The Supreme Court has ruled that HMRC cannot recover tax from an individual who took part in a failed tax scheme as it was out of time to raise the assessment. What’s the full story?
In HMRC v Tooth [2021] UKSC 17, the conditions that need to be met before HMRC can raise a “discovery assessment” were considered. For it to be valid, the discovery must be of something that was not provided at the time the return was made. The standard time limit is four years after the end of the tax year the assessment relates to. This is extended to six years if the loss of tax was due to “careless” behaviour, and 20 years if it was due to deliberate behaviour.
By the time this case got to the Supreme Court, there were two key questions in point. Firstly, did the fact that the taxpayer entered the right figure in the wrong box in the return constitute a “deliberate” inaccuracy? If so, the time limit for the assessment would be 20 years, not six. Secondly, was the “discovery” legitimate, given that HMRC had formed a view that the scheme did not work back in 2009? On the second point, the Court held that the fact that an opinion had been formed in 2009 did not prevent a discovery later on. However, the time limit was the crucial point in this case. The Court held that putting correct figures in the wrong box with a full explanation could not be a “deliberate error”. The correct time limit was therefore six years, not 20 and HMRC’s appeal was dismissed because the assessment had been raised after six years had elapsed.
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