HMRC loses Tooth, but staleness bites the dustby
The Supreme Court has unanimously found in Tooth’s favour, but the judgment means that tax advisers can no longer use the staleness of a HMRC decision as an escape route.
What was biting HMRC?
It all began in January 2009, when Raymond Tooth invested in a tax avoidance scheme (a film partnership) and claimed an employment-related loss which he wished to carry back against his 2007-08 tax liabilities. The scheme was ultimately invalidated by retrospective legislation, but at the time it was reasonable to hope its effect would be to reduce his liability by £475,498.20.
Using software approved by HMRC, his advisers prepared his 2007-08 SA tax return. Owing to a deficiency in the software, it was not possible for the loss to be entered in the appropriate box on the return; instead, it was entered on the “partnership” pages. A detailed explanation was entered in the “white space”, which included the phrase “I assume you will open an enquiry”.
HMRC did not open an enquiry, but eventually (in October 2014) issued a discovery assessment (under TMA 1970 s29(1)) to collect the tax.
Some arguments to chew on
- Did HMRC have the right to make a discovery assessment? Given the failure to open an enquiry, that would require three things 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 if HMRC did have the power to issue an assessment, had the discovery grown “stale” by the time the assessment was made? HMRC took five years to issue the assessment, while the legislation empowers an HMRC officer to make an assessment when he becomes newly aware of the loss of tax.
The Court of Appeal’s position was that, while the return if read as a whole was not inaccurate, nonetheless it did contain an inaccuracy (in that an employment loss was included on the partnership pages); as it was an active choice to submit the return in that format, the inaccuracy was deliberate; and an insufficiency of tax was the result. On point 1, the Court of Appeal sided firmly with HMRC.
However, on point 2 it sided firmly with 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 threw out HMRC’s appeal.
HMRC appealed to the Supreme Court.
The wisdom of the Judges
Looking first at the issue of deliberate inaccuracy, the Supreme Court concluded that the Court of Appeal was wrong to accept HMRC’s “tunnel vision” approach to the matter.
- To make a statement deliberately which subsequently turns out to be inaccurate is not the same as deliberate inaccuracy, absent either intent to deceive or recklessness.
- HMRC’s approach would, in fact, risk exposing an honest mistake to more penal treatment than actual carelessness. The parallels with the Finance Act 2007 penalty regime (from which the language of “deliberate” behaviour was derived) make it clear that treating honest error more harshly than carelessness 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 as a whole – including in particular the use of white 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 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 intractable 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.”
In conclusion, 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 [careless or deliberate action]. The situation mentioned in section 29(1) [an insufficiency of tax] was not brought about deliberately by him”.
This alone was enough to save Tooth £475,000 in tax - good news for him.
The doctrine of “staleness” has in recent years been a thorn in HMRC’s side: there have been many occasions when HMRC officers have been excessively slow to take action, and the FTT has thrown out assessments accordingly.
The Supreme Court, however, could see no merit in the notion of staleness. There are clear statutory time limits for making assessments, which run from the end of the relevant tax year; to introduce additional limits which run from a different, arbitrary date (the date when a discovery is made) is unnecessary and unhelpful.
A common argument in support of staleness is that, once a discovery has been made by one HMRC officer, it cannot be made again by another. This argument was also dismissed, as was any suggestion that HMRC should be considered to have “collective knowledge”, so that the first officer to discover a loss of tax somehow permeates that awareness to all his or her colleagues.
What matters is that a particular HMRC officer becomes “newly aware” of a loss of tax – even if other officers had become aware earlier. The Court 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.
There was no justification for a discovery assessment. HMRC should have dealt with the situation using the enquiry regime; since it did not, and since Tooth and his advisers bent over backwards to give HMRC all the information it needed (and even encouraged HMRC to open an enquiry!), it would be wrong to allege careless or deliberate inaccuracy.
If there had been a valid discovery, delay alone would not have been enough to prevent an assessment. The doctrine of staleness is dead.