Taxpayers understandably want certainty about their tax affairs, and demand finality when submitting their tax returns, that HMRC will be unable to make a ‘discovery’ outside the normal enquiry window. Unfortunately, there is invariably uncertainty when submitting returns about whether disclosures in it (normally in the ‘white space’) are sufficient to bring about the required finality.
In Pattullo, Re Judicial Review  CSOH 137, the taxpayer sought judicial review in respect of a discovery notice issued by HMRC under TMA 1970, s 20(1). On 31 January 2005, the petitioner filed his 2004 tax return, which contained information in the ‘white space’ concerning a capital loss arising under a capital redemption contract arrangement (referred to as the ‘CRC Mark II Scheme’). The issue was whether HMRC was entitled to make a discovery assessment under TMA 1970, s 29, and to serve a discovery notice.
It was argued for the taxpayer that the white space contained a full and detailed disclosure of what had happened. HMRC was therefore precluded from making a discovery assessment, and a discovery notice was ruled out. It was also argued that before a discovery assessment could be made, HMRC must discover something new, but no new matter was shown to have arisen.
However, the Scottish Court of Session dismissed the taxpayer’s application. Lord Bannatyne said that the taxpayer’s right to finality is balanced by a taxpayer’s duty to clearly alert HMRC to an insufficiency in the tax return. He stated:
“It is only if the taxpayer has made a return which has clearly alerted the officer to the insufficiency that it will be considered adequate and will shut out a section 29 discovery assessment.”
The standard of information to be provided by the taxpayer is such “…that would be objectively understood by an [HMRC] officer of general knowledge and skill”. Otherwise, HMRC can newly discover an insufficiency. Lord Bannatyne said that the onus then falls on the taxpayer to prove that HMRC has been clearly alerted to the insufficiency. He added:
“The full factual position would have included a statement that the petitioner was part of…a scheme and a full statement of the legal position would have included a statement of doubt or a statement that a contrary position to the HMRC was being insisted upon together with a clearer picture of the operation of the scheme.”
This is clearly a very high standard of disclosure, which in practice will render a high proportion of tax returns open to possible discovery. If HMRC does raise a discovery assessment, it may ultimately become necessary for the taxpayer to demonstrate to the Tax Tribunal (on a balance of probabilities) that HMRC has been clearly alerted to a possible insufficiency in the return.
The Pattullo case follows some notable decisions concerning discovery, including Langham v Veltema  STC 544 and Corbally-Stourton v CRC  SpC 692. It includes useful commentary on earlier case law, and neatly summarises the components of an adequate disclosure. In addition, HMRC’s views on achieving finality in self-assessment returns and avoiding discovery are contained in Statement of Practice 1/06.
The above article is reproduced from ‘Practice Update’ (March/April 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past, see the Newsletters section.