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Tooth – Court of Appeal confirms discovery assessment was invalid

05 June 2019

In HMRC v Tooth [2019] EWCA Civ 826, the Court of Appeal has held that an assessment, issued pursuant to section 29, Taxes Management Act 1970 (TMA), was invalid.


Mr Raymond Tooth (the taxpayer) participated in a tax planning arrangement known as 'Romangate', which was designed to reduce his income tax liability for 2007/08.  The arrangement was intended to produce an income tax loss in 2008/09 which could be offset against his 2007/08 liability. 

The taxpayer submitted his self-assessment return for 2007/08 and sought to reduce his income tax liability by carrying back employment-related losses generated in 2008/09. As the return did not contain a specific box for recording such losses, he entered them on the partnership pages of the return together with an explanation in the "white space" that the loss being claimed was an employment loss, not a partnership loss. 

Where a tax return is filed on time, section 9A, TMA, allows HMRC 12 months after the return is filed to open an enquiry. Schedule 1A, TMA, enables HMRC to open an enquiry into a claim which is not included within a return.   

In August 2009, HMRC informed the taxpayer that it had begun an enquiry into the loss relief claim under Schedule 1A, and that it did not intend to give effect to any credit for the loss claimed until its enquiry was completed. The taxpayer disputed that Schedule 1A could be used by HMRC to investigate his claim and the parties then awaited the decision of the Supreme Court in HMRC v Cotter [2013] UKSC 69. 

Following the Cotter decision, HMRC wrote to the taxpayer confirming  that income tax was overdue for 2007/08 and rejecting his claim to offset the employment losses from the Romangate arrangements against his other income. The taxpayer maintained his challenge to HMRC's use of its powers under Schedule 1A.  

In October 2014, HMRC issued an assessment to the taxpayer pursuant to section 29, TMA, for 2007/08, claiming that the taxpayer's return was inaccurate and that the mistake was deliberate. As HMRC claimed deliberateness, HMRC relied on the 20 year time limit for raising a discovery assessment pursuant to section 36(1A), TMA. 

The taxpayer appealed to the First-tier Tribunal (FTT). 

FTT decision

The appeal was allowed.

The taxpayer argued that HMRC had not made a 'discovery' and the assessment was out of time because there was no deliberate inaccuracy.   

Whilst the FTT acknowledged that HMRC had made a 'discovery', it held that there was no deliberate conduct and as such, section 29(4), TMA, was not satisfied and the assessment was invalid.

HMRC appealed to the Upper Tribunal (UT). 

UT decision

The appeal was dismissed.

The UT held that there was no inaccuracy in the return.  Although the entry on the partnership pages of the return was inaccurate, the taxpayer had given full white space disclosure to explain the position he was taking.  The UT concluded that, looking at the return as a whole, the approach taken by the taxpayer did not constitute an inaccuracy and even if there had been inaccuracies in the return, these were not deliberate as the taxpayer had taken steps to draw them to the attention of HMRC. 

Although the UT's decision on inaccuracy was enough to decide the matter, it considered the arguments regarding discovery.

The UT was of the view that any discovery was made in 2009, when HMRC knew all the facts and it had first raised a challenge.  As such, if a discovery had been made, the UT concluded it had become "stale" by the time HMRC issued the assessment in October 2014. 

HMRC appealed. 

Court of Appeal judgment 

The appeal was dismissed. 

There were two main issues before the Court of Appeal:
(i) whether there had been a discovery; and if there had been
(ii) whether the taxpayer had deliberately brought about a situation where an assessment to tax was insufficient.

(i) Was there a discovery?

Before the Court of Appeal, HMRC appear to have avoided the staleness issue by arguing that it made a discovery after receiving a letter from the taxpayer's accountants in March 2014, informing it that following the Cotter case HMRC should have opened an enquiry under section 9A, TMA. It was only then that HMRC discovered that the taxpayer's self-assessment was incorrect.  

The Court applied Charlton & Others v RCC [2012] UKUT 770 (TCC) and confirmed that for there to be a discovery of insufficient tax, for the purpose of section 29(1)(b), TMA, HMRC must have newly discovered that an assessment to tax was insufficient, it was not enough that HMRC had found a new reason for contending that an assessment was insufficient, or decided to invoke a different mechanism for addressing an insufficiency in an assessment which it had previously concluded was present. HMRC had not established that there had been a discovery and the assessment was therefore invalid.

(ii) Was there a deliberate inaccuracy

Despite finding that the discovery assessment was invalid, the Court considered the deliberate inaccuracy issue. 

HMRC relied on section 118(7), TMA, which provides that references to a loss of tax brought about deliberately, include a loss of tax that arises as a result of deliberate inaccuracy in a document provided to HMRC. It was contended that there is a distinction between an inaccuracy in a document and an inaccurate document. Accordingly, as the losses were included in the partnership pages of the taxpayer's return, this constituted an inaccuracy in the taxpayer's return.

Floyd LJ dismissed this contention. In his view, the individual parts of a document had to be read in the context of the document as a whole. He therefore concluded that there was no inaccuracy in the taxpayer's return. It was not sufficient that the taxpayer had included his employment-related losses in the wrong box, as he had explained what he had done elsewhere in his return.

However, Patten LJ and Males LJ disagreed with this analysis. In their view, there was an inaccuracy 'in' a document even though the inaccuracy was corrected elsewhere in the taxpayer's return.

All of their Lordships agreed that if there was an inaccuracy, it was deliberate.  The Court said that once a deliberate inaccuracy was established, no further enquiry about intention was required. The incorrect insertion of the losses in the partnership boxes in the return, rather than in the employment boxes in the return, was a deliberate inaccuracy; the fact that the taxpayer lacked intention to provide an inaccurate return was irrelevant.   


Although the issue of 'staleness' was not considered by the Court of Appeal as HMRC's case before that Court was that the relevant 'discovery' was made and the assessment issued, in 2014, the Court approved the UT's comments in HMRC v Charlton [2012] UKUT 770 (TCC), that once a discovery has been made by HMRC an assessment under section 29, TMA, must be made within a reasonable period of time. 

Due to the way HMRC pleaded its case before the Court of Appeal,  the decision does not directly address the issue of staleness in the way many practitioners had hoped it would.  However, in approving  Charlton, the concept of staleness has been impliedly approved by the Court of Appeal.  It is to be hoped that the Court of Appeal will provide further guidance on the important principle of staleness when it delivers its judgment in the appeal from the UT in Beagles v HMRC [2018] UKUT 380 (TCC), which is due to be heard later this year. 

The Court's obiter comments in relation to what constitutes a deliberate inaccuracy are unhelpful for taxpayers.  The deliberate inaccuracy in this case was essentially caused by a software failure, yet in trying to ensure that HMRC had all the relevant information required to make his return accurate, the taxpayer was deemed to have submitted a deliberately inaccurate return. It would appear that a 'white space' disclosure in a return cannot be relied upon by a taxpayer to remedy an 'inaccuracy' elsewhere in the return.     

A copy of the judgment can be viewed here

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