HMRC’s Assessment Powers

HM Revenue & Customs (HMRC) has the power to raise tax assessments and may only exercise these powers to aid tax compliance and must do so fairly in accordance with established guidelines. Understanding HMRC’s assessment powers and the key stages is crucial in order to be in a position to successfully challenge any such assessment, as our team of tax litigators often do before the Tax Tribunal.

Lord Dunedin’s framework, outlined nearly a century ago in Whitney v IRC [1926] AC 37, defines three key stages in tax administration: ‘liability,’ ‘assessment,’ and ‘recovery.’ In today’s era of self-assessment, taxpayers play a vital role in determining their tax liabilities, but errors are prevalent. This article explores the role of self-assessment, HMRC’s assessment powers, and the complexities of tax assessments, providing insight for taxpayers navigating tax compliance.

Lord Dunedin’s Explanation of Assessment

Nearly a century ago, Lord Dunedin observed in Whitney v IRC [1926] AC 37 that there were invariably three stages in administering a tax. The first of these – ‘liability’ – was rather abstract in nature and followed ‘the statute which determines what persons in respect of what property are liable’. ‘Assessment’, the second stage, was very different and much more tangible. ‘Liability does not depend on assessment’, he observed. ‘That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay.’ Only once a sum had been assessed would it be possible to move to the third stage: ‘recovery’.

Role of Self-Assessment & HMRC’s Powers

In the era of self-assessment, taxpayers primarily determine their own tax liability. However, erroneous calculations are not uncommon. Self-assessment is a mechanism employed by HM Revenue and Customs (HMRC) for the collection of Income Tax. Typically, taxes are deducted directly from wages and pensions. However, individuals and businesses receiving other income (including COVID-19 grants and support payments) are required to declare it in a tax return.

HMRC estimates indicate a significant prevalence of under-declarations in self-assessment returns, underscoring the agency’s paramount power: assessment. This power allows HMRC to rectify inaccuracies, ensuring tax compliance.

Enquiry Powers – Income Tax, Capital Gains Tax, and Corporation Tax

HMRC typically utilises the enquiry process as the primary method to review and potentially replace a taxpayer’s self-assessment. This process is initiated when HMRC opens an enquiry into the taxpayer’s self-assessment return within the 12-month ‘enquiry window.’ It serves as an inherent check within the self-assessment system, allowing HMRC to scrutinise and, if necessary, amend the taxpayer’s assessment through a closure notice. Notably, taxpayers also have the opportunity to amend their own assessment during this period.

Following the closure of the enquiry window, the taxpayer’s assessment remains unchanged unless HMRC is able to issue a new assessment through a subsequent discovery, provided that statutory requirements are met. HMRC is responsible for demonstrating its ability to issue a discovery assessment before the burden shifts to the taxpayer to challenge the assessment’s validity.

HMRC’s Assessment Powers

In tax administration, HMRC employs assessments to address non-compliance when formal enquiry powers are unavailable or when the enquiry period has lapsed. These assessments are also utilised in cases where taxpayers fail to submit their required tax returns. Time limits for assessments vary depending on the specific tax regime under consideration.

For instance, in the case of Value Added Tax (VAT), HMRC typically has a two-year window from the end of the relevant accounting period to issue an assessment for any additional tax owed. This time frame can be extended to four years if HMRC gathers sufficient evidence of the facts within the initial year. However, in situations where deliberate behavior leads to tax loss, the time limit extends to 20 years, contingent upon HMRC’s timely acquisition of evidence.

Similarly, in tax regimes such as Income Tax Self-Assessment (ITSA) and Corporation Tax Self-Assessment (CTSA), where HMRC identifies tax losses outside the standard enquiry window, they leverage discovery provisions to rectify inaccuracies through assessments. The usual time limit for discovery assessments in such cases is four years after the relevant tax period. However, this period can be extended to six or twenty years for careless or deliberate behavior, respectively.

HMRC Discovery Assessment

In tax assessment, a discovery assessment revolves around an officer identifying tax underpayments, which isn’t necessarily difficult. It’s about the officer realising there’s been an undercharge without needing new facts (Hargreaves v HMRC [2014] UKUT 395 (TCC)). This assessment remains valid despite time delays, and different officers can make successive discoveries (HMRC v Tooth [2021] UKSC 17).

If a discovery is made for one or more years, HMRC might use the ‘presumption of continuity’ to infer further discoveries. However, concrete evidence is needed beyond this presumption (HMRC’s Enquiry Manual at EM3236).

Taxpayers are shielded from discovery assessments if their errors align with prevailing practices (Taxes Management Act 1970 s 29(2)). HMRC can issue a discovery assessment if they prove either a hypothetical officer couldn’t have reasonably detected the underpayment or if careless/deliberate behaviour by the taxpayer or their agent led to the underpayment (‘the hypothetical officer condition’ and ‘the conduct condition’).

These conditions matter because HMRC’s window to issue a discovery assessment is limited: four years under the hypothetical officer condition and six or twenty years under the conduct condition for careless or deliberate behaviour, respectively.

HMRC’s Hypothetical Officer Condition

The hypothetical officer condition focuses on the information provided in the taxpayer’s tax return for the relevant year to determine if HMRC could have reasonably detected any underpayment. This often relies on what is disclosed in the ‘white space’ of the return.

The hypothetical officer, while not a specific individual, is a legal construct with basic legal, accounting, and practical knowledge (Pattulo v HMRC [2016] UKUT 270 (TCC)). Their awareness mainly depends on the information disclosed in the return, aiming to identify any under-assessment.

It’s not necessary for the disclosed information to resolve every aspect of the underpayment, especially in complex cases where an explanation of the relevant laws and the taxpayer’s position may be required (Langham v Veltema [2004] EWCA Civ 193).

HMRC’s Conduct Condition

HMRC holds the authority to issue discovery assessments for extended periods when tax underpayment results from careless or deliberate actions by the taxpayer or their representative. This terminology, replacing previous terms like ‘negligent’ and ‘fraudulent’ conduct, necessitates a clear causal link between the tax loss and the behaviour in question.

Taxpayers who exercise reasonable care are shielded from discovery assessments. Their conduct is evaluated against that of a ‘prudent and reasonable taxpayer’ in similar circumstances (Hicks v HMRC [2020] UKUT 12 (TCC)). Seeking professional advice from qualified professionals, like accountants or lawyers, often plays a crucial role in determining the taxpayer’s level of diligence. However, it’s essential to ensure that the advisor’s role remains purely advisory, as their careless or deliberate conduct could implicate the taxpayer (Trustees of the Bessie Taube Discretionary Settlement Trust v HMRC [2010] UKFTT 473 (TC)).

Carelessness encompasses a broad spectrum of behaviour, ranging from unfounded beliefs to outright recklessness. Statutes deem providing inaccurate information without subsequent correction as careless (TMA 1970 s 118(6)). Deliberate conduct, on the other hand, involves knowingly or intentionally taking actions leading to tax loss, requiring an element of dishonesty (HMRC v Tooth [2021] UKSC 17). While the question of whether recklessness constitutes deliberate conduct remains open, it’s crucial to distinguish between carelessness and deliberate actions based on the taxpayer’s intention (Suttle v HMRC [2023] UKFTT 873 (TC)).

Other Special Regimes and Assessment Parameters

Where the taxpayer has failed to file a tax return, HMRC are able to issue a discovery assessment within 20 years unless there is a reasonable excuse for the failure (Hextall v HMRC [2023] UKFTT 390 (TC)). A 20-year time period also applies where the loss of tax is attributable to the taxpayer using an avoidance scheme notifiable under DOTAS where the taxpayer has failed to notify HMRC of their use of the scheme.

Offshore personal tax cases are subject to a specific regime which allows HMRC to bring an assessment within 12 years. This produces a somewhat unfair scenario in which a diligent taxpayer with income or gains from abroad is potentially in a less favourable position than a careless taxpayer whose economic interests are purely domestic.

Expert UK Tax Law Advice

Navigating the complexities of tax assessments requires expert guidance. At LEXLAW, we specialise in providing comprehensive counsel to clients facing HMRC assessments. Our experienced team offers tailored solutions, ensuring adherence to tax laws while safeguarding clients’ interests. Whether addressing self-assessment discrepancies or challenging HMRC assessments, we’re committed to delivering strategic guidance and advocacy.

In conclusion, HMRC’s assessment powers are pivotal in maintaining tax compliance and fairness. Understanding the nuances of these powers and seeking expert guidance when needed empowers taxpayers to navigate tax administration with confidence. For further insights and assistance on tax assessments, contact LEXLAW today.

Expert Tax Investigation Lawyers

If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigation process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation. Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.

We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].