Once the time limit for enquiring into a return has expired (generally a year after the relevant filing date) HMRC are able to make an assessment so as to collect an alleged underpayment of tax (a ‘discovery assessment’) only if one of two circumstances exist.
The first is where the underpayment arises from the taxpayer’s fraudulent or negligent conduct (different words are used for different taxes but they all mean the same thing). We don’t discuss that circumstance further in this note.
The other is where, at the time at which the ‘enquiry window’ closed, HMRC could not reasonably have been expected to have been aware of the underpayment. That question has been before the Upper Tribunal in Carter & Kennedy v HMRC [2021] UKUT 300 (TC). The case was to do with Stamp Duty Land Tax (‘SDLT’): but the principles apply equally across all taxes.
The law in this area is fairly well-established. HMRC are not precluded from making a discovery assessment merely because, before the enquiry window closed, they had enough information to prompt a (hypothetical) competent officer to raise an enquiry. But they will be shut out from making an assessment if, when the window closed, they had information ‘sufficient as to make the hypothetical officer aware of the actual insufficiency to a level that would justify the making of an assessment’. That is, information sufficient to support a positive belief that the return does understate tax rather than that it might understate tax. And the burden of proof is on HMRC to show that they did not have the requisite information rather than on the taxpayer to show that they did.
The First-tier Tribunal (‘FTT’) had agreed with HMRC that they did not come to be possessed of the necessary information until after the closure of the enquiry window. There were two grounds on which, in Carter & Kennedy, the taxpayers sought to challenge that decision.
The ‘calculation ground’
It was said that it should have been apparent to HMRC from the SDLT return and the explanation given with it that the consideration payable for the property in question was much larger than the amount on which SDLT had been accounted for. The Upper Tribunal agreed that, even if that were the case, ‘[the hypothetical] officer would not necessarily have concluded that the taxpayer had implemented an avoidance scheme, let alone one which had produced an actual insufficiency of tax’.
The ‘state of the law’ ground
HMRC had asserted, and the FTT had accepted, that it was not until after HMRC had taken advice from Counsel that they concluded that there was an ‘insufficiency of tax’ in the SDLT return. Before the Upper Tribunal it was contended that that was not a view that was open to the FTT: it was, said the taxpayers, ‘clear that there was a loss of tax based on the wording of section 75A of FA 2003 and HMRC’s published technical guidance’. The FTT disagreed: the FTT had accepted the evidence of the HMRC officer as to what he was aware of at the relevant time, and was entitled to make its decision based on that.
As a side point, however, the argument put by the taxpayer may perhaps have been a dangerous one: for if it should have been clear to HMRC that the SDLT return was wrong, would its incorrectness not also have been apparent to the taxpayers or their advisers? In which case…
To discover more on the question of discovery, please get in touch with your usual BKL contact or use our enquiry form.
