The case concerned Raymond Tooth, a participant in the Romangate tax avoidance scheme promoted by NT Advisers, and used by some 500 individuals including the comedian Jimmy Carr. [Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs, 2016 UKFTT 723 TC05452].

The tribunal heard evidence that Tooth did not grasp all of the technicalities of the scheme, but did understand that if he participated in it employment related losses of £1,185,987 would be generated for 2008-09.

Tooth, along with other scheme participants, was advised by NT of the entries that should be included on the 2007-08 self-assessment tax returns of participants in the scheme to enable them to claim losses. In particular, they were instructed to enter, on the additional information pages, Ai3, in box 3 the amount of income losses and in box 4, ‘2007-09’.

In the ‘white space’ for ‘additional information’ on page Ai4, the instruction was to enter the explanation, i.e, that an employment related loss had been sustained in the year to 5 April 2009 and that details of that loss had been reported in box 3.

The explanation continued stating that details of the loss, which arose pursuant to a scheme for which a DOTAS reference was required, would be provided in the 2008-09 return. It concluded by stating that because the interpretation of the law ‘may be at variance’ with that of HMRC it was assumed that an enquiry would be opened.

In January 2009 Tooth’s adviser prepared his 2007-08 self-assessment tax return using software provided by IRIS Software. However, he was unable to access box 3 on page Ai3 and enter the income loss there as instructed. Advice from IRIS was that this was due to a technical issue with the IRIS software, and he was told that to ensure the claim was included in the 2007-08 return the loss should be included on another part of the return and reference made in the ‘white space’ to explain what had been done.

The adviser entered the employment related loss on the partnership pages of the return (in box 7). However, this created an additional problem. Because there was not a partnership there was no ten-digit partnership unique taxpayer reference (UTR) number which was necessary for the electronic submission of the return.

Having encountered similar problems previously, where clients had not been allocated a UTR in advance of the self-assessment filing date, the adviser used a UTR of ‘99999-99999’ and was able to successfully file the return electronically before the deadline and prevent the imposition of a late filing penalty.       

In August 2009 HMRC notified Tooth that they intended to enquire into his 2007–08 the return and the employment losses claimed, under the Taxes Management Act 1970 (TMA 1970), Sch. 1A. In April 2010 HMRC advised him that his 2007–08 tax return had been amended to withdraw his claim for £1,210,299 of losses that arose in 2008–09.

HMRC’s notification stated: ‘You submitted your tax return for the year to April 2008 on 30 January 2009. You included on a separate partnership page, with the UTR 99999 99999, a claim for your share of the partnership loss of £1,210,229. This was in fact employment losses carried back from 2008-09. It is my view that your actions in making this claim were deliberate.’

Tooth’s adviser disputed that there had been a deliberate act that had resulted in a loss of income tax and that if there had been a loss of income tax it was because HMRC had not accepted that the carry back claim could only be enquired into under s 9A TMA rather than schedule 1A TMA and it was this that had resulted in HMRC being out of time to issue an assessment.

HMRC’s actions followed on from the Supreme Court’s decision in R & C Commrs v Cotter [2013] BTC 837, in which it was decided that HMRC were correct to use TMA 1970, Sch. 1A as the vehicle for enquiring into a taxpayer’s claim for loss relief using the same scheme as Tooth.

HMRC went on to issue a discovery assessment under TMA 1970, s. 29 on 24 October 2014 to replace the amendment purportedly made under TMA 1970, Sch. 1A. HMRC submitted that the 20 year time limit for raising a discovery assessment in TMA 1970, s. 36(1A) applied because the loss of income tax was brought about deliberately by Tooth. They submitted that this was the case because if Tooth had entered the loss on the additional information pages of his return there would have been a free–standing tax credit, but as it had been entered on the partnership pages it resulted in immediate and automatic relief.

On the issue of whether HMRC had made a discovery, the FTT noted that there was a low threshold necessary for there to be a discovery. It was necessary to consider the position of the assessing officer and whether he had made a discovery and it did not depend on something new being discovered by reference to HMRC’s collective knowledge. The FTT found that the assessing officer did make a discovery of insufficiency of tax in October 2014.

The FTT then considered whether Tooth or his advisers had brought about the loss deliberately per TMA 1970 s. 29(4). Although the way the return was completed led to there being immediate and automatic relief instead of a free–standing tax credit, the FTT found that neither Tooth nor his advisers were aware of this.

It therefore followed that there was nothing that Tooth, or a person acting on his behalf, did that deliberately brought about an insufficiency of tax. As such, the condition in TMA 1970 s. 29(4) had not been fulfilled. The appeal was accordingly allowed.

Meg Wilson, CCH tax writer said: ‘The FTT noted that a causal link between the insufficiency of tax and the deliberate action is required and it is necessary to ask what a taxpayer has done, deliberately, to bring about that insufficiency.

‘Because in this case the FTT found that neither Mr Tooth, nor his advisers, were aware of the consequences of completing the tax return in the manner they did, instead of in the way they were instructed to complete it, the FTT found that there was nothing that Mr Tooth, nor his advisers, did that deliberately brought about the insufficiency of tax.’

Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs, 2016 UKFTT 723 TC05452 is here.