Received an HMRC Discovery Assessment for a Closed Tax Year

An HMRC discovery assessment is a formal assessment raised under section 29 TMA 1970 to collect tax that HMRC believes was underpaid in an earlier, otherwise closed, tax year. It is used when the normal enquiry window under section 9A has passed, or no enquiry was ever opened into that year's return.

The assessment is not simply HMRC reopening a year at will. HMRC must have 'discovered' that tax has been underpaid, over-relieved or over-repaid, and the assessment must meet specific statutory conditions before it can stand. Many discovery assessments are successfully challenged on procedural grounds alone.

Yes, but only in specific circumstances. The ordinary time limit for a discovery assessment is four years after the end of the relevant tax year. This extends to six years where the loss of tax was brought about carelessly, and up to twenty years where it was brought about deliberately, or in certain offshore matters.

HMRC carries the burden of showing that the relevant behaviour justifying the extended time limit actually applies. A simple genuine mistake, without carelessness, does not justify a six-year assessment, and carelessness alone does not justify a twenty-year assessment. The behaviour classification is often the most contested part of a discovery dispute.

HMRC can reopen a closed year, but only where the section 29 conditions are satisfied. Broadly, if your return was submitted on the basis of the prevailing practice at the time, and an officer could reasonably have been expected to identify the insufficiency from information already made available, a discovery assessment may not be valid.

This is sometimes called the 'hypothetical officer' test. It protects taxpayers who disclosed matters clearly enough that HMRC should have queried them within the normal enquiry window, rather than allowing HMRC an indefinite second opportunity based on information it already held.

HMRC can draw on third-party data, such as bank interest reports, land registry records, overseas information exchanged under international agreements, or information obtained using Schedule 36 FA 2008 powers, to identify a possible loss of tax before raising a discovery assessment.

Where HMRC relies on estimated figures because full records are unavailable, you can challenge the basis of the estimate. Providing your own reconstruction, supported by whatever evidence exists, can materially change the final assessed amount even where the underlying discovery is valid.

Where a discovery assessment reflects an inaccuracy in a return, HMRC may also charge a penalty under Schedule 24 Finance Act 2007. The percentage range depends on whether the behaviour was careless, deliberate, or deliberate and concealed, and on whether the disclosure was prompted or unprompted.

An unprompted disclosure, made before you knew HMRC was investigating, generally supports a lower penalty range than a prompted one arising from HMRC's own discovery. Within any range, cooperating fully, once contacted, by telling HMRC promptly, giving practical help and granting access to records can still reduce the penalty percentage applied.

A common mistake is focusing only on the figures and ignoring the validity question altogether. Many taxpayers argue about the amount without first checking whether HMRC was entitled to raise the assessment at all, or whether it relied on the correct extended time limit.

Another mistake is missing the appeal deadline while negotiating informally with HMRC. An informal discussion does not extend the statutory appeal window, so a protective appeal should usually be lodged even while talks continue. Accepting HMRC's behaviour classification without challenge, when the facts do not support carelessness or deliberateness, can also lead to an unnecessarily high assessment and penalty.

Consider an anonymised example. An individual sold a residential property that had also been let for several years, without reporting a capital gain. HMRC identified the sale from Land Registry data several years after the disposal and raised a discovery assessment covering the gain, relying on the extended time limit for careless behaviour.

The taxpayer's adviser reviewed the position and found that letting relief and private residence relief had been overlooked in HMRC's calculation, which had assumed the whole gain was taxable. After presenting evidence of the periods of occupation and letting, the taxable gain was substantially reduced. The behaviour was accepted as careless rather than deliberate, given a genuine misunderstanding of the reporting requirement, so the applicable penalty range and time limit were adjusted downward compared with HMRC's opening position.