In Raymond Tooth v HMRC [2016] TC 05452 the First Tier Tribunal (FTT) found that the extended discovery assessment time limit did not apply as the taxpayer’s deliberate error did not directly bring about the loss of tax. Spoiler alert: this case has been subject to various appeals, and was decided in favour of the taxpayer by the Supreme Court in 2021.

The normal time limit for a discovery assessment is 4 years, though this can be extended to 6 years where loss of tax is due to careless behaviour, or 20 years where behaviour is deliberate.

  • The taxpayer had taken part in a tax avoidance scheme intended to generate an employment loss in 2008/09 which could be carried back to 2007/08.
  • Due to software issues the taxpayer’s accountant could not follow the disclosure in the 2007/08 return recommended by the scheme promoter. Instead he included the loss on the partnership pages of the return together with white space disclosures.
  • Following the Supreme Court’s decision on a similar scheme, HMRC issued a discovery assessment in 2014.

Although the normal 4 year time limit had passed at this time, HMRC claimed they could go back up to 20 years as the taxpayer had deliberately entered the loss on the wrong part of his return.

The FTT disagreed, finding that:

  • HMRC had made a discovery: it was necessary to consider the position of the assessing officer and not HMRC’s collective knowledge.
  • For HMRC to go back 20 years there needed to be a direct causal link between the taxpayer’s deliberate action and the loss of tax.
  • Although the taxpayer had deliberately included the loss in the wrong part of the return this action did not itself bring about the loss of tax, meaning HMRC were out of time to make the assessment.

The taxpayer’s appeal was therefore allowed and the discovery assessment overturned.

Although this is a decision of the FTT and so sets no precidents, the issue of careless v. deliberate taxpayer behaviour in putting the right figures in the wrong boxes (or even using the wrong type of tax return) is something that comes up from time to time in discovery and penalty cases. 

Judge John Brooks says (para 56 of the decision):

"The deliberate (or indeed careless) conduct necessary to enable the issue of a discovery assessment and extend the time limits for doing so must involve more than the completion of a tax return which, in itself, is a deliberate act. As a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between “careless” and “deliberate” rendering otiose the necessity for the different conduct related time limits in s 36 TMA. Mr Vallat’s [HMRC's counsel] attempt to argue otherwise, saying that if the wrong figures were entered in the right boxes it might be careless but if the right figures were entered in the wrong boxes it would be deliberate, was somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about “playing all the notes, but not necessarily in the right order.”


FTT decision: Raymond Tooth v HMRC [2016] TC 05452

Our guides:

Discovery assessment and time limits

Penalties: Error in a return or document.

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