In 2005/06 and 2006/07 three taxpayers created losses using a tax avoidance scheme. The taxpayers then claimed the losses against capital gains on their self-assessment tax returns.
The taxpayers included sufficient information regarding the transactions in the additional information section of the tax returns. As required, the tax returns also revealed the scheme’s Reference Number under the disclosure of tax avoidance scheme (DOTAS) rules.
The scheme in question was subsequently found to be ineffective.
HMRC did not open an enquiry into the taxpayers return in time and therefore instead made a discovery assessment in respect of the gains.
The taxpayers appealed.
The tribunal found that the discovery assessments were not valid. The judge said that while HMRC had made a discovery within TMA 1970 s.29(1), the taxpayers were protected from the discovery assessment by virtue of TMA 1970 s29(5) as they had provided adequate information to allow the assessments to have been made in time.
The judge stated that ‘no officer could have missed the point that an artificial tax avoidance scheme had been implemented’ and it seemed ‘perfectly obvious’ that no one had ‘even looked at the returns’.
The case highlights the importance of disclosing sufficient additional information in the ‘white space’ of a tax return to protect against a future discovery assessment.