The Supreme Court has clarified the law in relation to discovery assessments in the case of HMRC v Tooth [2021] UKSC 17.
The judges have decided unanimously that disclosing information in the wrong box on a tax return, but explaining in the white space on the return what had been done, did not amount to an inaccuracy in the return, and they expressed the view that, for an inaccuracy to be deliberate, there would have to be an intention to mislead HMRC as to the truth of the relevant statement or, perhaps recklessness as to whether it would do so.
Less helpfully for other taxpayers, the judges have also opined that the concept of ‘staleness’ does not exist in relation to discovery assessments so that it does not matter how long it takes HMRC to raise an assessment after they have made a discovery (subject to the statutory time limits and public law principles).
Mr Tooth entered into a tax planning arrangement designed to generate employment-related losses. When Mr Tooth’s accountants completed his self-assessment return for 2007/08, the 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 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.
In 2009, HMRC opened an enquiry into Mr Tooth’s loss claim under TMA 1970 Sch 1A, which enables HMRC to open an enquiry into a claim which is not included within a return. However, in HMRC v Cotter [2013] UKSC 69, the Supreme Court said that in circumstances such as those of Mr Tooth, HMRC should open an enquiry under TMA 1970 s 9A. By this time, the time limit for doing so had passed, so the only way that HMRC could challenge Mr Tooth’s self-assessment was by making a discovery assessment and claiming that Mr Tooth’s behaviour was deliberate, which it did in 2014.
HMRC can only make a discovery assessment under TMA 1970 s 29 if an HMRC officer ‘discovers’ an underpayment of tax and that underpayment is due to careless or deliberate behaviour by the taxpayer or their agent. Alternatively, (although not claimed in this case) HMRC can make a discovery assessment if it discovers an underpayment and can show that, at the time when the enquiry window for a return closed or a closure notice was issued, the officer could not reasonably have been expected to be aware of the under-assessment.
The normal time limit for a discovery assessment is four years after the end of the year of assessment or six years in the case of carelessness. However, if the taxpayer’s behaviour is deliberate, HMRC can go back 20 years.
In order to assess Mr Tooth to tax, HMRC had to have made a valid discovery assessment and had to show that there was an inaccuracy in Mr Tooth’s return which had been brought about deliberately. HMRC therefore issued a discovery assessment alleging that Mr Tooth’s return contained a deliberate inaccuracy that brought about an insufficiency to tax.
The First-tier Tribunal (FTT), the Upper Tribunal (UT) and the Court of Appeal all decided that HMRC could not assess Mr Tooth to the tax, although this finding was reached on a slightly different basis in each case.
The FTT decided that, although HMRC had made a discovery, there was no deliberate inaccuracy in Mr Tooth’s return which brought about an insufficiency of tax. The UT decided that there was no inaccuracy in the return as when considering whether a document was ‘inaccurate’, the whole document had to be considered. The UT also held that even if that was wrong, Mr Tooth had not acted deliberately. Further, the UT found that there had been no discovery by HMRC in 2014 given that they had already formed their view of an insufficiency in 2009.
The Court of Appeal decided that there was no discovery, so the assessment was invalid. However two out of the three judges said that there was an inaccuracy ‘in’ a document given to HMRC, even though the inaccuracy was corrected in another part of the return and all the judges agreed that if there was an inaccuracy it was deliberate.
The Supreme Court therefore had to consider whether there was a deliberate inaccuracy in the tax return, and if there was, whether HMRC had made a valid discovery for the purposes of s 29.
TMA 1970 s 118(7) provides that references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to HMRC.
The Supreme Court said that the effect of s 118 is that where the conduct which brings about or ‘results’ in a situation consisting of an insufficiency within s 29(1) consists of an inaccuracy in a document given to HMRC by or on behalf of the taxpayer, then the s 29(4) condition is fulfilled even if the insufficiency itself was not deliberate, provided that the inaccuracy was. Section 118(7) effectively ‘waters down’ s 29(4) which read alone would require the taxpayer to have deliberately under-declared his tax liability. ‘In short, it decouples the insufficiency from the requisite intention, provided that the deliberate inaccuracy causes it in fact,’ the judges said (at para 38).
They acknowledge that this interpretation means that s 118(7) therefore opens the way to a discovery assessment with a 20 year time limit ‘by reason of conduct by the taxpayer that falls well short of a deliberate under-declaration of tax, so that it might be hard to describe such conduct as fraudulent, using the language of section 29(4) in force before 2010’ (para 40).
Applying this to the facts of the case, the judges said that if Mr Tooth had entered the employment-related loss in the partnership box without providing any explanation of its true source and nature, this would constitute a deliberate inaccuracy in the return. However, this is not what happened.
They said that deliberate inaccuracy means a statement which, when made, was deliberately inaccurate and not, as HMRC contended, a deliberate statement which is (in fact) inaccurate (even though genuinely believed by the maker to be true, and not intended to mislead). The court said that for a statement to be deliberately inaccurate ‘there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so’ (para 47).
HMRC argued that the online tax return form would be read initially by a computer which would look at each part of, or box in, the return separately and so an inaccuracy in one box was sufficient to make the return inaccurate. On this basis, it persuaded a majority of the Court of Appeal that it was enough if a deliberate inaccuracy could be found somewhere in the document, interpreted on its own and without regard to the rest of the document.
However, the Supreme Court agreed with the taxpayer’s argument that the accuracy of the return, read as a whole, had to be considered. The judges said that the meaning of each relevant part of the tax return had to be interpreted by reference to its place in the context of the document as a whole, just as is normally done when interpreting any other document.
The judges were not swayed by HMRC’s ‘very unattractive argument’ that the fact that a computer would read the return was a relevant consideration. ‘The Revenue cannot in our view have it both ways. If they sensibly include ample white spaces in their approved form of online returns so as to ensure that the taxpayer is not constrained by the limitations of the boxes for figures from making a correct and complete return, then they cannot thereafter assert, for the purpose of advancing a non-contextual interpretation of one or more boxes, that their computer cannot read what is written on the white spaces,’ the judges said (at para 51).
On this basis, the judges said there was no inaccuracy in the return. They said that even if they could have been persuaded that there was an inaccuracy, they would not have been satisfied that it was deliberate (i.e. that Mr Tooth or his advisers knew that the statements were inaccurate and intended to mislead HMRC).
This was sufficient to dismiss HMRC’s appeal and to render the discovery assessment invalid. However, the judges went on to express their views on the arguments raised on discovery.
Unlike cases such as C Beagles v HMRC [2018] UKUT 380 (TCC), the central issue in the Tooth case was not the ‘staleness’ of a discovery assessment, but HMRC clearly saw the appeal to the Supreme Court as a way to test the concept. It has been a heavily contested issue in the lower courts, with a divergence of views expressed by the judiciary, such that it was ripe for consideration by the Supreme Court.
The FTT found that HMRC had made a discovery in 2014, dismissing Mr Tooth’s claim that the discovery had been made in 2009 when the return had first been considered by HMRC and discussed in correspondence with Mr Tooth’s advisers. The FTT rejected the argument that for s 29(1) purposes it was appropriate to have regard to the collective knowledge of HMRC, including knowledge other officers had acquired in 2009.
The UT reversed the FTT’s decision on the timing of the discovery and took the view that if two different HMRC officers independently make the same discovery at different times, only the first discovery qualifies as a discovery for the purposes of s 29(1). The UT held that a discovery would lose its quality as a discovery for the purposes of s 29(1), if no assessment was issued while it was new, and it was allowed to become ‘stale’. The Court of Appeal unanimously upheld the decision of the UT on the discovery issue.
The Court of Appeal and the UT based their decisions on the UT’s decision in Charlton v HMRC [2013] STC 866 which said: ‘The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment.’
The Supreme Court judges pointed out that there is no reference to a concept of staleness in the earlier cases on discovery of HMRC v Mackinlay’s Trustees [1938] SC 765 or Cenlon Finance Co Ltd v Ellwood [1962] AC 782. They said that the judges in Charlton had misunderstood a reference to ‘newness’ in Cenlon. In that case, Viscount Simonds referred to discovery as covering ‘any case in which … it newly appears that the taxpayer has been undercharged’. The Supreme Court in Tooth said this was a reference to the state of mind of the person said to have made the discovery, to whom it ‘newly appears’ that an assessment to tax is insufficient.
‘In our judgment … there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time. That is unsustainable as a matter of ordinary language and, further, to import such a notion of staleness would conflict with the statutory scheme. That sets out a series of limitation periods for the making of assessments to tax, each of them expressed in positive terms that an assessment “may be made at any time” up to the stated time limit’ (para 76). The Supreme Court’s view was that taxpayers were adequately protected by the statutory time limits and the availability of relief through judicial review proceedings on the basis of public law principles.
The judges rejected the submission that once a discovery is made by one person, it cannot be made again by another. ‘The subjective nature of the test in section 29(1) by reference to the state of mind of a particular officer means that there is the possibility that a series of officers might each make the relevant discovery if a taxpayer’s file is passed from one to another. However, this is not a reason for seeking to introduce further restrictions as a matter of statutory interpretation. The statutory regime makes clear the time limits within which the taxpayer may be exposed to a discovery assessment, and they do not run from the date of the relevant discovery,’ the judges said (at para 80).
They also said that the discovery condition in s 29(5) operates by reference to the state of mind of a particular HMRC officer dealing with the taxpayer’s case at a particular point in time and does not involve any concept of collective knowledge of HMRC.
Once the judges had decided that there was no inaccuracy in the return, they did not need to consider the concept of staleness and whether there was a qualifying discovery. Their views on this point are therefore strictly obiter dicta. However, the point had been fully argued before them and the judgment expressed the views of all five judges, so the chance of another taxpayer getting leave to appeal another case to the Supreme Court on this point seems remote.
The authors’ firm acted for the taxpayer in this case. The authors thank Catherine Robins of Pinsent Masons for her contributions to this article.
The Supreme Court has clarified the law in relation to discovery assessments in the case of HMRC v Tooth [2021] UKSC 17.
The judges have decided unanimously that disclosing information in the wrong box on a tax return, but explaining in the white space on the return what had been done, did not amount to an inaccuracy in the return, and they expressed the view that, for an inaccuracy to be deliberate, there would have to be an intention to mislead HMRC as to the truth of the relevant statement or, perhaps recklessness as to whether it would do so.
Less helpfully for other taxpayers, the judges have also opined that the concept of ‘staleness’ does not exist in relation to discovery assessments so that it does not matter how long it takes HMRC to raise an assessment after they have made a discovery (subject to the statutory time limits and public law principles).
Mr Tooth entered into a tax planning arrangement designed to generate employment-related losses. When Mr Tooth’s accountants completed his self-assessment return for 2007/08, the 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 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.
In 2009, HMRC opened an enquiry into Mr Tooth’s loss claim under TMA 1970 Sch 1A, which enables HMRC to open an enquiry into a claim which is not included within a return. However, in HMRC v Cotter [2013] UKSC 69, the Supreme Court said that in circumstances such as those of Mr Tooth, HMRC should open an enquiry under TMA 1970 s 9A. By this time, the time limit for doing so had passed, so the only way that HMRC could challenge Mr Tooth’s self-assessment was by making a discovery assessment and claiming that Mr Tooth’s behaviour was deliberate, which it did in 2014.
HMRC can only make a discovery assessment under TMA 1970 s 29 if an HMRC officer ‘discovers’ an underpayment of tax and that underpayment is due to careless or deliberate behaviour by the taxpayer or their agent. Alternatively, (although not claimed in this case) HMRC can make a discovery assessment if it discovers an underpayment and can show that, at the time when the enquiry window for a return closed or a closure notice was issued, the officer could not reasonably have been expected to be aware of the under-assessment.
The normal time limit for a discovery assessment is four years after the end of the year of assessment or six years in the case of carelessness. However, if the taxpayer’s behaviour is deliberate, HMRC can go back 20 years.
In order to assess Mr Tooth to tax, HMRC had to have made a valid discovery assessment and had to show that there was an inaccuracy in Mr Tooth’s return which had been brought about deliberately. HMRC therefore issued a discovery assessment alleging that Mr Tooth’s return contained a deliberate inaccuracy that brought about an insufficiency to tax.
The First-tier Tribunal (FTT), the Upper Tribunal (UT) and the Court of Appeal all decided that HMRC could not assess Mr Tooth to the tax, although this finding was reached on a slightly different basis in each case.
The FTT decided that, although HMRC had made a discovery, there was no deliberate inaccuracy in Mr Tooth’s return which brought about an insufficiency of tax. The UT decided that there was no inaccuracy in the return as when considering whether a document was ‘inaccurate’, the whole document had to be considered. The UT also held that even if that was wrong, Mr Tooth had not acted deliberately. Further, the UT found that there had been no discovery by HMRC in 2014 given that they had already formed their view of an insufficiency in 2009.
The Court of Appeal decided that there was no discovery, so the assessment was invalid. However two out of the three judges said that there was an inaccuracy ‘in’ a document given to HMRC, even though the inaccuracy was corrected in another part of the return and all the judges agreed that if there was an inaccuracy it was deliberate.
The Supreme Court therefore had to consider whether there was a deliberate inaccuracy in the tax return, and if there was, whether HMRC had made a valid discovery for the purposes of s 29.
TMA 1970 s 118(7) provides that references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to HMRC.
The Supreme Court said that the effect of s 118 is that where the conduct which brings about or ‘results’ in a situation consisting of an insufficiency within s 29(1) consists of an inaccuracy in a document given to HMRC by or on behalf of the taxpayer, then the s 29(4) condition is fulfilled even if the insufficiency itself was not deliberate, provided that the inaccuracy was. Section 118(7) effectively ‘waters down’ s 29(4) which read alone would require the taxpayer to have deliberately under-declared his tax liability. ‘In short, it decouples the insufficiency from the requisite intention, provided that the deliberate inaccuracy causes it in fact,’ the judges said (at para 38).
They acknowledge that this interpretation means that s 118(7) therefore opens the way to a discovery assessment with a 20 year time limit ‘by reason of conduct by the taxpayer that falls well short of a deliberate under-declaration of tax, so that it might be hard to describe such conduct as fraudulent, using the language of section 29(4) in force before 2010’ (para 40).
Applying this to the facts of the case, the judges said that if Mr Tooth had entered the employment-related loss in the partnership box without providing any explanation of its true source and nature, this would constitute a deliberate inaccuracy in the return. However, this is not what happened.
They said that deliberate inaccuracy means a statement which, when made, was deliberately inaccurate and not, as HMRC contended, a deliberate statement which is (in fact) inaccurate (even though genuinely believed by the maker to be true, and not intended to mislead). The court said that for a statement to be deliberately inaccurate ‘there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so’ (para 47).
HMRC argued that the online tax return form would be read initially by a computer which would look at each part of, or box in, the return separately and so an inaccuracy in one box was sufficient to make the return inaccurate. On this basis, it persuaded a majority of the Court of Appeal that it was enough if a deliberate inaccuracy could be found somewhere in the document, interpreted on its own and without regard to the rest of the document.
However, the Supreme Court agreed with the taxpayer’s argument that the accuracy of the return, read as a whole, had to be considered. The judges said that the meaning of each relevant part of the tax return had to be interpreted by reference to its place in the context of the document as a whole, just as is normally done when interpreting any other document.
The judges were not swayed by HMRC’s ‘very unattractive argument’ that the fact that a computer would read the return was a relevant consideration. ‘The Revenue cannot in our view have it both ways. If they sensibly include ample white spaces in their approved form of online returns so as to ensure that the taxpayer is not constrained by the limitations of the boxes for figures from making a correct and complete return, then they cannot thereafter assert, for the purpose of advancing a non-contextual interpretation of one or more boxes, that their computer cannot read what is written on the white spaces,’ the judges said (at para 51).
On this basis, the judges said there was no inaccuracy in the return. They said that even if they could have been persuaded that there was an inaccuracy, they would not have been satisfied that it was deliberate (i.e. that Mr Tooth or his advisers knew that the statements were inaccurate and intended to mislead HMRC).
This was sufficient to dismiss HMRC’s appeal and to render the discovery assessment invalid. However, the judges went on to express their views on the arguments raised on discovery.
Unlike cases such as C Beagles v HMRC [2018] UKUT 380 (TCC), the central issue in the Tooth case was not the ‘staleness’ of a discovery assessment, but HMRC clearly saw the appeal to the Supreme Court as a way to test the concept. It has been a heavily contested issue in the lower courts, with a divergence of views expressed by the judiciary, such that it was ripe for consideration by the Supreme Court.
The FTT found that HMRC had made a discovery in 2014, dismissing Mr Tooth’s claim that the discovery had been made in 2009 when the return had first been considered by HMRC and discussed in correspondence with Mr Tooth’s advisers. The FTT rejected the argument that for s 29(1) purposes it was appropriate to have regard to the collective knowledge of HMRC, including knowledge other officers had acquired in 2009.
The UT reversed the FTT’s decision on the timing of the discovery and took the view that if two different HMRC officers independently make the same discovery at different times, only the first discovery qualifies as a discovery for the purposes of s 29(1). The UT held that a discovery would lose its quality as a discovery for the purposes of s 29(1), if no assessment was issued while it was new, and it was allowed to become ‘stale’. The Court of Appeal unanimously upheld the decision of the UT on the discovery issue.
The Court of Appeal and the UT based their decisions on the UT’s decision in Charlton v HMRC [2013] STC 866 which said: ‘The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment.’
The Supreme Court judges pointed out that there is no reference to a concept of staleness in the earlier cases on discovery of HMRC v Mackinlay’s Trustees [1938] SC 765 or Cenlon Finance Co Ltd v Ellwood [1962] AC 782. They said that the judges in Charlton had misunderstood a reference to ‘newness’ in Cenlon. In that case, Viscount Simonds referred to discovery as covering ‘any case in which … it newly appears that the taxpayer has been undercharged’. The Supreme Court in Tooth said this was a reference to the state of mind of the person said to have made the discovery, to whom it ‘newly appears’ that an assessment to tax is insufficient.
‘In our judgment … there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time. That is unsustainable as a matter of ordinary language and, further, to import such a notion of staleness would conflict with the statutory scheme. That sets out a series of limitation periods for the making of assessments to tax, each of them expressed in positive terms that an assessment “may be made at any time” up to the stated time limit’ (para 76). The Supreme Court’s view was that taxpayers were adequately protected by the statutory time limits and the availability of relief through judicial review proceedings on the basis of public law principles.
The judges rejected the submission that once a discovery is made by one person, it cannot be made again by another. ‘The subjective nature of the test in section 29(1) by reference to the state of mind of a particular officer means that there is the possibility that a series of officers might each make the relevant discovery if a taxpayer’s file is passed from one to another. However, this is not a reason for seeking to introduce further restrictions as a matter of statutory interpretation. The statutory regime makes clear the time limits within which the taxpayer may be exposed to a discovery assessment, and they do not run from the date of the relevant discovery,’ the judges said (at para 80).
They also said that the discovery condition in s 29(5) operates by reference to the state of mind of a particular HMRC officer dealing with the taxpayer’s case at a particular point in time and does not involve any concept of collective knowledge of HMRC.
Once the judges had decided that there was no inaccuracy in the return, they did not need to consider the concept of staleness and whether there was a qualifying discovery. Their views on this point are therefore strictly obiter dicta. However, the point had been fully argued before them and the judgment expressed the views of all five judges, so the chance of another taxpayer getting leave to appeal another case to the Supreme Court on this point seems remote.
The authors’ firm acted for the taxpayer in this case. The authors thank Catherine Robins of Pinsent Masons for her contributions to this article.
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