What is a discovery assessment for corporation tax?

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What is a Discovery Assessment for Corporation Tax?

What the law says

A discovery assessment for corporation tax is the mechanism by which HMRC can assess (or re-assess) a company to tax outside of the normal enquiry process, where an officer makes a relevant "discovery."

The statutory trigger (paragraph 41, Schedule 18, Finance Act 1998):

If an officer of Revenue and Customs discovers, as regards an accounting period of a company, that:

• (a) an amount which ought to have been assessed to tax has not been assessed, or
• (b) an assessment to tax is or has become insufficient, or
• (c) relief has been given which is or has become excessive,

the officer may make an assessment (a "discovery assessment") in the amount or further amount which ought in their opinion to be charged in order to make good to the Crown the loss of tax.

It is a two-stage process: First, the officer makes a discovery; second, that discovery must be notified to the taxpayer by way of an assessment. It is this latter document which is described as a "discovery assessment."

Restrictions on the power (paragraph 42, Schedule 18, FA 1998):

Where a company has already delivered a company tax return, the power to make a discovery assessment is only exercisable in the circumstances specified in paragraphs 43 or 44 of Schedule 18.

Time limits (paragraph 46, Schedule 18, FA 1998):

• The general time limit is 4 years from the end of the accounting period.
• Extended to 6 years where the loss of tax was brought about by carelessness by the company or a person acting on its behalf.
• Extended to 12 years for offshore matters or offshore transfers.
• Extended to 20 years where the loss of tax was brought about deliberately, or is attributable to a failure to notify chargeability, or to certain avoidance schemes.

HMRC guidance / practice

What constitutes a "discovery":

HMRC guidance indicates there is a potential discovery position where there is reason to suspect that tax may not have been assessed, may have been under-assessed, or relief given may be excessive — and if that suspicion turned out to be true, a discovery assessment could be made to correct the tax position.

The "hypothetical officer" test (conditions for making an assessment where a return has been filed):

Paragraph 44 of Schedule 18 FA 1998 provides the condition to validate a discovery assessment: the "hypothetical officer" could not have been reasonably expected, at the time when HMRC ceased to be entitled to open an enquiry (or after a closure notice was issued), based on the information made available, to be aware of the insufficiency.

The "hypothetical officer" is deemed to have the general competence, knowledge and skills needed to understand the return in front of them, including knowledge of court decisions and HMRC publications.

"Information made available" includes:

• Information contained in a relevant return or accompanying accounts, statements or documents;
• Information in any relevant claim or accompanying documents;
• Information in documents supplied in connection with an enquiry into relevant returns or claims;
• Information whose existence could reasonably be inferred from the above, or information notified in writing to HMRC by the taxpayer.

The test is one of disclosure adequacy — it is not enough to make the hypothetical officer aware that they need to ask questions; the disclosure must make them aware of the actual insufficiency.

Burden of proof:

Where a customer has filed a tax return, HMRC bears the burden of proof that one of the two further conditions for a discovery assessment applies. However, an officer does not need to demonstrate this at the time of making the assessment — it only becomes necessary if the customer appeals. It is therefore essential that officers maintain evidence to support that assertion.