The First-tier Tribunal (‘FTT’) case of Wilby v HMRC [2022] UKFTT 348 (TC) involved Stamp Duty Land Tax (‘SDLT’). But the substantive question – the requirements for HMRC to make a valid ‘discovery’ permitting them to collect additional tax – is as relevant to Income Tax, Capital Gains Tax and Corporation Tax as it is to SDLT, and the case is worth examining for that reason.
There are two main questions to be asked if a ‘discovery’ assessment is to be challenged.
The first is whether HMRC have made a ‘discovery’ that tax has been understated. The second is, if there has been a ‘discovery’, whether the conditions that permit HMRC to make an assessment as a result of it are fulfilled.
Wilby focussed primarily on the first question, and is a helpful summary of the state of the law:
- A ‘discovery’ happens ‘where it newly appears that a taxpayer has been undercharged’. It’s not necessary that some new fact must have been discovered: just that an officer of HMRC concludes that tax has been undercharged.
- HMRC’s ‘corporate knowledge’ is irrelevant; a ‘discovery’ must be made by some individual officer.
- What has to be ‘discovered’ is not the cast-iron copper-bottomed certainty that tax has definitely been undercharged: just a belief in a loss of tax that is objectively reasonable by reference to what the officer in question knows.
- It’s not necessary to identify which particular officer made the discovery – though since ‘discovery’ depends on what an officer knew and what, based on that knowledge, he or she believed, it is ‘necessarily difficult if the officer cannot be identified’. The FTT said in Wilby that ‘It might be a rare case in which this can be made out in the absence of evidence from the officer in question, but this does not mean that it can never be made out’. Wilby was one such ‘rare case’.
Thus, in Wilby:
- HMRC were able to produce detailed evidence as to the processes and procedures through which Land Registry data on property transactions were compared with SDLT returns;
- mismatches were considered on a case-by-case basis, including where there was an apparent bona fide reason for the mismatch; and
- a decision was taken as to whether an assessment should be made.
Although it wasn’t possible to identify which individual officer in the team had made the decision in Mr Wilby’s case, what was important was that, on the balance of probabilities, some officer had made the ‘discovery’. It follows, incidentally, that if the process had been fully automated and the decision to assess made by a computer following an algorithm, it’s very unlikely that any resulting ‘discovery’ assessments would be validly made: computers, however sophisticated, cannot make ‘discoveries’ in the sense meant by tax law.
Although Wilby focussed less on the second question, it’s nonetheless important. As well as showing that a discovery has been made, HMRC must show that one of a number of alternative conditions are fulfilled. The most common (and the one on which HMRC relied in Wilby) is that at the time at which the ‘enquiry window’ closed, and on the basis of the information that had at that time been made available (the extent of which is itself defined in statute), HMRC could not reasonably have been expected to be aware of the loss of tax. Sometimes it is evident that such a condition is met: but sometimes that is another ground on which a ‘discovery’ assessment may be challenged.
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