Tooth
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 October 2016 |
| Neutral Citation | [2016] UKFTT 723 (TC) |
| Date | 25 October 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Brooks
Julian Ghosh QC and Charles Bradley, instructed by Pinsent Masons LLP, appeared for the appellant
Richard Vallat, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Discovery assessment – Whether discovery – Yes – Whether insufficiency of tax brought about deliberately – No – Appeal allowed – Taxes Management Act 1970 (TMA 1970), s. 29, 36.
The First-tier Tribunal (FTT) allowed a taxpayer's appeal against a discovery assessment in relation to a failed tax avoidance scheme because although HMRC made a discovery of an insufficiency of income tax, the insufficiency was not brought about deliberately.
The appellant (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, thus reducing his tax liability for that year. 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 used to prepare the return 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 and arose through the use of a scheme which had been disclosed under DOTAS, but for which HMRC had not yet issued a scheme reference number. The return was filed electronically on 30 January 2009.
On 14 August 2009 HMRC notified Mr Tooth that they intended to enquire into his 2007–08 the return and the employment losses claimed, under the Taxes Management Act 1970 (TMA 1970), Sch. 1A. In April 2010 HMRC advised Mr Tooth that his 2007–08 tax return had been amended to withdraw his claim for losses that arose in 2008–09.
Following the Supreme Court's decision in R & C Commrs v Cotter TAX[2013] BTC 837, in which it was decided that HMRC were correct to use TMA 1970, Sch. 1A as the vehicle for enquiring into a taxpayer's claim for loss relief using the same scheme as Mr Tooth, HMRC accepted that Mr Tooth's circumstances were similar to that set out by Lord Hodge at [27], in which he said that:
Matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return. In such circumstances the Revenue would have his assessment that, as a result of the claim, specific sums or no sums were due as the tax chargeable and payable for 2007/08. Such information and self assessment would in my view fall within a return under TMA 1970, s. 9A as it would be the taxpayer's assessment of his liability in respect of the relevant tax year. The Revenue could not go behind the taxpayer's self assessment without either amending the tax return (TMA 1970, s. 9ZB) or instituting an enquiry under TMA 1970, 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. HMRC submitted that the 20 year time limit for raising a discovery assessment in TMA 1970, s. 36(1A) applied because the loss of income tax was brought about deliberately by Mr Tooth. They submitted that this was the case because if Mr Tooth had entered the loss on the additional information pages of his return there would have been a free-standing tax credit, but as it had been entered on the partnership pages it resulted in immediate and automatic relief.
On the issue of whether HMRC had made a discovery, the FTT noted that there was a low threshold necessary for there to be a discovery. It was necessary to consider the position of the assessing officer and whether he had made a discovery and it did not depend on something new being discovered by reference to HMRC's collective knowledge. The FTT found that the assessing officer did make a discovery of insufficiency of tax in October 2014.
The FTT then considered whether Mr Tooth or his advisers had brought about the loss deliberately per TMA 1970, s. 29(4). Although the way the return was completed led to there being immediate and automatic relief instead of a free-standing tax credit, the FTT found that neither Mr Tooth nor his advisers were aware of this. It therefore followed that there was nothing that Mr Tooth, or a person acting on his behalf, did that deliberately brought about an insufficiency of tax. As such, the condition in TMA 1970, s. 29(4) had not been fulfilled.
The appeal was accordingly allowed.
The FTT noted that a causal link between the insufficiency of tax and the deliberate action is required and it is necessary to ask what a taxpayer has done, deliberately, to bring about that insufficiency. Because in this case the FTT found that neither Mr Tooth, nor his advisers, were aware of the consequences of completing the tax return in the manner they did, instead of in the way they were instructed to complete it, the FTT found that there was nothing that Mr Tooth, nor his advisers, did that deliberately brought about the insufficiency of tax.
[1] Mr Raymond Tooth appeals against a discovery assessment issued by HM Revenue and Customs (HMRC) on 24 October 2014 under s 29 of the Taxes Management Act 1970 (TMA) in respect of income tax for 2007–08 in the sum of £475,498.20 in relation to his participation in a failed tax avoidance scheme. It is common ground that it is for HMRC to establish the relevant conditions for the issue of a discovery assessment under s 29 TMA have been met and that the assessments were in time by reference to s 36 TMA. It is also accepted that if HMRC establish the validity of the assessment the appeal cannot succeed.
[2] Mr Richard Vallat, who appears for HMRC, contends that HMRC not only discovered an insufficiency of tax within the meaning of s 29(1) TMA but that this was brought about deliberately by Mr Tooth or a person acting on his behalf thereby fulfilling the condition in s 29(4) TMA. As such, he says, the time limit for making an assessment is extended, under s 36(1A) TMA, to 20 years. Mr Julian Ghosh QC and Mr Charles Bradley, who appear for Mr Tooth, contend that there was neither a discovery nor, even if there was a discovery (which is denied), was any insufficiency of tax brought about deliberately.
[3] In addition to a bundle of documents, which included a copy of Mr Tooth's 2007–08 self-assessment tax return and correspondence between the parties, I heard from Mr Tooth and Mr Peter McMahon, a Tax Partner with Grunberg & Co Chartered Accountants (Grunberg). Mr McMahon advised Mr Tooth in relation to the tax avoidance scheme and completion of his 2007–08 tax return. Both Mr Tooth and Mr McMahon were cross-examined by Mr Vallat.
[4] Mr Christopher March and Ms Julie Thorley, both of HMRC, gave evidence on its behalf and were cross-examined by Mr Ghosh.
[5] I was also provided with a witness of Mr Ian Anders of HMRC. As he was unable to attend the hearing Mr Ghosh submits that the statement should not be admitted. However, I accept Mr Vallat's submission that it should be admitted, but having done so, consider that little, if any, weight be attached to it given Mr Anders was not available for cross-examination.
[6] It is on the basis of this evidence that I make the following findings of fact.
[7] Towards the end of 2008 Mr Tooth sought tax planning advice from Mr David Grunberg (the Senior Partner of Grunberg) as to how he could legitimately reduce his income tax liability for 2007–08. He was advised that a scheme, known as Romangate, which was promoted by NT Advisers (NT), might be of interest. Mr Grunberg asked a colleague of his, Mr McMahon, to contact NT and provide more information to Mr Tooth.
[8] On 20 January 2009 Mr Tooth attended a meeting with Mr McMahon, Mr Grunberg and Mr Anthony Mehigan of NT at which Mr Mehigan explained how the Romangate scheme operated. Although Mr Tooth did not grasp all of the technicalities of the scheme (and it is not necessary to describe the scheme for the purposes of this case) he did understand that if he participated in it employment related losses of £1,185,987 would be generated for 2008–09. These could then be set off against income recorded in his 2007–08 self-assessment return thereby reducing his tax liability for that year. Mr Tooth recalls Mr McMahon and Mr Grunberg raising questions at the meeting with Mr Mehigan who confirmed that NT were content that the stated tax treatment was correct having obtained the opinion of leading tax counsel to that effect.
[9] Having received further advice from Mr Grunberg and Mr McMahon that the Romangate scheme, although a complex tax planning arrangement, had a reasonable prospect of success and knowing it had been sanctioned by leading tax counsel Mr Tooth entered into it on 23 January 2009.
[10] On 27 January 2009 Mr Mehigan of NT sent an email to Mr McMahon and Mr Grunberg which included the following:
Please note that having taken [leading tax counsel's] detailed advice on the matter it is perfectly acceptable to set off the loss when calculating the final 2007–08 tax payment.
Also please note that, in our experience to date, HMRC do not proceed with the collection process where the SA is completed as recommended in the attached note.
[11] The note attached to the email (the Note) recommended participants in the Romangate scheme to settle their tax bills in full and seek repayment in due course once agreement had been reached with HMRC on the efficacy of the arrangement. It also recognised, on the basis that tax counsel was of the view that any challenge to the scheme was capable of being resisted, that some individuals would wish to withhold payment of...
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