Is it fair to rely on state of mind and knowledge of the particular HMRC officer?

Staleness is a concept that has prevented HMRC raising an assessment (a ‘discovery assessment’) outside the enquiry window. Accounting Web reported on the Tooth case this week, stating ‘staleness bites the dust’. It now means that an incompetent officer who fails to identify an insufficiency of tax based on clear representations can remain incompetent in the knowledge a more competent officer can come along and identify an insufficiency – so long as it is within the statutory time limits.

When an assessment is made outside of an enquiry window, it is necessary to consider if there has been a discovery. Section 29 TMA 1970 provides the ability for HMRC to raise an assessment where loss of income tax or capital gains tax is discovered. Paragraph 25 FA 2010 includes discovery provisions for corporation tax and s240 IHTA 1984 contains similar provisions for inheritance tax.

S36 TMA provides a statutory time frame for the making of discovery assessments (for income tax and CGT) where the loss of tax arises from either a careless act or a deliberate one. An assessment involving a loss of tax brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates. Whereas if the act is deliberate an assessment may be made at any time not more than 20 years after the end of the year of assessment to which it relates (subject to the Taxes Acts allowing a longer period).

‘Staleness’ was a taxpayer protection originating from cases where HMRC had been in possession of information that would have enabled a reasonably competent officer to identify an insufficiency of tax, but that officer had not done so within a reasonable period regardless of the statutory time limit. The appeal, Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Tooth (Respondent) [2021] UKSC 17 On appeal from: [2019] EWCA Civ 826 has now concluded that ‘staleness’ is not a concept permitted by the legislation.

Statement of Practice 1 2006 contained guidance on how a taxpayer could restrict the opportunity for discovery:

“A taxpayer can further restrict the opportunity for discovery by providing enough information for an HMRC officer to realise within the enquiry period that the self assessment is insufficient. However taxpayers are encouraged to submit the minimum necessary to make disclosure of an insufficiency………Information will not be treated as being made available where the total amount supplied is so extensive that an officer ‘could not have been reasonably expected to be aware’ of the significance of particular information and the officer’s attention has not been drawn to it by the taxpayer or taxpayer’s representative.”

“Where the taxpayer has fully alerted HMRC to the full circumstances of such an entry on the return, then the HMRC officer is in a position to determine whether or not there is an insufficiency, the conditions set by the Court of Appeal in Langham v Veltema have been met and the assessment will not be open to discovery on that point.”

However, in Tooth, HMRC disputed the correctness of the idea that a discovery can lose its quality as such if there is a delay after it is made and it becomes stale. It was also submitted that for the purposes of making an assessment under section 29(1) it depends upon the state of mind of the individual officer of the Revenue. There is no concept of HMRC having collective knowledge. According to HMRC ‘a second or third officer (and so on) can also make the same discovery for themselves, so that each of them becomes entitled serially to issue a discovery assessment’.

HMRC’s submissions were accepted

The legislation features time limits that are not triggered by a discovery event. The time limits run from the end of the year to which the relevant assessment relates. The concept of a discovery does not determine the period beyond which the taxpayer is safe from further assessment. The concept triggers the powers of HMRC to revisit an assessment already made.

There are two limbs to s29(1) TMA:

• A power is conferred on “an officer of the Board”, if he makes a discovery to make an assessment in the amount which ought in his opinion to be charged to make good the loss of tax.
• A power is conferred on the Board to make an assessment according to their opinion, if the Board discover the deficiency of tax.

Discovery by an officer is treated as separate from discovery by the Board. The Supreme Court considered that:

“the language and structure of the provision would make no sense if its operation turned on a concept of collective knowledge of the Board, derived from the knowledge of any and all of its officers.”

The first limb is therefore concerned with the state of mind and knowledge of the particular officer. I am desperately trying to avoid commenting on the state of mind and knowledge of some officers although, does this approach not provide too much power on a ‘particular’ officer and have the ability to ignore taxpayer protections? The court’s view appears to confirm an officer may use their state of mind and knowledge to make a discovery assessment maybe without reference to HMRC guidance. For example, the statement of practice 1 2006 suggested a taxpayer can restrict the opportunity for discovery. However, there appears nothing to restrict discovery other than the state and mind and knowledge of the officer.

The court specifically stated that “The officer would act on their behalf on the basis of the officer’s own state of mind and knowledge, not by reference to the state of mind or knowledge of anyone else in the organisation.” It would therefore appear that Statement of Practice 1 2006 is incorrect because you can’t restrict the opportunity for discovery because you can’t predict that the officer would or would not be able to identify an insufficiency of tax unless you were indeed that officer, who you’re not.

I also can’t disagree that within HMRC there is no principle of collective knowledge. Maybe that opinion is slightly tainted by HMRC officers taking a varied approach to tax often without regard for legislation, case law or even their own guidance. I guess that reaffirms my point regarding statement of practice 1 2006. Maybe it should be renamed ‘Statement of practice subject to an officer’s own state of mind and knowledge’.

The approach adopted by the Supreme Court isn’t new though. It follows the principle set out in Cenlon Finance Co Ltd v Ellwood (Inspector of Taxes) [1962] AC 782. That case involved a first inspector who agreed the computation of trading profits and a second inspector who concluded there was an additional amount requiring assessing. The taxpayer contended that the second inspector had not discovered anything new and that it was unjust to put the taxpayer in peril for an extended period of time when he had made all the facts known to the Revenue at the outset. The House of Lords held that there had been a discovery by the second inspector. There was no notion of staleness applied.

The Supreme Court considered that to import a notion of staleness would conflict with the statutory scheme.

The Court of Appeal in another leading case, Langham (Inspector of Taxes) v Veltema [2004] EWCA Civ 193 decision alluded to more taxpayer protection. The decision appeared to draw a distinction to cases where HMRC had not scrutinised the self assessment and when they had.

The Court found that It was plain from the wording of the statutory test in s29(5) TMA that it was concerned with what a tax inspector could have been reasonably expected to be aware of from the information made available to him by the taxpayer, of an actual insufficiency in the assessment. The Revenue was shut out from making a discovery assessment ‘when a taxpayer, in making an honest and accurate return, or in responding to an inquiry, had clearly alerted them to the insufficiency of the assessment’.

Shame the Supreme Court appear to accept that an officer does not have to be a hypothetical reasonable officer because some officers may be considered unreasonable. It is also a shame Statement of Practice 1 2006 and Veltema seemed to have been dismissed.

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