HMRC Discovery Assessments — When HMRC Can Reopen Your Tax Return (UK Trade Business Guide)

What Is a Discovery Assessment?

A discovery assessment is HMRC's power, under section 29 of the Taxes Management Act 1970 (s29 TMA 1970), to raise an assessment for additional tax outside the normal enquiry window when they "discover" that income or gains have not been assessed, or have been under-assessed. In plain terms: if HMRC later finds out that tax should have been paid and wasn't — because something was undeclared, under-declared, or relief was over-claimed — they can come back and assess it even though the standard window to open an enquiry has long passed.

For companies the equivalent power sits in paragraph 41 of Schedule 18 to the Finance Act 1998, but the principle is identical. A discovery assessment is not the same as an enquiry — it is the tool HMRC reaches for precisely because the enquiry window has closed.

The Normal Enquiry Window vs Discovery

When you file a Self Assessment return, HMRC normally has 12 months from the date you filed to open an enquiry into it. During that window they can ask questions, request records and adjust the return. Once those 12 months expire and no enquiry was opened, the return is — in normal circumstances — final.

Discovery is the exception. It allows HMRC to go behind a return that has become final, but only where specific statutory conditions are met. It exists to catch tax that genuinely slipped through, not to give HMRC a second bite at a year they simply chose not to look at closely. The longer time limits attached to discovery are the reason this power matters so much to trades who deal in cash, subcontract under CIS, or have income HMRC sees from third parties.

The Time Limits — 4, 6 and 20 Years

How far back HMRC can reach with a discovery assessment depends entirely on your behaviour. This is the single most important concept in the whole topic, because the same set of facts can be assessable for 4 years or 20 years depending on how HMRC classifies what happened.

• 4 years — the standard limit where the loss of tax was an innocent error or the return was simply wrong despite reasonable care.
• 6 years — where the loss of tax was brought about carelessly (failure to take reasonable care).
• 20 years — where the loss of tax was brought about deliberately, or where there was a failure to notify chargeability, or in certain offshore situations.

The clock runs from the end of the tax year of assessment, not from when you filed. Note also that the burden of proof matters: for the 6 and 20-year limits, HMRC generally has to demonstrate the careless or deliberate behaviour — it isn't enough for them to simply assert it.

The Conditions HMRC Must Meet

HMRC cannot raise a discovery assessment just because they've changed their mind. Under s29, once a return has been filed, one of two conditions must be satisfied:

• Condition A — careless or deliberate behaviour: the loss of tax was brought about carelessly or deliberately by you or someone acting on your behalf (such as an accountant).
• Condition B — insufficient disclosure: at the time the enquiry window closed, HMRC could not reasonably have been expected to be aware of the situation based on the information made available to them in the return and accompanying disclosure.

Condition B is why full disclosure is so powerful as a defence. If you put HMRC on notice of a contentious point in your return — typically in the "white space" (the additional information boxes) — and they didn't open an enquiry, they generally cannot later use discovery to assess that same point. They had the information and chose not to act on it.

Staleness and Taxpayer-Protection Rules

For years there was a developing argument that a discovery could become "stale" — that if HMRC discovered something but then sat on it for a long time before raising the assessment, the discovery lost its validity. The Supreme Court has since significantly narrowed this. In practice you should not rely on staleness as a defence; the courts have made clear that the statutory time limits, not a separate staleness doctrine, are the main protection.

What does protect you are the genuine statutory safeguards: the requirement that HMRC actually make a discovery, the Condition A / Condition B tests, the time limits tied to behaviour, and the hypothetical-officer test in Condition B (what a reasonable HMRC officer could have been expected to deduce from the information made available). These are real and frequently win appeals where the return contained adequate disclosure.

What Triggers a Discovery Assessment

HMRC rarely raises a discovery out of thin air. There is almost always a trigger — a piece of new information that prompts them to look back. For trade businesses the common triggers are:

• Undeclared cash jobs: the classic trade risk. Cash work that never reached the books is the most common reason trades end up facing a discovery, often surfacing through a customer dispute, an informant, or a lifestyle that doesn't match declared income.
• CIS mismatches: under the Construction Industry Scheme, contractors report payments and deductions for every subcontractor. If your declared turnover doesn't line up with the CIS returns filed about you, HMRC sees it.
• Offshore income: bank accounts, property or income held abroad. Automatic exchange of information between tax authorities means HMRC routinely receives offshore data, and offshore matters carry the longest assessment windows.
• Third-party data: banks, payment processors, online marketplaces and letting platforms all report to HMRC. A card-machine provider or an online tool platform reporting your takings can expose a gap.
• The Connect system: HMRC's data-analytics platform cross-references dozens of sources — Land Registry, DVLA, bank interest, Companies House, social media, card transactions — to flag taxpayers whose declared income looks inconsistent with the data held about them.

How to Protect Yourself

The best defence against a discovery assessment is making sure HMRC never has grounds to raise one — and, where a point is genuinely arguable, making sure you've disclosed it so Condition B protects you.

• File accurately and declare everything: every job, cash or card, on the books. The vast majority of discovery problems trace back to income that was simply never recorded.
• Use full white-space disclosure: where a figure relies on a judgement, an estimate, or a position HMRC might challenge, explain it in the additional information box. Putting HMRC on notice closes off later discovery on that point.
• Keep records for long enough: sole traders must keep records for at least 5 years after the 31 January filing deadline for the relevant tax year; limited companies must keep records for at least 6 years from the end of the accounting period. Given the 20-year window for deliberate behaviour, keeping records longer is sensible if anything is ever in dispute.
• Reconcile against CIS: if you subcontract, check your declared income against the CIS deductions reported about you so the figures never diverge.
• Take reasonable care: the difference between the 4-year and 6-year limit is "reasonable care". Good systems, a competent accountant and a clear audit trail are evidence that you took it.

What to Do If You Receive a Discovery Assessment

A discovery assessment is not the final word. It is HMRC's opening position, and there are several things to check before you accept or pay it.

• Check it is valid: has HMRC actually made a genuine discovery, and is at least one of Condition A or Condition B satisfied? If you made full disclosure in the return, Condition B may not be met.
• Check the time limit: confirm whether the year falls inside the 4, 6 or 20-year window for the behaviour HMRC is alleging. An assessment raised outside the correct limit is invalid.
• Challenge the behaviour classification: HMRC may allege "deliberate" to unlock the 20-year window and higher penalties. If the reality is an innocent error or, at worst, carelessness, push back — the classification drives both the time limit and the penalty.
• Appeal within 30 days: you have 30 days from the date of the assessment to appeal. Lodge the appeal in writing and, if appropriate, request that payment of the disputed tax is postponed while the matter is resolved.
• Consider Alternative Dispute Resolution (ADR): ADR brings in a trained HMRC mediator to help both sides reach agreement without going to tribunal. It is often quicker and less adversarial, particularly where the dispute is about facts and figures rather than law.
• Get professional advice: for anything beyond a small, clear-cut adjustment, an accountant or tax adviser experienced in disputes is worth the fee.

Penalties — Careless vs Deliberate

Where a discovery assessment results in extra tax, HMRC will usually also seek a penalty, and the penalty is driven by the behaviour. Penalties are charged as a percentage of the additional tax (the "potential lost revenue"):

• Careless behaviour: a penalty of up to 30% of the tax, reducible substantially for an unprompted disclosure and full cooperation.
• Deliberate (not concealed): up to 70% of the tax.
• Deliberate and concealed: up to 100% of the tax — and higher again for offshore matters.

The amount you can knock off the penalty depends on the quality of your disclosure: telling HMRC, helping them quantify it, and giving them access to records. A genuine innocent error taken with reasonable care should attract no penalty at all — which is exactly why being able to evidence reasonable care matters so much.

How Good Record-Keeping and Job Tracking Helps

Almost every discovery dispute comes down to one question: can you back up your figures? A trade that records every job, every quote, every invoice and every payment as it happens has a complete, contemporaneous audit trail. That trail does three things. It makes sure income is captured in the first place, so there's nothing for HMRC to "discover". It evidences reasonable care, which keeps you in the 4-year window rather than the 6-year one and away from penalties. And if HMRC does come knocking years later, it lets you answer their questions from records rather than memory.

The trades who get hurt by discovery assessments are usually the ones who priced jobs on the back of a van and took cash without recording it. Systematic job tracking removes that risk by design — the work, the invoice and the payment are logged together, reconciled against your bank and your CIS position, and ready to produce on demand.

Quick Reference: HMRC Assessment Time Limits by Behaviour

Time limits run from the end of the tax year of assessment. This table is a general guide for UK trade businesses and not a substitute for professional advice on your specific situation.