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Background – Raymond Tooth v HMRC
In the case of Raymond Tooth v HMRC, Mr Tooth had participated in a tax planning arrangement scheme.
The finer details of this scheme are not relevant – we are not sure whether it could be described as molar-ly repugnant tax planning or not – but its aim was to reduce his income tax liability for the tax year 2007/08 by creating a loss in 2008/09 and carrying it back.
He filed his tax return for 2007/08 including the scheme-based loss entering the losses on his partnership pages and with a white space disclosure that the loss being claimed was an employment loss rather than a partnership one.
For what might appear to be a very dry, technical case, it might be a surprise that it has worked its way through all the tiers of the UK tax system. However, today’s raised important issues around:
HMRC enquiry windows
Assuming the tax return is filed on time, HMRC is allowed to open an enquiry:
HMRC informed the taxpayer in August 2009 that it had begun an enquiry (under Schedule 1A) into the loss claim.
Mr Tooth disputed whether HMRC had the power to investigate his loss claim.
With the relevant Cotter case due to be heard in the Supreme Court, all interested parties waited for this decision with bated breath. Following judgement in Cotter, HMRC’s victory led to them re-stating its view that the loss claims were not allowed.
Not to be deterred, Mr Tooth maintained his view that HMRC’s enquiries were invalid.
HMRC issued a discovery assessment in October 2014. This claimed that the tax return was inaccurate and that the inaccuracies were deliberate in nature. The claims of ‘deliberate behaviour’ was important as this provides for a 20 year time limit for raising the assessment.
What is a ‘discovery assessment’
A discovery assessment essentially extends the window in which HMRC can intervene in to a taxpayers affairs.
HMRC have the authority to issue a discovery assessment where they discover that:
There are strict time limits in which HMRC must act – and these depend upon how culpable the taxpayer is for the position.
HMRC must commence a discovery assessment within a prescribed period of 4 years from the end of the tax year to which the assessment relates.
However, this 4-year period will be extended to:
First Tier-Tribunal (“FTT”)
The taxpayer appealed the discovery assessment to the FTT.
Mr Tooth argued that:
The FTT accepted that HMRC had made a discovery. However, crucially, they decided that the assessment was made ‘out of time’ as there was no deliberate conduct on the part of the taxpayer.
Upper Tier Tribunal (“UTT”)
Of course, HMRC appealed the decision to the UTT.
Here, the UTT held there was no inaccuracy in the return as the taxpayer had given full disclosure. In any event, if there was an inaccuracy, there was no deliberate conduct – as Mr Tooth had taken steps to draw HMRC’s attention to what had happened so HMRC was out for time.
In addition, the UTT also made clear that any discovery made by HMRC must have been made in 2009. In other words, HMRC knew all the facts when it had first disputed the return back in 2009.
As such, the UTT determined that the discovery had become “stale” by October 2014 when HMRC raised the discovery assessment. As such, it would be invalid and HMRC’s appeal was dismissed.
It is important to note that the statute does not explicitly impose a time limit between HMRC ‘discovering’ and raising the assessment itself.
Court of Appeal
HMRC once again appealed, this time to the Court of Appeal (“CoA”).
The CoA considered two main points:
In relation to this first point, HMRC had decided to circumvent the ‘staleness’ point by saying that they had made a discovery following the decision in the Cotter case. Rather than being an old and stale assessment, this assessment was made on a new discovery.
However, the CoA gave this short shrift. The CoA said that at the heart of a discovery is the discovery of an insufficiency of tax. Here, HMRC was simply asserting a new reason for averring that there had been an inadequacy of tax.
As such, said the CoA, HMRC had not established that there had been a discovery and therefore the discovery assessment must be invalid.
In relation to the second point, the CoA agreed that there was both an inaccuracy and that the inaccuracy was deliberate.
Today’s Supreme Court decision
Lord Briggs delivered the judgement of the Supreme Court (“SC”) in favour of the taxpayer this morning.
Broadly, we have travelled full circle with the SC agreeing with the FTT’s decision. In essence, it was found that the tax return should be read ‘as a whole’ and not with the ‘tunnel vision’ of a computer. They found that no human reader would be left in any question as to what Mr Tooth had done – he had not misled.
However, the SC did make some other observations that will have wider concerns.
Firstly, Lord Briggs stated that a taxpayer needs “no protection from stale discoveries”. This of course will be a worry for those who have raised this as a ground of appeal against similar assessments.
Secondly, it seems that a where a new Inspector looks at a case with fresh eyes then he or she may make a fresh discovery, even in relation to an old file.
Mr Tooth will no doubt be pleased that HMRC’s discovery assessment has been found to be invalid. This is on the basis that his conduct was not ‘deliberate’ and HMRC were therefore out of time.
However, more widely, today’s decision from the Supreme Court establishes that there is no concept of ‘staleness’ implicit in the tax code:
“there is no concept of ‘staleness’: any idea that a discovery might lose its quality over time is contrary to the ordinary use of language, the leading authorities, and the statutory scheme”
In other words, once a discovery has been made, there is no further restriction placed on HMRC other than the 4,6 and 20 windows from the end of the relevant tax year.
Despite the defeat, the conclusion on ‘staleness’ will please HMRC who have resisted this concept.
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