The Court of Appeal has held that finding a different reason for assessing an insufficiency of tax of which HMRC was already aware was not enough to enable HMRC to issue a discovery assessment.
The Commissioners for Her Majesty’s Revenue and Customs -v- Raymond Tooth A3/2018/1266
Background
The taxpayer, Mr Tooth, participated in a tax planning arrangement known as “Romangate” designed to reduce his liability for income tax for 2007/08. The arrangement was intended to produce an income tax loss.
Mr Tooth submitted his self assessment tax return for the relevant period and sought to reduce his income tax liability by carrying back employment related losses arising in 2008/09. The tax return did not contain a specific box for recording such losses, so Mr Tooth entered them on the partnership pages of the return together with an explanation in the blank white space that the loss being claimed was an employment loss, not a partnership loss.
In August 2009, HMRC informed Mr Tooth that it had commenced an enquiry into the loss relief claim under Schedule 1A, which enables HMRC to open an enquiry into a claim which is not included within a return.
Following the Cotter decision, HMRC wrote to Mr Tooth confirming that income tax was overdue and owing and rejected his claim to offset the employment losses against his other income.
In October 2014 (over six years after the tax year in question), HMRC issued an assessment to Mr Tooth claiming that his return was inaccurate and that the mistake was deliberate, which leads to a higher penalty. The normal time limit for a discovery assessment is 4 years but by claiming deliberateness, HMRC could rely on the 20 year time limit for raising a discovery assessment pursuant to section 36(1A), TMA.
Mr Tooth’s appeal to the First Tier Tax Tribunal (FTT)
Mr Tooth appealed to the First Tier Tax Tribunal arguing that HMRC had not made a discovery and there was no deliberate accuracy therefore the assessment was out of time.
Whilst the FTT acknowledged that HMRC had made a discovery, it held that there was no deliberate conduct and therefore the threshold of section 29(4), TMA had not been met which deemed the assessment invalid.
HMRC ‘s appeal to the Upper Tribunal (UT)
The Upper Tribunal dismissed the appeal holding that there was no inaccuracy in Mr Tooth’s tax return.
The Upper Tribunal considered Mr Tooth had provided a full explanation for the position he was taking on the partnership pages of the tax return. It concluded that looking at the return in its entirety, the approach Mr Tooth had taken did not constitute a deliberate inaccuracy, as Mr Tooth had taken steps to draw the inaccuracies to the attention of HMRC.
The Upper Tribunal considered HMRC’s assessment delivered in 2014, which followed a discovery back in 2009, to be “stale”.
Court of Appeal judgment
The Court of Appeal considered the following issues:
- Was there a discovery?
- Was there a deliberate inaccuracy?
- Did the deliberate inaccuracy result in an insufficiency in the assessment or a loss of tax?
i) Was there a discovery?
HMRC argued that it made a discovery that Mr Tooth’s self assessment was incorrect after receiving a letter from his accountants in March 2014.
The Court of Appeal applied Charlton & Others v RCC [2012] UKUT 770 (TCC) and confirmed that for there to be a discovery of insufficient tax, for the purpose of section 29(1)(b), TMA, HMRC must have newly discovered that an assessment to tax was insufficient.
The Court held that HMRC had not established that there had been a discovery and the assessment was therefore out of time and invalid.
This was good news for Mr Tooth however the Court proceeded to consider the other issues surrounding deliberateness, which comments are not positive for taxpayers in general.
(ii) Was there a deliberate inaccuracy?
Despite finding that the discovery assessment was invalid, the Court analysed the deliberate inaccuracy issue.
Floyd LJ concluded that there was no inaccuracy in Mr Tooth’s return merely because he included his employment related losses in the wrong box, given that he had fully explained what he had done elsewhere in his tax return.
Lord Justices Patten and Males disagreed however, holding that there was an inaccuracy in a document given to HMRC, even if it had been corrected in another part of the return.
All of the judges agreed that if there was an inaccuracy, it was deliberate as the figures were intentionally inserted on the partnership page.
Males LJ commented that there was no question of Mr Tooth or his advisers having acted dishonestly but the fact that Mr Tooth lacked intention to provide an inaccurate return was irrelevant.
This contrasts with the comments made in the Upper Tribunal that an allegation of deliberately bringing about a tax loss was ‘tantamount to an allegation of fraud’.
iii) Did the inaccuracy result in a loss of tax?
It was held that the inaccuracy resulted in an insufficiency of assessment because the partnership loss was forced into the tax computation by the software used to complete the self assessment return.
Comment
The Court’s comments in relation to what constitutes a deliberate inaccuracy are unhelpful for taxpayers. The deliberate inaccuracy in this case was essentially caused by a software failure, yet in trying to ensure that HMRC had all the relevant information required to make his return accurate, the taxpayer was deemed to have submitted a deliberately inaccurate return. It would appear that a taxpayer cannot rely on disclosure in a blank space to remedy an ‘inaccuracy’ elsewhere in the return.
The time limits in place for HMRC to enquire into returns and make assessments are designed to provide some certainty for taxpayers that if they have made a full disclosure in their return, HMRC cannot demand further tax from them. There appears to be an increase in cases where HMRC allege deliberate conduct in order to go back to earlier periods and this Court of Appeal decision makes it more difficult for taxpayers to obtain such certainty.
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