Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 137
P15/09	OPINION OF LORD BANNATYNE in the petition of NEIL PATTULLO Petitioner; for JUDICIAL REVIEW ­­­­­­­­­­­­­­­­­________________

Petitioner: Johnston, Q.C.; Brodies, LLP

Respondent: Artis; Acting Solicitor (Scotland), HM Revenue & Customs

7^th October 2009

Background

Overview

[1] This application for judicial review concerns a challenge to a decision to issue a notice (hereinafter referred to as "the discovery notice") to the petitioner made on 28 August 2008 by Dr Nicholas Branigan, one of HM inspector of taxes, the second respondent (hereinafter referred to as "Dr Branigan") in terms of Section 20(1) of the Taxes Management Act 1970 (hereinafter referred to as "TMA 1970"). The notice was consented to of even date by the commissioners.

The factual background
[2] The salient points in the history of events prior to the issue of the notice are as follows:

31 January 2005 The petitioner filed his tax return for the year ended 5 April 2004. Part of the tax return known as the white space contained the following:

"Capital Redemption Contract

1. On 24 February 2004 I settled an interest in possession trust with £6,000.

2. The trust is called 'The Pattullo 2004 Life Interest Settlement'.

3. I had borrowed on commercial terms a sum of £2,665,000 from Investec Bank UK Limited and settled this amount into the trust.

4. The trustees 'Nexus Trustee Company Limited' used the funds to acquire a number of capital redemption contracts to me on 4 March 2004.

5. I surrendered the Capital redemption contracts on 8 March 2004 and received redemption proceeds of £2,600,000.

6. This has given rise to a capital loss as a consequence of Section 37(1) TCGA 1992 amounting to £2,665,000."

[3] On 23 October 2006, Dr Branigan on behalf of the first respondents, Her Majesty's Revenue and Customs (hereinafter referred to as "HMRC") wrote to the petitioner advising him of his intention to seek the consent of a commissioner to issue a discovery notice. That letter, known as a precursor letter, was intended to comply with the provisions of Section 20B(1) TMA 1970 which requires the taxpayer to provide the information sought on a voluntary basis before a formal request is made under Section 20. In September 2007, Dr Branigan issued a discovery notice. However Dr Branigan subsequently acknowledged that the notice was invalid. Consequently, a fresh precursor letter in materially different terms was sent to the petitioner on 15 July 2008.

[4] The petitioner did not comply with the request set out in the precursor letter on the basis that he believed that HMRC having regard to the whole circumstances did not have power to recover the documentation sought. The discovery notice was served and the petitioner did not comply therewith on the basis that he believed HRMC had not competently served the discovery notice seeking the information contained therein.

The grounds of challenge

[5] In submission these narrowed from those that had been advanced in the petition. In short, the petitioner challenged the decision on the basis that it was (1) wrong in law and (2) unreasonable.

[6] Senior counsel said that the question in issue was this: whether HMRC were legally entitled, having regard to the information provided in the petitioners' said tax return (the white space), to make a discovery assessment in terms of Section 29 of TMA 1970 and, in order to do so, were entitled to serve a discovery notice. It was a matter of agreement between the parties that the sole disclosure made by the petitioner regarding said capital loss was contained in the white space.

The general tax law applicable

[7] Section 8 of the TMA 1970 sets out the basis for taxpayers submitting returns and introduces what is known as the self assessment regime.

[8] Section 9A of the TMA 1970 sets out the powers of an officer of the Board to enquire into a tax return following issuing notice of his intention to do so. The said Section allows the officer of the Board (hereinafter referred to as "the officer") an unrestricted right to enquire into anything contained in the return within a period of one year (hereinafter referred to as "the enquiry window").

[9] Section 19A of the TMA 1970 provides a power to request documents for purposes of certain enquires including an enquiry under Section 9A:

"(1) This section applies where an officer of the Board gives notice of enquiry under Section 9A(1) or 12AC(1) of this Act to a person ("the taxpayer").

(2) For the purpose of the enquiry, the officer may at the same or any subsequent time by notice in writing require the taxpayer, within such time (which will not be less than 30 days) as may be specified in the notice -

(a) To produce to the officer such documents as are in the taxpayer's possession or power and as the officer may reasonably require for the purpose of determining whether and, if so, the extent to which -

(i) The return is incorrect or incomplete, or

(ii) In the case of an enquiry which is limited under Section 9A(5) or 12 AC(5) of this Act, the amendment to which the enquiry relates is incorrect, and

(b) To furnish the officer with such accounts or particulars as he may reasonably require for that purpose."

The foregoing provisions relate to the self-assessment regime. The provisions hereinafter referred to fall outwith the self-assessment regime.

[10] Section 20 TMA 1970 is a further section giving an officer of HMRC the power to request documents and information from a taxpayer or a third party in connection with any tax liability or the amount of such liability. The relevant parts of the said section for the purposes of this case are:

"20 Power to call for documents of taxpayer and others

20(1) Subject to this section, an inspector may by notice in writing require a person -

(a) to deliver to him such documents as are in the person's possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to -

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of any such liability, or

(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability.

20(2) Subject to this section, the Board may by notice in writing require a person -

(a) to deliver to a named officer of the Board such documents as are in the person's possession or power and as (in the Board's reasonable opinion) contain, or may contain information relevant to -

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of any such liability, or

(b) to furnish to a named officer of the Board such particulars as the Board may reasonably require as being relevant to, or to the amount of, any such liability.

[11] Section 29 TMA 1970 gives an officer of HMRC power to make a further assessment (hereinafter referred to as a "discovery assessment") outwith the enquiry window.

[12] The relevant parts of the said section for the purposes of this case are as follows:

"29. - Assessment where loss of tax discovered.

(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a [year of assessment] -

(a) that any ..... [income], unauthorised payments under section 208 of the Finance Act 2004 or surchargeable unauthorised payments under section 209 of that Act or relevant lump sum death benefit under section 217(2) of that Act] which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed as capital gains tax...have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) that any relief which has been given is or has become

excessive, the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.

...

(3) Where the taxpayer has made and delivered a return under [section 8 or 8A] of this Act in respect of the relevant [year of assessment], he shall not be assessed under subsection (1) above -

(a) in respect of the [year of assessment] mentioned in that subsection; and

(b) [...] in the same capacity as that in which he made and delivered the return,

unless one of the two conditions mentioned below is fulfilled.

...

(5) The second condition is that at the time when an officer of the Board -

(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under [section 8 or 8A] of this Act in respect of the relevant [year of assessment]; or

(b) informed the taxpayer that he had completed his enquiries into that return, the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.

(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if -

(a) it is contained in the taxpayer's return under [section 8 or 8A] of this Act in respect of the relevant [year of assessment] (the return), or in any accounts, statements or documents accompanying the return;

(b) it is contained in any claim made as regards the relevant [year of assessment] by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim;

(c) it is contained in any documents, accounts or particulars which, for the purposes of any enquires into the return of any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer [...]; or

(d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above -

(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or

(ii) are notified in writing by the taxpayer to an officer of the Board."

Submissions on behalf of the petitioner

[13] Against the background of the material legislative framework as I have set it out senior counsel for the petitioner commenced his submissions by turning to consider how the new self-assessment system worked and did so by reference to pages 286 to 288 at paragraphs 10 to 15 in the judgement of Auld LJ in Langham v Veltema 76 TC 59;

"10. The self-assessment system was a significant change to the tax machinery. It imposed new burdens on taxpayers by requiring them to submit fuller tax returns than had previously been required ... including in many cases the taxpayer's own calculation of the amount of tax payable by him: 'self‑assessment'. The new burdens were balanced by new protections for taxpayers who conscientiously complied with the system, in particular by new and tighter time limits on the part of the Revenue to make further tax assessments. One of these time limits is at the heart of this case.

11. Section 8 requires an individual taxpayer to complete the self-assessment tax return, and to deliver it to an officer of the Board of Inland Revenue ... by a deadline date. The deadline for Mr Veltema's 1997/1998 return was 31 January 1999. He did complete and deliver the return, and, as I have already mentioned, he submitted it 6 months before the deadline, on 30 July 1998. I have also mentioned that the form specified a figure of £100,000 in the box against 'assets transferred/payments made for you'. That was by far the largest single item in the return.

12. When the inspector received Mr Veltema's tax return form he could, under Section 9A, have given Mr Veltema notice in writing that he intended to enquire into the return. If he was going to give such a notice he had to do so by 31 January 2000. ... The main effect of a notice would have been that, until the inspector gave notice that his enquiries were completed and for a further 30 days after that, the inspector could amend the assessment ... to what the inspector considered to be the correct figure. For full details of how this works see Section 28A. The practical effect was that the opening of an enquiry would for the time being have prevented time running against the inspector. However, the inspector did not give notice that he was opening an enquiry. On the contrary, on 9 September 1998 he sent a standard printed acknowledgement to PKF stating 'your client's tax return year ended 5 April 1998 has been processed without any need for correction'.

13. Before the introduction of the self-assessment system the inspector would still have been entitled until 5 April 2004 ... to make a further assessment if he discovered that the taxable income was greater than the amount shown in the tax return: Section 20(3) in its original unamended form. The 6 years period for an assessment did not depend on their having been some form of fraud or other default by or on behalf of the taxpayer: the inspector had 6 years whether the taxpayer was in default or not. The concept of a discovery was widely interpreted by the courts. When the inspector learned that the value of the house had been agreed at £145,000 instead of £100,000 ... that would have been a discovery, and if Section 29 had not been heavily amended as part of the self-assessment system, he could have made an additional assessment on the extra £45,000 at any time before 6 April 2004.

14. Section 29(1) in the new form of the section still uses the concept of a discovery. If an officer of the Board or the Board discover that income which ought to have been assessed has not been assessed, or that an assessment is or has become insufficient, the subsection empowers them to make an assessment in the amount, or the further amount, which in their opinion ought to be charged. However, the ability to make a discovery assessment is now more circumscribed: the inspector no longer has a free hand for the 6 years after the end of the tax year concerned.

15. The general rule is that, if the taxpayer has delivered a self-assessment return under Section 8 ... the inspector cannot make a discovery assessment under Section 29; see Section 29(3). The inspector's recourse where he is not satisfied with the return is to give notice of opening an enquiry under Section 9A, in which case no time limit runs against him while the enquiry is still in progress and for 30 days after that. That recourse was not used by the Kings Lynn inspector in Mr Veltema's case. I refer to the general rule that the inspector cannot make a discovery assessment under Section 29(1) there are two exceptions, and the present appeal proceedings by Mr Veltema have revolved around the exceptions. They are contained in Section 29(4) and (5) ... Section 29(5) reads as follows:

'(5) The second condition is that at the time when an officer of the Board -

(a) seeks to be entitled to give notice of his intention to enquire into the taxpayer's return under Section 8 ... of this Act in respect of the relevant year of assessment or

(b) informed the taxpayer that he had completed his enquiries into that return,

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, be aware of the situation mentioned in subsection (1) above.'"

[14] Having examined how the self-assessment system worked and what changes it had brought about in the tax assessment system, counsel then turned to the facts of the case and first to the terms of the disclosure in the white space of the petitioner's return. From the terms thereof he took a number of points:

(a) The heading is "Capital Redemption Contract" and therefore there is identification within the white space of the instrument involved in the transaction.

(b) All the steps in the transaction are set out.

(c) Reference is made to the particular section of the legislation which is said to give rise to the capital loss, namely Section 37(1) TCGA 1992.

The foregoing, he submitted, would alert an officer to the thought process of the petitioner. There was a full narration of the steps which had been taken i.e. of the facts of the transaction. In addition there was reference to the section relied upon by the petitioner as giving rise to the capital loss. Thus he submitted that the white space contained a full and detailed disclosure of what had happened. It was his position that given this full disclosure a discovery assessment could not be competently be made by an officer and therefore a discovery notice was ruled out.

[15] Senior counsel then secondly turned to examine in some detail the affidavit of Dr Branigan. This affidavit had been lodged on behalf of the respondents in support of their position in the case. Dr Branigan, at all material times, was an investigator with Specialist Investigations at HMRC. In particular he was in charge of the unit of Specialist Investigations investigating all tax avoidance schemes involving the use of capital redemption contracts, which contracts were at the heart of this case.

[16] Senior counsel referred first to paragraphs 7 and 8, which he submitted set out certain relevant background, namely: that there had been a number of investigations by the Specialist Investigations Unit regarding tax avoidance schemes involving the surrender of second hand life insurance policies known as SHIPS. The paragraph went on to refer to there having been a change in the legislation which had prevented the operation of SHIPS.

[17] In paragraph 9 of the affidavit it was stated what had flowed from that change in legislation, namely:

"in 2003/4 and later years, it would appear that the tax avoidance industry was looking for a product that produced the same tax advantage but that was unaffected by the change in the law. I first identified the existence of arrangements involving capital redemption contracts in late 2004. The first appearance of what HMRC refers to as the capital redemption contract Mark II scheme was in returns submitted for 2003/4. Responsibility for managing HMRC's response to the scheme was given to SI in Edinburgh and the project was registered on our internal case management system in May 2005. A team of investigators within SI Edinburgh was allocated to the project with me as project leader. The teams first task was to set up systems to identify participants in the scheme."

Senior counsel submitted from the terms of this paragraph that at the relevant time the use of capital redemption contracts was widely known within HMRC. In paragraph 11 the following was said:

"Some promoters (of such schemes) decided on grounds of prudence to make a disclosure even though it was not necessary (as the scheme does not involve a financial product as defined in paragraph 7 of SI 2004/1863). Other promoters decided that they were not required to do so (as the scheme had been marketed prior to June 2004) or that the regulations as they then existed did not require disclosure (as no financial product involved). Some of these promoters who had disclosed the scheme to HMRC did not advise their client to enter the scheme reference number on their returns as they decided after disclosure that the regulations did not actually apply".

Senior counsel submitted that it was of some interest that the affidavit recognised that some promoters on grounds of prudence made a disclosure. Why he asked was it prudent to make a disclosure? The answer to that was that it removed the possibility of a discovery assessment. It was his position that that was what had been done here by the petitioner, he had made a disclosure. That disclosure as he had earlier stated had detailed in fact and law everything that was necessary. Thus he submitted it was not proper to use the enquiry powers set out in Section 20.

[18] Turning to paragraph 13 the following is said:

"A number of means were adopted in an attempt to identify participants, including the publishing of descriptions of the arrangements on the HMRC intranet. The intranet pages gave details of the nature of any disclosure likely to be made in a tax return I gave instructions that the case officer ought to contact me in Edinburgh for instructions on how to proceed."

Senior counsel submitted the terms of this paragraph were of some significance as they again showed that knowledge of this type of scheme was widely disseminated within HMRC.

[19] He then turned to paragraph 19 of the affidavit which was in the following terms:

"SI Edinburgh identified Mr Pattullo as a possible participant in the CRC Mark II Scheme in October 2006. Mr Pattullo's 2003/4 return was obtained from store and received in Edinburgh on 23 October 2006. His return had been received by HMRC on 31 January 2005 and an enquiry should have been opened by 31 January 2006 to comply with the time limit provided for in Section 9A TMA 1970. My examination of this return led me to believe that Mr Pattullo had participated in the scheme."

[20] Senior counsel submitted that there were two points of significance which arose from the terms of this paragraph:

1. SI Edinburgh identified the petitioner as a possible participant in the CRC Mark II Scheme as at October 2006.

2. The final sentence made clear that it was from the return itself that Dr Branigan was able to identify that the petitioner had participated in the scheme. Therefore senior counsel submitted that the disclosure on the return was sufficient to alert Dr Branigan to the petitioners' participation in the said scheme. He particularly relied on the lack of anything new (my emphasis) having come to light, according to this paragraph in the affidavit, which caused Dr Branigan to believe that Mr Pattullo had participated in the

scheme.

[21] Senior counsel then turned to paragraph 53 which was in the following terms:

"31 August at 09.00 I emailed Mr Wells, notifying him that I thought he had misread or misunderstood the decision in Morgan Grenfell (EWCA Civ 329 (2001)). That case gave direct authority for the proposition that the application is ex parte and that the commissioner had no power to grant Mr Pattullo access. Mr Wells responded by email at 11.26. He accepted that the Morgan Grenfell decision (ibid) applied and that the commissioner would decide the matter on representations made at an ex parte application. He stated that Section 20 could not be used because there was no assessing position under Section 29. I responded by email at 11.46. I referred Mr Wells to the special commissioner's decision in Corbally-Stourton (SPC 692 (2008)). I advised Mr Wells that at this stage I don't have to prove that I can make a discovery assessment. Rather, I have to satisfy a commissioner that the document sought may, in my opinion contain information relevant to attach liability that may exist. Mr Wells replied by email at 13.55 suggesting that this was the first occasion on which I had suggested that the disclosure of Mr Pattullo's return may be inadequate and asking me to indicate why I held this view. Mr Wells denied that I had the power to use a Section 20 notice in this manner. I replied to Mr Wells by email at 14.42. I referred him to my letters of 6 May and 3 June 2008 to Mercury and my letter of 16 November 2007 to Mr Pattullo mentioning the fact that the disclosure on the return may be inadequate. I then quoted extracts in the special commissioner's decision in Corbally-Stourton (ibid) concerning the quality of the disclosure. I pointed out that the entries in Mr Pattullo's tax return hint that a scheme was put into affect but that there was nothing to say that the scheme may not work or that there might be an insufficiency."

[22] It was senior counsel's submission that what was said in the foregoing paragraph by Dr Branigan was misconceived. He submitted that the petitioner had disclosed the steps which he had taken and the relevant section in the legislation upon which he relied. It was the petitioner's position that he had achieved his intended result and there was therefore no insufficiency in tax. It was therefore not for the petitioner to say in the white space that he had not achieved the result which he said he had. Thus it was not for the petitioner in the white space to express a view contrary to that which he in fact held. He submitted that it could not be a correct understanding of the law that the petitioner should have disclosed in the white space that there was insufficiency in his self-assessment as that was not the position he held. Thus the position of the respondents was misconceived.

[23] Senior counsel's position was that this misconception on the part of Dr Branigan was repeated in other sections of his affidavit and underlay his whole approach.

[24] Senior counsel submitted that it appeared from Dr Branigan's affidavit that nothing new had arisen. However, it appeared to be Dr Branigan's position looking to the whole terms of his affidavit that documents might be recovered as a result of the serving of the notice and they might show something new. It was his position that the foregoing approach ran a coach and horses through the time limits set out in Section 9A which protects the taxpayer who has openly disclosed his tax affairs in his return.

[25] Having looked at in some detail the affidavit of Dr Branigan senior counsel then turned to look at the case law regarding the operation and construction of the applicable tax law. Senior counsel submitted that having regard to the approach of Dr Branigan in his affidavit the real question in this case is: in order to make a discovery assessment and for that purpose to serve a discovery notice is it necessary that something new has arisen to justify the officer in doing that or can he just serve a notice in order to see if there is anything new? It was his position that something new must have arisen in order to justify the officer in proceeding to make a discovery assessment and that on a proper analysis the case law supported this proposition.

[26] Counsel then turned to examine the law in relation to the outlined issue and first referred to: Langham v Veltema supra. The facts of the said case are so far as material for the purposes of the present case as follows:

[27] On 19 January 2000 - a few days before the end of the Section 9A enquiry period, but too late for practical purposes - the inspector at Leicester notified the company that the district valuer had reported that the open market value of a house at the date of transfer to Mr Veltema was £160,000. In the self assessment tax return the figure entered for said property had been £100,000.

[28] In March 2000 the company and the inspector at Leicester agreed a figure of £145,000 indicating on the basis of that agreement that Mr Veltema's self-assessment to tax was insufficient within Section 29(1)(b) of the TMA.

[29] In or about June 2000 the inspector at Leicester advised the inspector at Kings Lynn of the revised evaluation, indicating an insufficiency on Mr Veltema's self‑assessment return. This of course was long after the enquiry period under Section 9A of the TMA had closed on 31 January 2000. It was thus too late for the inspector at Kings Lynn to give notice under Section 9A of his intention to open an enquiry into Mr Veltema's tax return. He could only seek to make good the agreed loss of tax, namely £18,000, being 40% of the £45,000, by recourse to Section 29 of the TMA, which is what he sought to do. On 13 November 2000 he raised an assessment to tax in that amount against Mr Veltema, maintaining that the loss of tax was attributable to negligent conduct on his part (Section 29(4) TMA) or that he, the inspector, could not have been reasonably expected on the basis of the information made available to him before that date, to be aware of the assessment being insufficient (Section 29(5) TMA). See: page 288 paragraphs 18 to 20. The issue therefore before the Court of Appeal was the application of Section 29(5).

[30] Senior counsel first referred me to the judgment of Auld LJ at 285, paragraph 5 where he says:

"The discovery procedure in Section 29 has its origin in earlier tax statutes and may apply where after normal finality of an assessment, some new fact comes to light or incorrect application of the law (subject to Section 29(2)) or where, for any reason it newly appears that the taxpayer has been under charged; see Cenlon Finance Co Limited v Ellwood 1962 40 TC 176, per Viscount Simonds at pages 203 to 204. Section 29 enables the Inland Revenue where it discovers an insufficient assessment, subject to one or other of two conditions, to make an assessment in the amount or further amount necessary to make good the loss of tax (Section 29(1)(3) TMA)"

[31] Senior counsel laid particular emphasis on the use of the words "new" and "newly" in the said passage, which he submitted supported the position which he was putting forward.

[32] At pages 293 and 294 paragraphs 30 and 31 Auld LJ continued:

"30.  The first issue is whether awareness or inference of actual insufficiency is required to negative the condition, or would awareness that it was questionable do? And, whatever the source of the information, should the commissioners also take into account what enquiry it could reasonably have been expected to prompt the inspector to undertake and the likely result of that enquiry? The second issue is what is the relevant information before the inspector on the basis of which he could be said to be reasonably expected to be aware of an insufficiency? Is it simply that emanating from the taxpayer and any inference that could reasonably be expected to be inferred from it, as specified in Section 29(6)? Or may it also include other information before him, for example, the P11D form, as in this case?

31.  As to both of these questions, it may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer. This is subject to the exercise by the Inland Revenue of: 1 whatever routine or random checks that it sees fit to make as a form of light monitoring of self-assessment returns; 2 its statutory power of enquiry under Section 9A where it considers it appropriate; and 3 in the absence of fraud and negligent conduct, subject to further scrutiny thereafter only in the event of newly discovered information and/or reasonably drawn inferences there from that the self-assessment was insufficient resulting in loss of tax."

[33] Senior counsel again emphasised the use in paragraph 31 at point 3 of the phrase "newly discovered".

[34] Further at page 294 Auld LJ in paragraph 33 says:

"More particularly, it is plain from the wording of the statutory test in Section 29(5) that it is concerned, not with what an inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of."

[35] Senior counsel then turned to paragraph 36 of the judgment:

"The answer to the second issue - as to the source of the information for the purpose of Section 29(5) - though distinct from, may throw some light on, the answer to the first issue. It seems to me that the key to this case is that the inspector is to be shut out from making a discovery assessment under the section only when the taxpayer or his representatives, in making an honest and accurate return or in responding to a section 9A enquiry, have clearly alerted him to the insufficiency of the assessment, not where the inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question".

[36] Senior counsel submitted that what was said there related to the source of the information and was based on policy considerations as set out in paragraph 32 of the judgment. He stressed that what in particular the said passage did not do was to detract from the general statement in paragraph 31 to the effect that before the discovery assessment could be made, something new required to be discovered by HMRC.

[37] It was senior counsel's position that the real issue in the Veltema case was best set out by Chadwick LJ in his judgment at paragraphs 44 and 45 where he says:

"The grounds upon which it is said that the taxpayer's self assessment for the year 1997/1998, made...in a return delivered on 30 July 1998, was insufficient is that the value of the item 'benefit received from employment' shown in that return was understated. The benefit was described as "asset placed at disposal of employee - £100,000".

It is, I think, accepted that the revenue knew before 31 January 2000, that the asset in question was a house formerly occupied by the taxpayer as an employee. The assessment under Section 29(1) TMA is made on the basis that the open market value of the house transferred, at the date of the transfer, was £145,000. The circumstances in which the revenue rely on that figure have been explained by Auld LJ. It is not accepted that the Inspector of Taxes responsible for the taxpayer's affairs knew, on or before the 31 January 2000, that the value of the asset chargeable to tax as a benefit from the employment was in excess of the amount £100,000 which was stated in the return.

The question for the General Commissioners, the judge, and, now, this court, is whether the inspector responsible for the taxpayer's affairs could have been reasonably expected, on the basis of the information made available to him before 31 January 2000, to be aware that the value of the asset transferred and chargeable to tax as a benefit from employment was understated in the return".

[38] Senior counsel submitted that clearly the new information which had come to light in Veltema was: the value of the asset transferred.

[39] Senior counsel submitted that having regard to the whole facts in the Veltema case there was no reason for the inspector to be aware that the asset was worth significantly more that what was stated in the return. That information came to him subsequently and therefore there was new information which justified a discovery assessment. It was his position that it was clear in the Veltema case that something new had arisen which the inspector could not have been expected to know prior to the deadline, thus he was entitled to a discovery assessment. Thus it was his position that this case supported the proposition which he had made at the outset of his submissions under this head.

[40] Senior counsel then turned to look at the case of Revenue & Customs Commissioners v The Household Estate Agents Limited 78 TC 705. The facts of the said case in so far as material for the purposes of this case were:

[41] By deed dated 23 September 1998, the Household Estate Agents Limited established an employee benefit trust. On 22 October 1998 the company paid £61,000 into the said trust. On 15 December 1998 a total of £47,150 was paid out of the trust consisting of loans of £20,000 to two directors and a payment of £7,150 to the company re staff bonuses. On 17 June 1999 the company paid £60,000 to the trust. No payments out were made from the trust in 1999 but in January 2000, £9,500 was paid out of the trust to the company relative to staff bonuses and £53,548 was spent by the trust on the purchase of a Mercedes car which was used by one of the directors. The company's accounts and tax computations for the accounting period ended 31 December 1999 were submitted to the inspector under cover of a letter dated 21 August 2000. The £60,000 paid into the trust during the year was shown as a deduction in the accounts, and no adjustment was made in respect of the corporation tax computation. No notice of intention to enquire into the return for the accounting period ending 31 December 1999 was given by HMRC under paragraph 24 of schedule 18, Finance Act 1988 before the relevant time limit expired. An accountant's letter dated 22 September 2005 was the first occasion on which HMRC was fully informed about the payments out of the trust in 1998, 1999 and 2000. In the light of the decision of the House of Lords in McDonald v Dextra Accessories Limited 2005 UAK HL 47, it became clear that the sum of £60,000 paid into the trust in June 1999 was potential emoluments within the meaning of section 43(11) Finance Act 1989 and that the reduction of that sum in the computation of the company's schedule D profits for 1999 was prohibited by section 43(2) of the said act because the sum of £60,000 was not paid out as actual emoluments to employees before the end of September 2000. It was held that HMRC were entitled to make a discovery assessment.

[42] Senior counsel made two points arising from the foregoing. It was his position that two new matters or pieces of information had come to the attention of HMRC following the expiry of the deadline:

(a) The decision of the House of Lords in McDonald v Dextra Accessories Limited and

(b) The information as to what had and what had not been paid out of the trust.

[43] Thus it was his position that the decision in this case again supported the petitioner's position in the instant case, namely: something new had arisen which could not have reasonably been inferred from the information in the return within the enquiry period and thus a discovery assessment was competent.

[44] Counsel then turned to R (Johnson) (et al) v Branigan 2008 BTC 783. The facts of this case so far as material to the present case were:

[45] The taxpayers had all been served with notices under TMA 1970 section 20 on the basis that the tax inspector had reason to believe that the taxpayers might have been involved in arrangements relative to capital redemption bond contracts for the purpose of avoiding tax in circumstances where the liability of the taxpayers had been greater than that disclosed in the relevant tax return.

[46] The disclosure in the tax return was as follows:

"David Collins exchanged an endowment trust instrument with Paulden Activities Limited for a capital redemption policy (deferred annuity certain - guaranteed minimum value, payable quarterly for five years certain), the current market value of the right to receive guaranteed value on maturity date 4 April 2080, calculated actuarially is £139,738."

[47] Senior counsel turned first to paragraph 11 of the judgment which set out the reasons for the application for the section 20 notice. One of the principal reasons for seeking the section 20 notice was:

"That I believe that under those arrangements you were entitled to receive by way of loans part or the entire amount invested in the bond and that there was no expectation of any repayment".

[48] Senior counsel drew my attention to the fact that there was no reference to loans in the taxpayer's disclosure and submitted that this was at least one new matter which had come to the attention of the officer.

[49] The next section of the judgment to which senior counsel referred was paragraphs 14 and 15 which are in the following terms:

"In my judgment it is necessary to read section 20 together with the provisions of section 29 of the Taxes Management Act 1970. Section 29 confers the substantive power on the Inland Revenue to make an assessment to be served on the taxpayer requiring him to pay tax in addition to any which has been previously paid. It is headed 'Assessment where loss of tax discovered'. Section 20 itself confers no right to call for the payment of tax and of itself imposes no liability to pay tax. That right and that liability are the subject of section 29. An assessment made pursuant to section 29 may be the subject of appeal. It is perhaps not surprising that section 20 does not confer any right of appeal against a notice served under it, given that the notice is, in a sense, an interlocutory step, a step taken in order to obtain information with a view to deciding whether or not the power conferred by section 29 should be exercised.

The practical constraint on section 20 is that it can only be used when there is a sensible or reasonable possibility of an assessment under section 29. The power conferred by section 29 is very substantially qualified. It is so qualified no doubt because Parliament considered that generally a taxpayer who has honestly provided a tax return under the self assessment scheme should not be indefinitely liable to a demand for the payment of an amount of taxes beyond that which, by his return, he has disclosed as payable by him".

[50] In relation to the foregoing part of the judgment, senior counsel accepted that sections 20 and 29 must be read together. Regarding paragraph 15, it was his position that it contained observations which had been noted in other cases and that it contained a correct statement of the law as to the practical constraints on the use of section 20.

[51] Senior counsel then turned to paragraph 20 which was in the following terms:

"The first question which arises is: What is the test to be applied in determining the availability of the power under section 20 in circumstances where the time allowed by section 9A is expired? As I have already indicated, I accept as a correct statement of the legal position that the power under section 20 is exercisable where what is called for is information which may sensibly lead to a lawful assessment being made under section 29. It is not, therefore, the case as I understood Mr Price to suggest, that in the absence of fraud or an allegation of negligence, the power under section 20 is unavailable. In my judgment, it is also available in circumstances where it may be that the information acquired as the result of the service of a notice under section 20 may lead to a valid assessment under section 29".

[52] It was senior counsel's position that the last sentence of the foregoing paragraph was too widely stated.

[53] Counsel then turned to paragraph 22 and submitted that this was critical in understanding the ratio of the case. Said paragraph is in the following terms:

"Reading the reasons sensibly, together with the notice, it is clear that the defendant, Mr Branigan, has reason to believe that there was a tax minimising scheme, and I use the word minimising in order to be as neutral as possible, which involved the payment of a large sum of money in consideration for a bond which may also have involved the use of a company to grant the bond associated with, or owned or controlled by the taxpayer, that either in the bond, or in some collateral agreement, or in some informal agreement, there was a right to receive a loan of the whole or part of the consideration of the bond with no legitimate or real expectation of any repayment and that the possibility of that loan or the right to it may not have been properly included in the value of the transaction as disclosed in the tax return".

[54] It was his position that it was clear from that passage that there was a new matter, namely the loans. These had not previously been referred to in the taxpayer's return. So it was his position that this case fitted in with the two he had previously looked at. It was his position that in each of these three cases, the right to a discovery assessment had only arisen because new matters had come to the attention of HMRC outwith the enquiry period.

[55] Turning to paragraph 24, senior counsel's position was that he disagreed with the learned judges position set forth in that paragraph as to when section 20 powers may be exercised. It was his position that what was said within this paragraph was too widely stated.

[56] Paragraph 24 said:

"Looking at the matter sensibly, what this case is about is the belief of the Inland Revenue that Mr Taylor has been the progenitor of a tax minimising scheme which may or may not be defective once all the aspects of the scheme have been put on the table. The concern of HMRC and the reason for the serving of the notice in this case is to ensure that all the facts are on the table to say whether or not they give rise to a liability for a tax or a disallowance of an allowance other than that set out in the tax return and, if so, whether the conditions required for an assessment under section 29 are satisfied".

[57] It was his submission that if what was stated within that paragraph were a correct statement of the law, then every taxpayer's return would be covered and would be open to a discovery assessment. The test, if that were a correct statement of the law, would be no more than that the officer decides that it would be interesting to recover information to see whether it might be useful and would be no higher than that. It was his submission that the true ratio of the case was that new matter had come to the attention of the respondents' outwith the enquiry period, and that this was what entitled them to the discovery assessment.

[58] Contrasting that position with the position in the present case, he submitted that no reliance in the instant case was placed on anything other than the taxpayer's return, therefore it was impossible for HMRC to argue that anything new had emerged.

[59] Lastly, in his analysis of the relevant case law, counsel turned to look at Corbally-Stourton v Commissioners for Revenue & Customs 2008 STC (SCD) 907. The facts of the case so far as material for present purposes were:

"In 1998-1999 Mrs Corbally-Stourton participated in a scheme known as the Castle Trust Scheme suggested to her by her bankers Coutts & Co which was intended to deliver to her a capital loss of about £1M. She applied this loss in her 1998-1999 tax returns to eliminate the capital gain she had made in that year, and carried a small balance forward which was used in her returns for 1999-2000 and 2000-2001 to reduce gains occurring in those years. In her 1998-1999 return, she made a disclosure in the white space in the return of the source of the loss.

HMRC became aware of the Castle Trust Scheme, and started investigating it, in December 1999. Several hundred taxpayers have participated in it and claimed an allowable loss. Dr Branigan, an officer at HMRC at the special compliance office dealing with the Castle Trust Scheme and Mrs Corbally-Stourton's return, tried unsuccessfully to open an enquiry into her return in December 2000. His attempt to do so, failed because of administrative failures at HMRC. As a result, the self-assessment enquiry window for 1998-1999 closed on 21 January 2001.

HMRC continued their enquiries into the Castle Trust Scheme and had negotiations with Coutts and other advisers relating to the scheme. In November 2003, having come at some stage prior to that date to the conclusion that the scheme did not work, they discussed settlement proposals with those persons.

Early in 2002, Dr Branigan said that HMRC had obtained sufficient information to take a view on the scheme. By that time he said, and I accept, that he had received information that there was no record of the transactions in the derivatives at Exco and that the counter party PDR, was connected to the Castle Trust Trustees because PDR was a settlement settled by Mr Makhdumi".

[60] Senior counsel submitted that the last quoted paragraph was of considerable significance when looked at in the context of the taxpayer disclosure in her return as herein before set out. It was clear he submitted from said paragraph that the matters referred to therein did not appear in the taxpayer's disclosure in the white space. Thus, once more, he submitted that as with all the other cases there was clearly a new matter which had arisen which rendered competent a section 29 discovery assessment. Senior counsel then turned to paragraph 44 of the judgment which stated as follows:

"There is one other aspect of the word 'discover' to which I should refer. This arises from Cenlon Finance Company Limited v Ellwood 1962 1AER 854, to which I was referred by Miss Simler, Q.C. - 'a discovery' is something newly arising, not something stale and old. The conclusion that it is probable that there is an insufficiency must be one which newly arises on fresh facts or a new view of the law or otherwise".

[61] Senior counsel's submitted that this was a correct understanding of the law and fitted in with the general point he was making that the power could not be exercised unless something new had arisen.

[62] The judge in Corbally-Stourton summarised his position as follows at paragraph 59:

"In summary it seems to me that I must approach section 29(1) and (5) thus. The inspector may raise an assessment under section 29 only if:

(i) He newly comes to the conclusion that it is probable that there was an insufficiency; and

(ii) That at the relevant time an officer of the board could not reasonably have been expected, taking into account the general knowledge and skill that might reasonably be attributed to him, and on that basis only of the section 29(6) information, to have concluded that it was probable that there was an insufficiency".

[63] Senior counsel accepted that this was a correct statement of the law and in particular accepted that something other that definite knowledge must be the basis of the test, although he pointed out that the word probable did not appear in the statute.

[64] Lastly in this case, senior counsel referred to paragraph 66:

"It seems to me that an inspector equipped with a reasonable knowledge of tax law could reasonably be expected to conclude from the appellant's disclosure that something was going on, and that Mrs Corbally-Stourton had participated in a tax scheme. It would be reasonable to expect him to wish to question the workings of the scheme and the genesis and existence of the remarkable £1M loss but he would be also aware that some tax scheme's work and deliver the benefits claimed. There is nothing, leaving aside for the moment Mr Barnett's later two points, in the disclosure to suggest that this scheme did not work. In my judgment an inspector could not reasonably be expected to conclude from the clear hints that there was a scheme and that it was unlikely that it would work".

[65] Senior counsel submitted that the foregoing reinforced what he was putting forward relative to the requirement for a new matter to justify a discovery assessment.

[66] Senior counsel concluded by summarising his position as follows: the starting point was in what circumstances within the self assessment system was a discovery assessment allowed. It was his submission that having regard to the cases to which he had referred and in particular Veltema supra a discovery assessment was an exception outwith the norm. In order to come within the exception it had to be shown that the information provided in the return was inadequate and that the officer on new material had decided that there was an insufficiency in tax. It was his position that in the affidavit and in the accompanying correspondence referred to therein, no new matter was shown to have arisen.

[67] It was his position that he did not solely rely on the authorities to which he had referred in support of his position, although they were consistent with the position which he was advancing. It was his position that on an examination of the relevant sections it was clear that the position he was advancing was correct.

[68] He reminded me that the purpose of self assessment is finality. The respondents had a year in which to decide whether to enquire and were given wide powers to recover the information within that year. The officers are well trained, they have certain knowledge and material about capital redemption contracts which was widely disseminated among the respondents.

[69] It was his position that there was no new matter and that the present proceedings were no more than a second bite at the cherry and such proceedings were entirely inconsistent with finality. He submitted that if the respondents were correct in their assertions that the section 20 power was to be read this widely then anytime an officer would like to see if there was something to investigate, section 20 could be used and that was inconsistent with the entire system of self assessment. This would result in no taxpayers return being final.

[70] For these reasons he invited me to reduce the decision and uphold the petitioner's pleas in law. He said that I should reduce it on the basis that in carrying out their function no reasonable board would reasonably have taken the decision and that it was accordingly irrational.

Submissions for the Respondents
[71] Counsel for the respondents began by making the following broad submission: the issue before the court was not, as put by Mr Johnston, whether the respondents are in a position to make a discovery assessment by reason of new or further information which had come to light since the closing of the assessment window. Rather the proper question was this: were they foreclosed from making a discovery assessment by the taxpayer having made a proper disclosure in terms of his tax return.

[72] He then turned to examine the relevant provisions in some detail. He commenced by looking at Section 20 which he generally described as the investigative arm of the provisions.

[73] It was his position in relation to Section 20 that the circumstances in which it could be exercised had been correctly established by Stanley Burnton J in R (Johnson) (et al) v Branigan supra at paragraph 20. In that passage he said the power under Section 20:

"is exercisable where what is called for is information which may sensibly lead to a lawful assessment being made under Section 29"

[74] Thus counsel broadly accepted that if a Section 29 assessment could be shown to be foreclosed the Revenue could not competently proceed with a Section 20 notice. Thus in order to decide if a Section 20 notice could not be proceeded with the court had to consider that a Section 29 assessment was foreclosed.

[75] It was his submission that in cases such as the present one where there was no suggestion of fraudulent or negligent conduct on the part of the taxpayer assessment in terms of Section 29 was only precluded when the taxpayer in making an honest and accurate return had clearly alerted the Revenue to an insufficiency in the assessment he had made. Said submission was made under reference to Langham v Veltema supra and Revenue and Customs Commissioners v Household Estate Agents Limited supra.

[76] He stressed that in his submission the test set forth in the said cases said nothing about requiring the Revenue to show that there was some new information before them before they were entitled to proceed with a Section 29 discovery assessment. It was his position that the only condition that foreclosed an investigation under Section 20 was if the taxpayer had given sufficiently frank disclosure to allow the Revenue to conclude that there was an insufficiency.

[77] He submitted that it was crucial to appreciate the nature of the gateway. He described this as being essentially of a negative nature. The Revenue did not have to show anything or prove anything. Rather the Revenue were only foreclosed if there had been information before them which would have meant that they could have proceeded within the enquiry window.

[78] He submitted that if there had been sufficient disclosure in the return then that information made the analyst aware of the insufficiency and the Revenue could not then turn up after the enquiry window had expired and seek a Section 29 assessment.

[79] He went on to submit regarding a proper interpretation of Section 29 that awareness or constructive awareness of an actual insufficiency, not of possible or suspected insufficiency was the statutory test under Section 29(5). The respondent's knowledge was fixed objectively by reference to the information specified in Section 29(6). Nor, he submitted, were the respondents obliged to carry out any enquiry whether under Section 9A or otherwise. It was only if the disclosure contained enough information to enable an officer to conclude on balance that there was an insufficiency, so that he could reasonably have been expected to reach that conclusion before the close of the enquiry window that Section 29(5) foreclosed the possibility of an assessment. Said submission was made under reference to Corbally-Stourton v Commissioners for Revenue and Customs supra. In addition he said that importantly the test was that of the objective awareness of an officer of general knowledge and skill.

[80] He then turned to apply the test he had identified to the white space of the taxpayers return.

[81] He submitted that on application of that test to the information provided by the taxpayer within the white space that it would on no view exclude the possibility of a discovery assessment. He submitted that the disclosure could not make anyone aware that the tax computations were wrong; rather it was asserting to the contrary. Specialist knowledge such as that held by Dr Branigan raised the suspicion of insufficiency in assessment but he was unable to reconcile that suspicion without full information. Said submissions were made under reference to Dr Branigan's affidavit.

[82] It was his position that the petitioner's return did not disclose that the petitioner had participated in a particular type of tax avoidance scheme. Nor did it disclose that the scheme may not be effective to avoid tax by giving rise to Capital losses. He did not disclose that there was anything in his self-assessment about which there was some doubt. It did not disclose that he took a different view of the legislation and its operation from that of the Revenue. In particular it did not state that the interpretation and application of Section 37 applied within the self-assessment was different from that which the Revenue took. It did not disclose the interpretation of Section 37 which was being contended for by the taxpayer. The heading of the white space disclosure namely: capital redemption contract and the various steps referred to within the white space did not import any meaning to the tax treatment of the policy. The white space did not say that the redemption contract had been taken out as part of a tax avoidance scheme. He accepted that a series of transaction details were given within the white space however there was no mention of chargeable gains or loss and nor did the white space set forth how the tax loss had arisen. It was his position that against that background the likelihood that the disclosure related to a tax avoidance scheme and the possibility that the petitioner's self-assessment to tax may be insufficient, did not therefore come to the respondents' attention until the return was examined by Dr Branigan on October 2006 several months after the closure of the enquiry window on 31 January 2006.

[83] For these reasons he submitted that the disclosure in the white paper fell short of that necessary in terms of the relevant test.

[84] Counsel having examined Section 29 then returned to look at Section 20 and submitted that the test as to the circumstances in which a Section 20 notice could be used could not be as argued for on behalf of the petitioner in that were Section 20 to apply only where there was actual knowledge that there was a loss of tax, it could never be called in aid of a situation, after the closure of the enquiry window, in which there arose a suspicion short of knowledge. If the respondents knew that the self‑assessment was insufficient, they could assess for the amount which in their opinion could be charged. But if the petitioner was correct in his argument Section 20 could not apply where there were no grounds for making an assessment, the Revenue would be disarmed of the means by which it could investigate any suspicions. It was however his position that knowledge of loss of tax was, however, not the test for Section 20. The test was that the officer holds the reasonable opinion that what is sought contains or may contain information relative to any tax liability to which the taxpayer is or may be subject, or the amount of such liability.

[85] Counsel further referred me R v IRC ex p TC Coombs and Co 1991 2 AC 283. In that case it was held that in order for the making of a notice in terms of Section 20 to be incompetent it must be shown by the taxpayer that the officer could not reasonably have held the reasonable opinion what is sought contained or may contain information relevant to any tax liability to which the taxpayer is or may be subject, or the amount of such liability.

[86] It was his position that no evidence had been led on behalf of the taxpayer to the effect that the officer could not have held that view or that the holding of such was irrationale in the Wednesbury sense.

[87] Further he submitted that having regard to the decision in Kempton v Special Commissioner and HMRC 66 TC 249 the lack of specific evidence of irregularity in the taxpayers' affairs was not of itself irreconcilable with the officer reasonably holding the opinion that the documents sought might contain information relevant to any tax liability.

[88] In summary it was his position: (1) Section 20 was an investigatory power; (2) which could be exercised only (a) where the officer holds the reasonable opinion that what is sought contains or may contain information relevant to any tax liability to which the taxpayer is or may be subject, or the amount of such liability and (b) where what is called for is information which may sensibly lead to a lawful assessment being made under Section 29. (3) The Section 20 power could only be foreclosed if the taxpayer clearly alerted in his return the officer to the insufficiency of tax and (4) the test of new information advanced by Mr Johnston was incorrect and irrelevant. If it was of any relevance then the new information was the petitioner's participation in the foregoing scheme.

[89] He concluded by submitting that I should refuse the prayer of the petition repel the petitioner's pleas in law and uphold the respondents' pleas-in-law.

Discussion

The first issue
[90] The first point at issue before me is this: in what circumstances is an officer of the respondents entitled to issue a discovery notice in terms of Section 20 of the TMA 1970

[91] This power in my judgement is available to an officer in the circumstances identified by Stanley Burnton J in R (Johnson)(et al) v Branigan supra.

"14. In my judgement it is necessary to read Section 20 together with the provisions of Section 29 of the Taxes Management Act 1970. Section 29 confers the substantive power on the Inland Revenue to make an assessment to be served on the taxpayer requiring him to pay tax in addition to any which has been previously paid. It is headed 'Assessment where loss of tax discovered'. Section 20, itself confers no right to call for the payment of tax and of itself imposes no liability to pay tax. That right and that liability are the subject of Section 29. An assessment made pursuant to Section 29 may be the subject of appeal. It is perhaps not surprising that Section 20 does not confer any right of appeal against a notice served under it, given that the notice is, in a sense, an interlocutory step, a step taken in order to obtain information with a view to deciding whether or not the power conferred by Section 29 should be exercised.

15. The practical constraint on Section 20 is that it can only be used where there is a sensible or reasonable possibility of an assessment under Section 29. The power conferred by Section 29 is very substantially qualified. It is so qualified no doubt because Parliament considered that generally a taxpayer who has honestly provided a tax return under the self-assessment scheme should not be indefinitely liable to a demand for the payment of an amount of taxes beyond that which, by his return, he has disclosed is payable by him."

Accordingly in summary section 20 is:

"a step taken in order to obtain information with a view to deciding whether or not the power conferred by section 29 should be exercised"

and can only be used

"where there was a sensible or reasonable possibility of an assessment under section 29"

The second issue

[92] Given that the exercise of the power in terms of section 20 is limited as above identified it is necessary for me to reach a view as regards this question: in what circumstances is an officer entitled to make a discovery assessment?

[93] The statutory test, so far as material for the purposes of this case, is set out in Section 29(3), (5) and (6) of TMA 1970.

"(3) where the taxpayer has made and delivered a return under Section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above -

(a) in respect of the year of assessment mentioned in that subsection;

(b) in the same capacity as that in which he made and delivered the return unless one of the two conditions mentioned below is fulfilled.

...

(5) The second condition is that at the time when an Officer of the Board -

(a) ceased to be entitled to give notice of intention to enquire into the taxpayers return under Section 8 or 8A of this Act in respect of the relevant year of assessment. ...

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above."

Subsection 1 is in the following terms:

"If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a [year of assessment] -

(a) that any income, unauthorised payments under Section 208 of the Finance Act 2004 or surcharge of an unauthorised payments under Section 209 of that Act or relevant lump sum death benefit under Section 217(2) of that Act which ought to have been assessed to income tax or chargeable gains which ought to have been assessed to capital gains tax have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) that any relief which has been given is or has become excessive the officer ... may, subject to subsection (2) and (3) below, make an assessment in the amount or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax."

The proper construction of Section 29 has been considered in some detail in

certain cases to which I was referred in the course of submissions. The first of these was Langham v Veltema supra which specifically considered the operation of section 29(5). In the Court of Appeal the leading judgment was given by Auld LJ who begins his analysis of the subsection at p 293 paragraph 31.

"it may be helpful to consider first, the underlying purpose of the new self‑assessment scheme."

He then identifies the purpose as follows:

"The purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer."

He then says at paragraph 32 the following:

"32. If, as here, the taxpayer has made an accurate self-assessment, but without any fraud or negligence on his part, it seems to me that it would frustrate the schemes aims of simplicity and early finality of assessment to tax, to interpret Section 29(5) so as to introduce an obligation on tax inspectors to conduct an enquiry under Section 9(A), of self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it."

He then goes on at paragraph 33 to say the following:

"33. More particularly, it is plain from the wording of the statutory test in Section 29(5) that it is concerned, not with what an inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of. It speaks of an inspectors objective awareness, from the information made available to him by the taxpayer, of 'the situation' mentioned in Section 29(1), namely an actual insufficiency in the assessment, not an objective awareness that he should do something to check whether there is such an insufficiency, as suggested by Park J. If he is uneasy about the sufficiency of the assessment, he can exercise his power of enquiry under Section 9A and is given plenty of time in which to complete it before the discovery provisions of Section 29 take affect."

He goes on at paragraph 36 to say

"It seems to me that the key to the scheme is that the Inspector is to be shut out from making a discovery assessment under the section only where the taxpayer ... in making an honest and accurate return ... have clearly alerted him to the insufficiency of the assessment, not where the Inspector may have some other information, not normally part of his checks, that may put the sufficiency of the assessment in question"

He continues in paragraph 36 by saying that his identification of the foregoing as key to the scheme:

"is clearly supported by the express identification in section 29(6) only of categories of information emanating from the taxpayer."

[94] I agree (1)  with the approach taken by Auld LJ to the construction of Section 29(5) and that it should be interpreted in light of the underlying purpose of the self-assessment scheme; (2) that Auld LJ has correctly identified that underlying purpose in the passages of his judgment above referred to (3) that the interpretation of Section 29(5) he arrives at by reference to the underlying purpose of the Act is correct. In my view in approaching the construction of section 29(5) as he has done Auld LJ has arrived at a construction which is in line with the underlying purpose of the new scheme in that: the right is given to the taxpayer of early finality of assessment. However, that right is balanced by a corresponding duty incumbent upon the taxpayer namely: to clearly alert the officer to an insufficiency. It appears to me that if the section were read in any other way it would render the system of self assessment unworkable. In that without such a duty being incumbent upon the taxpayer the whole system would be open to the clearest abuse and would be likely to lead to material losses in tax to HMRC. It accordingly seems to me that he has correctly identified the key to the scheme.

[95] I disagree with senior counsel's submission that what is said by Auld LJ at paragraph 36 is limited merely to the source of the information. It is important to note the opening to that paragraph and precisely what is said:

"The answer to the second issue ... through distinct from, may throw some light on, the answer to the first issue. It seems to me that the key to the scheme ..." (my emphasis)

Thus he expressly states that his view is not confined to dealing with merely the question of the source of the information. He then goes on to say, it seems to me, that critical to the whole understanding of how the scheme operates is that the taxpayer in order to prevent a discovery assessment by an officer must "have clearly alerted him to the insufficiency of the assessment." Thus I take from this analysis that the test to be applied once the officer newly comes to the conclusion that there is an insufficiency in deciding whether a discovery assessment is competent is this: has the disclosure in the self assessment return clearly alerted the officer to the insufficiency?

[96] The approach taken by Auld LJ and the construction which he arrived at was followed in Revenue & Customs Commissioners v Household Estate Agents supra in which it was held:

"The Inspector was entitled to proceed on the basis that the Company's self assessment was correct and that the £60,000 was deductible. There was nothing in the Company's tax returns for 1999 ... , which should have clearly alerted the Inspector to the insufficiency of the return"

Having considered this passage in paragraph 36 in Auld LJ's judgment and his general approach it leads me on to the central question in the case before me. In the course of his submissions when considering the relevant test for the exercising of the section 29 power senior counsel for the petitioner advanced the proposition that it was only where the Revenue could show the discovery of something new (some new information) that the necessary pre condition for the exercise of the power by the Inspector could be satisfied. Counsel for the respondents concentrated on the clear alerting by the taxpayer of the insufficiency as being the test and submitted that the approach of senior counsel was incorrect.

[97] I am of the view that neither counsel's approach was entirely correct.

[98] In my view counsel for the respondent's position that the discovery of new information by HMRC was irrelevant to this issue was wrong.

[99] The submission had no regard for the terms of section 29(1).

"If an officer of the board ... discover(s) ... that an assessment to tax is or has become insufficient ..."

[100] It seems to me that in order to give content and meaning to the word discover and in order for section 29 to fit in with the underlying purpose of the scheme the position advanced by counsel for the respondents must be wrong. As a starting point for a discovery assessment there must be some element of discovery. It seems to me that Auld L.J. correctly defines "discover" at paragraph 5 in Langham v Veltema as follows:

"The discovery procedure in section 29 has its origin in earlier tax statutes and may apply where, after normal finality of an assessment, some new fact comes to light or incorrect application of the law or where for any reason it newly appears that the taxpayer has been undercharged"

This definition of discover gives it meaning and fits it in with the underlying purpose of the scheme. Thus I am of the view that counsel for the respondent's position is incorrect. Equally I am of the view that counsel for the petitioner's position is incorrect in that he appeared to concentrate at various times in his submissions, on the issue of the newly discovered fact to the exclusion of the duty incumbent on the taxpayer to clearly alert the officer to insufficiency.

[101] In my view on a proper understanding of Auld LJ's position in Langham v Veltema the proper approach to the circumstances in which an assessment under section 29 can be made is a two step process which is set forth in Corbally Stourton v Commissioners for Revenue and Customs at paragraph 59.

"(i) He (the officer) newly comes to the conclusion that it is probable that there was an insufficiency; and

(ii) That at the relevant time an officer of the board could not reasonably have been expected, taking into account the general knowledge and skill that might reasonably be attributed to him, and on that basis only of the section 29(6) information, to have concluded that it was probable that there was an insufficiency".

Applying a test in those terms would fit in with all the authorities to which I was referred.

[102] In my opinion the test has to be a two stage one to fit in with the underlying purpose of the scheme. The officer has to discover something new otherwise the underlying purpose of early finality of assessment would be defeated. His assertion of the newly discovered insufficiency is then tested against the adequacy of the disclosure by the taxpayer. 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.

[103] I recognise in reaching the conclusion that there is a two stage test it perhaps appears I am accepting a position Mr Johnston took at one stage in his submissions. However, I now turn to the approach to and application of that test and in relation to this I judge that I differ materially from his position.

[104] It seems to me that on a proper construction the first preliminary part of the test is no more than an assertion by the officer of a newly discovered insufficiency. The heart of the test I judge is clearly contained in part (II) of the test. On a proper understanding a discovery assessment can only be foreclosed if the taxpayer has clearly alerted in his return the officer to the insufficiency of tax which the officer has asserted he has newly discovered, thus rendering it not a new discovery but rather something on the information provided by the taxpayer the officer should have been aware of during the enquiry window. In my judgement on a proper construction the section clearly places the emphasis on the adequacy of the disclosure by the taxpayer. That fits in with the underlying purpose of the scheme. Thus the taxpayer is given the right of early finality. However, there is a corresponding duty on the taxpayer to clearly alert the officer to the insufficiency. If he does not the officer can newly discover an insufficiency. Accordingly I broadly accept counsel for the respondent's argument that in terms of the section it is for the taxpayer (once a newly discovered insufficiency is asserted) to prove that he has clearly alerted the officer to the insufficiency.

The third issue
[105] There is one further question in relation to the proper construction of Section 29 which requires to be considered. The tail piece to Section 29(6) at subsection (d) as quoted above requires to be interpreted. I find myself in agreement with the construction of the said part of the subsection set forth by special commissioner Charles Hellier in Corbally - Stourton v Commissioners for Revenue and Customs Supra at paragraph 58:

"In Veltema and Household Estate Agents, it is made clear that the only information which should be treated as being available to the inspector for the purposes of Section 29(5) was that listed in Section 29(6). But the tail piece of Section 29(6) speaks of what it would have been reasonable to expect the officer objectively to have been aware of on the basis of that information. In determining what it is reasonable to expect of an officer some knowledge must be attributed to him: he must have some awareness of the rules of elementary arithmetic, some knowledge of tax law, and some general knowledge. All of those he must be treated as applying and determining what it is reasonable to expect of him."

[106] Accordingly the information is that provided by the taxpayer as that would be objectively understood by an officer of general knowledge and skill.

The fourth issue

[107] Having regard to the relationship between Section 20 and 29 of the Act as I have explained it and having regard to the proper construction of these two sections the first question I require to ask myself is this: have HMRC newly come to the conclusion that it is probable that there was an insufficiency? The respondents are at an early stage in their investigations and are not able to say there probably is an insufficiency. That is what they wish to investigate. They however say they have newly discovered that the petitioner was probably a participant in the CRC Mark II scheme as a result of expert examination of the return and they believe that this may lead there to be an insufficiency. Applying Auld LJ's test that is properly understood a discovery,(a new fact has come to light: the petitioner's membership of the scheme) that in my view at this stage in the process fulfils that part of the test. The critical question in the case before me then becomes: should the information contained in the white space in the taxpayers return have clearly alerted an officer having regard to the general knowledge and skill that might reasonably be attributed to him, of an insufficiency of tax? If it should have there could be no reasonable or sensible possibility of an assessment in terms of Section 29 accordingly the respondents would not be entitled to a discovery notice in terms of Section 20.

[108] Mr Johnston's position in summary was that the white space set forth each step that had been taken in order to give rise to the capital loss. In addition within the white space was set forth the specific section upon which reliance was placed for the said capital loss. Thus, as I understood it, his position was that the full factual and legal basis for the capital loss was set forth in the white space. It was his position that nothing new had arisen i.e. that no discovery had been made which could found a discovery assessment. Thus it was his position that there was no sensible or reasonable possibility of an assessment in terms of Section 29 and accordingly there could be no competent notice in terms of Section 20.

[109] I am not satisfied that the information contained in the white space should have clearly alerted an inspector with the knowledge and skill as I have defined it to an insufficiency in tax.

[110] It is clear looking to Dr Branigan's affidavit as a whole that he as a result of his examination of the taxpayers return has reasons to believe that Mr Pattullo was a participant in a CRC Mark II Scheme which is a tax avoidance scheme and he explains at paragraph 23 of his affidavit that it involves the following arrangements:

"In 2003/04 Mr Pattullo realises a chargeable gain of £2.1 million pounds. He obtains advice on a potential mitigation strategy and decides to proceed with it. He establishes a trust by settling a nominal amount into a settlement in which he has a life interest. He approaches a bank for a loan of £2,665,000. He makes an additional settlement into trust of £2,665,000. The trustees of the trust then purchase a Capital redemption contract from a person who has subscribed for such a contract issued by an off shore insurance company. The trustees pay £2,665,000 for the policy with a surrender value of £2,600,000. The trustees then immediately resolve to appoint the contract out of trust to Mr Pattullo as life renter. Mr Pattullo immediately surrenders the policy and receives £2,600,000. Mr Pattullo then repays £2,665,000 plus any interest charged to the bank."

The avoidance scheme involves an interpretation of the relevant tax legislation as is fully set out in paragraphs 24 and 25 of the affidavit.

[111] Dr Branigan's position on a fair reading of his affidavit as a whole is: that (1) he was only able to reach this belief as a result of his specialist knowledge arising from his being the head of the team investigating the CRC Mark II scheme; (2) he is not at this stage able to say that he is aware of an actual insufficiency as he cannot say definitely that the petitioner was a participant. Further, if he was a participant, in the absence of the details of the scheme he is unable to say that he is aware of an actual insufficiency. Thus he is unable at this stage to proceed to a section 29 assessment and requires to proceed to a section 20 notice in order to discover documentation. The situation is accordingly very much on all fours with that in R (Johnson) (et al) v Branigan where a section 20 assessment was held to be competent.

[112] Given the position of Dr Branigan: therefore the question for the court becomes: is there a clear alerting of an officer within the white space, that officer being one of ordinary knowledge and skill of the participation by Mr Pattullo in such a scheme of tax avoidance and of an insufficiency in tax arising therefrom?

[113] The answer to the above question is that I have not been satisfied by Mr Johnston's submissions that there was such a clear alerting within the white space. [114] As is pointed out in his affidavit by Dr Branigan the white space does not contain the following:

1. A statement that Mr Pattullo was a participant in the CRC Mark II tax avoidance scheme. Dr Branigan at paragraph 26 makes clear that had there been such a statement this would have guaranteed that an enquiry would have been opened and that Mr Pattullo's tax advisers would have been aware of this.

2. A statement that the petitioner and his advisers had adopted a different view of the law from that published as HMRC's namely: they had taken a view in respect of the tax treatment of Capital Redemption Contracts which is the opposite of that taken by HMRC Capital Gains Tax Manual at CG69004 dated 2 September 2003 (production 7/3) is not contained within the white space. The petitioner's tax return was not filed until 31 January 2005. The necessity to make such a declaration in order to comply with the duty to clearly alert has been held to exist in HMRC Commissioner v Household Estate Agents Limited page 712, paragraph 10 where it was held as follows:

"Taxpayers who adopt a different view of the law from that published as HMRC's can protect against a discovery assessment after the enquiry period. The return and accounts would have to indicate that a different view had been adopted by entering comments to the effect that they did not follow HMRC guidance on the issue or that no adjustment had been made to take account of it."

3. There is no explanation as to how Mr Pattullo contends that Section 37 operates in order to produce the capital loss.

4. The details other than the basics of the transactions which have been entered into are not contained within the white space.

5. There is no indication of any doubt in the disclosure that the petitioner is entitled to the loss. I accept Mr Johnston's position that the taxpayer does not require in order to clearly alert to say there is an insufficiency as of course that is not his position. However, in circumstances such as this a reference to doubt or as I have said to the fact that it is, a position contrary to HMRC's would be necessary to comply with the duty incumbent upon him.

In the absence of information of the type as above described an inspector of the skill and knowledge as I have earlier defined it could not in my judgment have been aware of actual insufficiency. In so finding I have had regard, as I believe I am entitled to, that on any sensible reading of Dr Branigan's affidavit, he is a person who is a specialist in the area of tax investigation and has particular and considerable experience regarding this particular type of tax avoidance scheme and he is as yet, as he makes clear within his affidavit, unable to say that the petitioner is definitely a participant in said scheme and even if he is that there is an actual insufficiency. Rather the position which he presently takes is that he still requires further information to decide whether there is such an insufficiency and accordingly to decide whether to raise a Section 29 discovery assessment. Thus Dr Branigan has sought to go down the Section 20 route and to serve a notice in terms thereof in order to obtain documentation which he believes may contain information relevant to any tax liability to which Mr Pattullo is or may be subject.

[115] I do not believe for the foregoing reasons that Mr Johnston's position that the full factual and legal position is set forth in the white space is correct. The full factual position would have included a statement that the petitioner was part of such 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. I believe it is a fair conclusion to hold that the disclosure in the white space is a carefully crafted disclosure seeking to pass through the initial checks carried out by HMRC but in no way meeting the test of clearly alerting to an actual insufficiency.

[116] Accordingly in my opinion this is a case in which I cannot be satisfied that it has been shown there is no real or sensible prospect of a power under Section 29 being competently exercised. Accordingly in my judgment the right to serve a notice in terms of Section 20 was available.

[117] Turning to the question: for what purposes may a section 20 notice be used I preferred the submissions made on behalf of the respondents. In my view a section 20 notice, where there is a reasonable prospect of a section 29 assessment being exercised, can be used to obtain information in order to decide whether the section 29 power should be exercised. That in my view on a proper reading of section 20 is its purpose. I agree with the submission for the respondents that to hold otherwise would be to misread the section. I would agree with what is said by Stanley Burnton J at paragraph 14 in R (Johnson) (et al) v Branigan that section 20 is:

"a step taken in order to obtain information with a view to deciding whether or not the power conferred by section 29 could be exercised".

That is precisely the use to which it is being put in the instant case. I do not believe that such a use defeats the underlying purpose of early finality of assessment. Its use is of course constrained, as I have said above, by it only being exerciseable where there is a real or reasonable prospect of the power under section 29 being exercised. Thus a section 20 notice can properly be used in the circumstances of this case.

My decision

[118] Having regard to the foregoing reasons I repel the petitioner's pleas in law; uphold the respondent's pleas in law and refuse the petition. I have not been addressed in relation to the issues regarding expenses. Accordingly I will have this matter put out for a hearing in order that I can be addressed on these matters.