Tooth vs HMRC – A behind the scenes look at the landmark case

Grunberg & Co - Accountants London

During the 2008/09 tax year, Peter McMahon, Tax Partner at Grunberg & Co and founding Partner, David Grunberg, were asked to source a tax mitigation scheme to assist Mr Tooth in legitimately reducing his tax liability for the 2007/08 and 2008/09 tax years.

Having sourced such a scheme, Peter set about the necessary due diligence process involved in such matters, including reviewing Counsel’s Opinion and the scheme structure.

There was never any doubt in the minds of Peter, David, or indeed Mr Tooth, that he would be subject to an enquiry into his tax returns for those years and, when finalising the returns for Mr Tooth to sign, they invited HM Revenue & Customs (HMRC) to do just that in the white space of the return.

What followed was not an enquiry into Mr Tooth’s tax returns but instead an enquiry into matters outside of this, despite all information being included within the return. Not pursuing an enquiry into the 2007/08 return, appears to have been an oversight by HMRC, as the manner in which Peter McMahon had claimed the tax relief (by including it on the tax return and the manner in which he had included it) was seemingly at odds with the other scheme users. HMRC used a blanket approach to protect their interest in all of the participant’s potential tax refunds, namely by issuing an enquiry into something which was outside of a tax return.

Due to the obscure nature of the loss generated as a result of the planning, Peter was unable to enter the information in the relevant box and, instead, having consulted the scheme provider, entered it into their suggested box and explained exactly what he had done to HMRC, in the white space provided on the return.

When HMRC eventually realised that they could and should have made an enquiry into the tax returns, as a last resort, they claimed that they were entitled to raise a discovery assessment for that tax year on the basis that a loss of tax had been brought about deliberately by Mr Tooth and his tax advisers.

Indeed, during the enquiry, HMRC alleged, despite having had evidence to the contrary, that Peter had lied and entered the information into a different box deliberately to bring about a loss of tax, and this was the main crux of their argument.

Reflecting on the case, Peter said “Essentially, the Revenue’s main argument boiled down to a single main point, namely that the figures had been entered deliberately on the return meaning that the Revenue’s “deliberate” condition was satisfied.  Even at the time, this argument seemed somewhat absurd and was consequently questioned by the Upper Tier Tribunal Judges during the Court Hearing.  Clearly, if this was the case and the intention of Parliament at the time of drafting, it would not be possible for anyone to ever complete a tax return and not be within the discovery provisions for a 20-year period, as the action of completing and submitting a tax return itself is, of course, deliberate.”

First Tier Tax Tribunal Judge, John Brooks, dismissed HMRC’s argument as “somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about ‘playing all the notes, but not necessarily in the right order’”.

Having overwhelmingly convinced the First Tier Tax Tribunal that HMRC’s main argument was something of a damp squib, it was a surprise that HMRC then decided to seek Appeal to the Upper Tier Tax Tribunal.

At the time of the first victory, Peter recalls having a conversation with Mr Tooth, without wanting to spoil the party, saying that he would not be surprised if HMRC did seek leave to Appeal.

Now having recently won again at the Upper Tier Tribunal, it is disappointing to find that HMRC has sought leave to Appeal this second loss.

Peter said: “This is a significant landmark case which has left the Revenue with egg on its face. The tax legislation is there to protect both HMRC and the taxpayer alike and sets the legal framework within which we must all work.

“It appears that in taking this case, HMRC has attempted to overrule the law as they have failed to properly carry out a fundamentally basic aspect of their role as the tax collection agency in the UK, namely to open an enquiry into Mr Tooth’s return, as they had been invited to do.

“In my opinion, it would be wholly unjust for the taxpayer to lose this argument and it would fundamentally undermine the legal framework which underpins the UK tax system. I understand why HMRC have taken the case, as they have a litigation policy where tax losses are brought about by tax avoidance schemes.

“However, this case is not about tax avoidance, it is about the Revenue failing to do what was required of them in the first instance, and something fairly basic, at that.”