UK: Supreme Court dismisses HMRC’s appeal; “staleness” and discovery assessments

A Supreme Court decision regarding “deliberate behaviour” and “staleness”

A Supreme Court decision regarding “deliberate behaviour” and “staleness”

The Supreme Court—in a much anticipated decision, Tooth v. HMRC, [2021] UKSC 17—provided guidance regarding “deliberate behaviour” and “staleness.”

In this case, there were two issues:

  • Whether an insufficiency of tax had been caused deliberately by the taxpayer and therefore justified a discovery assessment by HM Revenue & Customs (HMRC) made within the extended 20-year time limit
  • Whether the discovery assessment made by HMRC was “stale” and therefore invalid

The Supreme Court dismissed HMRC’s appeal and agreed with the taxpayer that the alleged inaccuracy had to be looked at in the context of the income tax return as a whole. As a result, the Supreme Court also agreed that there was no deliberate inaccuracy in the return.

However, the Supreme Court found that the concept of “staleness” does not exist in the context of discovery assessments. 

KPMG observation

Following the decision in Tooth, HMRC will only be able to show that there was a deliberate inaccuracy if it can be shown that the maker of the statement knew it to be inaccurate when the statement was made. By analogy, and if HMRC asserts that the loss of tax itself was brought about deliberately, then HMRC will need to show that the taxpayer (or a person acting on the taxpayer’s behalf) knew of the loss of tax when the self-assessment or claim is made. However, the Supreme Court left open the possibility that reckless behaviour might also be enough to satisfy the test of deliberateness.

In addition, the Supreme Court has now aligned the concept of deliberate behaviour as it applies to both discovery assessments and penalties. The test of deliberate behaviour is therefore likely to apply with regard to all cases in which HMRC must show deliberate behaviour to justify the making of an assessment, and it may well apply in any penalty case in which HMRC alleges deliberate behaviour, regardless of whether the penalty concerns income tax, corporation tax or VAT. Thus, tax professionals believe that this decision is likely to have implications across all types of taxes.

Read a May 2021 report prepared by the KPMG member firm in the UK



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