UT confirms that HMRC cannot adopt a 'blanket' approach when issuing a discovery assessment

In HMRC v Harte [2026] UKUT 112 (TCC), the Upper Tribunal (UT) rejected HMRC’s single assessment approach, holding that the gateway in section 29(3), Taxes Management Act 1970 (TMA), must be satisfied for each distinct loss of tax, and a deliberate or careless insufficiency cannot validate the inclusion of less culpable insufficiencies or extend the time limits in section 36, TMA, to the assessment as a whole.

Background

Under section 29(3), TMA, when a return has been filed, HMRC's power to make an assessment is limited unless certain conditions are satisfied, including the "conduct" condition in section 29(4), TMA, which permits HMRC to make an assessment where the insufficiency of tax was brought about carelessly, or deliberately, by the taxpayer. Under section 34, TMA, HMRC has 4 years to issue an assessment, but this period is extended under section 36, TMA, to 6 years for careless conduct and 20 years for deliberate conduct. 

During the course of its enquiries into Shaun Harte, HMRC discovered multiple independent errors. The errors resulted in three distinct categories of behaviour:

(i)   Deliberate: For errors stemming from deliberate under-declarations.

(ii)  Careless: For errors resulting from carelessness.

(iii) Genuine mistakes: Where Mr Harte had taken reasonable care.

Four categories of insufficiency were identified by HMRC: 

(i) undeclared bank receipts (the Bank Statement Insufficiency); 

(ii) personal expenditure on a corporate credit card treated as income (the Credit Card Insufficiency); 

(iii) capital allowance claimed for a vehicle (the Capital Allowance Insufficiency); and 

(iv) a home-office expense claim (the Deductible Expense Insufficiency). 

HMRC therefore issued a number of discovery assessments to Mr Harte, under section 29, TMA, and Mr Harte appealed those assessments to the First-tier Tribunal (FTT).

The FTT was asked to consider whether the conditions in section 29(4), and the time-limit provisions in section 36, operate once in relation to each assessment, or must those conditions be satisfied in respect of each loss of tax included within an assessment?

FTT decision

The appeal was allowed. 

In the view of the FTT, it was open to a taxpayer to demonstrate that an assessment, which included an element of deliberate insufficiency, was excessive to the extent that it also included other insufficiencies in respect of which conduct falling within section 29(4) had not been established by HMRC, or where the 4 or 6 year time limit had expired. 

The FTT found that the part of the assessment that related to the Credit Card Insufficiency should be removed, as the conduct condition in section 29(4) had not been satisfied. The Capital Allowance Insufficiency and the Deductible Expense Insufficiency, which were considered to be careless, should also be removed as the 6 year time limit had expired. The Bank Statement Insufficiency was found to be deliberate. 

HMRC appealed to the UT. 

UT decision

The appeal was dismissed. 

The UT confirmed that HMRC's discovery assessment power is limited to charging the amount that corresponds to the discovered loss which satisfies a condition referred to in section 29(3). Loss of tax not brought about by deliberate or careless conduct, that also does not meet the condition in section 29(5), cannot be included in the assessment. In addition, the extended time limit provisions in section 36 may only be relied on by HMRC if either of the conditions referred to in section 29(4) or (5) have been met.  

The FTT was therefore correct to allow Mr Harte to argue that he had been overcharged to tax insofar as losses of tax did not satisfy the culpability condition in section 29(4) and/or the extended time limits in section 36 did not apply. The FTT had been entitled to remove the Credit Card Insufficiency, which fell outside section 29(4), and to remove the careless insufficiencies where they were outside the applicable 6 year time limit, notwithstanding that other deliberate items remained assessable within 20 years.

Comment 

This decision has important consequences for the process HMRC is required to go through when issuing a discovery assessment. The UT has made it clear that HMRC must analyse each tax issue separately when making a discovery assessment and cannot simply aggregate all issues and apply the strictest rules across the board. This should ensure that taxpayers are not penalised for genuine mistakes made when taking reasonable care, or for issues that are out of time for HMRC to assess. Only those elements that satisfy the relevant statutory criteria can be included in a discovery assessment for earlier years.

The decision also means that HMRC must be more precise in its enquiries and when considering a taxpayer's behaviour. Each issue must be properly considered and supported by evidence. HMRC must address the facts and circumstances of each issue individually, rather than relying on broad arguments.

The decision can be viewed here.