What does the decision mean for protective assessments?
On 14 May 2021 the Supreme Court handed down its unanimous
judgment in HMRC v Tooth [2021] UKSC 17, an important case on the
validity of discovery assessments. Although the outcome was a victory for the
taxpayer, any disappointment on HMRC's part will have been tempered by their
success on the issue of 'staleness'.
Discovery assessments issued under TMA 1970 s 29 allow HMRC to recover tax after the normal time limits for opening an enquiry
have expired if an HMRC officer 'discover[s]' that an additional amount of tax
is due. This is a significant HMRC power and the relevant legislation therefore
contains a number of conditions that must be met in order for the discovery
assessment to be valid. As was seen in Tooth, where the taxpayer
successfully argued that a condition that HMRC sought to rely on (essentially,
that Mr Tooth's tax return contained a deliberate inaccuracy) had not been
satisfied, whether the conditions have been met can form an important part of a
dispute.
Prior to the Supreme Court's decision in Tooth, a
series of decisions in lower courts developed the concept of 'staleness', which
effectively created an additional, non-statutory restraint on HMRC's powers. The
courts considered that a delay between an HMRC officer making a 'discovery' and
the issuing of the discovery assessment may render that discovery 'stale' and
the subsequent discovery assessment invalid. This notion derived from a
judicial interpretation of the word 'discover' as something that 'newly arises'.
HMRC has steadfastly refused to
accept that the concept of staleness exists. The Supreme Court has now made
clear, departing from the Upper Tribunal and a majority of the Court of Appeal,
that HMRC are right. The notion that a qualifying discovery could cease to
be so merely as a result of the effluxion of time was, the Supreme Court held, 'unsustainable
as a matter of ordinary language' and 'would conflict with the
statutory scheme'. Whilst these comments were obiter dictum, it is
difficult to see how any lower court could now take a different view.
Central to the Supreme Court's reasoning was that the statute
provides sufficient taxpayer protection in the form of express time limits on
HMRC's ability to raise a discovery assessment - generally four years, rising
to six if the taxpayer has been careless, or 20 in respect of certain
deliberate behaviour. These time limits run from the end of the relevant tax
year and the Supreme Court found no basis for the imposition of an additional, stricter
time restriction, based on 'staleness', running from when a discovery is made. The
Supreme Court observed that an HMRC decision to make a discovery assessment was
potentially subject to judicial review and, although it did not give its view
on the practical application of that remedy, said that counsel for HMRC accepted that, depending on the
circumstances, a deliberate decision not to assess promptly might amount to
irrationality sufficient to form the basis of a claim. This is unlikely to give
taxpayers much comfort as, in practice, founding a successful judicial review
claim based on delay by HMRC is likely to be very difficult.
Considering there is 'no place' for the
additional time limitation imported by 'staleness', by similar logic, any
non-statutory extension should also be impermissible. However, arguably, that
is what HMRC's current practice of issuing 'protective' assessments shortly
before the expiry of the statutory time limit achieves. Although HMRC says that a 'protective assessment' is only made
where the statutory conditions are met, in practice, it is common to see
assessments that lack detail and appear to have been hurried through before an
approaching time limit. Therefore, a taxpayer in receipt of a 'protective'
discovery assessment should scrutinise it carefully and bear in mind the fact that
the burden of proof lies with HMRC to demonstrate that a discovery has indeed
been made.
Taxpayers should not hesitate to challenge HMRC where it is
considered that HMRC are extending their powers beyond statutory intention, or
where HMRC may not be able to discharge their burden of proof. The sun may have set on staleness, but
procedural arguments regarding HMRC conduct are not going anywhere.
Home >Articles > Tooth, staleness and protective assessments
Tooth, staleness and protective assessments
What does the decision mean for protective assessments?
On 14 May 2021 the Supreme Court handed down its unanimous
judgment in HMRC v Tooth [2021] UKSC 17, an important case on the
validity of discovery assessments. Although the outcome was a victory for the
taxpayer, any disappointment on HMRC's part will have been tempered by their
success on the issue of 'staleness'.
Discovery assessments issued under TMA 1970 s 29 allow HMRC to recover tax after the normal time limits for opening an enquiry
have expired if an HMRC officer 'discover[s]' that an additional amount of tax
is due. This is a significant HMRC power and the relevant legislation therefore
contains a number of conditions that must be met in order for the discovery
assessment to be valid. As was seen in Tooth, where the taxpayer
successfully argued that a condition that HMRC sought to rely on (essentially,
that Mr Tooth's tax return contained a deliberate inaccuracy) had not been
satisfied, whether the conditions have been met can form an important part of a
dispute.
Prior to the Supreme Court's decision in Tooth, a
series of decisions in lower courts developed the concept of 'staleness', which
effectively created an additional, non-statutory restraint on HMRC's powers. The
courts considered that a delay between an HMRC officer making a 'discovery' and
the issuing of the discovery assessment may render that discovery 'stale' and
the subsequent discovery assessment invalid. This notion derived from a
judicial interpretation of the word 'discover' as something that 'newly arises'.
HMRC has steadfastly refused to
accept that the concept of staleness exists. The Supreme Court has now made
clear, departing from the Upper Tribunal and a majority of the Court of Appeal,
that HMRC are right. The notion that a qualifying discovery could cease to
be so merely as a result of the effluxion of time was, the Supreme Court held, 'unsustainable
as a matter of ordinary language' and 'would conflict with the
statutory scheme'. Whilst these comments were obiter dictum, it is
difficult to see how any lower court could now take a different view.
Central to the Supreme Court's reasoning was that the statute
provides sufficient taxpayer protection in the form of express time limits on
HMRC's ability to raise a discovery assessment - generally four years, rising
to six if the taxpayer has been careless, or 20 in respect of certain
deliberate behaviour. These time limits run from the end of the relevant tax
year and the Supreme Court found no basis for the imposition of an additional, stricter
time restriction, based on 'staleness', running from when a discovery is made. The
Supreme Court observed that an HMRC decision to make a discovery assessment was
potentially subject to judicial review and, although it did not give its view
on the practical application of that remedy, said that counsel for HMRC accepted that, depending on the
circumstances, a deliberate decision not to assess promptly might amount to
irrationality sufficient to form the basis of a claim. This is unlikely to give
taxpayers much comfort as, in practice, founding a successful judicial review
claim based on delay by HMRC is likely to be very difficult.
Considering there is 'no place' for the
additional time limitation imported by 'staleness', by similar logic, any
non-statutory extension should also be impermissible. However, arguably, that
is what HMRC's current practice of issuing 'protective' assessments shortly
before the expiry of the statutory time limit achieves. Although HMRC says that a 'protective assessment' is only made
where the statutory conditions are met, in practice, it is common to see
assessments that lack detail and appear to have been hurried through before an
approaching time limit. Therefore, a taxpayer in receipt of a 'protective'
discovery assessment should scrutinise it carefully and bear in mind the fact that
the burden of proof lies with HMRC to demonstrate that a discovery has indeed
been made.
Taxpayers should not hesitate to challenge HMRC where it is
considered that HMRC are extending their powers beyond statutory intention, or
where HMRC may not be able to discharge their burden of proof. The sun may have set on staleness, but
procedural arguments regarding HMRC conduct are not going anywhere.
