What do you normally do when you do not fully understand what is required on a form, including when completing a Tax Return form?
Most people would normally try and explain the position by writing a note on the form or enclosing a covering letter with additional information.
The case of Mr Tooth
In January 2009, Raymond Tooth ‘invested’ in a tax avoidance scheme and claimed an employment-related loss. He wanted to carry back this loss to the previous tax year and save tax due in the earlier year.
Mr Tooth’s advisers used HMRC approved Tax Return software to prepared his Tax Return for 2007-08. There was a deficiency in the Tax Return software. The loss could not be entered into the appropriate box on the Tax Return.
A detailed explanation of the problem was entered in the additional information section, known by accountants as the ‘white space’ named after the blank space available on a paper Tax Return. Mr Tooth’s advisers had even included the phrase ‘I assume you will open an enquiry’ in this section.
HMRC did not open a tax enquiry with the correct time period. Instead, in October 2014 they issued a discovery tax assessment to collect the extra tax. Discovery assessments are issued by HMRC when they find out new information that was not included on the original Tax Return. Of course, HMRC want not only the tax shortfall, but penalties and interest.
HMRC's view
Mr Tooth’s was heard by the First-tier Tribunal, the Upper Tribunal and the Court of Appeal. The legal argument looked at two main points.
Did HMRC have the right to make a discovery assessment? They had not opened a tax enquiry. A tax enquiry can only be opened where the Tax Return contained an inaccuracy, the inaccuracy resulted from carelessness or deliberate behaviour and the inaccuracy resulted in an insufficiency of tax.
Even assuming that HMRC had the power to issue a discovery tax assessment, had the passage of time made the discovery grow ‘stale’? HMRC took 5 years to issue their discovery assessment. HMRC should issue a discovery assessment when they newly become aware of the loss of tax.
What the courts said
The Court of Appeal stated that the Tax Return as a whole was not inaccurate, even though Mr Tooth had put the wrong information in the wrong section of the Tax Return and not used the correct Tax Return boxes.
The court agreed with Mr Tooth that a delay of 5 years by HMRC did not fit with being ‘newly aware’ of the previous disclosed tax issue and their right to issue a discovery assessment. The Court of Appeal therefore threw out the tax case appeal by HMRC. HMRC appealed to the Supreme Court.
To make a statement deliberately which subsequently turns out to be inaccurate is not the same as deliberate inaccuracy, absent either intent to deceive or recklessness.
The Supreme Court considered whether a Tax Return that contains an inaccuracy in one part should be considered as a whole, and especially any explanations or disclosure made in the additional information box.
They stated that ‘reading the Tax Return as a whole, Mr Tooth and his advisors did their best’ in dealing with the ‘online Tax Return form which did not appear to enable them to do’ what actually needed to do. In fact, the court said that Mr Tooth and his advisers had bent over backwards to provide HMRC with all the information they needed to open an enquiry.
It was therefore wrong for HMRC to say that Mr Tooth was ‘careless in completing his Tax Return’ and that it contained ‘deliberate inaccuracies’ i.e. the preconditions for HMRC to be able to issue a discovery assessment.
Lessons to be learned
The Supreme Court’s decision saved Mr Tooth £475,000 in tax. Arguably, he owed the tax, but didn’t complete the online Tax Return in such a way for the computer to automatically calculate the tax that he owed. He had however made full disclosure of his difficulties when completing the Tax Return in the additional information box.
The court stated that there was no justification for HMRC to issue a discovery assessment, as they had already been fully provided with the taxable income of Mr Tooth with the additional information section of the Tax Return.
HMRC has around two years from the end of the tax year to start a ‘normal’ tax enquiry and question the completeness and accuracy of a Tax Return. The Tax Return filing deadline is 31 January following the end of the tax year on 5 April. HMRC can enquire/investigate the Tax Return anytime up to the following 31 January after the filing deadline.
As an accountant, who has prepared hundreds of tax returns, I have used the additional information box on quite a number of occasions. I know from practical experience that unless HMRC opens a tax enquiry they rarely, if ever, read what is shown in the additional information ‘white space’ part of the Tax Return.
The highest court in the land has now confirmed what I have always said to my clients i.e. if you have any uncertainties when completing your Tax Return, and you cannot easily put a number, tick or cross in a box, because of those uncertainties, then making full disclosure should protect you, as a client, from HMRC if they do not actually read what you have told them.
I am sure that some of my clients, who have a bent towards linguistics rather than numbers, would rather explain away numerical information with words. This does not however give them a licence to ignore numbers!
Consider HMRC Fee Protection Insurance
Whilst Mr Tooth won his case, I do not know who actually paid for his legal and professional fees. This is a great example of where paying a relatively small amount for HMRC Fee Protection Insurance, through their accountant, can save a taxpayer dearly and gives them the funds to defend their interest.