Commissioners for HM Revenue and Customs v Tooth
| Jurisdiction | England & Wales |
| Judgment Date | 14 May 2021 |
| Neutral Citation | [2021] UKSC 17 |
| Court | Supreme Court |
[2021] UKSC 17
Lord Reed, President, Lord Briggs, Lord Sales, Lord Leggatt, Lord Burrows
Income tax – Discovery assessment – Whether taxpayer deliberately brought about a situation in which an assessment to tax is or has become insufficient – No – Whether HMRC made a relevant discovery – Yes – Appeal dismissed – TMA 1970, s. 29, 36, 118.
The Supreme Court upheld the Court of Appeal's decision in R & C Commrs v Tooth [2019] BTC 14, by allowing a taxpayer's appeal against a discovery assessment, but on the two key issues it reached opposing decisions to those of the Court of Appeal, instead substantially agreeing with the earlier decision of the First-tier Tribunal (FTT).
The respondent (Mr Tooth) participated in a tax avoidance scheme in 2008–09 designed to produce an employment-related loss to be carried back to 2007–08. Due to a technical issue with the software used to complete his tax return Mr Tooth was unable to include the loss in the correct box of his 2007–08 return and instead included it in the partnership pages. An explanation of what had been done and why had been included in a “white space” of the partnership pages.
From when HMRC first reviewed Mr Tooth's tax return in 2009, HMRC regarded the tax return as insufficient. In late 2013 the scheme used was formally found to be ineffective. HMRC had initially enquired into Mr Tooth's return under TMA 1970, Sch. 1A, but in 2013 HMRC accepted that they should instead have raised an enquiry under s. 9A. In October 2014, an HMRC officer, who had not previously been involved with Mr Tooth's case, reviewed the file and concluded that an assessment should be issued and accordingly arranged for the issue of a discovery assessment under TMA 1970, s. 29. As this was more than six years after the relevant tax year, for the discovery to be valid, as well as HMRC having to prove that they had made a “discovery”, they also had to show that the insufficiency of tax had been brought about deliberately by either Mr Tooth or a person acting on his behalf.
Mr Tooth appealed the discovery assessment to the FTT ([2016] TC 05452). The FTT determined that the assessment was invalid because the insufficiency of tax had not been brought about by a deliberate inaccuracy, so that TMA 1970, s. 29(4) was not satisfied (and therefore the 20 year time limit allowed for making a discovery assessment under TMA 1970, s. 36(1A) did not apply). The FTT did however find that HMRC had made a discovery in 2014 within the meaning of TMA 1970, s. 29(1).
HMRC appealed to the Upper Tribunal (UT) ([2018] BTC 505). The UT found that HMRC had not made a discovery in 2014, as HMRC had viewed Mr Tooth's return as insufficient since it was submitted in 2009, and even if it had been pleaded, it would have become “stale” by 2014. The UT also considered that there was no inaccuracy pursuant to TMA 1970, s. 118(7) in the return, when read as a whole, and even if there were an inaccuracy it had not been deliberate within the meaning of s. 29(4).
HMRC appealed to the Court of Appeal ([2019] BTC 14). The Court of Appeal agreed with the UT that HMRC had not made a qualifying discovery and accordingly the appeal was dismissed. If it had been necessary the Court of Appeal would have found, by majority, that there had been a deliberate inaccuracy in Mr Tooth's tax return.
HMRC appealed to the Supreme Court, which unanimously dismissed the appeal. In doing so the Supreme Court substantially agreed with the FTT that there had been a relevant discovery, but that Mr Tooth's return was neither inaccurate nor deliberately inaccurate.
The Supreme Court found that by construing s. 118(7) and s. 29(4), for there to be a deliberate inaccuracy in a document there must be demonstrated an intention to mislead HMRC on the part of the taxpayer, not merely a statement intentionally made that happens to be inaccurate as HMRC had argued.
Also, the tax return, like any other document was to be read as a whole and statements made in it interpreted in their context as part of the whole document. The fact that HMRC's computers may only look at each part of, or box in, a return separately and may not be able to contextually interpret all the contents did not change that. The reason the loss had been put in the wrong box had been fully explained so no human reader could have been misled as to its intended meaning.
The tax return was simply not inaccurate, and even if it had been, given the efforts to explain the use of the wrong box, there had been no intention to mislead HMRC, and therefore it was not deliberate.
This conclusion was enough to dismiss HMRC's appeal, but the Supreme Court went on to consider the discovery issue.
The interpretation of s. 29(1) and the way in which it operates alongside the relevant limitation periods of four, six and 20 years seemed to the Supreme Court to be clear. The subjective nature of the test in s. 29(1) by reference to the state of mind of a particular officer, and not the collective knowledge which might reside elsewhere within HMRC, means that there is the possibility that a series of officers might each make the relevant discovery if a taxpayer's file is passed from one to another. However, this is not a reason for seeking to introduce further restrictions as a matter of statutory interpretation. The statutory regime makes clear the time limits within which the taxpayer may be exposed to a discovery assessment, and they do not run from the date of the relevant discovery.
The Supreme Court found that the fact that HMRC generally knew of the insufficiency back in 2009 did not mean that the officer who decided to make the assessment in 2014 did not discover the insufficiency. He was new to Mr Tooth's file in 2014 and it was his discovery, not an earlier discovery by another HMRC officer, that mattered. The legislation about discovery is careful in focusing the discovery assessment on the officer who makes the assessment. Taxpayers do not require protection against stale discoveries because the required protection is provided by the four, six and 20 year time limits in TMA 1970, s. 34 and 36 which run from the end of the tax year to which the relevant assessment relates and not the date of discovery.
In this much anticipated judgment, the Supreme Court has ruled on several issues of general importance about HMRC's powers to make discovery assessments:
- Given the language in TMA 1970, s. 118(7), where an insufficiency of tax is brought about due to an inaccuracy in a document given to HMRC, TMA 1970, s. 29(4) is fulfilled if the inaccuracy was deliberate, even if the taxpayer did not deliberately under-declare tax.
- When considering whether there is an inaccuracy in a document, the document as a whole is to be considered, it is not enough for there to be an inaccuracy somewhere in the document.
- There is no principle of collective knowledge, what matters is the state of mind of the individual HMRC officer making the assessment.
- There is no concept of staleness. A discovery does not lose its quality over time, so contrary to several recent Tribunal decisions, delays in HMRC raising an assessment after making a discovery do not invalidate the assessment.
Hui Ling McCarthy QC, John Brinsmead-Stockham (Instructed by HMRC Solicitors Office (Bush House)) appeared for appellant
Julian Ghosh QC, Charles Bradley (Instructed by Pinsent Masons LLP (London)) appeared for respondent
[1] The complicated facts of this appeal raise some issues of general importance about the power of Her Majesty's Revenue and Customs (in this context “the Revenue”) to make what is generally known as a discovery assessment. Broadly speaking, if the Revenue are not content with the accuracy of the self-assessment to income tax (and capital gains tax) in a taxpayer's tax return, the Revenue may open an enquiry into the return and amend the assessment. The enquiry must be opened within one year of the filing of a timely return (and slightly longer if the return is late), although it need not be completed within that period. But if the Revenue find out (“discover”) that an assessment is or has become insufficient, then subject to satisfying one or the other of two conditions, they may make a fresh assessment (a “discovery assessment”) in the amount which they think will be sufficient to make good to the Crown the loss of tax. The first condition (which is the one in issue on this appeal) is that the insufficiency of the earlier assessment has been brought about carelessly or deliberately by the taxpayer (or their agent). The standard time limit for the making of an assessment by the Revenue, including a discovery assessment, is four years from the end of the year of assessment to which it relates. But if the insufficiency is brought about by carelessness the time limit is extended to six years, and if it is brought about deliberately by the taxpayer it is extended to 20 years.
[2] In the present case the taxpayer Mr Raymond Tooth filed a return in 2009 which contained his self-assessment of income tax for the 2007–8 year of assessment in an amount which, from the outset, the Revenue officers dealing with his case regarded as understating his true tax liability by almost half a million pounds, by his use of a tax avoidance scheme which they regarded as ineffective for that purpose (“the Romangate scheme”). Whether the Romangate scheme was ineffective or not was a matter of controversy between the Revenue, Mr Tooth and other taxpayers who had used the same scheme, which was only finally resolved in the Revenue's favour (with the assistance of retrospective legislation) at the end of 2013. The Revenue did not protect their position vis-à-vis Mr Tooth in the meantime by opening an enquiry into his return. The legal position at that time was obscure...
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