< Go Back HMRC Lose Tooth but Supreme Court extract Staleness Posted: Jun 1, 2021The Supreme Court has unanimously found in Tooth’s favour, but the detail of the judgment removes any hope that HMRC delays in making discovery assessments could mean that 'staleness' might be a useful argument.
Background In 2009, Raymond Tooth invested in a tax
avoidance scheme and claimed an employment-related
loss, carried back against his 2007-08 tax liabilities.
The scheme was later invalidated by retrospective legislation, but , in 2009, Tooth expected his claim would reduce his
liability by £475,498.
His advisers prepared the 2007-08 SA
tax return but, due to a deficiency in the (HMRC approved) software, they could not enter the loss in the appropriate box on the return;
instead, it was entered on the “partnership” pages and a detailed
explanation was entered in the “white notes space”. The advisers also included the phrase
“I assume you will open an enquiry”. HMRC did not open an enquiry, but issued
a discovery assessment (under TMA 1970 s29(1)) to collect the tax in October 2014.
Tooth appealed, which was heard in turn by the First-tier Tribunal (FTT), the Upper Tier Tribunal (UT) and the Court of Appeal where two essential points came to the fore:
Did HMRC have the ability to make a discovery assessment? As no enquiry was opened this would requie three pertinent points to be true:
The return contained an inaccuracy; The inaccuracy resulted from carelessness or deliberate behaviour; and The inaccuracy resulted in an insufficiency of tax. Even then, if HMRC did have the power to issue an assessment, had the
discovery grown “stale” by the time the assessment was eventually made as HMRC took
five years to issue the assessment, but the relevant legislation only authorises an
HMRC officer to make an assessment when he 'discovers' or, in other words, becomes newly aware of the
loss of tax. The Court of Appeal’s determined that whilst the return, if read as a whole, was not inaccurate, it did contain
an inaccuracy (as the employment loss was on the
partnership pages); and, as it was an active choice to submit the return like that, the inaccuracy was deliberate; and an insufficiency of tax was the result. On point 1, the Court of Appeal firmly decided for HMRC.
However, on point 2 it firmly decided for Tooth; a delay of five years
does not correspond with being “newly aware” of the need to make an
assessment. Accordingly, the Court of Appeal rejected HMRC’s appeal. HMRC appealed to the Supreme Court.
The Supreme Court Decides The Supreme
Court concluded that the Court of Appeal was wrong to accept HMRC’s
“tunnel vision” approach to the matter of inaccuracy in a return and the concept of carelessness or deliberate behaviour.
Making a statement deliberately which subsequently turns out to be inaccurate is not the same as deliberate inaccuracy, intent to deceive or recklessness being absent. HMRC’s approach would risk exposing honest mistakes to
more penal treatment than genuinely careless errors. Parallels with the
Finance Act 2007 penalty regime (from which the term “deliberate”
behaviour was derived) make it clear that treating honest errors more
harshly than careless errors was never Parliament’s intention. The question of whether a return (or other document) contains an
inaccuracy must be decided in the context of the return (or document) as a whole –
including the use of 'white note space'. HMRC cannot cherry-pick
individual items in order to point to an isolated “inaccuracy” when
those items have been fully and prominently explained in the white
note space. “The Revenue cannot in our view have it both ways”. “Reading the return as a whole, Tooth and his advisors did their
best, in the context of an flawed online form which did not appear
to enable them to do it more directly, to explain the employment-related
and scheme-derived basis of his ambitious claim to extinguish his
2007-8 tax liability by an admittedly contentious carry-back.” The Supreme Court concluded that HMRC lacked the preconditions to make a discovery
assessment: “Mr Tooth does not fall within the scope of the condition
set out in section 29(4) of the TMA (requiring a careless or deliberate action). The
situation mentioned in section 29(1) (insufficiency of tax) was not
brought about deliberately by him”.
Staleness The concept of “staleness” has been a useful argument to use against HMRC. Often, HMRC officers have been
excessively slow to take action and raise their discovery assessments. Consequently, the FTT has thrown out assessments
due to delay and 'staleness'.
The Supreme Court saw no merit in the idea of
staleness. They found that there are clear statutory time limits for making assessments,
which run from the end of the relevant tax year and to introduce
additional limits which run from a different, arbitrary date (the date
when a discovery is first made) is both unnecessary and unhelpful. One persistent argument was that, once a discovery
has been made by one HMRC officer, it cannot then be made again by another.
This view was also dismissed, as was any notion that HMRC somehow shared a “collective knowledge”, so that one officer
discvering a loss of tax permeates that information to all Officers.
It appears that what really matters is that a particular HMRC officer becomes “newly aware”
of a loss of tax, even if that epiphany had been experienced by other officers at some earlier point. It was also noted that the legislation says such an officer “may” make an
assessment; the fact that one officer chooses not to assess does not
debar another from subsequently choosing to do so.
Conclusion In this case there was no justification for a discovery assessment. Perhaps HMRC should
have dealt with the situation using the normal enquiry legislation but it did not and Tooth gave HMRC
all the information it ever needed (and even envisaged HMRC would open an
enquiry!), it would be wrong to allege careless or deliberate
inaccuracy. However, if there had been a valid discovery, HMRC's delay would not have been
enough to prevent a valid discovery assessment being raised.
In a way, this seems to be a victory for common sense in that putting the right figures
in the wrong boxes of a tax return because there is nowhere else to put them and to then making it clear to HMRC what you have done and why, cannot be construed as a deliberate error. That said, the doctrine of staleness is now dead.
Taking on the might of a large organisation like HMRC can be
daunting but sometimes it is the right thing to do, and sometimes a case
may turn on the smallest or most unlikely detail; if you're having
trouble with the taxman, contact us in complete confidence.
