Introduction

Revenue and Customs v. Tooth: (INCOME TAX) ([2018] UKUT 38 (TCC)) is a pivotal case adjudicated by the Upper Tribunal (Tax and Chancery Chamber) on February 7, 2018. The core issue revolves around the Commissioner for Her Majesty's Revenue and Customs (HMRC) issuing a "discovery" assessment under Section 29 of the Taxes Management Act 1970 (TMA) against Mr. Raymond Tooth for participating in the failed "Romangate" tax avoidance scheme. Mr. Tooth contested the sufficiency and deliberate nature of the tax insufficiency claimed by HMRC, leading to a legal battle that questioned the interpretation and application of Section 29 TMA.

Summary of the Judgment

HMRC initiated a discovery assessment amounting to £475,498.20 for the tax year 2007-2008, alleging that Mr. Tooth's involvement in the Romangate scheme deliberately resulted in an insufficient tax assessment. Mr. Tooth appealed, arguing that there was no such deliberate insufficiency. The First-tier Tribunal Tax Chamber (FTT) sided with Mr. Tooth, holding that while HMRC had made a discovery, the insufficiency was not deliberate. HMRC appealed this decision.

The Upper Tribunal (UT) thoroughly examined the merits of HMRC's appeal, focusing on whether Mr. Tooth's actions constituted a deliberate inaccuracy under Section 29(4) TMA, which is a prerequisite for a discovery assessment. Ultimately, the UT upheld the FTT's decision, dismissing HMRC's appeal. The Tribunal concluded that there was no evidence of deliberate inaccuracy by Mr. Tooth that led to the insufficiency in tax assessment.

Analysis

Precedents Cited

The judgment extensively references Revenue and Customs Commissioners v. Cotter [2013] UKSC 69, which dealt with similar tax avoidance schemes. In Cotter, Lord Hodge JSC clarified the boundaries between different enquiry mechanisms under the TMA, emphasizing that a "return" under Sections 8 or 8A should strictly pertain to information establishing tax liability, not ancillary claims like loss relief that do not affect the immediate tax charge.

Additionally, the case draws on Moore v. HMRC [2011] UKUT 239 (TCC), which differentiated between negligent and deliberate insufficiency of tax assessments, underscoring the necessity of proving deliberate intent for more extended limitation periods under Section 29.

Legal Reasoning

The UT meticulously dissected the requirements of Section 29 TMA, particularly focusing on the necessity of establishing a deliberate inaccuracy that leads to tax insufficiency. The Tribunal emphasized that for HMRC to succeed in a discovery assessment:

• There must be an inaccuracy in a document submitted to HMRC.
• This inaccuracy must be deliberate.
• The inaccuracy must causally result in an insufficient tax assessment.

In Mr. Tooth's case, the UT found that while there were entries in the tax return that HMRC deemed inaccurate, these were made based on a contested yet bona fide interpretation of tax law. Mr. Tooth explicitly acknowledged the controversial nature of his claims in his tax return, which undermined HMRC's assertion of deliberate inaccuracy. Furthermore, any alleged inaccuracy related to the improper placement of employment loss entries was a result of technical issues with the tax return software, not intentional deceit.

The Tribunal also addressed the concept of "discovery," reaffirming that it requires a genuine realization by HMRC of one of the scenarios laid out in Section 29(1) TMA. The UT concluded that HMRC's conclusion of deliberate inaccuracy lacked substantial evidence, especially considering Mr. Tooth's proactive clarification in his return.

Impact

This judgment reinforces the stringent standards HMRC must meet to impose additional assessments under Section 29 TMA. It underscores the requirement for clear evidence of deliberate wrongdoing rather than mere errors or contested interpretations. Consequently, taxpayers can be more confident that HMRC cannot easily reopen settled tax matters without incontrovertible proof of intentional deceit.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment is a tool HMRC uses to review and adjust past tax assessments when it identifies either unreported income, insufficient tax payments, or excessive tax reliefs. Under Section 29 TMA, HMRC can make such assessments if they discover that a taxpayer has either omitted income, underpaid tax, or overclaimed relief, provided certain conditions are met.

Section 29(4) TMA

This subsection stipulates that HMRC can only issue a discovery assessment if the taxpayer has deliberately or carelessly brought about the insufficiency in their tax assessment. Deliberate inaccuracy refers to intentional misinformation provided to HMRC, leading to reduced tax liabilities.

Deliberate Inaccuracy

For HMRC to claim a deliberate inaccuracy, there must be a clear intention by the taxpayer to provide false or misleading information on their tax documents. Mere errors, even significant ones, do not meet this threshold unless accompanied by intent.

Mutual Exclusivity of Enquiry Routes

The TMA outlines three distinct routes for HMRC to query past tax returns: Schedule 1A, Section 9A, and Section 29 discovery assessments. These routes are mutually exclusive, meaning HMRC must choose the appropriate path based on the nature of the discrepancy. For instance, if a claim is included in the return, Section 9A must be used, not Schedule 1A.

Conclusion

The Revenue and Customs v. Tooth case serves as a critical affirmation of the safeguards surrounding discovery assessments under Section 29 TMA. By requiring clear evidence of deliberate inaccuracy, the Tribunal ensures that taxpayers are protected against arbitrary or unfounded reassessments. This decision not only upholds the integrity of the tax system but also delineates the boundaries within which HMRC must operate when probing past tax affairs.

For legal practitioners and taxpayers alike, this judgment emphasizes the importance of accurate and honest reporting in tax returns. It also clarifies the procedural expectations HMRC must adhere to when initiating discovery assessments, thereby providing a precedent that balances the enforcement powers of the tax authorities with the rights of individuals.