Discovery assessments may only be made in very specific circumstances.  The recent case of Ho v HMRC (UKFTT387) has hopefully taught HMRC a few lessons.

Mr Ho was a London cabbie operating out of Heathrow.  HMRC’s enquired into his 2003/4 return and:

• undertook a cash flow test
• assumed a pattern of working and
• estimated private expenses

to discredit the accounts and rebuild turnover for the year.  Based on this the officer had made discovery assessments for an additional six years.

The FTT found for Mr Ho  who was seen as “an honest, straightforward and truthful witness”.  They found the errors HMRC had used to discredit the records were acidental and insufficient to amount to negligence.  They rejected HMRC’s methods and accepted that there was no 2003/4 under-assessment.  As a result discovery assessments could not stand.

The credibility of the taxpayer was contrasted with HMRC’s behaviour.  Costs were sought by Mr Ho and the Tribunal gave a strong indication that costs would be awarded.  So straightforward mistakes can be other than negligent/careless but HMRC’s blinkers were only taken off after the expense of much time and energy.  If considering litigation a key point is the taxpayer’s credibility as a witness.  Not only what they have to say but how they say it.