Discovery invalid, no carelessness and out of time

In Alan Loughrey v HMRC [2021] TC08198, the First Tier Tribunal (FTT) allowed a taxpayer to appear against discovery assessments. He was not careless and the HMRC's 'hypothetical officer' should have considered Real-Time Information (RTI) to ascertain there was a shortfall of tax within the normal enquiry deadline.

• Mr Loughrey was made redundant in November 2013.
• As part of his redundancy, he received a tax-free Termination payment.
• Having lost access to electronic payslips once unemployed, Mr Loughrey filed his 2013/14 tax return in March 2016 using his P45 and HMRC’s guidance.
• In January 2018, HMRC wrote to Mr Loughrey explaining that they had information that suggested his Tax Return was incorrect.
• The P45 had not made it clear that the gross income figure had already excluded the tax-free termination payment. Mr Loughrey followed HMRC’s guidance in claiming the tax-free termination payment on his Tax Return, effectively a second time.
• HMRC raised a Discovery assessment.
• Following a Statutory review the assessments were upheld.
• Mr Loughrey Appealed to the FTT

The FTT allowed the appeal finding that:

• There was no dispute that there was an insufficiency of tax as Mr Loughrey had effectively claimed the £30,000 tax relief twice.
• A valid discovery assessment had not been made as:
  • Mr Loughrey had taken reasonable care in completing his tax return, he had followed HMRC instructions and guidance which told him to deduct the £30,000 from the P45 figure.
  • There was no suggestion in that guidance that he should seek further advice from either HMRC or a suitably qualified professional.
  • HMRC should have been aware of the insufficiency of tax by the enquiry deadline based on the PAYE RTI information as its existence and relevance could be reasonably be inferred from the information on the return.
  • RTI information would make it obvious to a hypothetical officer that there was an insufficiency of tax in respect of employment income. This was evident from:
    • HMRC’s computer systems having flagged the discrepancy on the tax return using the RTI data to begin with.
    • The HMRC officer had first turned to RTI information when reviewing the correctness of the tax return.

Useful guides on this topic

Discover Assessments: At a glance (Freeview)
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment? 

Discovery assessment subscriber (Subscriber)
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Termination, redundancy and leaving payments (from 6 April 2018)
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

Termination, redundancy and leaving payments (to 5 April 2018)
How were redundancy and termination payments taxed prior to 6 April 2018? What amounts could be paid tax-free? What amounts were taxable as earnings?

RTI: Real-Time Information for PAYE
What is RTI: Real-Time Information (RTI) reporting for PAYE? How does it work?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

Statutory Review (by HMRC)
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review? 

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Alan Loughrey v HMRC [2021] TC08198