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CoA Tooth decision: deliberate inaccuracy/stale DA

https://www.bailii.org/ew/cases/EWCA/Civ/2019/826.html

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Taxpayer won. Surprisingly CoA seem to have confirmed staleness as a concept re discovery assessments (indeed, and perhaps more surprisingly, this did not even seem to be argued by HMRC's counsel as being incorrect law - see para 60 here http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j11104/TC07140.pdf and ironically this newness requirement was first argued by HMRC's counsel in HMRC's favour to justify a valid discovery at para 44 here: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00692.html). Their conclusion on deliberateness is very bizarre/confusing though (fortunately their comments seem to be confined to non-dishonest deliberate inaccuracies, so documents filed accurately and non-dishonestly albeit wrong (for whatever reason e.g. wrong interpretation of tax law under legal advice or simply a tenable view of tax law e.g. see para 54 here https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07118.html ) should be OK per previous comments here).

https://www.bailii.org/ew/cases/EWCA/Civ/2019/826.html

See: https://www.accountancydaily.co/discovery-decision-may-make-it-harder-ob...

Why didn't HMRC just retrospectively (for the previous 20 years if necessary) block this highly aggressive and abusive tax avoidance scheme (as they have done in other cases)?

"Q31 Chair: Can I tell you what really shocked me about you? I have another bit of paper here headed "Rushmore: the arrangement". A client signs this document, which says, "Please accept this as my instruction to create gross tax relief of," in this case, "£250,000 through the Rushmore income tax and chargeable gains tax mitigation arrangement developed by NT (Jersey) Ltd". In 2007-08, this person put down £125,000. In 2008-09, they wanted £125,000, and they sign it. If the public knew that this was the sort of business you were in-deliberately avoiding tax-they would consider you to be completely, utterly and totally immoral in the work that you are doing."

https://publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/uc788-i...

Para 27 shows HMRC botched this retrospective blocking of the scheme. For example, HMRC could have simply had a requirement for all scheme users to re-file their tax return showing the tax due (like a Follower Notice). See page 11 here:

https://webarchive.nationalarchives.gov.uk/20140122194050/http://www.lev...

 

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By Justin Bryant
06th Jun 2019 12:55

This latest case on "deliberate" is interesting for its Tooth comments (and narrows that CoA interpretation as expected):

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11144/TC0...

However, it begs the question (as does Tooth) as to deliberateness if no tax return is sent to HMRC at all (which perhaps ironically seems to be less deliberate), although the FTN 20 year time limit seems to step in there (as a bit of a fudge argument to justify the CoA dicta it seems).

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By Justin Bryant
07th Aug 2019 10:45

See this shockingly bad misapplication of the CoA’s Tooth decision to a failed PPR claim case:

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11253/TC0...

What a totally rubbish decision this is! If the decision were correct the corollary would be that all failed non-fraudulent, non-deliberately wrong (in the real world sense) PPR claims have a 20 year DA window!

This goes to my point above about how Tooth applies where gains etc. are not returned at all.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
06th Aug 2019 20:35

PPR?

In any event, I see nothing wrong with the decision in the link.

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Replying to Wilson Philips:
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By Justin Bryant
07th Aug 2019 10:48

Whoops! Sorry, wrong link. Please see above now with correct PPR case link.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
07th Aug 2019 11:20

Thanks. I don't think that it is so much a misapplication of "Tooth" that is the problem, but "Tooth" itself.

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By unearned luck
07th Aug 2019 02:20

Dear Justin

I think that you have not quite grasped the issues in Tooth.

Firstly, the law was changed retrospectively to block the scheme used. Mr Tooth’s claim for loss relief was predicated solely on the retrospection being contrary to his human rights. When the ECtHR refused to entertain this argument Mr Tooth had no choice but to concede that the blocking legislation did make his loss claim invalid.

Secondly, the case was not about staleness, although it was the elephant in the court room. In 2009 HMRC, the UT and CoA found, had ‘discovered’ that the assessment was insufficient as HMRC had already formed the view the loss claim was invalid. HMRC opened a timely sch 1A enquiry into the loss. In 2014 HMRC read the SC’s judgment in Cotter and discovered that their enquiry was of the wrong type (this is not a discovery within S29(1) TMA 1970) and they were now out of time to open a S9A enquiry, so they issued a discovery assessment. To avoid losing on staleness HMRC’s case was that they made the discovery in 2014, but HMRC could not prove that they made the discovery then, as the discovery had been made 5 years earlier ergo, they lost as the burden on proof was on them on this point. The CoA will consider, I understand, staleness shortly in Beagles.

Thirdly, the CoA view on deliberate is as bizarre as you suggest but you make a distinction that doesn’t exist. Making an error despite taking reasonable care was enough to defeat a DA (subject to adequate disclosure), now the deliberation that is part and parcel of taking reasonable care is sufficient to make the DA valid and give HMRC twenty years to assess. And as the FTT said at 56 ‘[a]s a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between “careless” and “deliberate” rendering otiose the necessity for the different conduct related time limits in s 36 TMA.’. Expect HMRC to cease arguing careless conduct to validate a DA. See also Keith Gordon in the current issue of Tax Adviser.

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Replying to unearned luck:
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By Justin Bryant
07th Aug 2019 10:54

You are clearly completely wrong, as if you were right the corollary would be that even taking advice from an expert tax advisor re PPR and omitting the gain from your tax return on that basis would be caught with a 20 year DA window under Tooth (assuming an income tax return had been filed so s7 FTN did not apply). That would clearly be just totally bonkers (as it would be totally contrary to the primary legislation in s36 TMA)!

This FTT judge has totally misapplied the CoA's reasoning re its Tooth dicta.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
07th Aug 2019 11:27

It might be bonkers but I fear that is where "Tooth" has left us.

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Replying to Wilson Philips:
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By Justin Bryant
07th Aug 2019 12:20

Don't be so ridiculous. This judgement is simply complete garbage.

Also, if it were correct then there would now be a complete mismatch between the treatment of penalties for deliberate wrongdoing (where reliance on an adviser etc. is a reasonable excuse to prevent carelessness, let alone deliberate wrongdoing) and deliberate wrongdoing re s36 TMA.

NB this potential mismatch re Tooth was identified and dealt with sensibly by the FTT judge in Leach. See:

https://www.taxjournal.com/articles/what-exactly-is-deliberate-behaviour-

The key difference with Tooth (that it would appear has completely escaped this FTT judge) is that in Tooth there was deemed deliberate wrong conduct (under s118(7) TMA 1970) only due to the fact that the taxpayer and/or his adviser knew the tax return was not completed 100% correctly (so at the very least it would mislead a computer to potentially cause a tax loss) and even that latter point had to be assumed by one of the judges for the purposes of that particular dicta. That is all a million miles away from the average PPR claim where there is no prior knowledge of anything being wrong at all with the return! In short this judge has put the horse before the cart here, since for Tooth to apply there has to be evidence of actual (i.e. not deemed) prior knowledge of the tax return being completed incorrectly and just because a judge later finds it's been completed incorrectly (contrary to the taxpayer's view under the law etc.) does not change the history re that point of course.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
07th Aug 2019 12:48

Get down off your high horse. I never said that the judgment was correct. Indeed, I agreed that it is bonkers. I was simply observing that the Tooth decision is likely to result in more such absurd judgements. Leach is a welcome glimmer of hope that future tribunals will take a more sensible approach but the worry is that many more will rely on Tooth - requiring appeals to higher courts.

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Replying to Wilson Philips:
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By Justin Bryant
07th Aug 2019 13:25

Noted that you agree the judgment is complete & utter garbage. I am very confident that commentators in the various tax trade magazines will agree with us on this in due course.

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Replying to Justin Bryant:
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By unearned luck
08th Aug 2019 01:34

Dear Justin thanks for your response.
I made three points; you only disagreed with the last. Surely ‘clearly completely wrong’ judges me too harshly; one-third wrong at worst? But my last point was not wrong, but I appreciate the silliness of the CoA’s utterances and their ramifications can be hard to grasp at first. You said:
[quote=Justin Bryant]

taking advice from an expert tax advisor re PPR and omitting the gain from your tax return on that basis would be caught with a 20 year DA window under Tooth (assuming an income tax return had been filed so s7 FTN did not apply). That would clearly be just totally bonkers (as it would be totally contrary to the primary legislation in s36 TMA)!

But the CoA expressly removed blameworthiness from the concept of deliberate. The taxpayer who omits a gain from his return on expert advice and the taxpayer who does so fraudulently are treated the same as far as a DA is concerned. To ram the point home here are a few quotes from the CoA:
79. ‘I agree with HMRC that Mr Tooth’s reasons for including his employment losses in the wrong box are irrelevant to the hard-edged question of whether or not there was an inaccuracy.
86. ‘It follows that the enquiry about the taxpayer’s intention stops once it is established there is a deliberate inaccuracy in a document…..
90 ‘….I do not regard it as surprising that, as a result of the expanded meaning given to the sub-sections by section 118(7), conduct which is overall not blameworthy is brought within the definition.
93 ‘…although it is important to keep in mind that it is not necessary to show that the taxpayer intended to bring about the situation (or in section 36(1A)(a) the loss of tax).
94 ‘Whilst it is no longer suggested that Mr Tooth and his advisers were, by this means, deliberately seeking a reduction in his liability to tax, the inaccuracy was, on any view, deliberate.
108. ‘It is important to say at the outset that there is no question of Mr Tooth or his advisers having acted dishonestly or even reprehensibly. They sought to make clear what was being claimed, stated in terms that they expected HMRC to challenge the claim, and did not intend to mislead anyone. Nor did they in fact mislead anyone. However, that does not in itself answer the three questions identified above’.
Until now a taxpayer who took a view of the law that was contrary to that of HMRC and paid less tax as a result was advised to fully explain matters in the white space and was told that if HMRC failed to open a timely enquiry finality had been achieved (see paras 18 & 19 of SP 1/06). Now finality will not be achieved for twenty years and the white space explanation makes it easy for HMRC to prove that the disputed entry or omission was deliberate in the TMA sense. Surely the advice to clients should now be to say nothing in the white space as doing so a) makes an enquiry more likely b) does not help as the relevant ‘document’ is the return in the narrow Cotter sense and any inaccuracy cannot be made ‘right’ by white space explanations and c) helps HMRC prove deliberate should they need to do so. Reason a) may lead HMRC to rue their attempt to win at all costs in Tooth.

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Replying to unearned luck:
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By Wilson Philips
08th Aug 2019 09:08

I'm not sure that I agree with your conclusion. The central issue with Tooth is about deliberateness, not discovery. On the contrary, therefore, I would suggest that more, rather than less, white space information may be the order of the day. Whilst it is true that such information cannot correct an error elsewhere, provided that there is sufficient information and detail to lead the Inspector to that 'error' (having Veltema in mind), discovery should be prevented.

Yes, it may increase the chances of enquiry but if the taxpayer/agent is confident about the treatment/advice they should have nothing to fear. On the other hand ...

The real worry is about the innocent cases - say the taxpayer/agent makes an innocent transposition error and understates sales by £3,600. Completely unaware of the mistake there will of course be no white space disclosure. A strict application of Tooth would seem to give HMRC 20 years to discover the error and raise an assessment. That is, to quote Justin, bonkers and garbage. Hopefully, though, 'Leach' would apply in such a case.

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Replying to Wilson Philips:
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By unearned luck
11th Aug 2019 18:32

Dear Wilson

“…provided that there is sufficient information and detail to lead the Inspector to that 'error' (having Veltema in mind), discovery should be prevented."

This is what Floyd said and it should be the law, however, the majority disagreed. They held 1) an inaccuracy in a document can’t be corrected by an entry elsewhere in the document (as you said) and 2) in any event, the document in question is the tax return in the narrow Cotter sense ie it didn’t include the white space as this isn’t ‘read’ by HMRC’s computer.*

“The real worry is about the innocent cases - say the taxpayer/agent makes an innocent transposition error and understates sales by £3,600. Completely unaware of the mistake there will of course be no white space disclosure. A strict application of Tooth would seem to give HMRC 20 years to discover the error and raise an assessment. That is, to quote Justin, bonkers and garbage. Hopefully, though, 'Leach' would apply in such a case”.

I think that anyone who expressly takes a different view should expect an enquiry. My point is that Tooth gives HMRC 20 years to open that enquiry. And why wouldn’t they take a ‘strict’ view of Tooth if it suited them? It destroys the concept of ‘finality’. Although, in the case of a transposition error I think that the 6-year careless cap would still apply. The trouble is that this bonkers view is very likely to be followed by the tribunals as they are bound to give CoA obiter dicta great respect.

The essence of Leach is that ‘deliberate’ has two meanings: The TMA meaning that involves no culpability and the FA 2007 meaning that is still tantamount to fraud. So, Leach doesn't help at all in challenging DAs.

*Disregarding MTD amendments, the TMA is really a pre-computer age Act. The list of things that ‘an officer’ is quired to do is long. It includes: issuing a notice to file, making corrections of obvious errors in returns, opening an enquiry, closing an enquiry, concluding on what, if any, adjustments are required when closing an enquiry and discovering an insufficiency (this list only goes up to section 29). So, why should the taxpayer suffer from this ‘narrow return’ interpretation simply because HMRC choose to employ computers in their work? The only reason why box 19 exists is that HMRC expects its officers to read the returns submitted. Any failure by them to do so should not neuter one of the safeguards in s 29.

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Replying to unearned luck:
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By Justin Bryant
08th Aug 2019 09:59

With the greatest respect you have totally misunderstood the dicta in Tooth, just like the FTT judge has done in the above case and if you (and he) were right it leads to nonsense results and it is a basic principle of law that statutes have to be interpreted so that they do not result in nonsense. I suggest you await the usual tax trade magazine commentary on the above FTT case that I expect will prove me correct basically for the reasons I give (i.e. it is totally and utterly distinguishable from Tooth re the 20 year DA window point since unlike Tooth there was no evidence of any prior knowledge of an error/inaccuracy in the return by the taxpayer or his agent (as found/assumed by CoA in Tooth) that could cause a deemed deliberate error as required under s118(7)).

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Replying to Justin Bryant:
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By unearned luck
11th Aug 2019 18:37

Dear Justin

Where do you get the idea that Mr Tooth or those acting on his behalf had “prior knowledge of an error/inaccuracy in the return”? A computer problem prevented the accountants from completing the return in the way recommended by the promoter so they adopted a workaround. I am sure that they were doing their best to prepare a correct return but were thwarted by the software and had to improvise. I wouldn’t characterise that as knowingly preparing an inaccurate tax return and, indeed, the CoA went out of their way to emphasise that none of Mr Tooth and his advisers acted in anyway wrongly.

In addition, there was then a lacuna in the tax return and in the guidance notes. There are in effect four boxes each for sole trader and partnership losses: Total, amount set off sideways, amount carried back and amount carried forward. But when it comes to employment losses only the second of these boxes exist and even then, the author of the guidance notes had not considered the possibility that the employment had not come to an end (the box was losses incurred in former employments). So, the advisers had to improvise in order to make the carry back claim, hence the uncertainty expressed in the white space.

The problem was that the workaround adopted had the effect of sidestepping the relief mechanism of sch 1B of the TMA. Clearly the accountants were not surprised that the workaround had the effect of reducing the SA by (say) 40% of the loss claimed. Like those who voted for Barabbas, the they knew not what they did. They were either unaware of sch 1B or the counsel’s opinion that asserted that the loss could be claimed on the 2007/08 return was interpreted by them as saying that sch 1B could be disregarded. If so, a wholly reasonable conclusion given the lacuna.

On the trade mag point, as I previously said, see the current Tax Adviser. Keith Gordon said he was “astonished”.

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By unearned luck
11th Aug 2019 18:13

.

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By Justin Bryant
08th Aug 2019 14:41

Incidentally, para 30 et seq here (especially para 92) shows the CoA Tooth analysis on DA staleness has at least been properly understood by the FTT:

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11266/TC0...

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Replying to Justin Bryant:
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By unearned luck
11th Aug 2019 18:42

You seem to have forgotten what you were railing against. It wasn’t the misapplication of staleness but the misapplication of deliberate:

“What a totally rubbish decision this is! If the decision were correct the corollary would be that all failed non-fraudulent, non-deliberately wrong (in the real world sense) PPR claims have a 20 year DA window!”

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