In the recent case of Burgess v HM Revenue and Customs  the Upper Tribunal (“UT”) considered what HMRC needs to prove in order for a discovery assessment raised by it on a taxpayer to be valid.
Where HMRC suspects that tax has been underpaid, it can generally raise an "enquiry” into the relevant tax return. However, if HMRC “discovers” additional unpaid tax after the deadline for raising an enquiry has passed, it may be able to recover this tax by way of a “discovery assessment”.
Certain conditions must be met in order for HMRC to be able to make a valid discovery assessment. These are, in brief, as follows:
- the tax loss must be the result of careless or deliberate action by the taxpayer; or
- HMRC could not reasonably have been expected to have been aware of the facts leading to the tax loss based on the information available when the enquiry was closed or when the time limit for raising an enquiry passed.
There are also time limits in which HMRC may raise a discovery assessment. Such assessments must usually be raised within four years of the end of the accounting period in which the tax was due but this is extended to six years in the case of carelessness or 20 years when the taxpayer's failure to correctly declare the tax due was deliberate.
HMRC had raised discovery assessments on Mr Burgess and his company, Brimheath Development Limited, for several years in which tax returns were not submitted or in which HMRC considered the tax returns submitted to be inaccurate.
The First Tier Tribunal (“FTT”) had found that Mr Burgess (and his company) did underpay tax and this was not disputed in the UT.
Mr Burgess appealed on the basis that the FTT had not fully considered whether the conditions for HMRC to make a discovery assessment were met and whether HMRC was in time to do so. In particular, since some of the discovery assessments were made over six years from the date of the relevant tax years, HMRC should have been required to prove that Mr Burgess' conduct in failing to submit these returns was deliberate but it had not done so.
The UT found that HMRC had the burden of proof of showing that the conditions and time limits for making the assessments were met before the burden of proving the substantive issues of the case, namely that the assessments were incorrect, shifted to Mr Burgess. HMRC had not addressed the conditions or time limits in the FTT so had not discharged its burden of proof. Contrary to HMRC’s argument, there was no obligation on Mr Burgess to raise these issues nor was he barred from appealing on the basis that the conditions for the assessments were not met just because he had not made this argument previously in the FTT. The UT therefore found that the assessments were invalid.
The UT considered remitting the case to the FTT so that it could reconsider its decision. However, it decided that doing so would give HMRC a "second bite of the cherry", which would go against general principles of justice.
The UT therefore reduced the discovery assessments to zero, meaning that no further tax was due.
While this was a good result for the taxpayer, as the UT admitted itself, the decision may seem unsatisfactory because the result was that, even though Mr Burgess and his company were found to have underpaid tax, HMRC would not be able to recover this. Mr Burgess won due to a failure of the FTT and HMRC to follow the correct procedure.
However, as the UT stressed in its judgment, the purpose of the rules on discovery assessment is to provide balance between HMRC and the taxpayer. Where, as here, the validity of the assessment depends on serious allegations of deliberate action or fraud, it becomes particularly important for HMRC to prove that the conditions are met.
As a result of this decision, we would expect to see HMRC put more emphasis on showing that a discovery assessment was validly made in future cases, which could be a high burden where there is a need to show that a taxpayer acted deliberately.