Introduction

Revenue And Customs v. Tooth ([2019] EWCA Civ 826) is a significant decision by the England and Wales Court of Appeal (Civil Division) that delves into the intricacies of tax law, specifically addressing the mechanisms available to Her Majesty's Revenue and Customs (HMRC) for correcting taxpayer assessments under the Taxes Management Act 1970 (TMA 1970). The case revolves around Mr. Raymond Tooth's participation in the so-called "Romangate scheme," a tax avoidance strategy that leveraged employment-related losses to reduce tax liabilities.

The core issues in the case pertain to whether HMRC could validly issue a "discovery assessment" to rectify an allegedly insufficient tax assessment made by Mr. Tooth and whether Mr. Tooth's actions amounted to a deliberate attempt to undermine the tax system. The judgment provides a comprehensive analysis of the legal standards governing discovery assessments and the delineation of deliberate misstatements in tax returns.

Summary of the Judgment

In this case, Mr. Tooth utilized employment-related losses from the 2008/09 tax year to offset his 2007/08 income, thereby reducing his tax liability. HMRC challenged this by raising a discovery assessment under section 29 of the TMA 1970, contending that the self-assessment was insufficient and that the insufficiency was deliberately caused by Mr. Tooth. The initial appeals to the First-tier Tribunal (Tax) and the Upper Tribunal were dismissed. However, upon further appeal, the Court of Appeal scrutinized both the discovery and deliberateness issues.

The Court ultimately concluded that HMRC failed to establish a valid discovery of insufficiency in the tax assessment. Additionally, while HMRC argued that Mr. Tooth had deliberately caused the insufficiency, the court found insufficient evidence to support this claim. As a result, the appeal by HMRC was dismissed, reinforcing the protections afforded to taxpayers against retrospective and unfounded assessments.

Analysis

Precedents Cited

The judgment extensively referenced the case of HMRC v Cotter [2013] UKSC 69, a pivotal Supreme Court decision that clarified how claims for relief should be treated within tax returns. In Cotter, it was established that claims for employment loss relief do not alter the tax computation for the year in which the relief is claimed but rather affect subsequent years. This principle was instrumental in shaping the Court of Appeal's understanding of how such claims influence tax assessments.

Additionally, the decision drew upon earlier interpretations of the TMA 1970, especially concerning the definitions and requirements of discovery assessments and the concept of deliberate misstatements within tax documents. The Court of Appeal emphasized that for HMRC to successfully invoke section 29(1)(b) of the TMA, there must be a newly discovered insufficiency in the taxpayer's assessment, not merely an ongoing dispute.

Legal Reasoning

The Court meticulously dissected the statutory provisions of the TMA 1970, particularly focusing on section 29, which grants HMRC the authority to issue discovery assessments when an insufficiency in a taxpayer's assessment is identified. The key aspects evaluated were:

• Discovery Issue: Whether HMRC had indeed made a relevant discovery that Mr. Tooth's self-assessment was insufficient.
• Deliberateness Issue: Whether Mr. Tooth or his agents had deliberately caused the insufficiency in the tax assessment.

The Court found that HMRC did not present a compelling case that a new insufficiency had been discovered independent of the ongoing disputes and previous assessments. Moreover, regarding deliberateness, the evidence did not convincingly demonstrate that Mr. Tooth had intentionally misled HMRC to achieve a tax reduction.

The judgment underscored the necessity for HMRC to provide clear and substantive evidence when asserting that a taxpayer's assessment is insufficient and that such insufficiency was deliberately orchestrated. Mere assertions without robust factual backing were insufficient to uphold discovery assessments.

Impact

This judgment has profound implications for tax law and the administration of tax assessments in the UK. It reinforces the principle that HMRC must adhere to stringent standards when attempting to revisit and rectify past tax assessments. Specifically:

• Enhanced Protections for Taxpayers: Taxpayers are afforded greater protection against retrospective and unfounded assessments, ensuring that HMRC must present clear evidence of both insufficiency and deliberateness.
• Clarification of Deliberateness: The decision provides clarity on what constitutes deliberate misstatements in tax returns, emphasizing the need for explicit intent rather than inferred or circumstantial evidence.
• Guidance for HMRC: HMRC is now more constrained in its ability to use discovery assessments, requiring more rigorous substantiation to challenge taxpayers' self-assessments.

Future cases involving tax avoidance schemes and the validity of self-assessments will likely reference this judgment to determine the legitimacy of HMRC's corrective actions.

Complex Concepts Simplified

Discovery Assessment

A discovery assessment is an additional tax assessment that HMRC can issue if it identifies that a taxpayer's original assessment was insufficient. Under section 29 of the TMA 1970, HMRC must demonstrate that there has been a discovery of insufficiency in the assessment, and in certain cases, that this insufficiency was deliberately caused by the taxpayer.

Deliberate Inaccuracy

Deliberate inaccuracy refers to intentional misstatements or omissions in a tax return aimed at reducing tax liability. Under section 118(7) of the TMA 1970, if a loss of tax arises as a result of such deliberate inaccuracies in documents submitted to HMRC, it can lead to enhanced scrutiny and potential penalties.

TMA 1970 Section 29(1)(b)

This specific section empowers HMRC to make an assessment if they discover that an assessment to tax is or has become insufficient. However, this power is subject to conditions, including the necessity to prove that the insufficiency was deliberate under certain circumstances.

Romangate Scheme

The Romangate scheme refers to a tax avoidance strategy where taxpayers utilized employment-related losses to offset income from previous years, thereby reducing their tax liabilities. Such schemes often come under scrutiny for bypassing legitimate tax responsibilities.

Conclusion