Taxpayers usually want certainty in their tax affairs whereas HMRC wants to assess additional tax if it considers more is due. HMRC is able to issue assessments for extra tax up to 20 years after the end of a tax year or accounting period if it discovers that the taxpayer’s return was incorrect or too little tax was assessed previously. This ‘discovery power’ is subject to criteria in the legislation which limit when the power can be used.
The Supreme Court’s decision in HMRC v Tooth [2021] UKSC 17 is welcome as it clarifies one situation in which HMRC sought use the 20 year time limit on the basis that it considered Mr Tooth’s return contained a ‘deliberate inaccuracy’. Mr Tooth used a tax avoidance arrangement, which he believed resulted in a loss. His agent included the loss on his tax return, albeit in a different box due to issues with their software, which they explained in a note in the Additional Information section. HMRC thought the arrangement was ineffective but did not enquire into the return within the usual enquiry window. Instead, many years later following another Court decision, HMRC issued a discovery assessment.
The Supreme Court decided that this was incorrect. Mr Tooth understood what his agents did forcing the entries on his tax return and the explanations provided. He thought that overall, his tax return was correct and had no intention of submitting an incorrect return. Rather than focusing on the one box containing the loss figure, as HMRC contended, the return had to be read as a whole document. Overall, it did not contain the ‘deliberate inaccuracy’ necessary for HMRC to use its extended time limits.
However, the Court also considered another technical point. The Court of Appeal previously accepted that if an HMRC officer discovered the ‘under assessment’ of tax then they needed to issue the assessment before that discovery ceased to be ‘new’. Several cases sought to use this to limit HMRC’s ability to assess tax it considered was due, even within the statutory assessment time limits. The Supreme Court decided that this approach is incorrect. It confirmed that the only temporal limitation on the issue of discovery assessments are the 4, 6, 12 and 20 year time limits, regardless of when HMRC realises the taxpayer should pay more tax.
HMRC’s power to issue assessments many years after taxpayers receive income, profits and gains is one of the key elements in its approach to closing the tax gap. It is an important element of tax disclosures and investigations and careful analysis of the reasons why any mistake arises is crucial to determining how many years’ tax is legally due. We encourage any taxpayer who needs to bring their tax affairs up to date or resolve an HMRC investigation to contact BDO’s Tax Dispute Resolution team for advice.
Read our recent article from Tax Journal that summarises what advisers should do now following the decision.
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