The question of what constitutes a discovery remains an area of ambiguity, although recent cases tended to have sided with HMRC’s view that virtually anything can be considered a discovery.
A further recent case was heard on the subject in N Pattullo v HMRC (TC03958), although the decision in the case is unlikely to be too controversial or unexpected, especially considering the case involved an avoidance scheme. In the current climate, the courts are tending to be reluctant to favour taxpayers in cases where they have used an avoidance scheme.
Mr Pattullo participated in a scheme which generated capital losses of around £2.6m which he reported on his 2003/04 tax return. HMRC concluded that he had participated in an avoidance scheme and issued a notice under TMA 1970, s.20(1) requesting relevant documents. The taxpayer did not comply with this request and instead sought a judicial review to revoke the notice, but this request was dismissed by the Court of Session in 2009.
In the meantime, the Court of Appeal had found in favour of HMRC in the case of J Drummond v CRC (2009) which involved a similar second-hand insurance policy scheme. Therefore, HMRC raised a discovery assessment for £835.400 as they were now satisfied that his original return was incorrect.
The taxpayer appealed, arguing that there had been no discovery as no new information had come to light. The Tribunal found that the decision in Drummond v CRC constituted a discovery as it converted a “suspicion” of an underpayment of tax into a “positive view”. It was doubtful that a hypothetical officer would have been aware of these avoidance schemes before the Drummond case was heard.
The taxpayer made a final attempt to protect his position by arguing that the grounds of his appeal should be amended to argue that the original avoidance scheme actually worked. This was again dismissed by the tribunal who felt that, bearing in mind there were a number of appeals on similar schemes to Drummond pending, he was trying to jump on a “bandwagon” allowing other taxpayers to argue his case for him. They felt the amendment was too vague and dismissed the appeal.
The final decision will likely not be a surprise to many, but does highlight the current attitude of the courts to the use of such avoidance schemes, and the wide definition of “discovery” that HMRC are using.