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HMRC loses Tooth, but gains second bite at discovery


Published: 18 May 2021 Update History

The Supreme Court has ruled that there was no deliberate inaccuracy in an income tax return despite the taxpayer "fudging" the return as result of a technical issue with the software used to prepare it. However, it also confirmed that HMRC can make discovery assessments after initially deciding not to raise an enquiry.

On 14 May, the Supreme Court passed its judgement on HMRC v Tooth [2021] UKSC 17, finding for the respondent, Mr Tooth.

Mr Tooth entered into a tax avoidance scheme and attempted to claim an employment income loss as a result for the 2007/08 tax year.

Owing to problems with the HMRC-approved software he was using, he entered the loss in a different box on the return and used the white space on the return to explain the claim he was making.

While HMRC did review his return and concluded that the avoidance scheme he had entered into was not effective, it did not raise an enquiry into Mr Tooth’s return within the normal enquiry window.

Following retrospective legislation that confirmed the scheme Mr Tooth entered into was ineffective, HMRC raised a discovery assessment into his return.

Deliberate inaccuracy?

To make this assessment, HMRC had to demonstrate that an insufficiency of tax had been brought about carelessly or deliberately. HMRC claimed that there was a deliberate inaccuracy in the return which was the basis on which it was able to raise the assessment.

The Supreme Court held that there was no such inaccuracy in Mr Tooth’s return. This is not an entirely surprising result given that Mr Tooth had, in the Court’s words, “done his best” with an intractable online form.

The impact of this is that taxpayers can feel reassured that they should not be penalised for making returns to the best of their abilities provided it is clear what they are claiming and why.

Had the discovery become stale?

The Supreme Court nonetheless found that there had been a valid discovery, albeit of something that wasn’t a deliberate inaccuracy and was therefore made outside of the appropriate time limit.

In the preceding hearing, the Court of Appeal had found that, as HMRC had reviewed but not raised an enquiry into the return, despite believing that the avoidance scheme was not effective, this prevented HMRC from making a subsequent discovery assessment.

The Supreme Court held that, just because one inspector had looked at a return and decided not to enquire into it did not mean that another inspector could not subsequently make a discovery in respect of that return.

The press summary of the case stated: “There is no principle of ‘collective knowledge’: section 29(1) TMA 1970 focuses on the state of mind of the individual officer of the Revenue who makes the assessment; if an officer had already made a discovery, that must not be regarded as a discovery ‘once and for all’ by the Revenue such that other officers cannot make the same discovery in future”.

The discovery assessment raised after the retrospective legislation had been introduced was therefore valid in the eyes of the Supreme Court.

This means taxpayers cannot assume that valid assessments will not be subsequently raised on their returns after they have been reviewed and no enquiries have been raised within the standard enquiry window.

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