Introduction

In the landmark case of Raymond Tooth v. Revenue and Customs ([2017] SFTD 338), the First-tier Tribunal (Tax) addressed significant issues surrounding tax avoidance schemes and the conditions under which HM Revenue and Customs (HMRC) can issue a discovery assessment under the Taxes Management Act 1970 (TMA). This case centers on Mr. Raymond Tooth's participation in the Romangate tax avoidance scheme and HMRC's subsequent discovery and assessment of insufficiency in his income tax declaration for the year 2007-08.

The key issues revolved around whether HMRC validly made a discovery assessment under section 29 TMA and whether the insufficiency of tax declared was brought about deliberately by Mr. Tooth or his representatives. The parties involved were Mr. Raymond Tooth (the appellant) and HM Revenue and Customs (the respondent).

Summary of the Judgment

The Tribunal examined whether HMRC had appropriately issued a discovery assessment under section 29 TMA for an insufficiency in Mr. Tooth's 2007-08 income tax return. HMRC argued that the insufficiency was brought about deliberately, justifying an extended time limit for assessment under section 36(1A) TMA.

The Tribunal concluded that while HMRC did identify an insufficiency of tax, they failed to establish that this insufficiency was brought about deliberately by Mr. Tooth. Consequently, the condition under section 29(4) TMA was not satisfied, leading to the allowance of Mr. Tooth's appeal. The discovery assessment was set aside, reaffirming that HMRC must prove deliberate action to warrant such assessments beyond the standard time limits.

Analysis

Precedents Cited

The judgment referenced several key cases that influenced the Tribunal's decision:

• HMRC v Charlton Corfield & Corfield [2013] STC 866: This case clarified the 'discovery' test under section 29 TMA, emphasizing that no new information is required beyond the conclusion that an insufficiency exists.
• Pattullo v HMRC [2016] STC 2043: Provided further interpretation on the newness of a discovery assessment, reinforcing that the freshness of the discovery is vital.
• Duckitt v Farrand [2001] Pens LR 155: Defined "deliberate" within the context of tax law, highlighting intentional or knowing actions.
• Colin Moore v HMRC [2011] UKUT 239 (TCC): Distinguished the difference between negligent and deliberate actions in tax assessments.

Legal Reasoning

The Tribunal's legal reasoning focused on interpreting section 29 TMA, which allows HMRC to make discovery assessments when an insufficiency of tax is identified. However, for such an assessment to be valid beyond the standard four-year period, HMRC must prove that the insufficiency was brought about deliberately under section 29(4) TMA.

The Tribunal analyzed whether Mr. Tooth's actions in declaring an employment-related loss as a partnership loss constituted deliberate inaccuracy. While Mr. Tooth received professional advice, the Tribunal found that there was no evidence of intentional wrongdoing or knowledge that the loss was reported incorrectly. The misplacement of the loss in the tax return was deemed a technical error, not a deliberate attempt to understate tax liabilities.

Furthermore, the Tribunal highlighted that merely completing a tax return does not inherently imply deliberate action to cause tax insufficiency. The distinction between careless and deliberate conduct is crucial, and in this case, the Tribunal determined that HMRC did not satisfy the burden of proving deliberate inaccuracy.

Impact

This judgment reinforces the necessity for HMRC to provide substantial evidence of deliberate action when issuing discovery assessments beyond standard timeframes. It underscores the importance of distinguishing between technical errors and intentional tax avoidance schemes. Future cases will likely reference this decision to ensure that HMRC's discovery assessments are justified by clear evidence of deliberate insufficiency.

Additionally, the case highlights the responsibilities of taxpayers and their advisors in accurately reporting tax information and the potential consequences of misreporting, whether intentional or accidental. It serves as a precedent for the interpretation of "deliberate" under section 29 TMA, providing clarity for both tax authorities and taxpayers.

Complex Concepts Simplified

• Discovery Assessment (Section 29 TMA): A mechanism allowing HMRC to assess additional tax when they uncover that a taxpayer's return contains insufficient tax. This can occur if income was not assessed correctly, or if reliefs were improperly claimed.
• Insufficiency of Tax: When the tax declared by a taxpayer is less than what is actually owed based on their income and reliefs claimed.
• Deliberate Action (Section 29(4) TMA): For HMRC to extend the assessment time limit beyond the standard period, they must prove that the taxpayer intentionally or knowingly caused an insufficiency in their tax declaration.
• Schedule 1A TMA: Provides provisions for assessing additional tax due to lost income tax or capital gains tax, with extended time limits under certain conditions.
• Loss Carry Back: A tax relief mechanism allowing taxpayers to apply losses from a future tax year against profits from a previous year, thereby reducing the tax liability of the earlier year.

Conclusion

The Tooth v. Revenue and Customs judgment serves as a pivotal reference in the realm of tax law, particularly concerning the validity and limitations of discovery assessments under the Taxes Management Act 1970. By affirming that HMRC must conclusively demonstrate deliberate action to justify extended assessment periods, the Tribunal safeguarded taxpayers against unwarranted and retroactive tax claims. This decision not only clarifies the threshold for HMRC's discovery assessments but also reinforces the principle that technical errors or misunderstandings in tax reporting do not equate to intentional tax evasion.

Moving forward, both taxpayers and tax professionals can draw on the clarity provided by this ruling to navigate complex tax reporting scenarios, ensuring compliance while understanding the boundaries of HMRC's assessment powers.