Discovery appears to be HMRC’s favourite word. It is appearing in numerous letters whenever they feel they can find something that they might have missed. However, how many of us stop and actually ask either ourselves or more importantly HMRC what it is they have actually discovered?
This is the fundamental question that should be asked whenever a letter is received which claims a discovery. It is also one of the points raised by a recent tax case called HMRC v Tooth.
HMRC actually lost at the first tier and when to the second where they lost again so it is a significant case.
It is important that HMRC has cleared all the statutory hurdles that are put in place to protect taxpayers from HMRC simply fishing. As stated above they do actually have to have made a discovery to enable them to issue discovery assessments or enquiries.
In Tooth HMRC issued assessments over 6 years after the year in question. Therefore they needed to demonstrate that the under assessment was attributable to the deliberate conduct of Mr Tooth. HMRC actually argued that the deliberate act here was the filing of a tax return. Not that it was deliberately wrong but because he had filed it!
Although this follows the literal definition of the word it is clearly a mockery of the true meaning here. Rightly it was thrown out. They go on to say other things and it is worth a read if you have a spare few minutes.
One other issue discussed was the discovery itself. What was found that it implied a relative newness of belief. In Tooth’s case, HMRC had started looking at this when Tooth told them about it 5 years before the assessments were raised. Therefore they had not made timely use of the information and therefore a discovery had not actually occurred.
The tribunal also went into what constitutes a discovery. As mentioned above HMRC have to make a discovery of an inaccuracy in a document submitted to them. In Tooth’s case, he added a large white space entry. The tribunal found that the represented a bona fide attempt by the taxpayer to provide an explanation of a possibly contentious area. They went on to say that as long as the taxpayer believes that the return is correct then it will not be an inaccurate return and therefore does not meet the first condition of a discovery assessment. This will surely be changed by a later case or legislation.
What we take from this is that we need to ensure HMRC are not merely fishing and have actually made a valid discovery before any information is sent to them. Always think and ask what has been discovered and has it been dealt with on a timely basis.