Case Report: Discovery Assessment Conditions Clarified

Moreover, the UT held that the discovery assessment regime was intended by parliament to align the basis of assessment and the applicable time limit with the conduct relating to each loss. As such, careless errors brought into the discovery assessment by other deliberate errors were still subject to the 6-year time limit for careless behaviour and not the 20-year limit for deliberate behaviour.

Context

• During the relevant period, the appellant was self-employed, their trading activities being providing consultancy services.
• The appellant’s original appeal to the FTT related to 6 discovery assessments (issued on 3 July 2018) under s.  29, TMA 1970 in relation to the tax years 2009/10-2015/16 (excluding 2014/15 which was part of an in-time enquiry and was followed by a closure notice).

Discovery Assessment Legislation

• The legislation is found in s. 29, TMA 1970 and, broadly, where there is an insufficiency of tax for a year of assessment, a discovery assessment may be made.
• Where the insufficiency of tax is attributable to an error in the taxpayer’s tax return (as in this case), one of two conditions must be satisfied for the discovery assessment to be valid.
• The conditions are found in s. 29(4) and (5) and are as follows:
  1. The insufficiency of tax must be brought about by the taxpayer (or a person acting on their behalf) acting carelessly or deliberately. (“s. 29(4)”)
  2. The insufficiency of tax was not reasonably apparent based on the information available when the normal time limits for enquires ceased, or when a closure notice was issued for an in-time enquiry. (“s. 29(5)”)
• In this case, s. 29(5) was apparently not met or relevant and only s. 29(4) was considered (i.e. whether the behaviour was careless or deliberate).
• In terms of time limits, the time limit for errors due to reasonable care is the ordinary 4-year time limit in s. 34, TMA 1970 and careless and deliberate behaviour is subject to the 6 and 20-year time limits in s. 36, TMA 1970 respectively.

The FTT Appeal

• Four categories of insufficiency were identified:
  • Undeclared bank receipts (“Bank Statement insufficiency”),
  • Personal expenditure on a corporate credit card treated as income (“Credit Card insufficiency”),
  • Capital allowances claimed for a vehicle (“Capital Allowance insufficiency”), and
  • A home-office expense claim (“Deductible Expense insufficiency”).
• The FTT concluded that the Bank Statement Insufficiency was deliberate, the Capital Allowance and Deductible Expense Insufficiency were careless, and the Credit Card Insufficiency was a mistake those arose despite the appellant taking reasonable care.
• HMRC’s argument was that once deliberate conduct was established regarding the bank insufficiency, HMRC could assess under s. 29(4) for the Credit Card Insufficiency (despite reasonable care) and that the 20-year time limit would apply.
• However, the appellant argued that the assessments should exclude any mistake brought about by taking reasonable care and that any careless errors should be removed from the assessments for the tax years 2009/10 to 2011/12 (being outside the 6-year time limit for careless errors).
• The FTT’s view of the relevant law in summary, contrary to that of HMRC, was that it was open to a taxpayer to show that an assessment which included some element of deliberate insufficiency, whilst prima facie valid, was excessive to the extent that it also included other insufficiencies in respect of which:
  • Conduct falling within s. 29(4) had not been shown, or
  • The time limit for assessment under s. 36 had passed.
• As such, the FTT upheld the appellant’s appeal in full.

UT Appeal

Arguments

• HMRC now appeal the FTT’s decision to the UT on the grounds that once deliberate conduct is found for any insufficiency for a particular year, the assessment for that year is valid as a whole and the 20-year limit applies.
• The appellant argued that s. 29 confers a power with reference to a particular loss of tax and the conditions of s. 29 and the time limits apply to the particular loss of tax.

Decision

• The UT noted that the conditions in s. 29 that must be met for a valid discovery assessment refer to “the situation mentioned in subsection 1” which directs attention to a particular loss discovered.
• Therefore, s. 29(4) is asking whether the particular loss was brought about carelessly or deliberately with no indication that the causal link be satisfied merely in part.
• Consequently, the UT held that a loss brought about by taking reasonable care could not be brought into a discovery assessment by reason of culpable conduct relating to a different loss.
• In relation to the time limit argument (so far as it relates to errors arising due to reasonable care), s. 36 speaks of “an assessment” and presupposes that there is already a valid discovery assessment.
• As such, where there is an insufficiency brought about despite taking reasonable care, s. 29(4) is not satisfied and (assuming s. 29(5) is not applicable) there cannot be a valid discovery assessment on such an insufficiency and, therefore, the time limit in s. 36 cannot exist.
• In terms of whether a deliberate mistake in a discovery assessment allows HMRC to use the 20-year time limit for all careless mistakes, the UT held that the discovery assessment regime was intended by parliament to align the basis of assessment and the applicable time limit with the conduct relating to each loss.
• As such, the UT dismissed HMRC’s appeal and the taxpayer won.

Summary

• Essentially, the UT held that the reference to a loss of tax in the discovery assessment provision must be linked to the particular loss which was caused by the deliberate behaviour.
• As such, careless mistakes are subject to 6-year time limits when they are part of a discovery assessment and are not pulled into a 20-year limit where deliberate behaviour is present on another insufficiency.
• Moreover, errors due to reasonable care cannot be caught by discovery assessments (unless s. 29(5) is applicable). Or, rather, when they are caught, the taxpayer has a valid argument that the discovery assessment is excessive and should be reduced (as in this case).
• This case helps provide clarity around the position moving forward.

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