Comments made by Court of Appeal judges in a recent case relating to ‘discovery’ assessments have potentially made it harder to obtain certainty that HMRC cannot go back and challenge a tax return, by raising issues around what constitutes a ‘deliberate’ error by the taxpayer, according to Pinsent Masons.
The law firm acted for Raymond Tooth in a Court of Appeal hearing on two issues related to his participation in the Romangate tax avoidance scheme which was designed to utilise employment-related losses incurred in 2008/09 to relieve his liability to tax on other income. [HMRC and Raymond Tooth,  EWCA Civ 826].
The first, dubbed the ‘discovery issue’, concerned whether HMRC made a relevant discovery about Tooth’s self-assessment, and in particular whether HMRC ‘discover[ed] … that an assessment to tax [was] insufficient’ within the meaning of section 29(1)(b) of Taxes Management Act 1970 (TMA 1970).
The second, known as the ‘deliberateness issue’ was whether Tooth could be said to have ‘deliberately’ brought about a situation in which an assessment to tax is or has become insufficient within ss29(1)(b) and (4) of TMA 1970. If so, HMRC was not prevented by s29(3) from raising the assessment.
The judges also considered a closely related question, which was whether HMRC could show, as required, that it could take advantage of the 20-year time limit for raising an assessment provided by s36(1A)(a) of TMA, which applies if a ‘loss of… tax… [is] brought about deliberately’.
Tax return When Tooth’s accountants completed his 2007/08 self-assessment return, the HMRC-approved software did not enable them to access the box within which they had been advised to record the losses, due to a technical issue.
They recorded the losses made in 2008/09 in the partnership pages and included wording in the ‘white space’ of the return, making it clear that the losses were employment losses and not partnership losses.
The wording said that Tooth’s interpretation of tax law may be at variance with that of HMRC and flagged the expectation that HMRC would open an enquiry into the return. Following the filing of the return, the government announced legislation that meant the scheme did not work.
In August 2009 HMRC opened an enquiry into Tooth’s loss claim. However, it opened the enquiry under a provision which applies only in relation to claims which are not included in a return. In 2013 the Supreme Court decided in another case that where the taxpayer had calculated his tax liability in the return, as Tooth had, an assessment should be opened under another statutory provision.
By this time the time limit to open an enquiry under the correct provision had long since expired and the only way that HMRC could assess Tooth to tax in respect of the failed scheme was to open a ‘discovery assessment’.
This enables HMRC to go back four years, or if it can show careless conduct six years. If it can show deliberate conduct it can go back 20 years to assess tax.
HMRC can only make a discovery assessment if it ‘discovers’ an underpayment of tax. It also has to show that the underpayment is due to careless or deliberate behaviour by the taxpayer or their agent or that at the time when an HMRC officer ceased to be entitled to open an enquiry into the return the officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax.
In October 2014, HMRC issued a discovery assessment alleging that Tooth’s return contained a deliberate inaccuracy.
‘Discovery’ The Court decided that HMRC did not a make a ‘discovery’ when it realised as a result of a Supreme Court decision that it had opened an enquiry into a taxpayer’s return under the wrong statutory provision. This meant that HMRC was out of time to assess the tax.
Lord Justice Floyd said in his judgment: ‘The [HMRC] officer must have newly discovered that an assessment to tax is insufficient. It is his or her new conclusion that the assessment is insufficient which can trigger a discovery assessment.
‘A discovery assessment is not validly triggered because the officer has found a new reason for contending that an assessment is insufficient, or because he or she has decided to invoke a different mechanism for addressing an insufficiency in an assessment which he or she has previously concluded is present.’
Clara Boyd, legal director, Pinsent Masons, said: ‘The decision is helpful in that it involves a more testing analysis of the nature and timing of any alleged discovery by HMRC.’
However, she warned the views expressed by some of the judges in relation to what constitutes an inaccuracy in a return and what amounts to deliberate behaviour ‘are very unhelpful for taxpayers’.
Boyd said: ‘The time limits for enquiring into returns and making assessments are designed to give the taxpayer some certainty that if they have made a full disclosure in their return there will come a time when they will know that HMRC cannot demand further tax from them.
‘The Court of Appeal decision in this case makes it much harder for taxpayers to obtain this certainty.’
‘Deliberateness’ Although the three Court of Appeal judges agreed that HMRC had not made a ‘discovery’ entitling them to assess Tooth outside the normal time for enquiring into a tax return, which meant that the assessment was invalid, they expressed opinions on the arguments they had heard about whether there was an inaccuracy in the return and whether the inaccuracy was deliberate.
Ian Robotham, a tax disputes expert at Pinsent Masons said: ‘Two of the judges said that including the employment-related losses in the wrong section of the return meant that there was in inaccuracy in the return, even though the return , as a whole, was not inaccurate because it explained elsewhere, in the white space, what had been done.’
All the judges agreed that if there was an inaccuracy in the return it was deliberate.
Robotham said: ‘It is unhelpful that the judges have expressed the opinion that deliberate conduct does not necessarily involve blameworthy conduct, thereby distancing themselves from comments made in the Upper Tribunal that an allegation of deliberate conduct was “tantamount to an allegation of fraud”.’
By Pat Sweet, Reporter for Accountancy Daily
Published by Croner-i Ltd