Clarifying Discovery Assessments under Section 29 TMA 1970: Charlton & Ors v. Revenue & Customs [2011] SFTD 1160

Introduction

The case of Charlton & Ors v. Revenue & Customs ([2011] SFTD 1160) delves into the intricacies of Capital Gains Tax (CGT) assessments, specifically focusing on the validity of discovery assessments under the Taxes Management Act 1970 (TMA 1970), particularly section 29. The appellants, Dr. Michael Charlton, Mrs. Barbara Corfield, and Mr. John Corfield, contested the decisions made by Her Majesty's Revenue and Customs (HMRC) regarding the denial of artificial capital losses they sought through participation in a tax scheme promoted by Tenon Limited.

The core issues revolved around whether HMRC's discovery assessments were valid under subsection 29(1) of the TMA 1970, especially in scenarios where no new facts or changed legal interpretations had emerged. Additionally, the application of subsection 29(5)—which deals with the notional officer's obligation to consider available information before the closure of the enquiry window—was scrutinized.

Summary of the Judgment

The First-tier Tribunal (Tax) examined whether HMRC had appropriately applied sections 29(1) and 29(5) of the TMA 1970 in making discovery assessments that denied the appellants the artificial capital losses they claimed. The tribunal evaluated the definitions and applications of "discovery" within subsection 29(1) and the responsibilities of the notional officer under subsection 29(5).

Ultimately, the tribunal concluded that HMRC's discovery assessments were not valid. The decision underscored that without new facts or a changed view of the law, and considering the information available to the notional officer at the closure of the enquiry window, HMRC could not justifiably issue discovery assessments. Hence, the appeals by Charlton and the other appellants were allowed.

Analysis

Precedents Cited

The judgment extensively referenced landmark cases to interpret and clarify the provisions of section 29 of the TMA 1970. Notable among these were:

Cenlon Finance Co. Ltd v. Ellwood - Established that HMRC could make discovery assessments based solely on a change of mind or differing views by Inspectors, without the necessity of new facts.
Scorer (Inspector of Taxes) v. Olin Energy Systems Ltd [1985] 1 AC 645 - Confirmed that sub-section 29(1) allows discovery assessments even if no new facts have emerged, provided there is a legitimate basis for believing an understatement exists.
Simon Langham (Inspector of Taxes) v. Frederick Veltema [2004] EWCA Civ 193 - Clarified the application of sub-section 29(5), emphasizing that it pertains to the information explicitly available to the notional officer, without extending to further research or consultations.
Corbally-Stourton v. HMRC (2008) SPc 00692 - Discussed how factual disclosures in returns impact the reasonableness of discovery assessments.
Pattullo [2009] CSOH 137 - Addressed the need for returns to sufficiently disclose information to allow the notional officer to determine the accuracy of tax assessments.

These precedents collectively shaped the tribunal's interpretation of what constitutes a valid discovery assessment and the extent to which HMRC can rely on existing information without uncovering new facts or changing legal interpretations.

Legal Reasoning

The tribunal's legal reasoning hinged on a twofold analysis:

Interpretation of Sub-section 29(1): The court upheld HMRC's view that discovery assessments under this sub-section do not necessitate the emergence of new facts or a change in the law. Instead, a simple change in the Inspector's perspective or the involvement of a new Inspector with a differing view suffices to justify such assessments.
Application of Sub-section 29(5): This sub-section provides taxpayers with a safeguard against unjust discovery assessments by asserting that assessments cannot be made unless a notional officer, based on available information at the closure of the enquiry window, reasonably believes there has been an understatement of tax. The tribunal determined that the appellants had adequately disclosed their participation in the Tenon scheme, including the Scheme Reference Number (SRN), which should have alerted the notional officer to the insufficiency in their tax returns.

The tribunal also criticized HMRC's administrative oversights, which failed to open enquiries when necessary, thereby preventing HMRC from correcting potential deficiencies in the appellants' tax assessments in a timely manner.

Furthermore, the tribunal rejected HMRC's contention that the notional officer needed to engage in further research or consultations beyond the provided information to identify insufficiencies, asserting that the officer could have reasonably deduced the inaccuracies based on the disclosed information.

Impact

This judgment has significant implications for the application of discovery assessments under the TMA 1970. It clarifies that HMRC cannot indiscriminately issue discovery assessments without relying on new facts or legal interpretations, especially when the taxpayer has transparently disclosed participation in recognized tax schemes.

For taxpayers, this provides a measure of protection against retroactive assessments, ensuring that finality in tax matters is respected when disclosures have been appropriately made. For HMRC, it emphasizes the importance of adhering to procedural correctness and the necessity of substantiating discovery assessments with credible grounds beyond mere administrative change or oversight.

Additionally, the case underscores the critical role of transparency and accurate disclosure in tax returns, as incomplete or misleading information can lead to successful challenges against HMRC's assessments.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment is an additional tax assessment HMRC can make after a taxpayer has submitted their self-assessment return. This typically occurs when HMRC discovers that the original return understated the tax liability due to undisclosed income, excessive reliefs, or other inaccuracies.

Sub-section 29(1) TMA 1970

This section empowers HMRC to make discovery assessments if they discover that a taxpayer has not fully assessed their income or capital gains, has an insufficient tax assessment, or has been granted excessive tax reliefs.

Sub-section 29(5) TMA 1970

This sub-section acts as a safeguard for taxpayers against HMRC's discovery assessments. It stipulates that HMRC can only issue a discovery assessment if it can be reasonably expected that a notional officer, based on the information available at the closure of the enquiry window, would recognize an insufficiency in the original tax assessment.

Scheme Reference Number (SRN)

An SRN is a unique identifier assigned to a disclosed tax avoidance scheme under HMRC's Disclosure of Tax Avoidance Schemes (DOTAS) rules. Taxpayers must provide this number in their tax returns when they participate in such schemes.

Conclusion

The Charlton & Ors v. Revenue & Customs judgment serves as a pivotal reference point for understanding the boundaries and applications of discovery assessments under the TMA 1970. By reinforcing that discovery assessments require substantive grounds beyond administrative changes or differing Inspector opinions, the tribunal ensures a balanced approach that protects taxpayers from undue retrospective taxation while maintaining HMRC's authority to correct genuine tax deficiencies.

This decision promotes fairness in tax administration, emphasizing the necessity for both transparency from taxpayers and adherence to stringent procedural standards by HMRC. As such, it provides clarity and direction for future cases involving complex tax schemes and the use of discovery assessments.