In Pattullo v HMRC [2016] UKUT 0270 the Upper Tribunal (UT) held that a discovery assessment into a CGT avoidance scheme was valid.

The taxpayer had entered into a tax avoidance arrangement involving the use of Capital Redemption Contracts (CRCs).  His tax return contained some details of the arrangements which were entered into as well as a claim for a large capital loss.

The case focussed not on whether the scheme worked (it was accepted that it did not), but whether the discovery assessment was valid.  This involved considering what amounts to a ‘discovery’ and when it ceases to be ‘fresh’, as well as revisiting the characteristics of the ‘hypothetical officer’.

An HMRC Inspector had picked up the taxpayer’s return within the enquiry window, but did not take any action at that time.  Instead, a discovery assessment was not raised until after the Court of Appeal had found in favour of HMRC in a related case. 

The First Tier Tribunal had previously held that this assessment was valid and the UT confirmed this, finding that:

  • A discovery can comprise a series of discoveries: there can be a series of findings and considerations that, at the end of the process, cross the threshold to be considered a discovery.
  • A discovery has to be acted on whilst it is relatively ‘fresh’ and not just within the statutory time limit.  However, in the current case there was no evidence that this was not the case.
  • The hypothetical HMRC officer would be expected to have a reasonable knowledge and understanding of tax law and HMRC practice, but not specialist knowledge.  In particular he would not be expected to be familiar with the ‘arcane’ world of CRCs and similar products.

The taxpayer’s appeal was therefore dismissed.


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

Pattulllo v HMRC [2016] UKUT 0270

Our freeview guide: Discovery assessments and time limits