Discovery assessments and continuity

The recent case of Kennerley v HMRC (SpC 578) has held that the Revenue's right to raise discovery assessments is not constrained by the self assessment enquiry process. As a consequence, the Revenue will, in certain circumstances, be able to use current knowledge of a taxpayer's negligent conduct to create an effective 20 year rolling enquiry window into future tax returns. Whilst we believe the Commissioner's construction of the law in Kennerley to be the right one, it does rather skew the balance of rights and obligations between the Revenue and the taxpayer in a way which is hard to find as satisfactory. One suspects that the Revenue might already be gearing up to use the discovery route as a blunt tool, with the decision in Kennerley having already been cited to the tribunal in the more recent case of Duffy v HMRC (SpC 596) which, similarly, concerned negligent tax returns by a self employed taxpayer.

In isolation, the decision in Kennerley may be of little obvious practical concern to taxpayers and their agents but, when combined with the presumption of continuity, taxpayers could, without care, find themselves subject to perpetual enquiry. The principle of the presumption of continuity (per Jonas v Bamford [1973] STC 519) holds that a situation will be presumed to continue until there is some change in that situation and, most importantly, that the onus to show that change is placed on the taxpayer.

What does this mean in practice ? It means where once the Revenue can show that a taxpayer has been negligent in a given tax year, the Revenue can presume the taxpayer has continued to be negligent in later tax years unless, and until, the taxpayer proves, on the balance of probabilities, that the reason for the negligence (or fraud) has ceased. In instances where the reason for the negligence is an isolated event, such as the one off failure to declare a source of investment income, it should be relatively straightforward to show that the situation has changed and, thereby, rebut the presumption of continuity which the Revenue would otherwise be able to rely upon. In other circumstances, being where the taxpayer is a self employed small trader with less than brilliant records, the ability to show that the reason for negligently under-declared profits in a given tax year has since ceased may be much harder to evidence.

Wherever possible, following a routine enquiry in which negligence has been agreed to exist, it can only be to the taxpayer's advantage to do whatever is considered reasonable, in the circumstances, to record that the reason for the negligence has ceased and to seek the Revenue's acknowledgment of that assertion. To fail to do so could leave the taxpayer open to the risk of future discovery assessments, and thereby deprive the taxpayer of any certainty that his tax affairs are considered final.