Staleness takes the biscuit: HMRC can’t wait forever to make a discovery assessment

29 April 2021

So-called "discovery assessments" have featured in the UK tax system since at least 1803, but the concept continues to evolve.

What is a discovery assessment? How can the "discovery" become stale?

HMRC has a window within which they can raise an "enquiry" into a self-assessment. Once that window has closed, HMRC’s only route to levy tax is to make a "discovery" and raise a "discovery assessment".

Leaving aside the question of what constitutes a discovery, discovery assessments must be made within certain prescribed time limits: ignoring the special regime for offshore non-compliance, these are four, six and 20 years, depending on the taxpayer’s actions. But even a discovery assessment within these time limits may be invalid if it is "stale".

If the word "discovery" makes you think of something fresh and new, then your instinct aligns with a number of tax tribunals and judges, who over the years have found that the natural meaning of the word requires HMRC to act promptly in issuing a discovery assessment after making a discovery, not necessarily of new information/fact/law but of perspective; even a correction of an oversight. Failure to do so "in time" will bar HMRC from pursuing the matter. This is the concept of "staleness".

There are two issues with this area of law. Firstly, the balance has shifted post self-assessment, under which now it is up to the taxpayer to assess the tax (pending challenge) based on its own records. Secondly, HMRC refuse to accept staleness exists as a concept and have appealed a test case to the UK Supreme Court (HMRC v Tooth) whilst another case awaits the attention of the Court of Appeal. In the meantime, a new case in the First Tier Tribunal (Mehrban), in relation to a workaholic sole trader in Accrington, has considered the point afresh.

What does Mehrban say?

Mehrban v HMRC [2021] UKFTT 53 (TC) is of interest for the following reasons.

  • Three-year delay: this is exceptional and sufficient to render a discovery stale.
  • Actions of the parties irrelevant: as long as a discovery has been made, the conduct of either the taxpayer or HMRC does not impact the question of whether the discovery has become stale.
  • No pause button for the "discovery clock": HMRC cannot simply make an information request to pause time from a discovery, with a view to staving off staleness.
  • Expansion of scope of application: unlike much of the previous case law, Mehrban considered the issue of staleness in the context of a fairly uncomplicated allegation of understatement of profits in a small retail business.

The taxpayer in this case was not married, has no children, has not travelled abroad for over 30 years and is open 17 hours a day, seven days a week, 364 days a year.

In Judge Malek’s view in Mehrban, it would be an "absurdity" to say that the concept of staleness does not exist: it remains to be seen whether the Justices of the Supreme Court agree. It is worth noting that HMRC faced some acerbic comment for, apparently, confiscating and then losing some of the documentary evidence the taxpayer would have wanted to use to promote his own case.

There has been some doubt cast on whether or not staleness as a concept exists. In our view there can be little doubt. The word “discover” connotes an element of newness or freshness. It would be an absurdity to hold otherwise.