A discovery cannot get too long in the Tooth

The issue

On 14 May the Supreme Court finally stuck a dagger in the concept of ‘staleness’ when applied to tax discovery assessments.

If a taxpayer diligently completes his tax return (or his advisers do) then HMRC usually only have a year from submission to raise an enquiry. When I say ‘diligently’ I am assuming that full and appropriate disclosure has been made in relation to any ‘non-standard’ interpretation of legislation and everything has been presented clearly.

If the return has been completed incorrectly, or anything is unclear, then there are time limits which allow HMRC to make a later enquiry. This is at least four years from the end of the tax year in question but can be extended to six years for a careless error and twenty years for a deliberate error.

Taxpayers have sometimes used the concept of ‘staleness’ to argue that even when HMRC make an assessment within the above limits, if they have known about the issue for some time, then it will not have the ‘newness’ necessary for a discovery assessment.

Where did the ‘staleness’ concept come from?

In the 2008 case of Corbally-Stourton the judge said “a discovery is something newly arising, not something stale and old. The conclusion that it is probable that there is an insufficiency must be one which newly arises….”

This has led many advisors to debate the validity of discovery assessments which have been made long after HMRC have been aware of the facts.

Tooth case

Here, the Supreme Court clarified that any reference to ‘newly’ relates to the state of mind of the Inspector when they come across the information but did not relate to the age of the information at the time that the assessment had been made. Therefore, in a careless case, there would be nothing to stop HMRC raising a valid discovery assessment into a tax return, three years after something they have ‘newly’ discovered in the year after submission.

Forbes Dawson view

In our view, the ‘staleness’ concept has always been rather fragile. If the intention was for HMRC to get cracking once some information came to light (and not just in accordance with the above time limits) then surely this would have been specifically included in the legislation and not simply have been left to case law. However, some legislation which provides a disincentive to stop HMRC sitting on things for months would certainly be welcome. I understand here that HMRC has already committed to a review of the Taxes Management Act…………

 

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