In January 2009 the taxpayer filed his self-assessment tax return for 2007–2008 online, using software approved by the revenue. He had taken part in a tax avoidance scheme and wanted to claim a resulting employment-related loss to reduce his income tax liability. However, due to a technical software issue, he was unable to enter the loss as an employment-related loss on the online form. On inquiry, the software engineers advised him to enter the loss in some other box and explain what he had done in one of the spaces included in the form for additional information. He entered the loss from the scheme as a partnership loss and explained in the adjacent space that it was in fact an employment-related loss. The form automatically totalled the tax due and he declared that he was entitled to a repayment of income tax. The revenue officers dealing with his return in 2009 regarded it as understating his true tax liability, because they considered that the tax avoidance scheme was ineffective, but they did not open an inquiry into his return. Following retrospective legislation which confirmed that the scheme was ineffective, an officer of the revenue issued a discovery assessment under section 29 of the Taxes Management Act 1970 in October 2014 on the basis that the insufficiency of tax in the return was “brought about … deliberately” by the taxpayer, within section 29(4), relying on the 20-year period within which to make that assessment. Under section 118(7) an insufficiency of tax “brought about … deliberately” included an insufficiency that arose as a result of a “deliberate inaccuracy in a document”. The taxpayer appealed against the discovery assessment, contending that the revenue officer had not made the “discovery” in 2014, as the revenue had had collective knowledge of the situation since other officers had first considered his return in 2009, and denying that the return contained an inaccuracy, let alone one which was deliberate. The First-tier Tribunal allowed the taxpayer’s appeal, holding that there was no deliberate inaccuracy in the tax return, although it accepted the revenue’s argument that the discovery had been validly made in October 2014. The Upper Tribunal dismissed the revenue’s appeal, ruling in favour of the taxpayer on both issues. The Court of Appeal dismissed the revenue’s appeal, holding that there had not been a requisite discovery but, by a majority, it accepted that the return had contained a deliberate inaccuracy.
On the revenue’s appeal—
Held, appeal dismissed. (1) The effect of the clear and unambiguous language of section 118(7) of the Taxes Management Act 1970 was that where an insufficiency in tax was brought about due to an inaccuracy in a document given to the revenue, section 29(4) was fulfilled if the inaccuracy was deliberate, even if the taxpayer did not deliberately under-declare tax. However, for there to be a “deliberate inaccuracy” in a document within the meaning of section 118(7), there had to be an intention to mislead the revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, recklessness as to whether it would do so, rather than merely a deliberate statement which was inaccurate. In considering whether there was an inaccuracy “in a document” within section 118(7), there was no reason to depart from the usual principle of interpreting each relevant part of the document by reference to its place in the context of the document as a whole. The fact that the revenue chose to use a computer to read online tax returns initially could not alter their meaning. Accordingly, applying that approach to the facts, there was no inaccuracy in the taxpayer’s tax return, read as a whole, and, even if there had been, it was not deliberate (paras 37–40, 42–59, 87).
(2) However, whether there had been a “discovery” for the purposes of section 29 of the Taxes Management Act 1970 depended upon the state of mind of the individual officer of the revenue who decided to make the assessment. For those purposes, there was no concept of the revenue having collective knowledge, such that if one officer made a discovery other officers could not subsequently make the same discovery for themselves and issue a discovery assessment. Further, a discovery did not lose its quality as such simply by the passage of time. There were a number of protections for the taxpayer in relation to exposure to a discovery assessment, including the conditions that had to be satisfied by the revenue in section 29, the statutory time limits and the possibility of obtaining relief in judicial review proceedings against any abuse of power. Accordingly, the revenue did make a qualifying discovery in October 2014 (paras 64–87).
Hui Ling McCarthy QC and John Brinsmead-Stockham (instructed by Solicitor, Revenue and Customs) for the revenue.
Julian Ghosh QC and Charles Bradley (instructed by Pinsent Masons LLP) for the taxpayer.