Loan charge discovery assessments

Examples of the letters that HMRC are issuing, along with a copy of the actual discovery assessment wording, can be found on the CIOT website.

Why have I received this letter?

You have received this as HMRC think that your 2018/19 tax return is wrong, in that it under-assesses the amount of tax you owe.

The likely reason for this is that HMRC have information that suggests you received disguised remuneration loans in connection with an employment, but you either did not include them or did not include the full amount of the loans. This means HMRC think the amount reported for the ‘loan charge’ is wrong.

There are lots of reasons why people may have missed off the loan charge on their 2018/19 tax return or declared the incorrect amount. This will include people who did not understand, either fully or at all, that they were being paid with disguised remuneration loans.

What normally happens if HMRC think a tax return is wrong?

HMRC will normally ‘enquire’ into it.

HMRC usually have a period of 12 months after the day on which a tax return is submitted to notify their intention to enquire into the tax return. Where a tax return is submitted late, this ‘enquiry window’ extends a bit, however for most people who submitted a 2018/19 tax return (given the deadline of 30 September 2020), the 2018/19 enquiry window will now be closed.

If HMRC do not start an enquiry within the time limit, the tax return will normally stand. However, in some circumstances, HMRC can have another ‘bite of the cherry’ through a discovery assessment.

What is a discovery assessment?

‘Discovery’ is a power held by HMRC that – in certain circumstances - allows an officer of HMRC to make an assessment to recover an underpayment of tax where the time limit to open an ordinary tax return enquiry has passed.

What do the discovery rules actually say?

For those with a technical interest, the circumstances in which HMRC may make a discovery  are contained in Section 29(1) of the Taxes Management Act 1970.  

They say that HMRC can make an assessment if an officer ‘discovers’ that:

1. an amount which ought to have been assessed has not been assessed; 
2. an assessment is or has become insufficient; or 
3. relief has been given which is or has become excessive. 

The assessment is to be in an amount which is considered necessary to make good the loss of tax.

Following the Supreme Court decision in HMRC v Tooth [2021] UKSC 17, the bar for a ‘discovery’ is quite low – most things will count as a discovery, including an HMRC officer simply changing their mind about something.

However, there are some restrictions on HMRC's ability to make a discovery assessment where a taxpayer has delivered a tax return for a tax year. The rules say that no discovery assessment may be made for that period unless:

1. the loss of tax was brought about carelessly or deliberately by or on behalf of the taxpayer; or 
2. the HMRC officer could not reasonably have been expected, on the basis of information available to them at the material time, to be aware of the loss of tax. 

HMRC need to prove that they have satisfied the conditions for issuing a valid discovery assessment. 

Even if the conditions are met, the assessment might be for the wrong amount. This could be because HMRC’s calculations are wrong (more on this below). In such circumstances, it is for you (the taxpayer) to demonstrate the correct amount.

Why are HMRC sending these out now?

The time limit for HMRC making a discovery is generally four years from the end of the tax year to which the assessment relates. If the loss of tax is due to careless behaviour by or on behalf of the taxpayer, the deadline is extended to six years from the end of the tax year to which it relates (or 12 years if the loss of tax involves an offshore matter). If it is due to deliberate behaviour, the deadline is extended to twenty years from the end of the tax year to which it relates.

The 2018/19 tax return will soon be outside the normal four-year ‘discovery’ time limit, therefore HMRC may be trying to protect their position by issuing the assessments now, otherwise they will need to prove there was careless or deliberate behaviour.

Is the assessment valid?

This will vary on a case-by-case basis. Discovery is a complex area of tax law. HMRC obviously believe the assessments they are issuing are valid – but that doesn’t necessarily mean that a Tribunal or Court would agree. (A Tribunal is a specialist court that is set up to listen to problems of a particular type – they can often be cheaper, less formal and more accessible for ordinary people than normal Courts.)

From statements made in various publications in the public domain, it seems that HMRC are in possession of lots of information about loan schemes, including on an individual level. For example, in their recent briefing pack, HMRC say ‘HMRC has recently updated its estimate of the number of individuals expected to be affected by the loan charge prior to the changes made following the Independent Loan Charge Review to approximately 61,000. This revised estimate is based on actual cases identified.’

By issuing a discovery assessment now, it is likely that HMRC will be proceeding mainly on the basis that the tax return contained insufficient information to alert them to the loss of tax before the end of the enquiry window. 

However, whether or not HMRC had enough information to be aware of the loss of tax before the end of the enquiry window will be fact specific, meaning in some instances, the discovery assessment can be challenged.  As a general rule, HMRC need to consider only the information provided to them by the taxpayer in or with the tax return itself.  However, this general rule is subject to exceptions and HMRC are expected also to take into account other documents provided by the taxpayer and, even, in some limited cases documents provided by third parties. 

So, as an example, if you made some comments (for example, in a covering letter with your tax return or on one of the “extra information” white spaces in your tax return) about your potential exposure to the loan charge, it is fair to argue that HMRC should have challenged your return through the enquiry process instead. This is because the HMRC officer could reasonably have been expected, on the basis of information available to them at the material time, to be aware of the loss of tax. As a result, the discovery assessment would be invalid.

If information is provided to HMRC in another form, then it would be harder (but not impossible) to argue that the HMRC officer had enough information at the material time. Each case turns on its own facts.

‘Discovery’ is a difficult area with lots of case law that gives HMRC a lot of flexibility - however it is also one that has not been fully tested in the context of the loan charge. And, as each case is different, previous case law can provide no more than a guide as to the outcome in any later case.

In addition, we understand there may be other, more esoteric, arguments that could possibly be made that HMRC have erred in raising an assessment.

You should also check carefully that HMRC have correctly calculated the additional income subject to the loan charge. See below for more information. 

What should I do?

If you receive a discovery assessment - do not ignore the document. Your options are either to pay it or to appeal it, which can include asking HMRC to postpone the tax – ideally within 30 days of the date of the letter. Although late appeals are possible in some circumstances, it is not guaranteed. HMRC set out how to appeal in the assessments they have sent out.

If you do not appeal, or appeal but do not ask HMRC to postpone the tax, ordinarily you would need to pay the assessed amount within 30 days of the date of the letter (or try and make a payment arrangement – again, details on how to do this are set out in the assessment). If you do not do this, then we would expect HMRC to start debt collection proceedings.

If you want to appeal, you may want to appeal the validity of the assessment in its entirety or just the numbers that HMRC have assessed. HMRC should have sent you a schedule which provides more information about how the additional tax has been calculated based on information available to them. Sometimes the amount will be an overestimate as HMRC may not have full or reliable information available to them about your loans and/or they may not be aware of your exact circumstances and the reliefs etc. available to you. Have they calculated the loans properly or have they made assumptions that you can show to be incorrect? Are you entitled to spread the additional income over several years and, if so, have HMRC correctly reflected this?

As touched on above, if you appeal, you can ask for payment of all or part of the tax in dispute to be postponed. This means you would not have to pay the amount while the appeal is being dealt with, however interest will continue to run. If you do not specifically ask to postpone the tax, then HMRC can start debt collection proceedings even if the assessment is under appeal.

A letter of appeal is initially to be sent to HMRC. However, if the matter cannot be resolved between you and HMRC then you can make a further appeal to the independent Tax Tribunal. There can be strict time limits for doing so which should be set out clearly in HMRC’s letters. However, you do have the right to notify the Tribunal of your appeal as soon as you have sent the letter of appeal to HMRC, to help set things in motion with the Tribunal.

If HMRC thought my tax return was wrong, why did they not open an enquiry? 

Given the background to the loan charge and the high profile/sensitive nature of the issue, we do not think it is unreasonable to expect HMRC, wherever possible, to have opened an enquiry under the ordinary rules.

As such, even if there is no legal challenge available against the actual discovery assessment, a judicial review could be an option if you feel very strongly that HMRC have acted in an irrational or unreasonable manner or a legitimate expectation has been breached.

A judicial review is an examination of the legality of decision-making by public bodies in the UK and it can be a powerful tool.

Judicial review arguments are usually heard in the High Court (or, in Scotland, the Court of Session). It can therefore be an expensive procedure and expert legal representation is usually needed, however given the strength of feeling there is around the loan charge, there may be pro bono help available. There are strict time limits for commencing judicial review procedures. There is a basic guide to the judicial review procedure on the Public Law Project website.

Some cases have raised the possibility of raising judicial review style arguments in the Tribunal. This is controversial and the right of the Tribunal to hear such arguments is far from certain. Therefore, most advisers suggest that such an approach should be followed only if the strict time limits for judicial review have been missed or if the potential costs of judicial review are prohibitive. Nevertheless, you should expect HMRC to challenge vigorously your right to raise such arguments in the Tribunal.

I’ve received an assessment but am in the process of settling. Why?

Even if you are in the process of settling, this doesn’t mean that you will conclude that process. If this happens, the discovery assessment will allow HMRC to recover the tax that they say is due, later. If you do go on to settle, although you have received an assessment, once settlement process is complete, HMRC should vacate (withdraw) the assessment.

What is the bottom line?

If you have received a discovery assessment, we strongly recommend that you obtain specialist tax advice/assistance with drafting an appeal against the assessment etc. as soon as possible. As explained above, there are strict time limits if you want to appeal.

Given the numbers of likely loan charge discovery assessments, if you choose to appeal, being part of a group may be a less expensive option. There are some tax and legal consulting firms with specialist loan charge knowledge, who are assisting groups of individuals affected by this situation – a quick look on some contractor forums, where they regularly post updates and information, should provide you with some options.

We are not in a position to endorse or recommend any of the firms discussed and suggest you thoroughly research all your options; however we can provide the following pointers to help you in your research:

• Check that any firm is a member of an appropriate professional body (such as the Law Society or the Chartered Institute of Taxation)

• Check if they are still accepting new entrants into their ‘groups’, that they will carry out the work for a fixed fee and what that fixed fee is.

• Check if they will offer you a half hour free consultation to discuss your case and how they may be able to assist – many good firms will do this.

If you can’t afford advice, you could seek assistance from TaxAid who are helping those on low incomes deal with loan charge issues.