The Supreme Court decision in HMRC v Tooth [2021] UKSC 17 was eagerly awaited and is of widespread interest. It has important things to say about both deliberate inaccuracies in returns and discovery.
Mr Tooth was a participant in a tax planning scheme that proved unsuccessful. The scheme involved his carrying back an ‘employment-related loss’ to an earlier year, which he genuinely (on advice) believed he was entitled to do. He filed his self-assessment return online, but the format of the return did not have a box apposite to the type of loss concerned. His work-around was to insert the loss into a box intended for a different kind of loss, so as to force the online computational software to generate what he believed to be the correct self-assessment figure. He used the ‘white space’ on the return to tell HMRC exactly what he had done and even invited them to open an enquiry.
For reasons that aren’t important, when it was established that the scheme failed, HMRC could recover the tax in question only if Mr Tooth’s tax return contained a ‘deliberate inaccuracy’.
The dichotomy, as the Supreme Court expressed it, was between
- a deliberate statement which is (in fact) inaccurate or
- a statement which, when made, was deliberately inaccurate.
HMRC’s position was that it was the former – it was sufficient that ‘the statement in the document constituting the inaccuracy was deliberately made: i.e., made intentionally rather than for example carelessly or by mistake.’ On that basis, Mr Tooth’s tax return contained a ‘deliberate inaccuracy’ in that he had deliberately put a figure in a box that he knew was inappropriate.
The obvious flaw in HMRC’s approach is that most people make the entries on their tax returns as the result of a deliberate action (rather than in a fit of absentmindedness or automatism). HMRC’s analysis would therefore inevitably lead to the conclusion that the great majority of inaccuracies on tax return are ‘deliberate inaccuracies’.
Reassuringly, the Supreme Court had the good sense to reject HMRC’s argument and concluded that ‘for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so.’
That was sufficient to win the case for Mr Tooth. But there was a second point, probably of even wider significance than the first.
Even if Mr Tooth’s tax return had contained a ‘deliberate inaccuracy’, HMRC could recover the tax only if they had made a ‘discovery’ – broadly, that they had, for whatever reason, newly concluded that tax had gone unassessed. Earlier case law had suggested two things that the Supreme Court have now definitively held to be wrong.
The first was that discovery was to be judged against HMRC’s ‘collective knowledge’: once one officer of HMRC had made a discovery, that was it: no other officer could discover the same matter. That, said the Supreme Court, was wrong: a discovery was made by an officer, not by HMRC as a body – it followed that a succession of officers could make the same discovery and become ‘entitled serially to issue a discovery assessment’.
The second was that a discovery could, if not acted upon reasonably promptly, become ‘stale’ and lose its ability to justify an assessment. Wrong again, said the Supreme Court: ‘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 second point is probably the most important point to come out of the case and we envisage that a number of cases which have been stayed, pending a final decision on whether a discovery assessment can be challenged as ‘stale’, will now proceed.
The Supreme Court points out that this does not mean that HMRC have carte blanche to delay indefinitely in making assessment once a discovery has been made. Where the necessary conditions are satisfied, HMRC have a discretion whether to issue an assessment but, like any public body exercising a discretion, they must act rationally and must not abuse their powers. If HMRC fail in those duties, the taxpayer may have a remedy in judicial review proceedings. But that is very different from asserting that a discovery may become stale by effluxion of time.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
