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Supreme Court ruling could have significant impact on future assessments
The Supreme Court ruled on a ‘discovery assessment’ case (HMRC v Tooth  UKSC 17) that if the information was included in the wrong box on a tax return – but extra information was provided in the ‘white space’ – that cannot be construed as a deliberate error.
However, the judges also said that a discovery assessment to recover underpaid tax would not be invalid because a large period of time has elapsed between the discovery of the underpayment of tax being made and the assessment being raised by HMRC, unless the assessment is beyond the legislative time limits. The Supreme Court’s position is that there is no concept of ‘staleness’ in relation to a discovery and that HMRC delays in raising an assessment after making a discovery do not invalidate the assessment.
Whether there is a discovery does not involve any concept of collective knowledge on the part of HMRC and an HMRC officer can make a discovery of something already known to other officers.
- On 23 January 2009 Mr Tooth entered into a tax scheme that was designed to generate (for him) an employment-related loss incurred in the tax year 2008-09, which he could utilise by setting it against income both for that year and (by way of carry-back) for the previous 2007-08 tax year.
- Mr Tooth’s tax advisers prepared his 2007-08 tax return in January 2009. By then, the time had passed to do so on paper and they used IRIS software, which is approved by HMRC.
- Due to a software issue, the loss was not entered in the right box. As a work-around, the loss was included on the partnership pages of the return, and an explanation was given in the ‘white space’ as to what they had done. It was clear that the losses were employment losses and not partnership losses.
- In August 2009 HMRC wrote to Mr Tooth to give notice that they were opening an enquiry under Schedule 1A to the Taxes Management Act 1970, which enables HMRC to open an enquiry into a claim which is not included within a return. The enquiry was under the wrong section (Sch 1A rather than s.9A of TMA 1970).
- In July 2014 HMRC gave advance notice of its intention to make a discovery assessment against Mr Tooth, on the basis that he had deliberately brought about a loss of tax by claiming an employment-related loss from 2008-09 in the partnership pages of his 2007-08 return.
- However, Mr Tooth argued that there was no deliberate error and, as a result, that the conditions of ‘discovery assessment’ were not met.
HMRC can only make a discovery assessment if an HMRC officer ‘discovers’ an underpayment of tax and that underpayment is due to careless or deliberate behaviour by the taxpayer or their agent.
Alternatively, HMRC can make a discovery assessment if it discovers an underpayment and can show that at the time when an HMRC officer ceased to be entitled to open an enquiry into the return, or issued a closure notice in respect of an existing enquiry, the officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax.
The normal time limit for a discovery assessment is four years after the end of the year of assessment or six years in the case of carelessness. However, if the taxpayer’s behaviour is deliberate, HMRC can go back 20 years.
The Supreme Court concluded that there was no deliberate error in the return entries. Although information was included in an incorrect box of the tax return, extra information was provided in the ‘white space’ such that this could not be construed as a deliberate error, as the return had to be considered as a whole. Looking at the whole document, there was simply no inaccuracy at all, deliberate or otherwise.
Even if the judges could have been persuaded that there was an inaccuracy, they would not have been satisfied that it was deliberate. ‘Reading the return as a whole, Mr Tooth and his advisers did their best (…), to explain the employment-related and scheme-derived basis of his ambitious claim to extinguish his 2007-08 tax liability by an admittedly contentious carry-back.’
As there was no deliberate error, the 20-year time limit did not apply and HMRC was simply too late in raising an assessment.
However, the judges went on to express their views on the arguments raised on discovery. The judges said that a discovery assessment to recover underpaid tax would not be invalid because a large period of time has elapsed between the discovery of the underpayment of tax being made and the assessment being raised by HMRC, unless the assessment is beyond the legislative time limits.
The Supreme Court’s position was that there is no concept of ‘staleness’ in relation to a discovery and that HMRC delays in raising an assessment after making a discovery do not invalidate the assessment.
In their Supreme Court Judgement, Lord Briggs and Lord Sales said ‘In our judgment, …there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time. That is unsustainable as a matter of ordinary language and, further, to import such a notion of staleness would conflict with the statutory scheme. That sets out a series of limitation periods for the making of assessments to tax, each of them expressed in positive terms that an assessment “may be made at any time” up to the stated time limit.’
The Supreme Court’s view was that taxpayers were adequately protected by the statutory time limits and the availability of relief through judicial review proceedings.
They also said that other courts had been wrong to say that only one HMRC officer looking at a tax return could make a valid discovery. The Supreme Court judges said ‘there is no good reason to suppose that a purpose of the legislation was that a taxpayer who committed a blatant fraud, of a kind likely to be spotted by the first inspector to look at the file, should be better protected against being exposed to a discovery assessment issued by a subsequent inspector if the first one for whatever reason fails to issue an assessment, than a taxpayer whose fraud is better concealed and therefore more likely only to be discovered by another officer at a later stage.’