'Discovery' decision may make it harder to obtain tax return certainty

The Court decided that HMRC did not a make a 'discovery' when it realised as a result of a Supreme Court decision that it had opened an enquiry into a taxpayer's return under the wrong statutory provision. This meant that HMRC was out of time to assess the tax.

"The [HMRC] officer must have newly discovered that an assessment to tax is insufficient. It is his or her new conclusion that the assessment is insufficient which can trigger a discovery assessment. A discovery assessment is not validly triggered because the officer has found a new reason for contending that an assessment is insufficient, or because he or she has decided to invoke a different mechanism for addressing an insufficiency in an assessment which he or she has previously concluded is present," Lord Justice Floyd said in his judgment.

Clara Boyd of Pinsent Masons acted for Raymond Tooth, the taxpayer in the case. She said: "The decision is helpful in that it involves a more testing analysis of the nature and timing of any alleged discovery by HMRC. However, the views expressed by some of the judges in relation to what constitutes an inaccuracy in a return and what amounts to deliberate behaviour are very unhelpful for taxpayers."

"The time limits for enquiring into returns and making assessments are designed to give the taxpayer some certainty that if they have made a full disclosure in their return there will come a time when they will know that HMRC cannot demand further tax from them. The Court of Appeal decision in this case makes it much harder for taxpayers to obtain this certainty," she said.

The case concerned Raymond Tooth, who entered into the 'Romangate' tax planning scheme, designed to generate employment-related losses which could be set off against income in the previous tax year.

When Tooth's accountants completed his 2007-2008 self-assessment return, the HMRC-approved 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 made in 2008-2009 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. The wording said that Tooth's interpretation of tax law may be at variance with that of HMRC and flagged the expectation that HMRC would open an enquiry into the return.

Following the filing of the return, the government announced legislation that meant the scheme did not work. 

In August 2009 HMRC opened an enquiry into Tooth's loss claim. However it opened the enquiry under a provision which applies only in relation to claims which are not included in a return. In 2013 the Supreme Court decided in another case that where the taxpayer had calculated his tax liability in the return, as Tooth had, an assessment should be opened under another statutory provision.

By this time the time limit to open an enquiry under the correct provision had long since expired and the only way that HMRC could assess Tooth to tax in respect of the failed scheme was to open a 'discovery assessment'. This enables HMRC to go back four years, or if it can show careless conduct six years. If it can show deliberate conduct it can go back 20 years to assess tax.

HMRC can only make a discovery assessment if it 'discovers' an underpayment of tax. It also has to show that the underpayment is due to careless or deliberate behaviour by the taxpayer or their agent or that at the time when an HMRC officer ceased to be entitled to open an enquiry into the return the officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax. In October 2014 HMRC issued a discovery assessment alleging that Tooth's return contained a deliberate inaccuracy.

Although the three Court of Appeal judges agreed that HMRC had not made a 'discovery' entitling them to assess Tooth outside the normal time for enquiring into a tax return, which meant that the assessment was invalid, they expressed opinions on the arguments they had heard about whether there was an inaccuracy in the return and whether the inaccuracy was deliberate.

"Two of the judges said that including the employment-related losses in the wrong section of the return meant that there was in inaccuracy in the return, even though the return , as a whole, was not inaccurate because it explained elsewhere, in the white space, what had been done," said Ian Robotham, a tax disputes expert at Pinsent Masons.

All the judges agreed that if there was an inaccuracy in the return it was deliberate.

"It is unhelpful that the judges have expressed the opinion that deliberate conduct does not necessarily involve blameworthy conduct, thereby distancing themselves from comments made in the Upper Tribunal that an allegation of deliberate conduct was 'tantamount to an allegation of fraud'," Ian Robotham said.