The Chartered Accountants Tax Case Digest this month considers HMRC’s appeal to the Supreme Court which raised issues of general importance on the power of HMRC to raise a discovery assessment where it is not content with the accuracy of a taxpayer’s self-assessed return. A discovery assessment would have similarities to an amended assessment raised by the Revenue Commissioners in Ireland and is made by HMRC in cases where it believes there is underpaid tax as it broadly allows earlier periods which may be closed to be reopened where there has not been complete disclosure by the taxpayer.

The time limit for these assessments is four years from the end of the tax year in question but increases where there has been a careless or deliberate understatement, similar to an assessment raised by the Revenue Commissioners on the grounds of fraud or neglect.

The facts of this case concerned a tax avoidance scheme (“the Romangate scheme”) through which Mr Tooth generated an employment related loss. Retrospective legislation rendered the Romangate scheme ineffective, however owing to the timing of their enquiries HMRC failed to protect their position against Mr Tooth’s 2007/08 self-assessed return which led to the course of a discovery assessment being pursued. This appeal concerned the validity of the discovery assessment raised by HMRC.

Introduction

Owing to an issue with the software for completing an electronic tax return, Mr Tooth included the employment loss generated through the Romangate scheme in his self-assessment tax return for 2007–08 as a partnership loss and included a written explanation that the loss was an employment related loss in the “white space” on the return, as advised by the software engineers on raising an enquiry. The software was IRIS software approved by HMRC.

HMRC contended that the online return contained a deliberate inaccuracy because the employment related loss was wrongly inserted into a box reserved for partnership losses and thereby resulted in a deduction to the electronic calculation of the self-assessment liability, causing an understatement of tax due.

The course of appeals taken by Mr Tooth saw the First-tier Tribunal (FtT) find in his favour on the grounds that there was no deliberate inaccuracy in Mr Tooth’s self-assessed return, but it accepted HMRC’s argument that a discovery of an understatement had been made by one of its officers in October 2014. The Upper Tribunal (UT) agreed with the FtT on the deliberate inaccuracy issue. It also agreed with Mr Tooth on the discovery issue. The Court of Appeal (CoA) agreed with the UT on the discovery issue and so dismissed HMRC’s appeal, although the majority of the CoA accepted the Revenue’s argument on the deliberate inaccuracy issue.

The Supreme Court judgment divided the issues in this appeal into two groups; in the context of section 29(4) and 118(7) of the Taxes Management Act 1970 (TMA), whether a deliberate inaccuracy arises “in” the document, and whether there had been a qualifying discovery36 under section 29(1) TMA 1970.

Deliberate inaccuracy

The Supreme Court in their analysis of the relevant legislation found that where an understatement arises from an inaccuracy in the document provided to HMRC, the necessary conditions for making an assessment are fulfilled provided the inaccuracy is deliberate, even where the understatement itself is not deliberate. The Court considered the legislation to relate to “a statement which, when made, was deliberately inaccurate”, rather than “a deliberate statement which is (in fact) inaccurate”. In order for a deliberate inaccuracy to exist in a document, there must be an “intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement…”.

On the meaning of the phrase “deliberate inaccuracy in a document”, HMRC argued that a deliberate inaccuracy found somewhere in the document, without regard to the document as a whole, was capable of bringing about an insufficiency for the purposes of raising an assessment. The Supreme Court found that “each relevant part of the document by reference to its place in the context of the document as a whole…” should be considered. The Supreme Court detailed that this is not to ignore the word “in” in the relevant statement but that a tunnel-vision approach should not be applied. The Court found difficulty with the argument that HMRC has powers to specify the form in which a return should be presented and that it was not open to the taxpayer to enter figures incorrectly in the boxes on the return to facilitate a reading by computer in the first instance, on the basis that the electronic form itself was defective.

The Supreme Court in their interpretation of sections 29 and 118 found the judgments of the FtT and the UT to be correct, in that there was no deliberate inaccuracy to be found.

Discovery

In assessing whether a qualifying discovery had been made, the Supreme Court considered the issues of collective knowledge, what is required under section 29(1) for a discovery and the legal protections on a delay between the discovery and the issuing of an assessment.

With reference to the language in section 29(1); the powers of “an officer of the Board” and “the Board” themselves and the reference to “his or their opinion”, the Supreme Court agreed with HMRC that the concept of collective knowledge could not be applied to a discovery, and it was the state of mind of the individual officer that was relevant. Accordingly, where an officer makes a discovery, it does not preclude another officer from making the same discovery in the future. With reference to Anderson v Revenue and Customs Comrs [2018] UKUT 159 (TCC), the Supreme Court agreed that section 29(1) sets out public law powers and its interpretation was informed by principles of public law. In the application of public law principles, it was prescribed that an officer “…must act rationally, must not abuse their powers and may be required to respect any legitimate expectation which they have created.”

The Supreme Court considered the idea that a discovery could lose its quality as such due to the passing of time to be contrary to the ordinary use of the word “discover”. It was positioned that “…the question is whether the officer of the Board who is deciding whether to make a discovery assessment under that provision has subjectively made a discovery that there has been an under-assessment of tax.”

Such an interpretation was said not to serve as a means for the introduction of further restrictions, and the taxpayer is protected by statutory time limits for a discovery assessment to be made relative to their culpability. The Supreme Court found that the FtT correctly applied the law in their assessment that HMRC had made a qualifying discovery.

Conclusion

While upholding the validity of the discovery assessment, the Supreme Court dismissed HMRC’s appeal as a deliberate inaccuracy could not be said to exist in Mr Tooth’s self-assessed return, and so allowing the appeal by Mr Tooth against the discovery assessment raised in 2014. This case provides important guidance on the powers of HMRC to raise a discovery assessment, while providing the taxpayer with the assurance that a computer’s inability to contextualise their return does not give rise to an inaccuracy.

The full judgment in this case is available from:- https://www.bailii.org/uk/cases/UKSC/2021/17.html