HM Revenue & Customs v Tooth [2019] EWCA Civ 826
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HM Revenue & Customs v Tooth [2019] EWCA Civ 826 was an appeal by HMRC before the Court of Appeal (Lord Justice Floyd, Lord Justice Patten and Lord Justice Males) concerning the validity of a discovery assessment made under section 29 of the Taxes Management Act 1970 in relation to losses claimed under a tax avoidance scheme. The appeal was dismissed.
Mr Tooth had participated in the Romangate scheme in 2009, which sought to utilise employment-related losses incurred in 2008/09 to relieve his liability to tax on other income by carrying back those losses to 2007/08. Although the scheme was defeated by anti-avoidance legislation, Mr Tooth maintained that his self-assessment for 2007/08, which took account of the disputed losses, should stand as it had not been validly challenged. In 2014 HMRC purported to raise a discovery assessment under section 29 of the Taxes Management Act 1970 in respect of income tax contended to be due for 2007/08. Mr Tooth appealed successfully to the First-tier Tribunal and the Upper Tribunal, and HMRC appealed with permission.
The Court of Appeal examined in detail the procedural history. Mr Tooth had filed his 2007/08 return on 30 January 2009 including a self-assessment computation. Due to a technical difficulty with HMRC-approved software, his advisers could not enter the employment-related loss in box 3 on Additional Information page 3 as intended. Following advice from the software engineer, they entered the loss on the partnership pages and used a UTR of “99999-99999” because no partnership existed. The return included explanatory text at box 19 and box 30 clearly stating that the claim related to an employment-related loss under section 128 of the Income Tax Act 2007 incurred in 2008/09 and that full details would be reported on the 2008/09 return. The explanatory text expressly stated that Mr Tooth’s interpretation of the law might differ from HMRC’s and that he assumed HMRC would open an enquiry.
On 14 August 2009 HMRC wrote to Mr Tooth stating their intention to enquire into his claim for employment losses under Schedule 1A of the Taxes Management Act 1970. In April 2010 HMRC wrote stating they had amended Mr Tooth’s return to withdraw the claim for losses. On 7 June 2010 Mr Tooth’s advisers challenged HMRC’s use of Schedule 1A, contending the claim was made within the return and should have been enquired into under section 9A. Following the Supreme Court decision in Revenue and Customs Commissioners v Cotter [2013] UKSC 69, which held that a claim for employment losses from a later year did not form part of the return where the taxpayer had left HMRC to calculate the tax, HMRC initially sought to collect the tax. However, Mr Tooth’s advisers pointed out that his case fell within paragraph 27 of Lord Hodge’s judgment in Cotter because Mr Tooth had performed his own self-assessment computation, meaning the claim was included in the return. HMRC accepted this distinction in May 2014.
On 28 July 2014 HMRC wrote stating their belief that Mr Tooth’s return was inaccurate and their intention to make an assessment under section 29. HMRC contended that the situation had been brought about deliberately by Mr Tooth within section 29(4), thereby overcoming the prohibition in section 29(3) which ordinarily prevented an assessment where a return had been made and delivered. The discovery assessment was issued on 24 October 2014.
The appeal raised two broad issues. The first was whether HMRC made a relevant discovery under section 29(1)(b), namely whether an officer had discovered that an assessment to tax was insufficient. The second was whether the insufficiency had been brought about deliberately within sections 29(4) and 36(1A)(a), which extended the time limit for raising assessments to 20 years where a loss of tax was brought about deliberately.
On the discovery issue, HMRC contended before the Court of Appeal that the relevant discovery was made when Mr Tooth’s advisers wrote on 11 March 2014 explaining that his case fell within paragraph 27 of Cotter, meaning HMRC had incorrectly believed his self-assessment to be correct until that point. HMRC relied on Charlton & others v RCC [2012] UKUT 770 for the proposition that a discovery occurred when it newly appeared to an officer, acting honestly and reasonably, that there was an insufficiency in an assessment.
Floyd LJ held that the requirement for newness related to the conclusion itself that the assessment was insufficient, not to the discovery of a new reason for an existing conclusion. A discovery assessment was not validly triggered merely because the officer had found a new reason for contending an assessment was insufficient or decided to invoke a different mechanism for addressing a known insufficiency. The assessment which must have been discovered to be insufficient was Mr Tooth’s self-assessment filed on 30 January 2009. HMRC’s pleaded case before the First-tier Tribunal had not directly addressed the need to show a new conclusion that the self-assessment was insufficient, but had merely asserted that an officer newly concluded that Schedule 1A was not the appropriate mechanism to make good the insufficiency. The pleadings and skeleton argument suggested HMRC had always appreciated there was an insufficiency.
Floyd LJ examined the chronology in detail. HMRC’s letter of 14 August 2009 showed they understood Mr Tooth was claiming employment-related losses carried back from 2008/09. In April 2010 HMRC stated they had amended the return to withdraw the claim. Correspondence was replete with references suggesting HMRC was purporting to use Schedule 1A to amend Mr Tooth’s return or assessment to remove the claim for losses, making clear HMRC was well aware throughout that the assessment as it stood was insufficient. On 4 March 2014 HMRC wrote claiming overdue tax based on Mr Tooth’s self-assessments, but rapidly accepted this was incorrect after the Grunberg letter of 11 March 2014. On 23 May 2014 HMRC confirmed agreement that Mr Tooth’s circumstances were similar to those in paragraph 27 of Cotter. On 28 July 2014 HMRC announced their intention to raise a discovery assessment, recognising that Schedule 1A did not give power to remove the claim. The email exchange on 23 October 2014 between HMRC officers showed they had decided to abandon their attempt to address the insufficiency using Schedule 1A and to issue a discovery assessment instead.
Floyd LJ held that this history showed HMRC first thought they had powers under Schedule 1A to address the insufficiency. When those powers were successfully challenged following Cotter, they sought to address the same insufficiency through a discovery assessment. The documents did not support the assertion that HMRC believed Mr Tooth’s self-assessment to be correct until receipt of the Grunberg letter. There was no discovery of an insufficiency either on receipt of that letter in March 2014 or on the review of the file in October 2014. HMRC had not established they made a valid discovery assessment and the appeal should be dismissed on this issue. Floyd LJ declined to remit the matter to the First-tier Tribunal, as HMRC had failed to plead or argue a coherent case of discovery and the burden of proof had been on them.
On the deliberateness issue, Floyd LJ held it was unnecessary to decide this given his conclusion on discovery, but addressed it fully. The issue sub-divided into whether there was an inaccuracy in the return, whether that inaccuracy was deliberate, and whether the deliberate inaccuracy resulted in an insufficiency or loss of tax. On the first sub-issue, Floyd LJ agreed with the Upper Tribunal that Mr Tooth’s return, read as a whole, did not contain an inaccuracy. Section 118(7) referred to “an inaccuracy in a document” rather than “an inaccurate document”, but this did not displace the normal approach of reading individual parts in the context of the document as a whole. The return fully explained what Mr Tooth had done. There was no inaccuracy merely because he included employment-related losses in the wrong box.
On the second sub-issue, assuming contrary to his conclusion that there was an inaccuracy, Floyd LJ held that the incorrect insertion of employment losses in boxes reserved for partnership losses was a deliberate inaccuracy, though it was no longer suggested Mr Tooth was deliberately seeking a reduction in tax liability. The Upper Tribunal had erred in relying on absence of intent to bring about an insufficient assessment, a point no longer pursued by HMRC. On the third sub-issue, Floyd LJ held that once the focus was on the inaccuracy in the partnership pages, the resultant calculations performed by software would force the losses into the calculation of tax due. Had Mr Tooth adopted a course not involving the inaccuracy, the losses would not have been reflected in his self-assessment and his situation would have been the same as Mr Cotter’s, allowing HMRC to collect tax via a Schedule 1A enquiry. This was a sufficient causal connection to conclude the situation or loss of tax occurred as a result of the inaccuracy.
Males LJ agreed the appeal must be dismissed on the discovery issue but reached different conclusions on deliberateness. He held the right approach was not to read the document as a whole. The statutory question was whether there was an inaccuracy “in” a document. As the Upper Tribunal found, the entry of figures into the partnership pages meant those pages were inaccurate, even if the true position was apparent on a fair reading of the whole document. This was a hard-edged question. He agreed the inaccuracy was deliberate and agreed with Floyd LJ’s reasoning on causation. Because the entry of a figure for partnership loss fed automatically into the computation of Mr Tooth’s tax liability, it did as a matter of fact cause his self-assessment to be insufficient.
Patten LJ agreed with Floyd LJ on the discovery issue. On deliberateness, he took the same view as Males LJ that there was an inaccuracy in the return notwithstanding that the document read as a whole neutralised it. This was a technical condition which should be given its straightforward literal meaning.
In short, HMRC’s appeal was dismissed because they failed to establish a valid discovery under section 29 of the Taxes Management Act 1970, having never newly concluded that Mr Tooth’s self-assessment was insufficient but merely sought to use a discovery assessment as an alternative mechanism to address an insufficiency of which they had been aware throughout.
Customs Commissioners v Cotter [2013] UKSC 69; [2013] 1 WLR 3514
HMRC v Tooth in Derry v HMRC [2019] UKSC 19
Also cited as: [2019] BTC 14 · [2019] STC 1316