HMRC’s Investigation Powers

HMRC has the authority to recover unpaid tax outside of the enquiry window through discovery assessment. If it has a reason to believe that a tax liability has been understated due to an error in your tax return.



Discovery Assessment

Discovery assessment happens in one of three situations:
  1. You inform HMRC that you have made a mistake in a tax return when it’s too late for you to correct it or for HMRC to start an enquiry.
  2. It receives information from a third party that suggests you have made a mistake and it’s too late for it to begin an enquiry.
  3. While HMRC is investigating your tax return, it discovers errors (i.e. your accounts) and it’s likely that similar errors will have occurred in earlier years.


Defending Against Discovery

Upon receiving the assessment, you have two options:
  1. Accept it and pay the tax
  2. Appeal against it – HMRC will only settle the appeal where you satisfy that the assessment was wrong. It can ask for the same evidence to settle an appeal as it would an enquiry.


Time Limits

HMRC is bound by time limits for issuing discovery assessments:
  • If you make an innocent error and notified HMRC that your tax return a couple of years ago was wrong due to a mistake in data you received from a third party, it has four years in which to issue an assessment.
  • It has six years where the error was caused by your carelessness.
  • It has twenty years if the loss of tax resulted from deliberately providing incorrect information (i.e. you have not declared income that you knew about).

Tax investigators are notorious for thinking they can issue discovery assessments any time. However, they must have grounds for believing that you have underpaid tax so be prepared to challenge them when they have overstepped the mark.