Charlton v HMRC: When Your Tax Return Told HMRC Enough To Stop A Discovery Assessment

You put a tax avoidance scheme's reference number (SRN) on your return, or explained an unusual position in its notes. Years later, HMRC has reopened that year with a discovery assessment, though it had that information all along. Can it?

Sometimes not. In Charlton v HMRC [2012] UKUT 770 (TCC), the Upper Tribunal held HMRC's discovery assessments invalid: the returns, with the promoter's form the SRN pointed to, were enough to make an officer aware the tax was too low before HMRC's deadline for opening an enquiry. Yet the scheme had failed.

What counts is what your return showed, not what HMRC knew. An SRN alone is not enough, and the argument fails if HMRC proves you or your adviser were careless or deliberate. You can raise it only by appealing: write to HMRC within 30 days of the date the assessment was issued. See our guide to discovery assessments.

On this page:

• Where Do You Stand?
• What Happened
• What The Tribunal Decided
• Does An SRN Protect You?
• Where The Argument Stops
• What To Do Now

Where Do You Stand?

What Happened In Charlton

In the 2006/07 tax year, Dr Michael Charlton and Mr and Mrs Corfield used a marketed scheme meant to create capital losses to set against their gains, by buying and surrendering second-hand life insurance policies. Under the avoidance scheme disclosure rules (DOTAS), the promoter described it to HMRC on form AAG1; the SRN that HMRC issued in February 2007 said nothing about whether it worked.

Each return gave the SRN on a separate page, under "Other Information", and described the policy deals in the white space. Mr Corfield's, the tribunal's example, set a loss of £195,323 against gains of £197,825 while returning only £58 of policy gain as income.

HMRC opened enquiries into 38 of the scheme's 41 users but missed these three. An enquiry letter to Mrs Corfield dated 8 January 2009 was never sent (whether an enquiry was validly opened can matter in itself). The enquiry windows, HMRC's time to open a formal check of a return, closed on 31 January 2009. HMRC's coordinating officer found out in March 2009, waited until the courts had finished with a similar scheme, which failed, and only then made the assessments.

Everyone accepted the scheme did not work; the only question was whether the assessments were valid. HMRC did not allege fault, so everything turned on section 29(5) TMA 1970, the awareness test: unless HMRC proves carelessness or deliberate behaviour, it can assess a year you filed a return for only if, when the enquiry window closed, an officer could not reasonably have been expected to be aware from your information that the tax was too low.

Langham v Veltema shows that test going against a taxpayer; Charlton shows it working for one. The First-tier Tribunal found for the taxpayers, and HMRC appealed.

What The Upper Tribunal Decided

Numbers in square brackets, like [37], are paragraph numbers in the decision cited, so you can find the passage and refer to it in your own appeal.

A Change Of Mind Is Enough For A Discovery

The taxpayers argued that a discovery needs something new, and new to HMRC as a whole. The tribunal disagreed: "no new information, of fact or law, is required for there to be a discovery" ([37]). What must be new is the officer's conclusion, and a change of view, a change of opinion or the correction of an oversight will do. HMRC won this point, so the argument that your return told HMRC enough belongs in the awareness test, not in the discovery question.

Later in the same paragraph, the tribunal suggested in passing that a conclusion left too long might lose its "essential newness". That remark was obiter (not needed for the decision), and the Supreme Court rejected it in HMRC v Tooth [2021] UKSC 17 at [76]-[77]: "there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time". Delay alone is no defence (EM3260 agrees); the time limits are your protection (our Tooth analysis).

Still good law? Yes on what counts as a discovery (accepted in Tooth); no on the delay remark.

The Officer Reads Your Return, Not HMRC's Files

The First-tier Tribunal had reasoned that the hypothetical officer in the awareness test would have asked a specialist colleague. That was an error of law: the officer is a construct of the law, not a real person, and what counts is the information you gave, not the officer's expertise. HMRC's specialist teams are irrelevant, and the officer does not know what the rest of HMRC knows ([53]-[57], [66]). HMRC won this sub-point but still lost the appeal.

The Court of Appeal now describes the officer as having "general competence, knowledge or skill which include a reasonable knowledge and understanding of the law" (Sanderson v HMRC [2016] EWCA Civ 19 at [17(2)]). Charlton adds that the knowledge is what the particular information calls for ([65]; more in our Langham analysis). That knowledge includes the courts' rulings, as HMRC's own guidance accepts (EM3233): here, that the High Court had already rejected a similar scheme.

Still good law? Yes, with the Court of Appeal's wording now leading.

The Scheme Number Brought In The Promoter's Form

The awareness test counts only information you made available, a closed list in section 29(6) (see our Langham analysis). It includes information whose existence and relevance an officer could reasonably infer from your return (section 29(6)(d)(i)).

The officer need not be able to work out what that information says, only that it exists and is relevant. But the inference must be reasonable, must point to the tax being too low, and can come only from what you supplied: "Inference is not a substitute for disclosure" ([78]-[79]). The Court of Appeal endorsed both points (Sanderson at [41]).

An SRN tells an officer that the promoter filed a form AAG1 explaining how the scheme is meant to work. Hence the key sentence ([84]):

"In our view, the form AAG1 is just the sort of information the availability and relevance of which might reasonably be inferred from the inclusion of the SRN in a return which also discloses tax effects consistent with tax planning."

The condition at the end is the point. The SRN being on a different page from the figures did not matter ([82]-[83]).

Still good law? Yes: the Upper Tribunal has applied it since, though Hoey shows its limits (below).

Aware Enough To Justify An Assessment

The officer did not need to understand exactly how the scheme worked, only to be able to see that the tax was too low, enough to justify an assessment. Information that only raises questions, which need more information to answer, is not enough; information that justifies an assessment is, and "The test is one of awareness, and not one of certainty or even probability" ([92]).

Nor did the returns have to explain the scheme or flag that the taxpayers' view differed from HMRC's: it is a matter of degree. Even leaving the promoter's form aside, "the difference between the allowable loss claimed and the income declared was enough, in our judgment, to justify an officer making the assessment" ([93]). The form only strengthened the case.

So an officer could have been aware before the windows closed and, with no allegation of fault, the discovery assessments were invalid ([95]-[96]). The taxpayers kept their original self-assessments, even though the scheme did not work.

Still good law? Yes: the Court of Appeal draws the same line between questions and awareness (Sanderson at [35]).

Does A Scheme Reference Number Protect You?

Not on its own. In Charlton the SRN brought in the promoter's form only because the return also showed tax effects consistent with tax planning, and the figures were enough without the form. Nor is an SRN HMRC approval ([7]).

The main counterpoint is Hoey v HMRC [2021] UKUT 82 (TCC), a disguised-remuneration loan case. Mr Hoey's returns said the loans came from an employee benefit trust and were repayable on demand, and his 2009/10 return gave the SRNs of two schemes. The First-tier Tribunal found these were only "factors which indicate that something might be wrong and that perhaps the hypothetical officer should make further enquiries" (quoted at [185]), and the Upper Tribunal upheld that ([190]).

As HMRC pointed out, nothing disclosed, including the scheme form, showed that the loans would not be repaid, a point highly relevant to the tax ([187]). Nor was the reasoning in Rangers yet known. In the tribunal's words, "each case will turn on its facts and an evaluation of the particular disclosures made" ([195]).

Timing works both ways. The officer knows the law as it stood when your window closed: in Charlton, a court had already rejected a similar scheme; in Hoey, the decisive ruling came years later.

So what is enough? In HMRC v Hicks [2020] UKUT 12 (TCC), the Upper Tribunal said a simple case needs the full facts and the position the taxpayer took; a complex one may also need an adequate explanation of the main tax law issues and the position taken on them ([197]-[198]).

Where The Argument Stops

Carelessness or deliberate behaviour. Under section 29(4), HMRC can still assess if it proves the shortfall was brought about carelessly or deliberately by you or anyone acting for you, including your adviser (agent liability). Deliberate behaviour needs more: an intention to mislead HMRC (our Tooth analysis).

In Hicks, HMRC had not enquired into two years that used losses from a disclosed dividend-strip scheme, and assessed them in 2015. For the 2010/11 tax year, applying Charlton, the form counted, and the Upper Tribunal would have upheld the finding that an officer could have been aware. But Mr Hicks's accountant had been careless in advising on and claiming the deduction, so both assessments stood ([141], [205]). Whether relying on a promoter or adviser is careless depends on the facts.

Time limits. HMRC normally has 4 years from the end of the tax year to assess, 6 years if it proves carelessness (which brought Mr Hicks's earlier year back into time) and 20 years for deliberate behaviour. If you never reported your SRN, it has 20 years for the 2009/10 and later tax years without proving any fault (section 36(1A)(c) TMA 1970), unless you had a reasonable excuse for not reporting it and put that right without unreasonable delay once the excuse ended (section 118(2) TMA 1970). Our guide has the full table.

Other regimes. An accelerated payment notice (APN), a demand to pay disputed avoidance tax upfront, cannot be appealed and must be paid whatever your section 29(5) argument. Nor does section 29(5) stop the loan charge, a separate charge with its own disclosure relief. For stamp duty land tax schemes, the equivalent test is in paragraph 30 of Schedule 10 FA 2003: see SDLT appeals.

What To Do Now

1. Diary the deadline. Appeal in writing to the officer who issued the assessment within 30 days of the date it was issued, with your grounds (section 31A TMA 1970); the awareness point can only be raised in that appeal (section 29(8)). If HMRC reply with their view and offer a review, you have 30 days from that letter to accept it or notify your appeal to the tribunal, or HMRC's view settles the appeal (section 49C TMA 1970); after a review, you have 30 days to go to the tribunal (how reviews work). Late? See late appeals. Already appealed without this ground? See changing your grounds.
2. Get the returns (from your adviser, or from HMRC by a subject access request) for the year and the two years before, which also count, and, if you were in a partnership, its returns for those years (section 29(7)): every page, the white space and anything sent with them, plus anything you or your adviser wrote to HMRC about the point before the window closed.
3. Find the SRN entry and try to get the form AAG1. The promoter or your adviser may have it, and HMRC holds it; we know of no published route to a copy, so ask in writing. Once your appeal is with the tribunal, it can direct HMRC to produce documents (rule 5(3)(d)).
4. Fix the date the test looks at: when HMRC's enquiry window for that return closed or, if HMRC enquired, when it issued its closure notice (or a partial closure notice on that point).
5. Ask the Charlton question. Reading only those documents, would an officer with a reasonable knowledge of tax law have been aware your tax was too low, enough to justify an assessment, or only have had questions to ask? A tribunal decides this on the facts of each case.
6. Check your other grounds: the behaviour HMRC alleges (yours or your adviser's), the time limit and the amount (the five grounds). Carelessness can also bring a penalty, which has its own appeal.
7. Pay or postpone. Appealing does not stop the tax being due (section 55); to postpone the disputed tax, apply to HMRC in writing within 30 days of the date the assessment was issued. Interest runs from the year's original due date on tax you turn out to owe, and an APN must be paid regardless.
8. Make your full case at the First-tier Tribunal. The awareness question is an evaluation of the facts, hard to overturn on appeal, where only an error of law counts (Sanderson at [35]). HMRC must prove the conditions for the assessment (the split burden), but as the test is applied to your own documents the burden rarely decides it, as the Upper Tribunal noted in Hicks, so prepare as if you had to prove it. Scheme cases are high-value and technical: consider professional help. Each side usually bears its own costs, but in a Complex case you risk paying HMRC's costs unless you opt out in time: see tracks and costs.

Key Legislation And Resources

The Judgment

• Charlton v HMRC [2012] UKUT 770 (TCC), [2013] STC 866—formally HMRC v Charlton, Corfield and Corfield; Upper Tribunal (Tax and Chancery Chamber), Mr Justice Norris and Judge Roger Berner; released 20 December 2012. BAILII holds the decision as a PDF.

Legislation

• Section 29 TMA 1970—discovery assessments: the carelessness condition (subsection (4)), the awareness test (5), information made available (6) and raising the point only on appeal (8)
• Section 9A TMA 1970—the enquiry window
• Section 34 TMA 1970 and section 36 TMA 1970—time limits, including an unreported SRN (subsection (1A)(c)) and losses brought about by someone acting for you (subsection (1B))
• Section 31A TMA 1970—appealing in writing, with grounds
• Section 55 TMA 1970—postponing payment
• Section 313 FA 2004—the scheme user's duty to give HMRC the SRN

Key Cases

• Charlton v HMRC [2012] UKUT 770 (TCC)—an SRN in a return showing the effects of tax planning brings in the promoter's form AAG1; the return's figures alone would have made an officer aware, so the discovery assessments were invalid
• HMRC v Tooth [2021] UKSC 17—rejected Charlton's "essential newness" remark: a discovery does not go stale
• Sanderson v HMRC [2016] EWCA Civ 19—the Court of Appeal's statement of the officer test; endorsed Charlton's inference rule; a return showing a scheme, not a shortfall, was not enough
• Hoey v HMRC [2021] UKUT 82 (TCC)—SRNs on the return, but the disclosures only raised questions; the taxpayer lost
• HMRC v Hicks [2020] UKUT 12 (TCC)—the form AAG1 counted, but an accountant's carelessness let HMRC assess anyway

HMRC Guidance

• EM3233—whether information was made available, and what the hypothetical officer is taken to know
• EM3260—HMRC accepts, after Tooth, that a discovery cannot go stale
• CH54000—the longer time limit where a scheme user did not report the SRN, and the rule for earlier years
• Disclosure of tax avoidance schemes: overview—GOV.UK on reporting your SRN, and why an SRN is not HMRC approval

On This Site

• Discovery Assessments—the hub: both conditions, time limits, the five grounds and the burden of proof
• Langham v Veltema—the other half of this story: why silence is not protection, and why Mr Sanderson's white-space note was not enough
• HMRC v Tooth—what "deliberate" means, and why a discovery does not go stale
• HMRC Enquiries And Closure Notices—the enquiry window whose closing date the awareness test looks at
• Accelerated Payment Notices And Follower Notices—the separate regime for scheme users, with no appeal
• The Loan Charge And Disguised Remuneration—for loan scheme users
• Postponing Payment During An Appeal—how section 55 works
• Writing Your Grounds Of Appeal—putting the awareness point into your appeal

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.