HMRC has the power to raise assessments where an understated tax liability has been identified. Any such action must be undertaken within the relevant statutory framework which includes various conditions, including behavioural considerations and associated time limits.

Those time limits can be determined by the taxpayer’s behaviour which led to the under-statement. In the most serious cases, when a taxpayer has deliberately failed to pay the right amount of tax, HMRC has the power to raise tax assessments going back 20 years. In most instances the time period is restricted to six years when it is considered that the under-reporting is due to the taxpayer being careless. The period is restricted up to four years when a mistake has been made but the taxpayer took reasonable care.

HMRC v Shaun Harte: Upper Tribunal case explained

In HMRC v Shaun Harte, Mr Harte had failed to report his total liability and that failure was attributable to various independent errors. HMRC and Mr Harte agreed that the underlying behaviour which led to each error differed: some were genuine mistakes while others were considered careless and deliberate errors.

HMRC argued that the 20-year time limit for deliberate conduct should apply to support an assessment to tax for all errors, despite the fact some of those errors did not arise from deliberate conduct.

The Upper Tribunal disagreed with HMRC and ruled that the facts attributable to each error must be considered independently to determine whether an assessment has been raised on a valid basis.

How the judgment affects tax disputes

As the judgment has been made by the Upper Tribunal (following HMRC’s appeal against an earlier First Tier Tribunal decision), it creates a precedent for tax disputes going-forward.

Tax disputes involving deliberate under-reporting of tax are often dealt with through a process called Code of Practice 9 (COP9). Under COP9, the individual agrees to a full disclosure of all irregularities in exchange for HMRC’s commitment not to open a criminal investigation.

In a COP9 process, it is not unusual to identify numerous irregularities which need to be disclosed to HMRC. However, these disclosures and the tax liabilities associated with them are restricted by the time limits set out in the tax legislation, with those being applied in accordance with the Upper Tribunal’s judgement.

Key takeaways from the HMRC v Shaun Harte case

The HMRC v Shaun Harte decision will be welcome news to anyone entering into a COP9 process. Had HMRC been successful, taxpayers who had made non-deliberate errors would have faced increased tax exposure from the extended time limits. Meanwhile HMRC faced the risk of dampening taxpayer appetite for voluntarily disclosure of historical discrepancies which would have been counter-productive to their objectives.

For more information on tax disputes or COP9, please contact Olivia Wiggett or your usual RSM contact.

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