Subjective approach required for deliberate behaviour

The taxpayers took part in a Montpelier tax avoidance scheme intended to create a tax loss without any corresponding economic loss. HMRC opened a code of practice 9 enquiry on the grounds that it suspected the taxpayer of submitting tax returns containing loss claims which he knew to be incorrect.

HMRC issued discovery assessments (TMA 1970 s 29) but for these to be valid HMRC needed the extended time limit for loss of tax brought about deliberately (TMA 1970 s 36(1A)). Deliberate behaviour includes a deliberate inaccuracy in a document (ITA 2007 s 118(7)).

The First-tier Tribunal dismissed the taxpayers’ appeal.

The taxpayers appealed. They accepted the scheme did not work but said their behaviour was not deliberate therefore the extended time limit should not apply.

The Upper Tribunal said it was common ground that the First-tier Tribunal had set out the correct legal test – as...