Sanderson v HM Revenue and Customs

For the second condition governing a discovery assessment under section 29(5) of the Taxes Management Act 1970, the hypothetical officer must be reasonably expected to perceive an actual insufficiency from the information defined by section 29(6). Information which merely prompts further enquiry does not suffice.

Awareness is a matter of perception and understanding, assessed by judgment rather than a standard of proof. The officer need not resolve every legal dispute, although legal complexity may prevent adequate factual disclosure from establishing awareness. The test differs from the real officer’s discovery under section 29(1): section 29(5) tests the adequacy of the taxpayer’s disclosure at a fixed time and by reference to limited statutory sources.

The taxpayer claimed a capital loss generated through the Castle Trust tax scheme against a chargeable gain. His return disclosed the claimed loss, its trust origin and the small amount received from the trust, but omitted the reciprocal derivatives and other transactions underlying the scheme. HM Revenue and Customs did not open a timely enquiry and later issued a discovery assessment under section 29 of the Taxes Management Act 1970.

The First-tier Tribunal upheld the assessment. The Upper Tribunal, Newey J, dismissed the taxpayer’s appeal in [2013] UKUT 0623 (TCC). Before the Court of Appeal, the scheme’s ineffectiveness and the absence of fraud or negligence were no longer disputed. The sole issue was whether the second condition in section 29(5) permitted the assessment.

1. Appeal dismissed unanimously. The Upper Tribunal was entitled to find that the second condition in section 29(5) of the Taxes Management Act 1970 was satisfied. The information made available by the taxpayer did not enable the hypothetical officer reasonably to be expected to perceive an actual insufficiency in the self-assessment.

2. Section 29(5) concerns a hypothetical officer of general competence who possesses a reasonable understanding of the law. The officer’s awareness must concern an actual insufficiency, rather than a reason to question the return or to make further enquiries. The assessment is confined to the information made available within section 29(6).

3. The statutory concept of awareness does not import the balance of probabilities or any other standard of proof. It concerns perception and understanding. The disclosed information must justify an assessment, but the hypothetical officer need not resolve every potential factual or legal dispute. Legal complexity may nevertheless mean that even adequate factual disclosure does not create the required awareness.

4. The requirements of sections 29(1) and 29(5) are distinct. A real officer makes a discovery under section 29(1) using all information available when the assessment is issued. Section 29(5), by contrast, restricts that power by testing a hypothetical officer’s assessment at a fixed time and by reference to limited statutory information. Its purpose is to test the adequacy of the taxpayer’s disclosure.

5. The return might have alerted an officer to a tax scheme, but it omitted the reciprocal option, the funding transaction and the change of trustees. Those omissions prevented an informed application of the purposive approach to the relevant capital gains provisions. Suspicion that the loss was artificial, or knowledge that comparable schemes had later been blocked, did not establish awareness of an actual insufficiency.

6. HMRC’s internal views and investigation results could not be attributed to the hypothetical officer. Under section 29(6)(d)(i), the existence and relevance of further information must be reasonably inferable from the taxpayer’s disclosure and must relate to the insufficiency. Inference cannot substitute for disclosure. Nothing in the return supported an inference that another HMRC department held relevant information about the scheme.

Patten LJ delivered the judgment. Briggs and Simon LJJ agreed.

1. Court of Appeal (Civil Division): Dismissed the taxpayer’s appeal and affirmed the Upper Tribunal’s conclusion that the section 29(5) condition was satisfied: [2016] EWCA Civ 19.
2. Upper Tribunal (Tax and Chancery Chamber): Newey J dismissed the appeal from the First-tier Tribunal: [2013] UKUT 0623 (TCC).
3. First-tier Tribunal (Tax Chamber): Upheld the discovery assessment issued under section 29 of the Taxes Management Act 1970.