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The Supreme Court deliberated over ‘deliberate’ or ‘not’ in the circumstances surrounding details provided in a tax return. Santhie Goundar details the decision and its potential impact.
The Supreme Court ruled in favour of Raymond Tooth regarding a discovery assessment that HMRC made into the taxpayer’s return.
Tooth, a divorce lawyer nicknamed ‘Jaws’, and known for his celebrity and high net-worth clients, submitted his 2007/08 self-assessment tax return electronically in January 2009.
He disclosed his participation in the Romangate scheme on his tax return, as was HMRC’s requirement at the time – however, due to a fault with the HMRC-approved software, instead of disclosing this in the correct box on his return, he disclosed the details in the additional information white space.
HMRC opened an enquiry upon the return in 2009 into the employment loss relief he claimed under the Romangate scheme – but after the scheme was defeated in 2013, HMRC issued Tooth a discovery assessment in 2014 to the sum of £475,498.37, arguing that the online tax return contained a deliberate inaccuracy.
The standard time limit for HMRC to make an assessment, including a discovery assessment, is four years from the end of the year to which it relates. This time limit is extended to six years if the inaccuracy was due to carelessness, and if it is brought about deliberately by the taxpayer – as HMRC argued – it is extended to 20 years. The Supreme Court found that Tooth had not made a deliberate inaccuracy on his tax return, dismissing HMRC’s appeal seeking to uphold the validity of the discovery assessment made. Any assessment, therefore, was made outside the time limit.
Prior to the Supreme Court ruling, Tooth had appealed the discovery assessment to the First-tier Tribunal, denying that his return had contained any inaccuracy, nor a deliberate one. The tribunal accepted HMRC’s case on discovery, but agreed that there had been no deliberate inaccuracy on the return.
HMRC appealed to the Upper Tribunal, which found there was no inaccuracy in the return “read as a whole”, and no discovery in 2014, “mainly because [HMRC] had formed its own view about the insufficiency in Mr Tooth’s return since 2009, and that a discovery in 2009, even if it had been pleaded, would have become ‘stale’ by 2014”. The Court of Appeal, however, found that there had been a “deliberate inaccuracy” in the taxpayer’s return, but dismissed HMRC’s appeal, saying HMRC had not proved a qualifying discovery.
The Supreme Court held that “both the First-tier Tribunal and the Upper Tribunal were correct to that there was no deliberate inaccuracy to be found, sufficient to fulfil the first condition for a discovery assessment”, adding: “For there to be a deliberate inaccuracy in a document… there will have to be demonstrated an intention to mislead on the part of the taxpayer as to the truth of the relevant statement.”
RSM tax investigations associate director Justin Stevenson noted the decision has implications both for what constitutes a deliberate error, and for timing of a discovery, explaining: “The legislation clearly sets out the standard time limits in which HMRC can enquire into a tax return once it’s submitted. For individuals, the enquiry window is twelve months. However, the legislation also allows discovery assessments to be raised, extending this enquiry window… The concept of ‘staleness’ means that for HMRC to make a discovery it must discover something new, then act on this promptly. Yet the Supreme Court judges quite clearly stated that in their view there is no concept of staleness, and HMRC’s delay would not invalidate a discovery assessment if other conditions are met. This will be positive news for HMRC.
“Less positive for HMRC though, and the reason the Tooth case was ultimately lost, is the question of what constitutes a deliberate error… HMRC’s argument was that the taxpayer had deliberately entered the figures in the incorrect section, so had made a deliberate error. The Supreme Court Judges disagreed, confirming that a deliberate error requires a degree of conscious dishonesty in attempting to mislead HMRC.”
An HMRC spokesperson says: “HMRC is pleased that the Supreme Court has confirmed HMRC’s view that the time limit for making assessments is clearly set in law, and that the concept of a ‘stale discovery’ does not exist. HMRC will continue to consider whether inaccuracies in returns are careless or deliberate on a case-by-case basis.”
Santhie Goundar is a freelance journalist