The case concerned Raymond Tooth, who entered into the 'Romangate' tax planning scheme, designed to generate employment-related losses which could be set off against income in the previous tax year.
When Tooth's accountants completed his 2007-2008 self-assessment return, the HMRC-approved software did not enable them to access the box within which they had been advised to record the losses, due to a technical issue. They recorded the losses made in 2008-2009 in the partnership pages and included wording in the 'white space' of the return, making it clear that the losses were employment losses and not partnership losses. The wording said that Tooth's interpretation of tax law may be at variance with that of HMRC and flagged the expectation that HMRC would open an enquiry into the return.
Following the filing of the return, the government announced legislation that meant the scheme did not work.
In August 2009 HMRC opened an enquiry into Tooth's loss claim. However it opened the enquiry under a provision which applies only in relation to claims which are not included in a return. In 2013 the Supreme Court decided in another case that where the taxpayer had calculated his tax liability in the return, as Tooth had, an assessment should be opened under another statutory provision.
By this time the time limit to open an enquiry under the correct provision had long since expired and the only way that HMRC could assess Tooth to tax in respect of the failed scheme was to open a 'discovery assessment'. This enables HMRC to go back four years, or if it can show careless conduct six years. If it can show deliberate conduct it can go back 20 years to assess tax.
HMRC can only make a discovery assessment if it 'discovers' an underpayment of tax. It also has to show that the underpayment is due to careless or deliberate behaviour by the taxpayer or their agent or that at the time when an HMRC officer ceased to be entitled to open an enquiry into the return the officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax. In October 2014 HMRC issued a discovery assessment alleging that Tooth's return contained a deliberate inaccuracy.