In D S Sanderson v HMRC [2016] EWCA Civ 19 the Court of Appeal upheld a discovery assessment on the grounds that the information disclosed by a taxpayer on his tax return was not sufficient to provide a hypothetical HMRC officer with enough information to raise an enquiry, even though the actual officer involved did possess that information.

  • Mr Sanderson entered into the Castle Trust tax scheme to generate a capital loss.
  • The losses were disclosed on his 1998/99 Tax Return which he did not submit until February 2003.
  • In July 1999 HMRC’s Special Compliance Office (SCO) received a list of names and addresses of individuals who had participated in the scheme, including that of Mr Sanderson.
  • When this list was forwarded to Mr Thackeray, an SCO officer, Mr Sanderson had not yet submitted his Tax Return.
  • Mr Thackeray was not aware that Mr Sanderson had claimed the capital losses on his 1998/99 return until after the enquiry window had closed.  As soon as he saw the Return, in January 2005, he issued the discovery assessment for capital gains tax of £713,011.48, plus interest.

The issue before the Court of Appeal was whether Mr Sanderson’s disclosure of the scheme was adequate.  If it was not then HMRC could raise the discovery assessment.  Both the First Tier Tribunal and the Upper Tribunal had found in favour of HMRC.


TMA 1970 s29(5) enables HMRC to make a discovery if at the time when an officer ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return, the officer “could not have been reasonably expected, on the basis of information made available to him before that time, to be aware of the situation [which gave rise to the loss of tax]…”

Mr Sanderson’s argument

Mr Sanderson contended that HMRC was out of time to raise a discovery assessment on the grounds that:

  • He had disclosed on his Tax Return that the losses arose as a result of his participation in the Castle Trust.
  • HMRC were already aware when he submitted his Return that he had participated in the scheme.
  • Mr Thackeray knew as soon as he saw the Return that the Scheme losses had been claimed and admitted that he could have raised an assessment within the enquiry window, based on the information in the return, if he had seen it in time.
  • The hypothetical officer who did see Mr Sanderson’s Return within the enquiry window should therefore also have had sufficient information at that time to raise the assessment but did not do so.

Court of Appeal Decision

  • The correct test is that the hypothetical officer should be able to infer the information he needs.
  • That inference must be:
    • Reasonably drawn.
    • Relate to the insufficiency of tax rather than be a general inference of something that might shed light on the taxpayer’s affairs.
    • Drawn from the Return provided by the taxpayer.
  • It would be speculative for the hypothetical officer to conclude when viewing the Return that another branch of HMRC might have relevant information about the effectiveness of the scheme.
  • It cannot be assumed that a hypothetical officer would have the same knowledge as an actual officer such as Mr Thackeray who happens to possess the specific knowledge that he needs to enable him to raise an enquiry.


The Castle Loss scheme was, if our recollections are correct, a tax saving scheme perhaps devised by KPMG and marketed by Coutts bank and it did not work. HMRC received a lot of data on scheme users but it had some difficulties, having in many cases lost or destroyed the original returns. Taxpayers had been advised to make a disclosure in respect of the scheme on their tax returns when submitted. When it was discovered that the scheme had failed Coutts' advisers had called the taxpayers in and explained that they probably had no case. It seems that HMRC was overwhelmed with data, however the result is equitable given the circumstances.

It should be noted that the Upper Tribunal has previously determined that the inclusion of a DOTAS number on the Return was adequate disclosure for the taxpayer (Charlton v HMRC [2013] STC 866).  The Sanderson case precedes the DOTAS regime, and although the standard disclosure given to scheme users mentioned the scheme, it did not reveal that it did not work, and HMRC's officers had no way of knowing at the time whether it did.

Useful guides on this topic

How to appeal a decision of HMRC
Key steps in appealing a decision of HMRC.

How to appeal a tax penalty
Essential reading in cases were there are penalties too

Discovery assessment and time limits
How far HMRC can go back, what conditions must be met for a valid discovery

Penalties: Error in a return or document
How work out penalties for different forms of inaccuracies

DOTAS: Disclosure of Tax Avoidance Schemes
Rules for declaring use of tax schemes

External links

Case reference: Mr David Stephen Sanderson v HMRC [2016] EWCA Civ 19