Discovery assessment upheld by the Court of Appeal despite disclosure in return

The Court of Appeal decision in the case of David Stephen Sanderson v HMRC [2016] EWCA Civ 19 represents yet a further stumbling block for those taxpayers faced with a discovery assessment who have made a disclosure on their tax return. Upholding the decisions of the First and Upper Tier Tribunals, the Court of Appeal found that the discovery assessment was valid on the basis that there was insufficient information upon which to open an enquiry during the relevant period, despite the avoidance scheme in question being disclosed on the return.


When the appellant submitted his 1998/99 tax return on 24 February 2003, it included details of a marketed avoidance scheme which he had used to generate capital losses. The wording included on the white space had been provided to him by the scheme promoter and approved by leading tax counsel.  The return was submitted and no enquiry opened.

In July 1999, HMRC’s Special Compliance Office (SCO) was provided with a list of 200 taxpayers who had participated in this scheme, including Mr Sanderson. No enquiry was raised at this stage as his 1998/99 return had not been filed.  In November 2003 it was agreed between HMRC and the scheme promoters that the losses generated under the scheme would be reduced to nil.  In October 2004 it became apparent to SCO that Mr Sanderson had filed his 1998/99 tax return claiming the losses and in the following January a discovery assessment was raised.

The Decision

It was not disputed at any stage that a valid discovery had been made. Neither did HMRC attempt to contend that the appellant had acted negligently in submitting an incorrect return.  It was therefore for the Court of Appeal to decide whether the disclosure included on Mr Sanderson’s 1998/99 tax return provided enough information to make the hypothetical HMRC officer aware of an insufficiency.

Mr Sanderson contended that the white space note on his return clearly stated his involvement in the scheme and that losses had been generated as a result. Also, HMRC were aware of his involvement in the scheme before the return was submitted, thanks to the list passed to SCO back in July 1999.

The SCO inspector who raised the discovery assessment in January 2005 admitted that had he seen the return during the enquiry window, he would have acted on this and opened an enquiry. It therefore followed that another officer should have acted accordingly and opened an enquiry.

The discovery legislation at Section 29(5) TMA 1970 states that information is ‘made available’ to HMRC if it is:

  • Contained in the taxpayer’s return for the relevant tax year (return), or in any accounts, statements or documents accompanying the return.
  • Contained in any claim for the relevant tax year by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim.
  • Contained in any documents, accounts or particulars that, for the purposes of any enquiries into the return or any such claim by an HMRC officer, the taxpayer produces or provides to the officer.
  • Information the existence of which, and the relevance of which as regards the situation mentioned in section 29(1) of TMA 1970: an HMRC officer could reasonably be expected to infer from information falling within the first three categories above; or the taxpayer notifies in writing to an HMRC officer.


The argument put forward by HMRC focussed on the last of these, and what a hypothetical officer could reasonably be expected to infer from the information provided. The simple fact that there was a loss shown on the return and this was attributable to a scheme was not in itself enough to make the officer aware of an insufficiency.  The officer who reviewed the return was not aware of the list held by SCO and he could not reasonably be expected to have inferred from what was made available that additional information was held elsewhere within HMRC.  The existence of the scheme may have led the officer to speculate as to a potential insufficiency but it could not be inferred from this.

The Court of Appeal decided in favour of HMRC, that a valid discovery assessment had been raised. It was noted that the information provided on the return may have prompted the hypothetical offer to ask further questions, but this does not meet the conditions of Section 29(5) TMA 1970.

Why does this matter?

The decision in this case may be compared to that in Charlton, when the inclusion of the DOTAS number on the return was deemed sufficient for the hypothetical officer to infer the existence of additional information relating to the scheme. This case preceded DOTAS and no reference number was shown.

This case is a further reminder, if one were needed, that only the fullest disclosures providing specific details are likely to prevent a discovery assessment from being raised further down the line. When submitting a return which includes a disclosure of any kind, it is unwise to assume that the individual reviewing the return will be aware of other initiatives going on within the department.

If you have a query regarding a discovery assessment or would like advice in relation to including a disclosure on the tax return, please call TaxDesk on 0845 4900509 and ask for Isobel Clift.