The decision in the first-tier tribunal of Realbuzz Group Ltd v HMRC [2025] UKFTT 493 is a significant moment for UK taxpayers and particularly companies who avail research and development (R&D) relief claims, with the taxpayer’s successful appeal against a discovery assessment denying R&D relief.
The decision of this case has clarified HMRC’s authority in relation to discovery assessment powers, and most importantly, reinforced that time limits must be adhered to.
HMRC cannot simply use discovery assessments as a fallback for when they have failed to issue an enquiry on time, if sufficient disclosure was made.
This has not been the first development in this area, in 2024 the case of Stage One Creative Services Ltd v HMRC [2024] UKFTT 1059 (TC) also highlighted significance and relevance of HMRC timings in issuing their discovery assessment for earlier periods, particularly in relation to R&D claims.
The background
In the case of Realbuzz, the R&D claim for the year to 30 April 2021 was under investigation by HMRC and found that five out of the 10 R&D projects submitted in the company’s claim were not eligible for relief. The inspector issued a discovery assessment in respect of the 2020 claim on the basis that the relief claimed was also excessive.
The appeal here, was that HMRC did not open an enquiry during its statutory enquiry window, and while investigating 2021, it formed a view that the previous year also did not qualify, thus issuing a discovery assessment for 2020.
The legal position
The framework for HMRC to make a discovery assessment into a company tax return is under Schedule 18 to the Finance Act 1998:
- Paragraph 41 permits HMRC to issue a discovery assessment where it discovers that tax has been under-assessed or relief overclaimed.
However, a caveat to this power, is found in paragraph 44:
- No discovery assessment may be made where the officer could reasonably have been expected to be aware of the insufficiency based on information made available before the enquiry window closed.
Therefore, if there is evidence to suggest HMRC could have reasonably known of the tax issue when the enquiry window was open, but ignored this information and did not use the opportunity to appropriately use the time to open an enquiry, it cannot simply issue a discovery assessment to make up for the lost opportunity.
The decision
The decision was based on HMRC having sufficient information available through disclosure in the company tax filings to open an enquiry and conclude the relief was excessive. The burden was on HMRC to prove the discovery assessment was valid. HMRC’s arguments, that the application of the relief was a complex matter and could not be easily determined from the information originally supplied, were rejected, and the appeal against the discovery assessment was upheld by the FTT.
Overall, Judge McKeever held, ‘We have decided that the hypothetical officer should reasonably have been aware at the LDE of the excessive claim for R&D relief and the consequent insufficiency in tax. Accordingly, HMRC is not entitled to raise a discovery assessment.’
A further point is that HMRC cannot assume based on information held in one year, automatically means that prior years are incorrect and warrant a discovery assessment. The tribunal noted in this case that the company returns for the R&D claims for 2021 and the report held for these claims were not sufficiently relevant enough to retrospectively assume an insufficiency of tax had occurred in the previous 2020 return.
The implications
This decision is welcomed by businesses engaged in R&D activities as it affirms the time and effort that goes into the R&D reports, which contain the information to provide sufficient disclosure to HMRC and clarity around earlier years R&D claims. This is a reminder to HMRC to adhere to the statutory provisions when issuing discovery assessments.
This makes a statement on one’s ability to challenge HMRC assessments that do not comply with legislated requirements, especially where disclosure has been made in tax filings.
Taxpayers should ensure that their filings to HMRC are supported with a full and clear disclosure and follow the tax legislation to mitigate the risk of disputes. If you or your business is subject to an HMRC enquiry or have received a discovery assessment from HMRC and require experienced professional assistance please contact Danielle Ford, Head of Tax Disputes and Resolutions.
