UK Supreme Court: tax return not inaccurate if wrong box completed

The Supreme Court ruled that a discovery assessment made by HM Revenue & Customs (HMRC) in this particular case was invalid. However, the judges also said that a discovery assessment to recover underpaid tax would not be invalid because a large period of time has elapsed between the discovery of the underpayment of tax being made and the assessment being raised by HMRC, unless the assessment is beyond the legislative time limits.

Tax disputes expert Clara Boyd of Pinsent Masons, the law firm behind Out-Law, said: “It is good news for taxpayers in general that the Supreme Court has dismissed HMRC’s argument that a tax return could contain a deliberate inaccuracy, enabling HMRC to go back 20 years to assess tax, just because a software glitch meant the taxpayer had to disclose the information in the wrong box, even though the return contained a full explanation”.

“However, HMRC will be pleased that the Supreme Court's position is that there is no concept of staleness in relation to a discovery and that HMRC delays in raising an assessment after making a discovery do not invalidate the assessment. We have seen the staleness concept accepted by tribunals in a number of cases over the last few years to rule assessments invalid, even though it is not expressly set out in the legislation,” she said.

The case considered by the Supreme Court concerned Raymond Tooth, who had entered into a tax planning arrangement designed to generate employment-related losses. Pinsent Masons acted for Tooth in the case.

When Tooth's accountants completed his self-assessment return, the 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 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.

HMRC opened an enquiry under the wrong statutory provision. When it came to light that it had failed to protect its position, it issued a discovery assessment, alleging that the insufficiency in Tooth's return had been brought about deliberately, and relying on the 20 year period within which to make the assessment.

The Supreme Court decided that putting the information in the wrong box and providing an explanation in the 'white space' did not amount to an inaccuracy in the return. The judges said that even if it had amounted to an inaccuracy, it would not have been a deliberate inaccuracy.

"For there to be a deliberate inaccuracy in a document … there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so," Lord Briggs and Lord Sales said in the judgment.

When considering what amounts to an inaccuracy in a return, the judges rejected HMRC's narrow view that it was enough if a deliberate inaccuracy could be found somewhere in the document, interpreted on its own and without regard to the rest of the contents of the document, provided it had the causative effect of bringing about an insufficiency of tax.

The judges said: "It almost goes without saying that the meaning of particular words or phrases in a document of any kind is generally to be ascertained by a contextual approach, that is by appraising the critical passage in the light of its context as part of the document read as a whole. There is no reason in principle why the same should not be true of a tax return."

"In the ‘making tax digital’ era that taxpayers now find themselves in, this sensible, common-sense approach to how a tax return should be read and interpreted will be a welcome relief to taxpayers," said Ian Robotham, a tax disputes expert at Pinsent Masons.

As the judges decided that there was no inaccuracy in Tooth’s return, HMRC’s discovery assessment was not validly issued and its appeal was dismissed.

Previous decisions of the Court of Appeal and the tax tribunals had suggested that the concept of ‘staleness’ exists in relation to discovery assessments to recover unpaid tax, so that assessments would be invalid if there was a significant delay between an HMRC officer making a discovery that insufficient tax had been paid and the raising of the assessment. These cases had said that once a discovery had been made by one HMRC officer, another HMRC officer looking at the return later could not also make a valid discovery in relation to the same issue.

However, in their Supreme Court judgment, Lord Briggs and Lord Sales said: "In our judgment … there is no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time”.

“That is unsustainable as a matter of ordinary language and, further, to import such a notion of staleness would conflict with the statutory scheme. That sets out a series of limitation periods for the making of assessments to tax, each of them expressed in positive terms that an assessment ‘may be made at any time’ up to the stated time limit," they said.

They also said that other courts had been wrong to say that only one HMRC officer looking at a tax return could make a valid discovery.

"It is perfectly possible, as a matter of ordinary language, to speak of someone making a discovery for himself or herself even if it is something already known to others. The approach in the authorities supports this view," the judges said.

After a self-assessment tax return is filed, there is a period known as the ‘enquiry window’, during which HMRC can launch an enquiry into the return. For individuals, the enquiry window is 12 months after the return is filed, assuming it is filed on time. If HMRC has not opened an enquiry within this time, it can only recover unpaid tax relating to the return by issuing a discovery assessment.

HMRC can only make a discovery assessment if an HMRC officer 'discovers' an underpayment of tax and that underpayment is due to careless or deliberate behaviour by the taxpayer or their agent. Alternatively,

HMRC can make a discovery assessment if it discovers an underpayment and can show that at the time when an HMRC officer ceased to be entitled to open an enquiry into the return, or issued a closure notice in respect of an existing enquiry, 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.

The normal time limit for a discovery assessment is four years after the end of the year of assessment or six years in the case of carelessness. However, if the taxpayer's behaviour is deliberate, HMRC can go back 20 years.