Where a loss of tax has been brought about deliberately by a taxpayer, the time limit for HMRC to raise a discovery assessment is increased from 4 years to 20 years.

In The Commissioners for HMRC v Raymond Tooth (“Tooth“),1 the Court of Appeal held that for an inaccuracy to be “deliberate”, there need not be any culpable conduct attributable to the taxpayer in question.  In the authors’ view, that decision was wrong.  The authors took some comfort, however, from the fact that the relevant part of the Court of Appeal’s decision was not binding.

Disappointingly, the decision in Tooth has now been followed by the First-tier Tribunal (Tax) (the “Tribunal“) in Cliff v The Commissioners for HMRC (“Cliff“).2

The perverse result of the decisions in Tooth and Cliff (if correct) is that it is easier for HMRC to establish “deliberate” conduct (securing a 20 year window for issuing a discovery assessment) than to establish “careless” conduct (which requires culpability on the part of the taxpayer, but secures only a 6 year window for issuing a discovery assessment).

Judicial intervention is now required, urgently, in order to restore the common sense position.


The Court of Appeal in Tooth

The Tribunal’s application of Tooth in Cliff

Leach: making the best of a bad situation

Parliament’s intention


The Court of Appeal’s obiter comments in Tooth


Mr Tooth entered into a tax scheme which, if successful, would have allowed him to set off employment-related losses generated in tax year 2008/09 against income in the previous tax year (2007/08).

Computer software approved by HMRC and used to complete Mr Tooth’s 2007/08 tax return did not allow his accountant to record the claimed employment-related losses in the correct box. Instead, the taxpayer used the partnership pages of the return, which included a box that would accept the entry, and inserted a fictitious ten-digit partnership unique taxpayer reference (which was necessary for the successful electronic submission of the return). The taxpayer’s accountant then used the “white space” in the return to explain what had been done to avoid any question of misleading HMRC.

HMRC sought to deny the relief sought by Mr Tooth by issuing a discovery assessment pursuant to section 29 TMA, but outside of the ordinary assessment time limit, relying on the extended time limit of 20 years applicable where a loss of tax has been brought about deliberately.   Mr Tooth challenged the discovery assessment, which challenge raised two core issues:

  • Had HMRC “discover[ed] … that an assessment to tax [was] insufficient” (within the meaning of section 29(1)(b) TMA) (the “Discovery Issue“)?
  • Had any such insufficiency been brought about by a deliberate inaccuracy (within the meaning of section 29(4) TMA) (the “Conduct Issue“)?

The Decision

In the Court of Appeal, all three judges found against HMRC in relation to the Discovery Issue.  As such, they dismissed HMRC’s appeal against the decision of the Upper Tribunal (who had found for the taxpayer), and their conclusions in relation to the Conduct Issue were, strictly, obiter dicta (ie, not binding upon a later tribunal, though of persuasive value).

As regards the Conduct Issue, the Court of Appeal had to consider two matters: was there an inaccuracy in Mr Tooth’s return, and was any such inaccuracy “deliberate”.

The bench was divided on the question of whether there had been an inaccuracy.

  • In his Judgment, Floyd LJ held that there was there was no inaccuracy in Mr Tooth’s tax return. In his view, Mr Tooth’s tax returns had to be interpreted as a whole, and when interpreted as such it was clear that the use of the incorrect box had been explained elsewhere in the document.  Overall, there was no inaccuracy.  The authors respectfully agree with Floyd LJ’s decision in this regard.
  • Males and Patten LLJ disagreed. They both preferred to take a literal approach, finding that there was undoubtedly an inaccuracy in Mr Tooth’s 2007/08 tax return, even though the white space disclosure ensured that inaccuracy was not misleading.

The bench was, however, unanimous in finding that the inaccuracy (if indeed there was one) was deliberate.

Giving the leading judgment, Floyd LJ started by accepting that, in isolation, sections 29 and 36 TMA (which, taken together, provide for a discovery assessment to be issued within 20 years in a case involving a loss of tax brought about deliberately) would require HMRC to prove that the taxpayer “intended to bring about a particular fiscal result“.  However, Floyd went on to consider the effect of section 118(7) TMA.  That subsection provides as follows:

In this Act references to a loss of tax or a situation brought about deliberately by a person include a loss of tax or a situation that arises as a result of a deliberate inaccuracy in a document given to [HMRC].

Floyd LJ considered this to be a deeming provision, the effect of which is to establish the requisite “inten[tion] to bring about a particular fiscal result” where HMRC can show simply that there was a deliberate inaccuracy in the relevant document given to HMRC.  In Mr Tooth’s case, this meant that the known inaccuracy (ie, the one explained in the “white space” of his 2007/08 return) was deemed to have been made with the requisite degree of intent.

The Tribunal’s application of Tooth in Cliff

In Cliff, the taxpayer claimed loss relief on the basis that he was carrying on a trade on a commercial basis with a view to profit. In his tax returns, he described himself as a “dealer in thoroughbreds“.

The Tribunal came quickly to the view that Mr Cliff was not a “dealer in thoroughbreds” because he did not buy or sell horses. He had bought and sold shares in racehorse rather than dealing in the animals themselves. Further, the Tribunal found that the purchase documents relating to the racehorse shares made clear that the purchases were made for the pleasure of owning the horse and not as an investment.

Having found against the taxpayer in relation to the substantive tax issues, the Tribunal was faced with the following issues regarding the validity of HMRC’s discovery assessments and imposition of penalties:

  • Had Mr Cliff brought about a loss of tax deliberately or carelessly (by making the conscious choice to use the phrase “dealer in thoroughbreds” rather than giving a more accurate description of his activities) enabling HMRC to issue an extended time limit discovery assessment pursuant to section 29 TMA (the “Assessment Issue“)?
  • Could a penalty be imposed upon Mr Cliff (under schedule 24 of the Finance Act 2007 (“Schedule 24“)) on the basis that a deliberate or careless inaccuracy in a return had led to an understatement of a liability to tax (the “Penalty Issue“)?

In the Tribunal, Judge Bailey held that the term “deliberate” had to be interpreted consistently across both section 29 TMA and Schedule 24.  Accordingly, she decided that the Court of Appeal’s reasoning in Tooth should be applied uniformly in deciding both the Assessment Issue and the Penalty Issue.  In particular, the Judge (agreeing with the Court of Appeal) held that “deliberateness” did not require blameworthiness.  Indeed, the Judge appeared to take the Court of Appeal’s analysis one step further by indicating that it was not necessary for the taxpayer to know that the relevant statement was inaccurate:

[W]e do not consider it is necessary for [HMRC] to demonstrate that the [taxpayer] deliberately made a claim to which he knew he was not entitled. We have already found that the [taxpayer] did consciously choose to make claims, and that those claims are inaccurate.”3

Curiously, in reaching her decision, the Judge cited with approval a passage from the Tribunal’s 2016 decision in Anthony Clynes v the Commissioners for HMRC (“Clynes“) – indicating that “deliberate” means “involv[ing] an element of conscious or purposeful choice“. The relevant passage in Clynes reads “on its normal meaning, therefore, the use of the term indicates that for there to be a deliberate inaccuracy on a person’s part, the person must to some extent have acted consciously, with full intention or set purpose or in a considered way“.4


In the authors’ view, there are at least three elements of the decision in Cliff which can be criticised.

  • First, although Judge Bailey was right to take account of Clynes (which was a robust and correct decision), the authors consider that the decision was misapplied.  In Clynes (which was concerned with the meaning of “deliberate” in the context of Schedule 24) Judge Harriet Morgan held as follows:”[…] simply filling in a VAT return with particular information can be held to be a deliberate act (in the sense of being undertaken with intent or a set purpose of filling in the form) whether or not the person knew or had any consciousness as regards the accuracy of the information. Our view is that such an interpretation cannot be correct on a purposive interpretation looking at the natural wording and the scheme and context of the overall provisions. […] The fact that the deliberate conduct is tied to the inaccuracy, indicates that for this penalty to apply the person must have, in a subjective sense, acted with some level of knowledge or consciousness as regards the inaccuracy.”5
  • Second, the term “deliberate” should be interpreted uniformly across section 29 TMA and Schedule 24 (in that regard, see the section below entitled “Parliament’s Intention“). It cannot be right that Schedule 24, which is a penal code, is not concerned with culpability (when using the terms “careless” and “deliberate”), hence it cannot be the case that section 29 TMA in unconcerned with behaviour.
  • Third, there is no equivalent to the (apparent) “deeming” provision of section 118(7) TMA in relation to careless inaccuracies.  As such, if Cliff is correct (and section 118(7) TMA removes the need for HMRC to show intent in relation to deliberate inaccuracies), it is easier for HMRC to establish “deliberate” conduct than to establish “careless” conduct.  Plainly, that would be absurd since the sanctions that can be imposed in relation to deliberate conduct are more severe than those that can be imposed in relation to careless conduct.

Leach: making the best of a bad situation

The meaning of “deliberate”, post Tooth, was also considered by the Tribunal in Anthony Leach v the Commissioners for HMRC (“Leach“).6 As in Cliff, HMRC had both to assess (under section 29 TMA) and penalise (under Schedule 24) in relation to deliberate conduct.

Whilst the Tribunal accepted the Court of Appeal’s analysis as to the meaning of “deliberate” in the context of section 77 of the Value Added Tax Act 1994 (“VATA“) (a provision materially similar to section 29 TMA), it declined to do so for the purposes of Schedule 24.

In relation to Schedule 24, the Tribunal followed to approach taken in the earlier case of Auxilium Project Management v Commissioners for HMRC (“Auxilium“)7 in the interpretation of Schedule 24.  It did so apparently for three principal reasons.

  • First, the Tribunal identified the fact that tax penalties, unlike provisions extending time for assessment purposes, are criminal for the purposes of Article 6 of the European Convention on Human Rights, and no “reasonable excuse” defence is available under Schedule 24.
  • Second, unlike the relevant provisions in TMA and VATA, in Schedule 24 there are no “contiguous statutory provisions which also extended the time limit [for assessment which] do not depend on proving any blameworthy conduct by the taxpayer“.8  (Sections 29 and 36 TMA, and section 77 VATA, both contain provisions which extend the time limit for assessment in circumstances where, culpably or not, the taxpayer has failed to comply with a tax notification obligation.)  Accordingly, there is some intellectual justification for interpreting the term “deliberate” differently in section 29 TMA and Schedule 24.
  • Third, the Explanatory Notes to Finance Bill 2007 refer repeatedly to the fact that the level of penalty imposed under Schedule 24 is based on taxpayer “behaviour” (with the most serious penalties being reserved for “deliberate and concealed behaviour”). Per the Tribunal in Leach, “This behaviour-based approach shows that the meaning of ‘deliberate’ cannot extend to purely mechanical errors, where there is no intention to mislead.”9

Parliament’s intention: Explanatory Notes to the Finance Bill 2007 and 2008

Whilst the authors agree with  the Tribunal’s decision in Leach regarding the meaning of “deliberate” in the context of Schedule 24, we do not consider that the term should be interpreted any differently in the context of discovery assessments in the TMA.

In the authors’ view, the error made by the Court of Appeal in Tooth (followed in Cliff and, to a degree, in Leach) was encouraged by their Lordships’ dismissive approach to the explanatory notes to Finance Bill 2007 and 2008.

2007 Explanatory Notes: “deliberate” v “fraudulent”

The Explanatory Notes to Finance Bill 2007 make clear that the purpose behind Schedule 24 was to “[bring] together a single penalty framework for a number of different taxes where there were previously different ones.” The change in vocabulary is explained as follows:

These definitions of behaviour [i.e. “careless” and “deliberate”] are designed to replace the current concepts of misdeclaration, repeated misdeclaration, dishonest conduct and reasonable excuse (in relation to inaccuracies) for VAT and, for direct taxes, they replace fraudulent and negligent conduct. They provide a uniform language for behaviours using more accessible language across the taxes covered.

There is therefore no evidence that Parliament intended to lower the threshold for the application of penalties. To the contrary, the notes made clear that the changes were clarificatory only: to make the language and concepts more familiar to the lay taxpayer.

In advancing this point, the authors are aware that Judge Morgan was of the opposite opinion in Clynes (and in another case from 2016).10  In Clynes she stated:

In the explanatory notes published with the draft legislation in 2007, it was stated that the new terms of deliberate and careless behaviour were to “provide a uniform language for behaviours, using more accessible language across the taxes covered.” However, our view is that, even if it is permissible to look to such materials for guidance as to the intent of Parliament in interpreting legislation, the statements in the materials are not sufficient to conclude that the new terms are simply interchangeable with the previous ones. Parliament has chosen to use different words and it is those words which must be interpreted. The starting point must be that the term “deliberate inaccuracy” has to be interpreted according to the usual principles of statutory interpretation.11

2008 Explanatory Notes: TMA v Schedule 24

The Finance Act 2008 made a series of amendments to the TMA which, as the Explanatory Notes make clear, were designed to align the language in section s29(4), 36(1A)(a) and 118(7) TMA to the language in Schedule 24.

  • Prior to Finance Act 2008, Section 29(4) TMA read “is attributable to fraudulent or negligent conduct on the part of”.  Finance Act 2008 changed this language to “was brought about carelessly or deliberately by“.
  • As originally enacted, Section 36 TMA allowed HMRC to make an assessment “at any time… where any form of fraud or wilful default has been committed” with leave of the General or Special Commissioner. This was amended by Finance Act 1989 to refer to “a loss of tax attributable to his fraudulent or negligent conduct“, and a limitation period of 20 years was introduced.  Finance Act 2008 changed the provision to its current form, with subsection (1) referring to a loss of tax “brought about carelessly” (with a 6 year limitation period) and subsection (1A)(a) referring to a loss of tax “brought about deliberately”  (with a 20 year limitation period).
  • Section 118(7) was a new provision introduced by the Finance Act 2008.
  • Similar changes were made in respect of section 77 VATA.
  • The Explanatory Notes to the 2008 Finance Bill state explicitly:
    • in respect of section 29(4) TMA: “This corresponds with the terms used in paragraph 3 of Schedule 24 to FA 2007“;
    • in respect of section 36 TMA: “[…] where the loss of tax is brought about carelessly by the person assessed. This corresponds with negligent conduct“; and (most importantly)
    • in respect of section 118(7) TMA: “New subsection (7) provides that where a loss of tax or a situation is brought about by a deliberate inaccuracy in a document, it is to be treated as brought about deliberately. This is to ensure that in cases where a penalty is due for deliberate inaccuracy under paragraph 3 of Schedule 24 to FA 2007, the corresponding increase in time limit also occurs.

It is therefore, in the authors’ opinion, clear that the terms “deliberate” and “careless” must be interpreted consistently across the relevant sections of the TMA and Schedule 24. The quotation from the Explanatory Notes in the final sub-bullet point above was brought to the attention of Floyd LJ in Tooth, who dismissed it – stating that he:

did not find the Explanatory Notes to the relevant Finance Bill … to be of assistance in reaching any other conclusion. The first sentence of the Notes confirms … that [section 118(7)] is a deeming provision, because it uses the language ‘is to be treated as …12


On (comparatively) rare occasions, the law takes a wrong turn, and that wrong turn may be not infrequently acted on.  On such occasions, the Courts should not (and, indeed, do not) shy away from reversing the error.  Pitt v Holt and Futter v Futter are good and recent examples of the Courts putting the law back on the right course (after 20 years of error in relation to the so-called rule in Re Hastings-Bass).

In the authors’ view, Tooth, Cliff and (to the extent it was concerned with the TMA) Leach were wrongly decided, and the Courts should not shy away from saying so.

The correct position is that in order for HMRC to secure a 20 year assessment window (and to impose penalties for deliberate inaccuracies), HMRC must show that the taxpayer intended to secure an underpayment of tax.

The good news is that none of the decisions in Tooth, Cliff and Leach is binding on a Tribunal hearing a tax appeal in the future.  As such, it should be easier than in some cases for a taxpayer to persuade the Tribunal to be bold and to reset the case law.

Nick Clayton
Nick Clayton
+44 20 7466 6409
Matthias Steiner
Matthias Steiner
+44 20 7466 2313








1 [2019] EWCA Civ 826
2 [2019] UKFTT 564 (TC)
3 Cliff [68]
4 Clynes, [82] emphasis added
5 Clynes [83]
6 [2019] UKFTT 0352(TC)
7 [2016] UKFTT 0249 (TC)
8 Leach [97] (4)
9 Leach [97](6)
10 Anderson v Revenue and Customs Commissioners [2016] UKFTT 335 (TC) at [120]
11 Clynes [80]
12 Tooth [87]