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Tax enquiries: Discovery vs RTI

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Can HMRC ‘discover’ information missing from a tax return if has been provided with the relevant data under RTI? The FTT has reached opposing conclusions to this question in two cases.

3rd Aug 2021
Tax writer
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When HMRC ‘discovers’ that a taxpayer has paid insufficient tax, it can make a discovery assessment (TMA 1970 s29) to recover the missing tax. Its power to do so is limited in certain situations, where HMRC could – and should – have recovered the tax using routine self-assessment methods.

If the window for opening an enquiry has closed with no enquiry actually made, HMRC can’t raise an assessment to recover any missing tax unless one of two conditions is satisfied:

  • The error was brought about carelessly or deliberately by the taxpayer (or someone acting on his behalf) (TMA 1970 s 29(4)); or
  • An officer “could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of” the insufficiency (TMA 1970 s29(5)).

Langham vs Veltema

The Langham v Veltema case, Statement of Practice 1/2006 and subsequent cases have all laid emphasis on TMA 1970 s29(6), which restricts the information to:

  • What is made available to the officer by the taxpayer (whether in his return, or accompanying it, or separately in writing), or
  • What might “reasonably be expected to be inferred” from information which was provided by the taxpayer (TMA 1970 s29(6)(d)(i)).

However, those principles were established long before RTI and the resulting pre-population of tax returns.

HMRC now receives masses of detailed information from employers which should enable officers to detect errors in tax returns long before the closing of the enquiry window.

Two cases, heard by two different FTT panels, reveal that this is still an open issue.

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Replies (9)

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ghm
By TaxTeddy
03rd Aug 2021 13:37

I think these cases, and others like them, could become even more relevant when MTD comes into play.

More than ever, HMRC will have an avalanche of data filed in "real time" and so the question of whether they had information already at their fingertips on which an HMRC officer could have acted becomes ever more important.

It may also become one of the deciding factors as to whether the periodic submissions should be made under the "Making Tax Up" format as advocated by many participants on this site, myself included - or whether there really is a need to protect the client from discovery assessments by making accurate periodic returns.

For the most part, I think this will depend upon how "discovery" evolves and whether it still remains tied to the final (real) tax return submission, or not.

Of course, all of this supposes that we will receive clear guidance and even clearer legislation from HMRC. But experience suggests that no detailed information or support will be made available as to how discovery assessments tie in with MTD. Quite possibly, HMRC haven't even thought about it.

Time will tell.

Thanks (3)
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By Hugo Fair
03rd Aug 2021 15:09

Quote:
“Process now, check later” is beginning to seem less viable if HMRC already has the numbers at its fingertips.
Ultimately a case needs to go before the Upper Tribunal to obtain binding precedent, but things are looking promising.

I guess that conclusion depends on what constitutes "promising" in your book?

If HMRC start to work from the opposite perspective ("Check now, process later"), and there's every sign over the last 9 or so months that this is indeed happening, then two things result:
1. Resolution of cases (and in particular processing of rebates) will take longer and longer;
2. The opportunities for HMRC to make data-driven mistakes will accelerate exponentially as they sink under a mountain of data - and worse, if they use AI to sift the data for 'anomalies' then the basis of any incorrect decision will become opaque to them as well as to the taxpayer.

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By More unearned luck
03rd Aug 2021 17:22

Every case depends upon is facts. It is hardly surprising therefore that two cases are decided diffidently when considering the same bit of law. The key difference is Scoggins didn't include any information about the PAYE source in his return so no officer could check the return to the data filed by the payer, whereas Loughrey did include such information, so an officer could have checked. Loughrey's error was one of quantum; Scoggins complete omission. I think both tribunals got it right.

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Replying to More unearned luck:
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By More unearned luck
03rd Aug 2021 19:20

For 'diffidently' read 'differently'.

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By Justin Bryant
04th Aug 2021 10:55

The Loughrey case is probably wrongly decided per my comments on valid DAs here:

https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-loses-tooth-but-sta...

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Replying to Justin Bryant:
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By Justin Bryant
04th Aug 2021 12:07
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Replying to Justin Bryant:
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By More unearned luck
04th Aug 2021 12:39

Firstly how does Tooth - where the validity of the DA depended on the deliberate limb of s 29(4) - bear on a case where the issue was the careless limb and and alleged inadequacy of disclosure (s29(5))?

Secondly, you are yet again giving links that you claim support your case that do no such thing. The link is to a case report with no editorial comment on the correctness or otherwise of the decision.

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Replying to More unearned luck:
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By Justin Bryant
05th Aug 2021 09:18

Eh? I said per my comments there on valid DAs. Have a proper read.

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Replying to Justin Bryant:
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By More unearned luck
05th Aug 2021 20:47

Er? to you too, Justin.

The link is to a discussion on Tooth where the issues were staleness and deliberate bringing about a loss of tax. Neither issue was in point in Loughray.

You then made a case (that Ray McCann didn't think much of) that DAs wouldn't be valid if in the case of defective CNs*. Again not relevant to Loughrey as there was no s9A enquiry and so no CN. So please do spell out in word of one syllable your reasons for saying Loughray was decided wrongly to this dimwit.

You didn't answer my charge of wrongly suggesting that Taxation agreed with you.

*It depends, of course, what you mean by 'defective'.
If the defect is in the s9a notice (as it wasn't in Tinkler) or the absence of a s9a notice (as was the case in Tooth) then obviously a DA wouldn't be invalid for those reasons, although by the time the DA is issued ETL and conduct are likely to be in point.
If the defect is in the CN such that it doesn't meet the definition of a CN, then HMRC could and should issue a defect free notice because the enquiry hadn't yet been closed or they could rely on s114 TMA as they did in Archer.
If the defect is merely in the quantum of their conclusion (eg HMRC concluded the further tax due was £20K but typed £10K in error) then I agree with you, otherwise FCN wouldn't be final , subject to the conduct and ETL safeguards. I don't think that s114 helps HMRC here as there is a difference between not saying anything at all about the extra tax and understating the tax and in most cases there are no APNs.

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