Tax disputes briefing: Court strikes down discovery assessment issued too early

Discovery assessments are a significant HMRC power, allowing it to recover tax after the enquiry window for a tax return (normally one year) has expired. HMRC can issue a discovery assessment if an officer of HMRC 'discovers' that an additional amount of tax is due. The time limit for issuing a discovery assessment is generally four years from the end of the tax year to which it relates (but can be extended, for example, to six years if the taxpayer has been careless or 20 years in respect of certain deliberate behaviours). 

The underlying tax issue in Norton related to whether two rare cars (a Maserati and Ford GT40) were made available to a director so as to give rise to a taxable benefit.  However, for one of the years in dispute, the discovery assessment had been made before the enquiry window for the relevant tax return had expired. In the First-Tier Tribunal (FTT), HMRC had successfully argued that that did not prevent the assessment from being valid, but, since that decision, the FTT in another case, Curtis v HMRC [2022] UKFTT 172 (TC), had come to the opposite conclusion on the same point.

The Upper Tribunal closely considered the relevant statutory provision.  This allows a discovery assessment where an officer of HMRC could not reasonably be expected to be aware of an insufficiency of tax based on the information made available to the officer. It applies at a time when the officer "ceased to be entitled to give notice of his intention to enquire into the taxpayer's return".  The Tribunal held that the legislation contained a temporal condition which must be satisfied, and noted that HMRC's view would mean that the validity of a discovery assessment would remain uncertain until the end of the enquiry period (as the contents of a return submitted during that period could mean that the conditions for the assessment would cease to be satisfied), observing that:

"We do not accept that a discovery assessment issued during the enquiry period can exist in an indeterminate state like Schrödinger's cat until the enquiry period ends."

Subject to any appeal by HMRC, Norton appears to settle a point that had given rise to conflicting FTT decisions, and is a good reminder that taxpayers should scrutinise whether HMRC has correctly complied with the statutory requirements governing the tax disputes process.

The decision will not be relevant in situations where the insufficiency of tax has been brought about carelessly or deliberately by the taxpayer (or a person acting on their behalf), as, in that case, the statutory wording the UT focused on does not apply.