Tooth Ache!

By | 11 October 2022

HM Revenue and Customs’ (HMRC’s) power to make discovery assessments is a formidable tool. The ordinary time limit for HMRC to make income tax or capital gains tax discovery assessments is four years after the end of the relevant tax year. However, a 20-year extended time limit applies in cases of ‘deliberate behaviour’ by taxpayers.

This article concerns the discovery rules for individuals (TMA 1970, s 29), although the discovery rules for companies are broadly similar.

The long arm of HMRC!

The discovery legislation is relatively brief and widely drawn, resulting in numerous cases before the courts and tribunals over the years.

An important case is Revenue and Customs v Tooth [2021] UKSC 17. The Supreme Court (SC) in that case had to consider: (1) whether the taxpayer had made a ‘deliberate inaccuracy’ in his tax return; (2) whether HMRC can make discoveries more than once; and (3) whether a discovery can become ‘stale’ by HMRC delays in making a discovery assessment.

In Tooth, in January 2009 the taxpayer (T) entered into a tax avoidance scheme to enable an employment-related loss to be generated for 2008/09, which could be carried back to 2007/08. When T’s accountant prepared his tax return for 2007/08 using commercial software, they were unable to access a box on the return to enter the income loss. Following advice from the software firm, the employment-related loss was included on another part of the return instead (i.e. the partnership pages), and reference was made in the ‘white space’ to explain what had been done.

Not deliberate…or inaccurate

In October 2014, HMRC raised a discovery assessment to withdraw the loss claim. HMRC considered that it was entitled to make a discovery assessment under the extended time limit provisions, on the basis that T included on the partnership pages of his tax return a claim for a partnership loss, which was actually an employment loss. HMRC considered that T’s actions in making this claim were deliberate. The case eventually proceeded to the SC.

The SC was satisfied that there was no ‘deliberate’ inaccuracy. As to whether there was an inaccuracy, the SC saw no reason to depart from the usual approach to interpreting the return as a whole (indeed, HMRC invites taxpayers to add information in the ‘white spaces’ of returns). Therefore, there was no inaccuracy in the document; even if there had been, it was not deliberate as T did his best with an “intractable online form”.

Not all good news

HMRC’s appeal was dismissed. However, the SC went on to consider the discovery issue. The SC disagreed with the Court of Appeal’s decision that as HMRC formed its view in 2009, the discovery in 2009 would have been ‘stale’ by 2014. There was no principle of ‘collective knowledge’. If an HMRC officer had already made a discovery, that was not a discovery ‘once and for all’ such that other HMRC officers could not make the same discovery in future.

Furthermore, there was no concept of ‘staleness’ for discovery purposes.

Practical point

The SC’s finding on the ‘staleness’ issue is bad news for taxpayers. The SC pointed out that HMRC’s discretion to issue an assessment could be challenged in judicial review proceedings on public law grounds; however, this will probably not be an attractive proposition for many taxpayers.

The above article was first published in Tax Insider (December 2021) (