Supreme Court rules on what is "deliberate"

The Supreme Court has dismissed the Revenue's appeal in HMRC v Tooth [2021] UKSC 17, a case concerning whether a "discovery assessment" was validly made by HMRC.

Owing to a technical issue encountered when filing an electronic tax return, the taxpayer's advisers had been constrained to claim relief for an employment-related loss in the partnership pages of the return (rather than appropriate part of the return for such losses). In proceedings arising out of HMRC's decision to issue a discovery assessment (pursuant to s.29 of the Taxes Management Act 1970 ("TMA")) in connection with that loss relief claim, the issues between the parties were as follows:

1. Had HMRC "discover[ed]" an "insufficiency" within the meaning of s.29(1) TMA in 2014, notwithstanding that the improvisation in the taxpayer's return (and anomalous use of the partnership pages) had already been spotted by an HMRC officer in 2009 (the "Staleness Issue")?
2. Was any such insufficiency brought about as a result of a "deliberate inaccuracy in a document given to [HMRC]" for the purposes of s.29(4) TMA (read together with s.118(7) TMA) (the "Culpability Issue")?

In relation to the Staleness Issue, although the Court did not accept that the discovery assessment legislation itself prohibited an "in time" assessment from being issued after the relevant discovery ceased to be "fresh", it acknowledged that a decision to delay issuing an assessment (following a discovery) might be amenable to judicial review.  Indeed, it seems clear that a failure on HMRC's part to act expeditiously could still give rise to challenges grounded on procedural fairness (or natural justice), irrationality, and Article 6 of the European Convention on Human Rights, .

In relation to the Culpability Issue, taxpayers and their advisers will be relieved that the Supreme Court has overturned the decision of the Court of Appeal, and has determined that (for the purposes of s.29 TMA) "deliberate" conduct requires an "intention to mislead" (or, possibly, recklessness).  The perverse result of the Court of Appeal's decision (considered in greater detail here) had been that it was easier for HMRC to establish deliberate conduct (securing a 20 year window for issuing an assessment) than careless conduct (securing only a 6 year window).  The applicability of the Supreme Court's decision to other instances where tax legislation utilises the concept of "deliberate" behaviour is considered below.

The statutory framework

In summary, sections 29(1), (3) and (4) TMA empower HMRC to conduct a discovery assessment where:

• an HMRC officer "discover[s]" that an assessment is or has become "insufficient"; and
• that situation was "brought about carelessly or deliberately by the taxpayer or a person acting on his behalf".

Section 118(7) TMA further stipulates that:

"[…] a situation brought about deliberately by a person includes a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to Her Majesty's Revenue and Customs by or on behalf of that person."

The standard time limit for a discovery assessment is 4 years following the end of the relevant assessment year.  However, under s.36(1A) TMA, the limit is extended to 20 years where a loss of tax was brought about "deliberately" by the taxpayer.

The facts

The essential facts were as follows.  In January 2009, the taxpayer (Mr Tooth) signed up for a tax avoidance scheme, called the Romangate scheme.  The scheme was designed to generate an employment-related loss for the 2008-2009 tax year which could be carried back against income in 2007-2008.  Mr Tooth sought to carry back a loss of £1,185,987.

Mr Tooth's tax advisers filed his self-assessment tax return using the HMRC-approved IRIS software.  He was advised that the loss he sought to claim was to be entered in "box 3" on the "Additional Information" page of the form.  However, a technical issue prevented "box 3" from being accessed.  Upon enquiry, Mr Tooth's tax advisers were told to enter the loss in some other box, and to explain what they had done in the "white space" on the form.  So they did.  They stated in the form that Mr Tooth (i) was seeking to claim relief for an employment-related loss, and (ii) had recorded this in the partnership supplementary pages.

Unbeknownst to Mr Tooth and his tax advisers, however, their use of the partnership pages instead of "box 3" made it such that the software generated a reduction instead of a tax credit.  This resulted in Mr Tooth obtaining an unintended timing advantage, but with no overall difference in his account with HMRC.

Eventually, the Romangate scheme turned out to be ineffective by virtue of retroactive legislation passed in 2013.  In October 2014, HMRC sought to issue a discovery assessment.  HMRC took the position that the requirements under s.29(1), (3), and (4) TMA for a discovery assessment were met, because (i) HMRC had made a qualifying discovery of an anomaly in Mr Tooth's tax assessment (ii) which had arisen "as a result of a deliberate inaccuracy" in his return.

The Supreme Court's reasoning

The issues were treated differently at each stage of the proceedings.

• The FTT found against HMRC, holding that, whilst a discovery had been made, the requirements for a discovery assessment were not met because the insufficiency in Mr Tooth's assessment had not been caused deliberately.
• The UT dismissed HMRC's appeal on grounds that there was no inaccuracy and, in any event, no extant discovery as of 2014 because any discovery would have been made in 2009 and would have become "stale".
• The Court of Appeal upheld the UT's decision, but held instead that, although there was no extant discovery, there was a deliberate inaccuracy.

When it finally reached the Supreme Court, Lord Briggs and Lord Sales JJSC concluded that there was no deliberate inaccuracy, but added for completeness that a "discovery" was made in 2014.  The Court made the following essential points.

(i) "Deliberate inaccuracy" denotes an intention to mislead

First, the Court clarified when an insufficiency would be brought about deliberately within the meaning of s.29(4) read with s.118(7) TMA.

Lord Briggs and Lord Sales JJSC noted that there was an apparent discrepancy between the language of both sections:

• s.29(4) TMA, read on its own, suggested that the "deliberateness condition" would be met only where the taxpayer intends to bring about a "situation" in which its assessment is "insufficient" (i.e. to have deliberately under-declared tax).
• s.118(7) TMA, however, indicated that the "deliberateness condition" would be satisfied as long the taxpayer has intentionally stated something inaccurate in its return, regardless of whether the taxpayer also intends that any insufficiency should thereby be occasioned.

The Court's solution was to hold that s.118(7) was akin to "a deeming provision in a definition section of a statute" that amplified the meaning of a more general expression used elsewhere.  Thus, the requisite deliberateness only needed to pertain to the making of the inaccuracy in the assessment.  The taxpayer need not have further intended to under-declare its tax.

Lord Briggs and Lord Sales JJSC acknowledged that such a construction had the result that the deliberateness condition would be satisfied by conduct "fall[ing] well short of a deliberate under-declaration of tax, so that it might be hard to describe such conduct as fraudulent".  However, the language of s.118(7) was clear, and the courts were obliged to apply it.

The Court then rejected HMRC's argument that s.118(7) merely required that the statement in the document constituting the inaccuracy had been intentionally made, irrespective of whether its inaccuracy had been intended.  Accordingly, the phrase "deliberate inaccuracy" implied that the statement's inaccuracy had to be deliberate as well, not merely its making.  In other words:

"[…] for there to be a deliberate inaccuracy in a document within the meaning of section 118(7)  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."

(ii) Inaccuracy "in a document" means an inaccuracy not neutralised by a contextual reading

Second, the Court explained when an inaccuracy would be found "in a document" under s.118(7) TMA.

A majority of the Court of Appeal below had taken the view that an "inaccuracy in a document given to [HMRC]" would exist as long as any part of the document was inaccurate, even if a holistic reading of the document in context neutralised that inaccuracy.  Males LJ had reasoned that an inaccuracy in one part of a document that was corrected in another part was still an inaccuracy "in" a document.

The Supreme Court disagreed.  It reasoned that an inaccuracy "in a document" denoted an inaccuracy in a document "read as a whole".  Accordingly, this was because "the meaning of particular words or phrases in a document of any kind [was] generally to be ascertained by a contextual approach", and tax returns were no exception to that truism.  The Court rejected HMRC's argument that "[c]omputers […] do not do contextual interpretation, but look at each part of, or box in, the return separately", noting that a document could not have a "different meaning depending upon whether it is read by a human being or by a computer".

Applying these conclusions, the Court dismissed the appeal on the ground that Mr Tooth's return did not contain an inaccuracy, deliberate or otherwise.  Although a "tunnel-vision[ed]" reading of some of the boxes in Mr Tooth's return could suggest that he was falsely claiming to have incurred a partnership-related loss, a closer perusal of Mr Tooth's accompanying explanations would have revealed the position.  Moreover, Mr Tooth's return did display "the correct overall figure at which he self-assessed his liability to tax".

(iii) The concept of a "discovery" under s.29(1) TMA

Third, the Court addressed whether (i) a discovery could be made by an officer even if it had previously been made by a different individual, and (ii) a previous discovery could ever become 'stale'.

The UT and Court of Appeal had held that the discovery condition under s.29(1) TMA was not fulfilled in Mr Tooth's case because the relevant discovery had occurred back in 2009.  Accordingly, (i) such a discovery had become "stale" as of 2014, and (ii) there could not be a new discovery in 2014.

The Supreme Court disagreed with both conclusions.

As to the first, the Court held that there was (i) "no place for the idea that a discovery which qualifies as such should cease to do so by the passage of time" and (ii) "no basis for implication of an additional and stricter time restriction" than the time limits expressly set out in the TMA.  Accordingly, to introduce a concept of staleness would contradict the statutory scheme under TMA, which had already contained limitation periods for discovery assessments.

Regarding the second, the Court clarified that a discovery within the meaning of s.29(1) could occur where an HMRC officer reads a self-assessment and forms the view that it is too low.  That a different HMRC officer had made the same discovery before did not preclude a new one from being made, since (i) there was no principle of "collective knowledge" between different HMRC officers and (ii) it was perfectly possible to speak of someone making a discovery of a thing already known to others.

Comment

The Supreme Court's decision is likely to be met with a mixed reception.  On the one hand, its reasoning on the meaning of "deliberate" is likely to be welcomed by taxpayers. On the other, its ruling that no "staleness" bar exists for discovery assessments under s.29 TMA might be welcomed by HMRC instead.  In any event, there is now at least more clarity for both.

That said, three points are worth highlighting.

First, whilst the Court's reasoning is, in strict legal terms, specific to the provisions of the TMA, it is likely that it would be applied in other contexts involving very similar concepts, such as such as s.77 of the Value Added Taxes Act 1994 (cf. Leach v The Commissioners for Her Majesty's Revenue and Customs [2019] UKFTT 0352 (TC) at [97]-[98]).

By contrast, it is less clear whether the Court's guidance will be transposed to provisions creating tax penalties, such as Schedule 24 of the Finance Act 2007, for which a deliberate inaccuracy is made when "a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document" (see Auxilium Project Management v HMRC [2016] UKFTT 249 (TC) at [63]).  It might be recalled that the FTT in Leach v The Commissioners for Her Majesty's Revenue and Customs [2019] UKFTT 0352 (TC) at [100]-[102] had previously answered this question in the negative when considering the Court of Appeal's approach in Tooth, reasoning that an intention to mislead was essential to the "behaviour-based approach" to penalties envisaged in Schedule 24.  At first glance, it might be thought that the Supreme Court's formulation, being also "behaviour-based", is more compatible with Schedule 24 than the Court of Appeal's, and so the question might be revisited in the future.  Nevertheless, it should be noted that the Auxilium and Tooth formulations still differ slightly in that the latter does not necessarily require an intention that HMRC should rely on the inaccuracy made, but simply that the document should be inaccurate.

Second, it is noteworthy that the Court refrained from addressing Floyd LJ's obiter suggestion below that the requisite test of causation contemplated by the words "arises as a result" in s.118(7) involved a simple counterfactual inquiry whether the insufficiency would have obtained "but for" the inaccuracy.  This leaves open the possibility that satisfaction of the "but for" test, which is "a minimum threshold test of causation" in other contexts (see The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd [2021] UKSC 1 at [181]) is necessary but not sufficient.  The point remains unsettled for now.

Finally, there is some ambiguity in the Court's observation that it was "unnecessary in this context" to decide whether Mr Tooth and his tax advisers had "no alternative" but to file his self-assessment return in the precise way they did, "a point briefly but inconclusively argued in this court".  It might be queried it would ever be apt for such a question to be asked if it is not alleged that the inaccuracy was carelessly made.  Certainly, the Supreme Court's clarification that a deliberate inaccuracy (generally) denotes an intention to mislead suggests that it will be legally irrelevant whether the taxpayer could have done better, barring the unusual case where a taxpayer's failure to do better affords an inference that the taxpayer intended to mislead.