EM3251 - Discovery: issuing discovery assessments: when to issue a discovery assessment
Recovery of overpayment of tax
Where an assessment is needed to recover excessive repayments of tax for an accounting period/tax year you may need to make a s30 TMA 1970 assessment. Please see EM3266 for more guidance on this matter.
Quantifying
Before an officer issues a discovery assessment they must first identify the quantum as accurately as possible to ensure that the correct amount of tax has been recovered.
However, there will be times when it is not possible to identify the quantum accurately. If this happens the officer can use their best judgment to determine the amount of tax due and issue the assessment.
Evidencing the discovery and assessment
HMRC has the burden of showing that a discovery has been made and that the assessment is valid, and must show that the relevant conditions have been met.
In order to do this, adequate record keeping is vital and best practice should be followed, see EM3252.
Evidencing behaviour
An officer does not need to show whether their discovery assessment meets either of the conditions, see EM3232, at the time they issue it.
However, if careless or deliberate behaviour has been asserted HMRC must be able to support this assertion with appropriate evidence. Once HMRC have done this satisfactorily, the onus of proof will normally revert to the taxpayer if they are appealing against the amount of the assessment.
‘Protective assessments’
There is nothing in legislation to describe ‘protective assessments’. In fact, ‘protective assessments’ do not exist. An assessment cannot be made merely to investigate a taxpayer’s position or to protect time limits in case HMRC later discover a loss of tax.
However, an officer may legitimately raise an assessment to protect HMRC’s position with the time limits in mind; although the assessment should not be made unless the officer has already discovered a loss of tax. If there is only a suspicion, and not a conclusion, then an assessment should not be made.
Source of income
The recent First-tier Tribunal case Ashraf [2018] TC 06355 highlighted that it is important that where HMRC are considering an assessment(s) for any unexplained amounts it should first be identified whether there is a compatible source of income, for example, trading, rental, employment, etc.
Amongst other things, the need for a ‘compatible source’ is driven by the fact that the income tax charge should be computed in accordance with the rules in the relevant part/schedule of the Taxes Acts. Without a ‘compatible source’ HMRC cannot be certain that they have charged the correct tax at the right time.
This does not mean that where there is an established source of income (for example a self-employment) and it is reasonable in the circumstances to attach the unexplained amounts to that trade, an officer won’t be able to issue assessments because HMRC don’t have evidence that the unexplained amounts emanate from that source.
Instead this particular issue arises where all identified sources of income have been ruled out as the source of the unexplained amounts and HMRC proceed to issue assessments under ‘other’ or ‘miscellaneous’ income charging provisions without a proper explanation.