The recent Tooth case in the Court of Appeal (HMRC v Tooth  EWCA Civ 826) has highlighted a contentious topic when it comes to preparing and submitting tax returns electronically.
The HMRC-approved tax return software did not allow inclusion of a loss arising from a particular avoidance arrangement. The loss was consequently entered elsewhere on the return following advice sought from the software provider. A white space note was also included to explain the entries in order to protect the taxpayer from the risk of discovery in future. The return as a whole, when read in context, was therefore correct.
HMRC later attempted to recover the perceived loss of tax by issuing a discovery assessment. HMRC’s case included an argument that the assessment window could be extended up to 20 years given the alleged deliberate inaccuracy in respect of the way the loss was entered on the tax return.
All three Court of Appeal Judges agreed there was no blatant dishonest act or intention to mislead by Mr Tooth or his advisers. However, by a majority, the judges agreed with HMRC, noting that the legislation refers to “an inaccuracy in a return”, which means the single box with the incorrect entry should be their sole focus for considering whether or not there is a deliberate inaccuracy.
HMRC will undoubtedly continue to interpret similar situations in this way to extend discovery time limits up to 20 years. Although the taxpayer won the case on other grounds, the above interpretation is wholly favourable to HMRC and will surely become their standard practice until such a time as it is successfully challenged.
Advisers need to be cautious in future when dealing with anomalies with tax return software and consider whether it is appropriate to submit a paper tax return instead. There is risk that HMRC will try to assess historic tax, thought to be years out of time