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It should be noted that, following the Supreme Court’s decision in May 2021, the concept of ‘staleness’ is not recognised for the purposes of discovery assessments. For more information, see here.
Background – Tooth v. HMRC
In the case of Raymond Tooth v HMRC, Mr Tooth had participated in a tax planning arrangement scheme. Details of this scheme are perhaps not relevant 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.
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 the ability HMRC’s powers to investigate this claim. As the Cotter case was to be heard in the Supreme Court, all parties waited for this decision with bated breath.
Following the Cotter decision, HMRC re-stated its view that the loss claims were disallowed.
Unsurprisingly, 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.
Raymond Tooth appealed this assessment to the tribunal.
|Tribunal / Court||Decision|
|First Tier Tribunal (“FTT”)||Taxpayer appeal was allowed
Taxpayer had argued that:
· there was no ‘discovery’; and
· the assessment was out of time any way as there was no deliberate inaccuracy
The FTT accepted that HMRC had made a discovery but that the assessment was out of time as there was no deliberate conduct
|Upper Tier Tribunal (“UTT”)||HMRC’s appeal was dismissed
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 had taken steps to draw HMRC’s attention to so was out for time.
The UTT also provided its view on whether there discovery was made in 2009 – in other words, the time at which HMRC knew all the facts and it had first disputed the return. The UTT concluded that this discovery had become “stale” by October 2014 when HMRC raised the discovery assessment.
|Court of Appeal||HMRC’s new appeal was dismissed by the Court of Appeal (“CoA”).
The CoA considered two main issues:
(1) was there a discovery; and
(2) If there was, had Mr Tooth’s inaccuracies been brought about by deliberate conduct?
In relation to the first point, the CoA stated that HMRC must have newly discovered that there was an insufficiency of tax. HMRC cannot simply find a new reason for disputing the adequacy of the assessment. In sum, HMRC had not established that there had been a discovery and therefore the raising of the discovery assessment was invalid.
In relation to the second point, the CoA agreed that there was both an inaccuracy and that the inaccuracy was deliberate.
If you receive a letter from HMRC where they say they are raising a discovery assessment then you must take action immediately. In the first instance you may look at appeal this discovery assessment and normally the time limit for doing so to HMRC is 30 days. Late appeals may be accepted by HMRC but, if not, you will need to appeal to the First Tier Tribunal.
We would recommend that if you receive such an assessment from HMRC that you speak to a specialist adviser without delay.
For more articles on discovery assessment please visit our signpost document.
If you, or your clients, have received a discovery assessment or have any queries about discovery assessment, then please do not hesitate to get in touch.
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