Revenue and Customs Commissioners v Tooth
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 February 2018 |
| Neutral Citation | [2018] UKUT 38 (TCC) |
| Date | 07 February 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0038 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Honourable Mr. Justice Marcus Smith, Judge Charles Hellier
Richard Vallat, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellant
Julian Ghosh, Q.C. and Charles Bradley, instructed by Pinsent Masons LLP, appeared for the respondent
Income tax – Discovery assessment – Whether insufficiency of tax brought about deliberately – No – Whether discovery – No – Appeal dismissed – TMA 1970, s. 29 and 36.
The Upper Tribunal (UT) upheld the First-tier Tribunal (FTT) decision in Tooth [2016] TC 05452, allowing a taxpayer's appeal against a discovery assessment. The UT agreed with the FTT that an insufficiency of tax had not been brought about deliberately, but disagreed with the FTT that HMRC had made a “discovery”.
The respondent (Mr Tooth) participated in the “Romangate” tax avoidance scheme. This was on the understanding that this would lead to employment related losses being generated in 2008–09 which could then be set off against his 2007–08 income. The scheme promoters prescribed the entries that Mr Tooth should have included in his 2007–08 self-assessment tax return, but due to a technical issue with the software he was unable to include the employment related loss where he had been advised to and instead included it on the partnership pages of the return. The partnership pages of the return included a “white space disclosure” explaining that: the loss was employment related; it arose through the use of a scheme which had been disclosed under DOTAS; and his interpretation of the tax law might be different to that of HMRC. The return was filed electronically on 30 January 2009.
Initially HMRC enquired into Mr Tooth's 2007–08 return under TMA 1970, Sch. 1A and amended his return to withdraw his claim for losses that arose in 2008–09. Following the Supreme Court's decision in R & C Commrs v Cotter [2013] BTC 837, HMRC accepted that as Mr Tooth had included a self-assessment in his 2007–08 tax return they were not entitled to raise an enquiry under Sch. 1A, but should instead have raised an enquiry under s. 9A. As a result HMRC issued a discovery assessment under TMA 1970, s. 29 on 24 October 2014 to replace the amendment purportedly made under TMA 1970, Sch. 1A. Mr Tooth appealed.
The FTT allowed Mr Tooth's appeal, determining that the assessment was invalid because:
- although HMRC had made a discovery within the meaning of TMA 1970, s. 29(1);
- the situation had not been brought about deliberately by either Mr Tooth or any person acting on his behalf, 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).
HMRC appealed, contending that the FTT had been correct to find that there had been a discovery, but had erred in law in holding that the requirement of “deliberateness” in s. 29(4) had not been satisfied. Mr. Tooth, in response, contended that the FTT had erred in holding that there had been a discovery, but had correctly held that the requirement of “deliberateness” was not satisfied.
The UT noted that it was common ground that Mr Tooth's self-assessment was or had become insufficient. The questions before the FTT, and before the UT, were:
- whether the assessment lay sufficiently far in the past to protect it from further inquiry; and
- whether the discovery condition for the making of the assessment had been satisfied.
In relation to whether there had been a deliberate inaccuracy in a document, the UT considered that in this case the word “document” in TMA 1970, s. 118(7) included both Mr Tooth's 2007–08 tax return and the accompanying 6-page computation.
The UT considered that there was no inaccuracy in the document given to HMRC. Mr Tooth had adopted a position in his return which, albeit controversial, could not (at the time of the return) be said to have been wrong and in a white space disclosure he had taken the trouble to identify the position he had taken (and the fact that it was controversial). Given this he could not be guilty of an inaccuracy when, subsequently, it was established that the position taken by him was wrong. It could be said that the return had become inaccurate, but it could not, in the UT's judgment, be said that the return was, at the time of its making, inaccurate, and such a document could not be said to be inaccurate for the purposes of TMA 1970, s. 118(7). Also given that Mr Tooth's use of the partnership pages to claim an employment loss was effectively forced upon him because of an error in HMRC approved software and given that he explained his approach the UT could not accept that the return, as a whole, was inaccurate.
Given the above conclusion that the pre-condition to the operation of s. 29 was not met, i.e. there was no inaccuracy, HMRC's appeal had to fail. However the UT also did not consider that the inaccuracies alleged by HMRC could be said to have been deliberate, because Mr Tooth took steps to draw the (alleged) inaccuracies to HMRC's attention. So Mr Tooth did not act deliberately within the meaning of s. 29(4).
Again, given the above, it was not strictly necessary for the UT to consider whether the (alleged) deliberate inaccuracy had brought about an insufficiency in an assessment to tax. However the UT did not consider that the uncertainty about the proper route to challenging a return could be relevant to the question of whether there was or was not an insufficiency in an assessment to tax.
On the issue of “discovery” the UT noted that the burden of showing that the requirements of s. 29 were met was on HMRC. The UT considered that there was no sufficient basis – given the facts found by the FTT – to justify the conclusion that there was, properly speaking, a discovery.
HMRC's appeal was accordingly dismissed.
It was common ground that the taxpayer's self-assessment was or had become insufficient due to his use of a failed tax avoidance scheme. However as the UT considered that there had been no inaccuracy in the return when it was submitted (although it had become inaccurate since) it was not inaccurate for the purposes of TMA 1970, s. 118(7) and therefore the discovery assessment could not stand.
[1] On 24 October 2014, the Appellant – the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) – made a “discovery” assessment under section 29 of the Taxes Management Act 1970 (“TMA”) in respect of income tax for 2007–2008 in the sum of £475,498.20 in relation to the Respondent's (Mr. Tooth's) participation in a failed tax avoidance scheme (the “Assessment”).
[2] A self-assessment had been contained in Mr. Tooth's tax return, which was made under section 8 TMA.
[3] Section 29 TMA provides (so far as material):
(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment –
- that any income 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
- that an assessment to tax is or has become insufficient, or
- 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 –
- in respect of the year of assessment mentioned in that subsection; and
- in the same capacity as that in which he made and delivered the return,
(4) The first condition is that the situation mentioned in subsection (1) was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board –
- ceased to be entitled to give notice of his intention in enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
- 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.
…
[4] HMRC raised the Assessment on the basis that:
- An officer of the Board or the Board had discovered, as regards Mr. Tooth and the year of assessment 2007–2008, that an assessment to tax was or had become insufficient within section 29(1)(b) TMA.
- Mr. Tooth had made and delivered a return within section 29(3) which satisfied the condition within section 29(4) TMA, namely that the insufficiency of the assessment had been brought about deliberately by Mr. Tooth or a person acting on his behalf.
[5] Before the First-tier Tribunal Tax Chamber (the “FTT”), Mr. Tooth contended that these requirements of section 29 TMA were not met in two regards:
- First, because there had been no discovery within the meaning of section 29(1) TMA.
- Secondly, because the situation within section 29(1) TMA (i.e. that the assessment to tax was or had become insufficient) had not been brought about deliberately by Mr. Tooth or a person acting on his behalf.
In order successfully to challenge the Assessment it was only necessary for Mr. Tooth to succeed on one of these grounds.
[6] In a decision dated 25 October 2016 (the “Decision”), the FTT determined that:
- HMRC had made a discovery within the meaning of section 29(1) TMA.11See Decision at [43] to [46].
- But that the situation had not been brought about deliberately so that section 29(4) TMA was not satisfied.22See Decision at [47] to [58].
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