Supreme Court refuses HMRC appeal seeking over £475,000 in unpaid tax from divorce lawyer

HMRC claimed that the respondent, Raymond Tooth, who had previously acted for clients including the ex-wife of Jude Law, Sadie Frost, owed them unpaid taxes from the tax year 2007-8, relying on section 29 of the Taxes Management Act 1970 allowing them to make a discovery assessment where a past tax assessment was discovered to be insufficient. The respondent challenged their ability to do so on the basis that he had not deliberately understated his tax liability.

The appeal was heard by the President of the Supreme Court, Lord Reed, sitting with Lord Briggs, Lord Sales, Lord Leggatt, and Lord Burrows. The appellant was represented by Hui Ling McCarthy QC and John Brinsmead-Stockham, and the respondent by Julian Ghosh QC and Charles Bradley.

Technical error

The respondent had been a participant in the Romangate tax avoidance scheme, which he used to generate an employment-related loss he could use to offset his tax liability. His tax advisors, Grunberg & Co, filled out an online tax return for that tax year in 2009 using IRIS software approved by HMRC were unable to input the loss in the required field. They were advised by an IRIS engineer that it was a technical issue and to enter the loss in another box and use “white space” at the end of the form to explain this.

Grunberg entered the employment loss in a box for partnership income, resulting in the form declaring that the respondent was entitled to a repayment of income tax for the year 2007-8. HMRC believed that the respondent had understated his tax liability for that year by over £475,000. The scheme was deemed ineffective at the end of 2013 with the aid of retrospective legislation, but HMRC never opened an enquiry into the respondent’s return in the mistaken belief that they had protected their position using a different statutory power that turned out to be ineffective.

HMRC later issued a discovery assessment into the respondent’s return in October 2014, which was appealed to the First-tier Tribunal. Mr Tooth denied that his return had contained a deliberate inaccuracy, which the FtT accepted and therefore allowed the appeal. HMRC then appealed to the Upper Tribunal, which found there had been no discovery as necessary to allow a fresh assessment.

The UT’s decision was appealed to the Court of Appeal, which agreed with the UT on the absence of a qualifying discovery but found, by a majority, that there had been a deliberate inaccuracy in Mr Tooth’s return. HMRC then appealed to the Supreme Court seeking restore the FtT’s decision that there was a discovery and to uphold the judgment of the majority in the Court of Appeal that there was a deliberate inaccuracy in Mr Tooth’s return.

Counsel for HMRC submitted that the level of misconduct required to allow for a discovery assessment was lowered by section 118(7) of the 1970 Act to include deliberate inaccuracy in a document submitted to HMRC. In response, it was submitted for Mr Tooth that he had not brought about any inaccuracy in his self-assessment deliberately.

Cannot alter the meaning

A joint opinion was written by Lord Briggs and Lord Sales, with whom the other three judges agreed. Considering whether Mr Tooth had made a deliberate inaccuracy in terms of section 29(4) of the 1970 Act they said: “Section 29(4) read on its own suggests that to fall foul of the first condition (otherwise than by carelessness) the taxpayer must deliberately have brought about the ‘situation’ mentioned in section 29(1), which in this case is that his self-assessment was insufficient.”

Addressing whether it was relevant that the form was interpreted by a computer, they added: “A document written in the English language cannot have a different meaning depending upon whether it is read by a human being or by a computer. A choice by the recipient of such a document to have it machine-read cannot alter its meaning.”

They continued: “If [HMRC] sensibly include ample white spaces in their approved form of online returns so as to ensure that the taxpayer is not constrained by the limitations of the boxes for figures from making a correct and complete return, then they cannot thereafter assert, for the purpose of advancing a non-contextual interpretation of one or more boxes, that their computer cannot read what is written on the white spaces.”

Applying this finding to the case at hand, the judges said: “Although the application of tunnel-vision to boxes 1, 7, 19 and 20 of the partnership pages might suggest at first blush that Mr Tooth was claiming to have incurred a partnership-related loss in the 2007-8 tax year, perusal by a reasonably well-informed and careful reader of the detailed explanations provided in [the boxes] revealed, to the contrary, that he was claiming to carry back an employment-related loss from the 2008-9 tax year derived from participation in a tax avoidance scheme.”

They concluded: “It follows that the task of interpretation required by the need for the Revenue to prove that there was a deliberate inaccuracy in Mr Tooth’s tax return was to interpret the meaning of each relevant part of the document by reference to its place in the context of the document as a whole, just as is normally done when interpreting any other document.”

The Supreme Court therefore refused the appeal for the reason that there was no inaccuracy in the return submitted to HMRC. In a separate section of the judgment, the judges found that HMRC had made a qualifying discovery for the purposes of Section 29(1), as was found by the First-tier Tribunal.