The question of what constitutes a ‘discovery’ continues to cause disagreements between HMRC and taxpayers.  A further case on the matter was recently heard by the Upper Tier Tribunal.  Interestingly, the question of negligence on the taxpayer’s part was also considered.


The taxpayer appealed against the First-tier Tribunal’s decision to uphold a ‘discovery’ assessment.   HMRC were also cross-appealing one part of that decision.

Mr Sanderson filed his 1998/99 tax return in February 2003. He claimed losses of around £2m to set against a chargeable gain of £1.8m.

These losses arose as a result of an avoidance scheme in which he had participated, claiming the benefit of Trust Fund losses in the Castle Trust scheme under TCGA 1992, s. 71(2). Some limited additional information in relation to this claim was given in the ‘additional information’ box on the return.

HMRC had been investigating the Castle Trust scheme since 1999 through the Special Compliance Office and Special Investigations Section. In July 1999, HMRC had a list of the users of the scheme, but Mr Sanderson’s return was not submitted until 2003.  By that point the scheme was found to be ineffective, and its capital losses were reduced to nil. Mr Sanderson was informed of this by the scheme promoter in January 2004.  On contacting his accountants he was advised to do nothing.

In late 2004 the Inspector became aware that Mr Sanderson’s return had been filed and raised a discovery assessment in January 2005. The normal enquiry window for the return had closed on 30 April 2004 which all parties agreed.

The First-tier Tribunal (FTT) had found that there had been a ‘discovery’ by HMRC and that an officer could not reasonably have been expected, on the information made available to him, to have been aware of the insufficiency.  However they determined that the insufficiency of tax was not attributable to negligent conduct on the part of the taxpayer or anyone acting for him.

Both the Taxpayer and HMRC were appealing against the decisions against them in the FTT.


The taxpayer claimed HMRC knew about his participation in the scheme before he submitted his return and as they had decided the Castle Trust scheme was not effective before he filed, they should have been aware of tax insufficiency before the enquiry window closed.

The Upper Tribunal found that the return did not contain enough information to make an HMRC officer aware that there was a tax insufficiency by itself, despite the fact that it would have alerted a hypothetical official to the fact the taxpayer was taking part in the scheme.

The discovery assessment was therefore valid, and Mr Sanderson’s appeal was dismissed.

However, on the question of negligence, the Upper Tribunal found in favour of the taxpayer.  They did not accept HMRC’s contention that the taxpayer’s adviser was negligent in advising to do nothing further on discovering that the Castle Trust scheme was ineffective.  Interestingly, the judge noted there was “no statutory provision imposing an obligation on a taxpayer to tell HMRC about something in a filed return that he subsequently finds to be erroneous.”

The recent First-Tier Tribunal (FTT) case of Donovan & McLaren v HMRC has confirmed that regular dividend waivers constitute a settlement for Income Tax purposes.


It was argued by HMRC that the effect of the dividend waivers and the intention of them was to allow higher dividends to be paid to the two directors’ wives than their respective shareholdings entitled and lower dividends to be received by the two directors.

HMRC stated that according to ITTOIA 2005 s.620 the directors’ dividend waivers and the consequent payment of dividends to their wives constituted an arrangement that can be defined as a ‘settlement’ whereby the directors were the settlors. HMRC inferred that the directors waived entitlement to dividends as part of a plan that dividend income otherwise due to the directors would be paid to their wives, therefore constituting an ‘arrangement’ under the settlements legislation. It was argued that this scheme was used for tax avoidance purposes so that the directors and their wives could reduce this aggregate liability income tax by using the wives’ unused basic rate band of tax.

HMRC rejected the alleged commercial rationale for executing the dividend waiver which was to maintain reserves and cash balances in order to accumulate sufficient of each to fund the purchase of the company’s own freehold property. They contended that this could have been more easily achieved by voting a lower rate of dividend.

The settlements legislation also requires an element of bounty to be part of the arrangement. Consequently, HMRC argued that the directors’ arrangement was not one that was entered into at arm’s length and the arrangement therefore contained an element of bounty.


The two directors failed to provide any evidence to defend their position other than inferences from previous correspondence submitted by them and their accountant. Furthermore it had been admitted by the appellants and their agent in a letter to HMRC that ‘dividend waivers are by their very nature not on arm’s length or commercial’ which substantially weakened their appeal.

They had also argued that structuring the waivers as they did was tax efficient and made commercial sense.


The FTT found that the directors had waived their entitlement to dividends as part of a plan to ensure that the dividend income became payable to their wives so as to reduce their aggregate liability to Income Tax. The income which arises from the dividend waiver arrangement clearly arose during the lives of the director and the dividend income paid to their wives from their shares together with the dividend rights attached to them are benefits enjoyed by the directors’ wives. On the balance of probabilities the FTT accepted the submissions by HMRC; including the opinion that there was no commercial purpose for the waivers and that they did not have taken place at arm’s length.

The FTT also found that there was a lack of sufficient distributable reserves within the company were it not for the directors waiving the dividends.

Finally, they rejected the claim by the directors that the discovery assessments raised by HMRC were invalid. All appeals asserted by the two directors were dismissed.


This case serves as a reminder that companies need to be cautious when considering the use of dividend waivers. The definition of a ‘settlement’ is wide-ranging and to avoid being caught in an arrangement which may constitute a settlement arrangement it is best to seek professional advice.

There are options that remain effective for efficient tax planning through family companies that can be used without the need for dividend waivers. Seeking professional advice in advance is preferable to finding out the planning did not work in the Courts.

HMRC have recently won 2 cases where the taxpayer failed to show they had ‘reasonable excuse’ for their conduct and so suffered penalties.

In Crownfield the finance director was unfortunate in that he had not appreciated that the tax climate had changed.  In earlier times he had been able to negotiate making PAYE payments late.  Thus, cash flow problems had led him to assume HMRC would accept late payment.  Indeed, he admitted he may have paid on time if he had realised there was a penalty.  The Tribunal found that this effectively precluded saying that any unexpected event was a legitimate excuse.

In EN Jones the taxpayer argued that neither her advisers nor HMRC had told her how much tax was due, so she had a reasonable excuse for not paying on time.  The Tribunal found that she had been under self-assessment for some time, so knew tax was due each January 31.  She should therefore have been more active in finding out what was due.


Again the case law points to the fact that taxpayers have a duty to be active and diligent in meeting their tax obligations, but implicitly reasonable excuse can go beyond ‘death, disease or disaster’.  It all depends upon the facts and being ‘reasonable’.

A recent case concerned an application for an appeal relating to years that would normally be outside of the appeal window.
Background and Facts
The taxpayer’s returns for 1997/98 and 1998/99 were amended by HMRC after she had left the UK to live in Spain.  HMRC were informed of her departure (after the enquiries were raised) but continued attempting to contact the taxpayer at her old address for the next three years.
Assessments were also raised by HMRC for 2000/01 and 2001/02, and having located Mrs Davison’s details in Spain were able to deduct funds from her Spanish bank account.  In 2008, she telephoned HMRC receiving confirmation that the tax due on the assessments for those two years had been incorrectly raised and that the tax was not due.
Mrs Davison therefore asked for a refund of the tax, however HMRC said this was not possible as tax was still due on the earlier assessments for the years 1997/98 and 1998/99. This was the first she had heard of the earlier year assessments as they had not been sent to her in Spain.
The representative for HMRC indicated that if she wanted a repayment they would seek payment for the tax due and she might lose the case. As a result, she believed that by not pursuing the matter further it would be resolved (as suggested by HMRC).  This was confirmed by HMRC’s internal notes, which stated they “now consider this case closed”.
She applied for a repayment in 2012 having returned to the UK but this was refused by HMRC because of the outstanding 1997/98 and 1998/99 liabilities.
She therefore sought to appeal the assessments which HMRC claimed were now out of time.
In making its decision the Tribunal noted that HMRC could have confirmed the assessments for 1997/98 and 1998/99 were still due at any point from 2001 until 2011 but had not done so.
Mrs Davison was reasonable in her belief that the assessments had been vacated, and therefore would have had no reason to think she needed to appeal.
The application for the right to appeal out of time was allowed.
The case shows the importance of taxpayers asserting their rights and challenging HMRC’s occasionally draconian application of the rules on appeals.  It is worth remembering that out of time appeals can be sought in suitable circumstances.

The case of A Dickinson involved private residence relief and rested on when the character of land ceases to be that of garden and grounds where there is development planned.
The taxpayer owned a house with large garden and grounds, including a tennis court.  In 1989 part of the taxpayer’s garden and tennis court were included in a developer’s approved planning permission application.   The taxpayer had continued to automatically renew the planning permission every three years.
Sometime in 2006 the taxpayer learned that she was no longer going to be able to automatically renew the planning permission.  She therefore decided that rather than sell the land direct to a developer she would  design and build the houses herself. So, with her husband and two friends she formed a company, “Ilex Developments Limited” to manage the project.
On 14 December 2006, Ilex “agreed”, subject to contract, to buy the land. Solicitors were instructed by each party.
The taxpayer said that at this stage she assumed (erroneously) that contracts had been exchanged, and Ilex was given permission to start work on the groundwork for the development, which it did on 7th June 2007.
There were in fact some teething issues with the highways agency and contracts were not actually exchanged until 27 July 2007.
Mrs. Dickinson’s 2007-08 tax return was submitted but did not disclose the land sale on the basis that Private Residence Relief was applicable under s.222 TCGA 1992, as the land formed the garden and grounds of her private residence.
HMRC’s Position
An enquiry into the return was subsequently raised.
HMRC refused the claim on the basis the land was already under development when the contracts were exchanged.  They argued that it had to be available to the owner as “garden or grounds” on the date it was sold for relief to be granted.
As a result they raised an assessment to tax of £48,314.20 plus interest.
First-tier Tribunal’s Decision
They concluded that the commencement of ground works by Ilex did not constitute a “material start”,  thus permanently changing the legal status or character of the land.
This was because without an unconditional exchange of contracts, or some other form of legally binding pre-contract, permitting entry onto and development of the land, it cannot have been the parties’ intention.
For land to lose its character as “garden or grounds”, the change must be permanent or regarded as permanent.  The change cannot be transient or conditional.
Ilex was allowed onto the land disposed of to start foundation work on an informal basis.  There was no agreement allowing Ilex access onto the land to carry out the works.  At any stage prior to formal exchange of contracts, if for example the access problem had proven to be insurmountable, either party was at liberty to “walk away” from the transaction.
If the transaction had not progressed to completion it could not be suggested that the land had temporarily ceased to be “garden or grounds”, only to have reverted to its original status on the transaction becoming abortive.
They concluded that when Ilex entered onto the land and started the works it did not constitute a disposal of the land.  The land therefore retained its character as “garden or grounds” within the meaning of s 222(1)(b) until the time of its disposal on 27 July 2007 when contracts were exchanged.
The disposal of the land therefore attracts principal private residence relief and the taxpayer’s appeal was allowed.