In HMRC v Raymond Tooth [2021] UKSC 17, the Supreme Court ruled on two important issues in relation to HMRC's powers in making Discovery Assessments. Entering the correct figures in the wrong boxes of a tax return because there is nowhere else in the return to put them and to then make a full disclosure of that fact, cannot be construed as a deliberate error and the concept of 'staleness' in respect of assessments has a very narrow application.

The normal time limit for a Discovery Assessment in respect of a loss of tax detected by HMRC in a tax return is four years, extended to six if the taxpayer is careless or 20 if the loss was deliberate.

The taxpayer argued that the main Discovery condition was not met as there was no deliberate error: it was very clear from the return that an employment loss was being claimed.

HMRC argued that the taxpayer had deliberately filled in the wrong part of the return: that created a deliberate error.

The taxpayer also argued that HMRC was out of time to make a Discovery, because, by 2014, the essential newness of the loss scheme was lost: the Discovery had become 'stale'.

The Supreme Court found that:

As there was no deliberate error, the 20-year time limit did not apply and HMRC simply was too late in raising an assessment.

Commentary

A lucky escape for the taxpayer who avoided an assessment for a tax scheme that did not work. With hindsight, it's clear that HMRC was overwhelmed by the volume of tax avoidance schemes in the noughties and simply did not have the systems or manpower in place to raise the assessments that it should have raised in time. 

There is a victory for common sense in that entering the right figures in the wrong boxes of a tax return because there is nowhere else in the return to put them and to then make a full disclosure of that fact, cannot be construed as a deliberate error.

We have a useful ruling on the concept of 'staleness'. Back in the FTT Discovery case Murano v HMRC [2020] TC7685, judge Anne Redston opined that she thought that "the case law on TMA s 29 has taken a wrong turning" in respect of staleness. We were all wondering what the Supreme Court would have to say on the matter. It has now corrected the direction of travel and confirms that within HMRC's assessment process it is extremely difficult for a discovery to become stale.

Useful guides on this topic

How to appeal a decision of HMRC
Key steps in appealing a decision of HMRC.

DIscovery assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences? Case law tracker.

Discovery assessment and time limits
FREEVIEW: How far HMRC can go back?

Penalties: Error in a return or document
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

DOTAS: Disclosure of Tax Avoidance Schemes
What are rules on Disclosure of tax avoidance schemes (DOTAS)? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

External link

HMRC v Raymond Tooth [2021] UKSC 17


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