In HMRC v Tooth [2019] EWCA Civ 826, the Court of Appeal clarified the conditions necessary for HMRC to raise conduct-based 'discovery' assessments.
Provided certain conditions are met, HMRC can raise discovery assessments into tax errors caused by a taxpayer's carelessness or deliberate behaviour, even after the normal enquiry time limit has expired.
The first condition is that HMRC must 'discover' an underpayment of tax that they could not reasonably have known about before the time limit expired. In Tooth, the Court of Appeal confirmed that only a new discovery can trigger a discovery assessment. The Court ruled that HMRC's discovery assessment was invalid because it had merely found a new reason for contending there was an underpayment.
This assists taxpayers and serves to remind HMRC officials that they may reach the point of having to issue an assessment before they would otherwise be ready to do so.
Whilst the above finding made the assessment invalid, the Court of Appeal still considered the second condition. The second condition is that HMRC must show the underpayment was caused by an inaccuracy in a document that was either careless or deliberate on the part of the taxpayer or their agent.
In this case, HMRC argued that there was 'deliberate' conduct on the part of the accountants, who had included an employment-related loss in the partnership profit section of Mr Tooth's self-assessment return. The accountants had used the white box on Mr Tooth's return to explain that a technical issue with the relevant software prevented access to the correct section. The Court of Appeal held by majority that this had led to an inaccuracy which was deliberate: the wrong box had been knowingly used, which had caused Mr Tooth's self-assessment to be insufficient. It did not matter that there was no intention to mislead HMRC.
This wide interpretation of 'deliberate' has already influenced the Tax Tribunals to the advantage of HMRC. For instance, in Leach v HMRC [2019] UKFTT 352, the Tribunal applied Tooth, holding that for 'deliberate conduct' all HMRC needs to show is that a taxpayer or agent knows that the return he is submitting contains an error, even when there is no intention to mislead.
Advisers will have to be very careful when completing tax returns in the future for fear of falling within the Court's view of what constitutes 'deliberate' conduct.