Discovery Assessments - Clarification of Law
30 June 2008
The recent Special Commissioners' case of Corbally-Stourton v HMRC, has added clarity to the law on HMRC's ability to raise a discovery assessment.
HMRC may open a routine enquiry into a taxpayer's return if notice is given to the taxpayer within a period of 12 months from the filing date of a return. In this case the filing date was 31 January 2000. HMRC attempted to issue such a notice but because of administrative errors the notice was never issued and so HMRC were no longer able to open an enquiry.
A discovery assessment can be issued where there has been a loss of tax to the Crown. HMRC can make an assessment in the amount which they consider is needed in order to make good to the Crown the loss of tax. This effectively allows HMRC a second bite at the cherry as HMRC have 6 years within which to make a discovery assessment (to be reduced to 4 years following Finance Bill 2008).
However, there are safeguards: circumstances in which HMRC will be 'shut out' for making a discovery assessment. The relevant restriction for the purposes of this case is that HMRC are shut out where at the end of the normal enquiry period (in this case 31 January 2001) "the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the [circumstances giving rise to the loss of tax]".
While there were many issues for determination in this case, of key importance was the level of disclosure that needed to be made on the taxpayer's return in order for HMRC to be shut out from making a discovery assessment on these grounds.
The law in this area has been very uncertain since the 2004 case of Veltema v Langham. The main area of concern, until the case, has been that it has not been known what level of awareness an officer of HMRC must have before he is shut out from making a discovery assessment. The Special Commissioner accepted that the test should be whether a reasonable officer would conclude that it was more probable than not that there had been a loss of tax. In a key passage the Special Commissioner stated:-
"Thus in my view it is not required that the officer be aware that there was in truth an insufficiency or that he be aware that it was beyond all reasonable doubt that there was an insufficiency, but merely that the information should enable him to conclude on balance that there was an insufficiency. Again a mere suspicion would not be enough, but, a conclusion in relation to which he had some residual doubt may well be sufficient. If he could reasonably have been expected to have come to such a conclusion before the later of the times mentioned he is precluded from making a discovery assessment".
On the particular facts of the case, although the taxpayer had given fairly full disclosure on her tax return, it was not enough to satisfy the Special Commissioner that it was "probably wrong".
Burges Salmon acted for the taxpayer in this case. While it is disappointing that the decision went against her on the facts, the judgement is none the less welcome. It should bring some degree of certainty to this area of tax law and provide comfort to taxpayers going forward. It is likely to be cited and relied upon in future cases.