If HMRC discover that a person has not declared all his income, they may make an assessment to make good the loss of tax to the Crown. The exact wording of the statute is to be found in Taxes Management Act 1970 Section 29.

It should be noted however that unlike S28C (Determination where no return is delivered) where an Inspector may make a determination to the best of his information or belief, there is no such power under S29. HMRC have to actually discover  a finite amount of tax which has not been paid and then make an assessment to make good the loss to the Crown.

TIME LIMITS

The ordinary time limit for making an assessment under S29 is given by S34 and is not more than 4 years after the end of the year of assessment to which it relates.  For example:  if HMRC discovered that there was undisclosed income for 2006/07, they would have 4 years from the 5th April 2007 to make an assessment under S29, in other words up to the 5th April 2011.

However, an assessment may be made under S36. This section is headed “loss of tax brought about carelessly or deliberately”

In the case of the loss of tax being brought about carelessly, the time limit for making an assessment under S36 is not more than 6 years after the end of the year of assessment to which it relates.

In the case of the loss of tax being brought about deliberately, the time limit for making an assessment under S36 is not more than 20 years after the end of the year of assessment to which it relates.

All the statutes to which I have referred are after the amendments made by Finance Act 2008 Schedule 39 which came into force on the 1st April 2010.

CARELESSLY OR DELIBERATELY?

Careless

If a person completes his tax return and is unsure how to do it but does not ask for help and consequently makes an error, he has been careless. If a person completes his tax return, not caring very much whether it is right or wrong and consequently makes an error, he has been careless. If however a person makes an honest and genuine mistake in his return, he has not been careless. We all make mistakes and HMRC make more of them than anybody else!

Deliberate

If a person makes a deliberate error in his return, designed to make him liable for less tax than would otherwise be the case, then this is clearly an attempt to defraud the Crown but the error does have to be deliberate rather than just careless.

Undeclared Income - A Discovery Assessment