The Supreme Court has released its eagerly awaited judgment in HMRC v Tooth  UKSC 17. In doing so it has handed down its authoritative interpretation of the law on discovery assessments and clarified the meaning of deliberate inaccuracy. It has also laid to rest any emerging jurisprudence on the concept of staleness in relation to a discovery assessment, declaring that there is no such thing.
In this article I will explain the facts of Tooth and the key issues from the Supreme Court judgment. But first, I shall briefly summarise the statutory law on discovery.
The law on discovery assessments
Under Taxes Management Act (TMA) 1970, section 29(1), a discovery assessment may be issued if an HMRC officer, or the Board of HMRC itself, discovers that:
- any taxable income or chargeable gains that ought to have been assessed on a particular taxpayer for a particular year of assessment has not been so assessed;
- an assessment is or has become insufficient, or
- any relief given is or has become excessive.
For a discovery assessment to be valid, section 29(3) requires that one of two conditions must be fulfilled:
- either (section 29(4)) the insufficiency of tax must have been brought about carelessly or deliberately by the taxpayer or someone acting on his behalf;
- or (section 29(5)) the officer making the discovery could not reasonably have been expected to be aware of the insufficiency on the basis of the information made available to him during the period allowed for raising an enquiry into the taxpayer’s return.
It is the condition in section 29(4) which was relevant in Tooth.
The normal statutory time limits apply to any discovery assessment:
- four years from the relevant year of assessment in a normal case;
- six years if the taxpayer or agent has been careless; or
- 20 years if the insufficiency has been brought about deliberately.
The facts of Tooth
To recap briefly on the facts of Tooth, the taxpayer used a tax avoidance scheme (the Romangate scheme) to reduce his taxable income by use of employment-related losses. Because the HMRC software he used to complete his return for 2007/08 did not accommodate employment losses, he entered them in the partnership box and explained what he had done in the white space, adding that his interpretation differed from HMRC’s and he expected HMRC would raise an enquiry.
HMRC did indeed raise an enquiry, but under TMA 1970, Sch 1A, which was appropriate for claims not made in returns; whereas the taxpayer had made the claim in his 2007/08 return and therefore HMRC should have proceeded under TMA 1970, section 9A.
After this had become clear in a Supreme Court decision on another case in 2013, and the same decision had decreed that the Romangate scheme did not work, HMRC issued Mr Tooth with a discovery assessment on the grounds that the 2007/08 assessment to tax was insufficient and the taxpayer had made a deliberate inaccuracy.
Having been unsuccessful in the tax tribunals and in the Court of Appeal, HMRC appealed to the Supreme Court.
The main issue before the Supreme Court judges was whether there was an inaccuracy, and if so whether it was deliberate. If not, then the condition in TMA 1970, section 29(4) could not be fulfilled and the discovery assessment would not be valid.
On the meaning of “deliberate”, TMA 1970, section 118(7) states:
“In this Act 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 Her Majesty’s Revenue and Customs by or on behalf of that person.”
The further significance of a finding of deliberate inaccuracy lies in the time limit for raising an assessment (20 years as against six for careless inaccuracy or four in a normal case) and the level of the resulting penalties chargeable.
HMRC contended that a deliberate inaccuracy in section 118(7) occurs when a statement that was made intentionally happened to be inaccurate. By inserting his employment losses in the partnership box on the return Mr Tooth had made an inaccuracy, and because he did not do so accidentally, his action was deliberate. But the Supreme Court said that to be deliberate, an inaccuracy had to be intentional when made – “deliberate” had to qualify both the making of the statement and the fact that it was inaccurate. The court did not believe that Parliament would have intended the longer time limit for assessment and the higher penalties that attached to deliberate inaccuracy to have applied to the case where a taxpayer had deliberately stated something that happened to be inaccurate, even if he himself thought it was true and even if he had taken reasonable care to get it right. It concluded (para 47):
“It may be convenient to encapsulate this conclusion by stating that, for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) 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.”
The taxpayer had not intended to mislead HMRC; indeed he had gone to great lengths to explain what he was doing in the white space of what was clearly a defective online form (defective because it did not have the correct box for him to use).
Was there a valid discovery?
The other issue under appeal was whether there was a discovery. In its judgment the Supreme Court dealt with the question of whether HMRC had collective knowledge, or whether an individual officer could make a discovery; what is required for there to be a discovery under section 29(1); and whether a discovery can be invalidated by becoming “stale”, or “allowed to lie unactioned on the file for a significant period” before an assessment is issued.
On staleness, some recent court decisions had imposed a requirement that the discovery should be something “newly arising, not something stale and old” (Corbally-Stourton v HMRC Commrs  UKSPC SpC 00692). The idea that an otherwise valid discovery assessment could be invalidated by staleness had been further developed by the Upper Tribunal in Beagles v HMRC  UKUT 380 (TC); and in Tooth, the Upper Tribunal and the Court of Appeal had determined that a discovery could lose its essential “newness” if there was too long a delay before an insufficiency of tax, discovered either by an officer or by the Board, was assessed.
The Supreme Court, on the other hand, observed in Tooth that time limits ran not from any discovery event, but from the end of the tax year to which the relevant assessment relates. There was no such thing as “staleness”. Section 29(1) gives an officer a discretion whether to issue an assessment, and any official discretion is to be governed by principles of public law, in which judicial review provides a remedy for any excessive delay. We should not distort the statutory regime to deal with things that ought to be dealt with in accordance with the principles of public law.
The court said that the language of section 29 would make no sense if its operation turned on the concept of collective knowledge by the Board, or HMRC as a whole. Section 29(1) allows either an individual officer to make an assessment of an amount which “in his opinion” ought to be charged to make up a deficiency of tax, or the Board to make such an assessment if “in their opinion” such a deficiency arises. Section 29(5) refers to the state of mind of a particular hypothetical officer dealing with the taxpayer’s case at any particular time. There is no principle of collective knowledge; it is the state of mind of the officer or of the Commissioners that is relevant. To “discover” should be interpreted widely as to “find out”, which can mean a file being seen by two officers, of whom the second finds out something that eluded the first (as in the leading case of Cenlon Finance Ltd v Ellwood (HMIT)  AC 782).
It is unusual for the Supreme Court to reverse so comprehensively the judgments of lower courts.
The Upper Tribunal and Court of Appeal held that HMRC already knew about the insufficiency of tax in 2009 when Mr Tooth submitted his return and it was not open to an individual officer to “discover” it five years later, but the Supreme Court held there is no principle of collective knowledge in HMRC and it is possible for an individual officer to discover something for himself or herself.
The Upper Tribunal and Court of Appeal both agreed that a gap of five years between finding out there was an insufficiency and issuing an assessment resulted in the assessment being stale and therefore invalid. The Supreme Court held there is no such thing as staleness; the requirement is that the assessment be made within the statutory time limits.
The Court of Appeal by a majority held that Mr Tooth had made a deliberate inaccuracy in his return, but the Supreme Court held he had not acted deliberately because there was no intention to mislead, and therefore the condition for a valid discovery assessment had not been met.
Practitioners will undoubtedly be relieved by the Supreme Court’s findings on deliberate inaccuracy, but perhaps ambivalent about the possibility for HMRC to have more than one bite at the cherry and the demise of the concept of staleness. Nevertheless, the Supreme Court’s decision has at least given us an authoritative analysis of the legislation and some certainty about the scope of discovery assessments, an area which had given rise to considerable doubt in recent years.