quantum.
Time Limits Depend on the Circumstances
The normal assessment period is generally four years after the end of the relevant tax year. It can extend to six years where the tax loss was brought about carelessly and to 20 years where deliberate behaviour applies. A 12-year period may apply to certain offshore matters, subject to statutory restrictions.
A discovery assessment should therefore be reviewed for the existence of a discovery, the statutory condition relied upon, the assessing time limit and the amount assessed. HMRC’s explanatory letter should identify the basis on which the assessment has been issued, although the absence of a detailed letter does not by itself settle the legal validity.
An HMRC tax investigation involving discovery should examine both the original return disclosure and the evidence concerning behaviour. Where the dispute centres on what HMRC could reasonably have understood before the enquiry deadline, an HMRC compliance check response should preserve the returns, attachments, correspondence and proof of delivery relied upon.
Disclaimer: This article is provided for general guidance only and does not constitute personal tax, legal or financial advice. The correct tax treatment depends on the specific facts, applicable legislation and HMRC practice at the relevant time. You should contact us for advice tailored to your circumstances before taking or refraining from any action.
