You’ve received an assessment from HMRC which it says relates to extra tax it’s discovered is due because of an error in one of your tax returns. What checks should you make before accepting and paying the tax?

Discovering tax

Tax legislation gives HMRC authority to issue assessments to collect almost any type of tax which it believes has been under assessed by an individual or business. These are called discovery assessments. If you receive one it’s advisable to get a tax expert or your accountant involved straightaway to check if HMRC was within its rights to issue it and handle the appeal.

What’s discovery?

The rules allow HMRC to claim discovery in almost any situation where it finds insufficient tax has been assessed; even, for example, where one tax inspector disagrees with a previous inspector’s view. However, this doesn’t give them carte blanche. They can only make an assessment if they “could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation” .

Tip 1. If you can show that you provided all the information necessary for HMRC to check the correctness of your tax return, a discovery assessment will not be valid.

Tip 2. A discovery assessment will also not be valid if the reason for the underpaid tax is because HMRC has changed its view on, say, the deductibility of an expense.

Unfair timing

While it seems morally fair for HMRC to collect tax which should have been paid, there have to be time limits. These prevent HMRC issuing assessments willy-nilly decades after the end of a tax year when records may no longer exist to back up an appeal. There’s an equivalent time limit if you discover that you’ve overpaid tax, you only have four tax years in which to claim a refund. However, HMRC has more leeway with discovery, depending on why the tax has been underpaid.

A reasonable mistake. HMRC has four years from the end of a tax year in which to make an assessment if it discovers tax underpaid resulting from a mistake in your tax return, but this wasn’t caused by carelessness and wasn’t deliberate.

Carelessness. The time limit is six years where the underpaid tax resulted from carelessness.

Deliberate. HMRC has 20 years if you deliberately declared incorrect information.

Tip. The rules don’t allow HMRC to issue a discovery assessment during the period in which it’s allowed to start an enquiry, unless it has concluded one and discovers further tax has been unpaid.

Have you been careless?

The six-year time limit only applies if HMRC can show you’ve been careless in completing your tax return. It almost invariably takes this view initially. However, the courts don’t always agree and you can use their rulings to help persuade HMRC that it’s wrong.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.