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.”