HMRC discovery assessments

The FTT has rejected the validity of HMRC's discovery assessment on the basis that there was no evidence that HMRC had actually made a "discovery" in the circumstances of the case: Lowe v HMRC [2024] UKFTT 826. The decision is a useful reminder of the burden on HMRC to demonstrate that a valid discovery had been made and that the tribunal will not simply assume that, because a discovery assessment has been issued, that burden has been met. What is necessary is admissible evidence from the assessing officer of primary facts that would justify the tests for the making of a discovery.

Background

The case concerns claims for tax relief made by an employee on subsistence expenses when travelling for work. It appears that he took the view, after advice, that he had not been fully recompensed by his employer for such expenses and was due further tax relief on the amounts not refunded to him. He used an accountancy firm, Apostle, to advise him and submit the claims.

HMRC opened an enquiry into the taxpayer's return. There is a suggestion that HMRC considered that Apostle had been responsible for submitting careless inaccurate claims for deductible expenses in other cases. However, the only direct evidence in relation to the taxpayer's claims was a "not easy to follow" note of call between HMRC and the taxpayer following notice of the enquiry. The call appears to have moved onto questions of business expense deductions which were not relevant to the particular claim and also may have led HMRC to consider the claims were invalid. Following that call, HMRC rejected the claim and issued a discovery assessment.

The review of that assessment indicated that HMRC thought that Apostle had either deliberately or carelessly made incorrect expense claims and no evidence of business expenses had been provided.

FTT decision

The FTT has held that, in this case, HMRC had not made a valid discovery on which the assessment could be based for the purposes of TMA 1970 section 29.

The FTT pointed out that it was not a requirement to submit evidence of deductions with a self-assessment return. The whole basis of self-assessment was a "process now, check later" regime. Whilst HMRC had asked the taxpayer to provide evidence of the expenses as part of its enquiry, it had not waited until that evidence had been provided and had proceeded to issue an assessment (apparently on the basis of the telephone call).

It was also important in this case that whilst HMRC had provided a witness statement by the officer, the officer had not appeared as a witness for cross examination and therefore, in the absence of oral evidence, the FTT was unwilling to accept the witness statement was any evidence at all. (HMRC had also failed to indicate whether that same officer was the assessing officer.) In any event, the witness statement simply indicated that an enquiry was opened on 8 February 2023 and on 11 April 2023 HMRC wrote to the taxpayer to advise that HMRC would issue an assessment as no evidence was provided to support the expenses claim. The FTT pointed out that the statement provided no evidence that a discovery had been made.

As a result, the FTT concluded that there was simply no evidence in this case on which an HMRC officer could, subjectively or objectively, reach a justifiable conclusion that there had been an insufficiency of tax in this case. A reasonable officer in this case would have sought further information about the expenses claims so as to have information on which to base a decision. It was unreasonable for HMRC to have based the decision to assess on the telephone call, where certain answers provided by the taxpayer had clearly been in relation to a new business the taxpayer might set up in the future.

As the FTT concluded: ""In our view the objectively reasonable officer in the position of the discovery officer would have sought further information about the expense claims. That officer would then have information on which to base an objectively reasonable decision. But the officer does not appear to have done this."

Comment

The decision highlights that HMRC may not simply issue an assessment simply because it is within the time limits for doing so. HMRC must make a discovery to justify the assessment. And when a taxpayer challenges an assessment HMRC must put forward clear and admissible evidence of who made the discovery and what it was that they discovered.