“Not careless or deliberate” – Discovery assessment reduced to nil

When HMRC publishes a scheme under Disclosure of Tax Avoidance Schemes (DOTAS), it is easy for hindsight to colour the entire situation.

What can be lost in that process is the reality of how arrangements were entered into at the time and crucially, whether a taxpayer’s behaviour genuinely meets the legal threshold of being careless or deliberate.

The case I want to talk about here is a clear example of why that distinction matters and how it can ultimately determine whether an assessment stands or falls.

Background information

Our client was a company whose director had (some years earlier) entered into a tax arrangement that was later categorised by HMRC as a tax avoidance scheme.

At the time, our client did not appreciate that the arrangement would later be challenged in this way of course.

The mechanics were relatively straightforward:

• The director took a loan from the company
• They then entered into an annuity agreement under which the company had the option to receive annuity payments over the director’s lifetime
• That option was subsequently cancelled, releasing the director from the obligation to repay the loan.
• As a result, no Corporation Tax or Income Tax was paid on the original loan amount.

HMRC opened an enquiry into the company tax return for the relevant period and requested full supporting information in relation to the annuity arrangement.

The client’s previous agent complied fully, providing all of the information HMRC required to consider the position.

That information was provided before the self-assessment enquiry window for the 2016–17 tax year closed.

Despite this, in March 2021 HMRC issued a discovery assessment in respect of the 2016–17 year.

The discovery assessment

The assessment treated the £160,000 loan as a distribution for Income Tax purposes, resulting in a liability of approximately £71,000.

This was a significant and unexpected exposure for the client, particularly given that HMRC already had the relevant information within the enquiry window.

The assessment was appealed by the client’s former agent on a number of grounds.

Central to the appeal was the argument that HMRC had not met the statutory conditions set out in section 29 of the Taxes Management Act 1970.

In particular, it was argued that HMRC had not made a valid discovery and that, in any event, the assessment could only be raised if the loss of tax was brought about by careless or deliberate behaviour or if HMRC could not reasonably have been expected to make an assessment within the enquiry window.

HMRC accepted that it could reasonably have raised an assessment during the original enquiry, as all of the relevant information had been provided at the time.

However, it continued to maintain that a valid discovery had been made and that the client’s behaviour was at least careless.

On that basis, HMRC asserted that the assessment remained valid.

After a lengthy and ultimately unsuccessful dispute, the client approached inTAX in August 2025 for a fresh review of the case.

Where does a tax investigations specialist come in?

Our role was to assess whether the appeal still had merit and, importantly, whether there was an alternative line of argument that had not yet been fully explored.

We undertook a detailed review of the case papers, including correspondence between the client and the scheme provider.

During that process, it became apparent that there may have been other parties involved in the arrangement beyond the scheme promoter itself.

Further enquiries revealed email chains involving both an accountant and a solicitor, each independent of the scheme provider, who were aware of the arrangement and had facilitated its implementation.

Neither professional had expressly advised on the technical merits of the scheme.

However, their involvement was highly relevant.

We argued that the client’s decision to involve independent professional advisers was evidence of taking reasonable steps to ensure that the arrangement was appropriate from a tax perspective. *

On that basis, we submitted further representations to HMRC, focusing squarely on the issue of behaviour.

Our position was that HMRC could not demonstrate that the client had acted carelessly, let alone deliberately.

Without careless behaviour, the statutory conditions for a valid discovery assessment under section 29(4) TMA 1970 were simply not met.

*(If there had been a clear or obvious tax risk at the time, it would have been reasonable for the client to expect that risk to be flagged by one of the professionals involved).

How we resolved the issue

In January 2026, HMRC accepted our arguments.

It conceded that it could not evidence careless behaviour on the part of the client and, as a result, that the discovery assessment was invalid.

The assessment was reduced to nil, saving the client approximately £71,000 in Income Tax, together with any associated interest and penalties.

This case underlines just how critical the question of behaviour can be in tax disputes.

Whether an inaccuracy arises from careless or deliberate conduct is inherently subjective, but it is often decisive when it comes to HMRC’s powers to assess and penalise.

It also demonstrates the importance of looking beyond the surface of a case and interrogating the evidence in detail.

For anyone facing a dispute with HMRC, having an adviser who can identify and present the strongest possible arguments from the available facts can make the difference between a substantial liability and a complete victory.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email info@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.