HMRC Discovery Assessments Explained

A discovery assessment is HMRC’s power to reopen tax years you thought were closed. If HMRC sends you a discovery assessment, it is claiming the right to collect tax, sometimes interest and penalties too, for a year that may be many years in the past. Understanding the strict legal conditions that must all be met is the foundation of any effective challenge.

What is a discovery assessment?

A discovery assessment is a formal statutory notice raised by HMRC under section 29 of the Taxes Management Act 1970 (“TMA 1970”). It gives HMRC the power to assess an amount of income tax or capital gains tax that was not assessed when it should have been , in other words, to charge tax for a year after that year’s assessment would ordinarily have become final.

The word “discovery” is a term of art. It does not mean HMRC has simply found new documents or run a data-matching exercise. It has a specific legal meaning established by decades of case law, and HMRC must genuinely satisfy the legal test before an assessment is valid.

Discovery assessments apply to individuals, partnerships and trustees. The equivalent provision for corporation tax is Finance Act 1998 Schedule 18 paragraph 41, which follows the same structure.

The three conditions HMRC must satisfy

For a discovery assessment to be valid, all three of the following conditions must be satisfied simultaneously:

1. HMRC has “discovered” an insufficiency of tax. An officer of HMRC must have genuinely formed a subjective belief that tax has been or will be lost. This is more than suspicion, the officer must actually conclude that an under-assessment has occurred.
2. The relevant time limit has not expired. HMRC must raise the assessment within the applicable window (4, 6, 12 or 20 years depending on the circumstances, see below). An assessment raised even one day late is void.
3. Either the taxpayer was careless or deliberate, OR the officer could not reasonably have been expected to be aware of the insufficiency from the return and documents submitted. This is the “gatekeeper” condition in s29(3)–(5) TMA 1970. Where a return was made, HMRC is barred from using a discovery assessment unless one of these two routes is open.

If any one of these conditions fails, the assessment is unlawful and should be appealed.

The discovery threshold, what counts as a “discovery”?

The leading authority is Langham v Veltema [2004] EWCA Civ 193. The Court of Appeal confirmed that discovery requires the officer to have actually formed a view that there is an insufficiency, not merely to have access to information from which that conclusion might be drawn.

This distinction matters enormously. HMRC’s computer systems (the Connect platform) ingest vast quantities of third-party data, bank interest certificates, property transaction records, employer returns, overseas exchange information. The mere fact that this data was in HMRC’s possession does not, by itself, constitute a discovery. A human officer must have processed it and formed the relevant belief.

The flip side, equally important, is that Langham v Veltema also established that a discovery can happen at any time, including years after a return was filed, as long as the officer genuinely reaches the relevant conclusion for the first time. HMRC cannot be said to have “already discovered” something simply because the data was theoretically available to it years earlier; but see the staleness doctrine below.

A discovery can also occur where a previous assessment has become insufficient , for example, where a court decision changes the interpretation of a tax avoidance scheme used by the taxpayer (s29(6) TMA 1970).

The three time windows

HMRC’s ability to raise a discovery assessment is strictly time-limited. The window that applies depends on the taxpayer’s conduct:

4 years, the standard window (s34 TMA 1970)

Where there is no culpable behaviour by the taxpayer, HMRC has 4 years from the end of the tax year in which the assessment was made (which in practice means from the filing date for the relevant return). This applies to ordinary underpayments, including those caused by innocent errors on the return.

6 years, careless behaviour (s36(1) TMA 1970)

Where the loss of tax was brought about by the taxpayer’s careless behaviour, the window extends to 6 years. “Careless” has a specific statutory meaning: failure to take reasonable care. HMRC must establish this, it is not enough to assert it. See our detailed guide to discovery assessment time limits for the Finance Act 2007 Schedule 24 definition and how it applies in practice.

20 years, deliberate behaviour (s36(1A) TMA 1970)

Where the loss was brought about deliberately, HMRC has 20 years. “Deliberate” means the taxpayer knew the position was wrong and proceeded anyway, a much higher bar than carelessness.

12 years, offshore matters (s36A TMA 1970)

For losses involving an offshore element, foreign income, overseas assets, offshore structures, Finance Act 2013 inserted s36A TMA 1970, creating a 12-year window where the behaviour was careless (as opposed to deliberate, which still attracts 20 years). This significantly extends HMRC’s reach for international tax matters.

Careless vs deliberate: why the distinction matters

The distinction between careless and deliberate behaviour does more than determine which time limit applies. It also affects:

• Whether the s29(3) taxpayer-protection provision can be overridden (it can only be overridden by careless or deliberate conduct under s29(4)–(5))
• The penalty range HMRC can impose under Finance Act 2007 Schedule 24
• Whether HMRC can go back 6 years or must accept the 4-year window

HMRC bears the burden of establishing which category applies. In tax tribunal proceedings, HMRC must lead evidence and argument on the point, it cannot simply assert carelessness or deliberateness and invite the taxpayer to disprove it.

Where HMRC seeks to apply the 6-year or 20-year window, the taxpayer’s representative should scrutinise every statement in the assessment notice and covering letter to identify whether HMRC has actually pleaded the necessary behaviour and on what factual basis.

Sufficient disclosure: the taxpayer’s primary statutory shield

Section 29(3) TMA 1970 provides that where a taxpayer has made a return, HMRC cannot issue a discovery assessment unless a hypothetical HMRC officer, one possessed of the information made available to HMRC in the return and accompanying documents, could not reasonably have been expected to be aware of the insufficiency.

This is the concept of sufficient disclosure. If the taxpayer’s return and supporting documents contained enough information to put a reasonable officer on notice of the underpayment, HMRC is blocked from using the discovery route (unless carelessness or deliberateness applies).

The test is objective and hypothetical. It asks what a reasonable officer would have noticed, not whether HMRC’s actual officer did notice. The leading cases on this point are Langham v Veltema and Corbally-Stourton v HMRC [2008] SpC 692, in which the Special Commissioner emphasised that the standard is that of a reasonable, competent officer reading the return with care.

In practice, sufficient disclosure arguments commonly arise where:

• The taxpayer disclosed the existence of a tax avoidance scheme in the return (even if in a footnote or white-space explanation)
• The return showed a capital gain or income item and HMRC is now claiming additional amounts arose from the same transaction
• The taxpayer’s accounts or computations were filed with the return and contained the relevant figures
• HMRC had previously inquired into the same point and closed its enquiry without adjustment

Common triggers for discovery

Discovery assessments typically follow one of these data sources reaching an HMRC officer’s attention:

• Third-party data matching: HMRC receives annual returns from banks (bank interest, savings income), employers (PAYE income), pension providers, letting platforms and share registrars. Discrepancies between these and the taxpayer’s return flag automatically.
• HMRC Connect: HMRC’s proprietary analytics system processes over 30 billion data points and identifies risk indicators including lifestyle mismatches (property purchases inconsistent with declared income), multiple occupancies and offshore flows.
• Common Reporting Standard (CRS) and FATCA: Over 100 jurisdictions exchange financial account data with HMRC under CRS. US financial institutions report to HMRC under FATCA. Undeclared overseas income and assets are a major source of discovery assessments following offshore exchange.
• Informants: HMRC’s hotline receives tens of thousands of tip-offs each year. An estranged business partner, a disgruntled employee or a former spouse can trigger a discovery assessment.
• Property data: Land Registry data on residential and commercial property transactions is cross-referenced against capital gains tax returns and letting income declarations.
• Employer PAYE returns: Discrepancies between P60 data filed by employers and income declared in self-assessment returns are automatically identified.

How HMRC issues a discovery assessment

A discovery assessment is issued by written notice. The notice must:

• Identify the taxpayer and the tax year in question
• State the amount of tax assessed
• Be issued by a properly authorised officer of HMRC (s29(2) TMA 1970, an assessment by an officer without the necessary authorisation is void)

The notice will usually be accompanied by a covering letter explaining HMRC’s position. In many cases HMRC will also issue penalty determinations alongside the assessment.

It is important to note that the assessment fixes an amount of tax, not a final liability. The taxpayer has the right to appeal both the assessment and any associated penalty. The quantum stated in the assessment is HMRC’s opening position, not the final settlement figure and in our experience it is frequently overstated.

The appeal right

A taxpayer who receives a discovery assessment has the right to appeal under s31 TMA 1970. The appeal must be lodged within 30 days of the date of the assessment notice. Missing the deadline is serious, late appeals require either HMRC’s agreement or permission from the First-Tier Tribunal.

The appeal can be directed at any or all of the following grounds:

• No valid discovery was made (the officer had no genuine subjective belief)
• The assessment is out of time under s34 or s36 TMA 1970
• The staleness doctrine applies
• Sufficient disclosure was made under s29(3) TMA 1970
• The quantum is wrong, the amount of tax assessed is overstated
• The accompanying penalty is disproportionate or incorrectly categorised

Before proceeding to the First-Tier Tribunal, the taxpayer may request an HMRC internal review or may go directly to the Tribunal. See our full guide to appealing a discovery assessment for the procedural detail, including postponement of tax under s55 TMA 1970 and the ADR process.

Interaction with s9A enquiries

It is a common misconception that a discovery assessment and a s9A enquiry are mutually exclusive. They are not. HMRC may have an open enquiry into one aspect of a return (for example, a specific expense claim) while simultaneously raising a discovery assessment in respect of an entirely different item that was not covered by the enquiry scope.

More commonly, a discovery assessment is raised after a s9A enquiry has closed. This is permissible provided HMRC has genuinely made a new discovery, one based on information that was not available during the enquiry. If, however, HMRC had the relevant information during the enquiry and simply overlooked it or chose not to pursue it, the staleness doctrine may apply to defeat the later assessment. See our guide to the staleness defence for the detailed analysis.

It is also possible for a discovery assessment to precede an enquiry, for example, HMRC may issue a protective assessment to preserve its time limit while a more detailed enquiry investigation continues.

Frequently asked questions

Related guides in this series

• HMRC discovery assessment time limits: 4, 6 and 20 years explained
• The staleness defence against a discovery assessment
• How to appeal an HMRC discovery assessment
• Section 29 TMA 1970: the statutory power in detail
• Income tax investigation service
• Corporation tax investigation service