VAT assessments: meaning of 'deliberate'

• First case to apply Court of Appeal judgment in HMRC v Tooth
• Tooth analysis of 'deliberate' can apply to time limits for VAT assessments
• 'Deliberate' penalties cannot be issued on the basis of purely mechanical errors

Following the Court of Appeal's recent decision in HMRC v Tooth [2019] EWCA Civ 828 (Tooth), the first case to apply that decision has now been published by the First-tier Tax Tribunal (FTT). Perhaps surprisingly, rather than being a discovery assessment case, Leach v HMRC [2019] UKFTT 352 (TC) considers the applicability of the analysis of 'deliberate' adopted in Tooth to the time limits for making a VAT assessment and behaviour-based penalties in the context of VAT.

HMRC raised an assessment to recover overpaid VAT and issued a penalty on the basis that Mr Leach's behaviour had been 'deliberate and concealed'. Mr Leach had made claims to recover input tax but had destroyed all relevant documents relating to his claims. Following a HMRC officer's visit to his premises, Mr Leach continued to file VAT returns, but retained the evidence to support the input tax figures.  However, the input VAT claimed in those subsequent returns dropped significantly, leading HMRC to raise assessments for recovery of overpaid VAT in the earlier periods.

Extended time limits allow HMRC to make a VAT assessment within 20 years of the end of the relevant accounting period where the loss of tax has been 'brought about deliberately'. For these purposes, a reference to a loss of tax 'brought about deliberately' includes a loss that arises as a result of a deliberate inaccuracy in a document submitted to HMRC.

In considering whether the tax loss had been 'brought about deliberately' by Mr Leach, the FTT considered whether the analysis of 'deliberate' adopted by the Court of Appeal in the recent Tooth judgment could be applied to VAT assessments.

In Tooth, the Court of Appeal considered whether a discovery assessment in respect of a self-assessment tax return could be raised on the basis that the loss of tax had been 'brought about...deliberately' therefore resulting in an extended assessment time limit of 20 years. As a result of a software glitch Mr Tooth had included information in his online tax return in the incorrect box, although he had explained the reasons in the 'white space' on the return.

The Court of Appeal decided that the discovery assessment was invalid on the basis that HMRC had not shown that it had made a 'discovery'. The Court of Appeal did, however, go on to consider whether the tax loss had been brought about deliberately. The majority found that in knowingly utilising the wrong box in his tax return, Mr Tooth had deliberately brought about the loss of tax. Although the return may not be inaccurate when read as a whole, where the document is to be read by a computer, inputting information into the incorrect box caused there to be an insufficiency of tax in the return.

The judgment in Tooth was not binding on the FTT, both because it related to different statutory provisions and because the comments made in respect of the meaning of 'deliberate' were made in passing and did not form a necessary part of the court's decision. The FTT nevertheless found that the same analysis could be applied when considering whether a VAT assessment had been validly issued within the relevant time limits. In particular, the FTT noted that both the discovery assessment provisions and the VAT provisions adopt almost identical wording in respect of when a loss of tax can be brought about deliberately as a result of a deliberate inaccuracy made in documentation provided to HMRC. In addition, VAT returns, similarly to self-assessment returns, are read by computers.  

The FTT took a different approach, however, in respect of the penalty HMRC issued, which had been calculated on the basis that Mr Leach's behaviour was 'deliberate and concealed'. The FTT found that the Tooth analysis of 'deliberate' was too wide for penalty purposes and that 'deliberate' cannot extend to purely mechanical errors in circumstances where the level of the penalty is based on the taxpayer's behaviour. Instead the FTT preferred the existing approach adopted in case law on behaviour-based penalties, which require that the taxpayer must have knowingly provided to HMRC a document that contains an error with the intention that HMRC should rely upon it as an inaccurate document.

Lauren Redhead and Clara Boyd are tax disputes experts at Pinsent Masons, the law firm behind Out-Law.com. The firm acted for the taxpayer in HMRC v Tooth in the Court of Appeal.