HMRC have won their appeal to the Supreme Court in Cotter.
But, their victory may be hollow.
Mr Cotter filed his 2007/08 tax return on 31 October 2008. In his return he made no claim for loss relief. He left HMRC to calculate the tax due for that tax year. On 24 December 2008 the Revenue produced a tax calculation showing income and capital gains tax due of £211,927.77.
On 29 January 2009 Mr Cotter’s accountants wrote to HMRC enclosing a ‘provisional 2007/2008 loss relief claim’ and amendments to his 2007/08 tax return. The amendments explained that Mr Cotter had sustained an employment-related loss of £710,000 in the tax year 2008/09. The accountants asserted that no further tax was due in respect of 2007/08 because of the loss claim and, should the conclusion of HMRC’s inevitable enquiry under s.9A, Taxes Management Act 1970 (“TMA”) (claims made in a return) be that the tax was due, the tax was not payable until the enquiry was completed.
HMRC enquired into the loss claim under Schedule 1A, TMA (claims not made in a return), rather than s.9A TMA. It issued proceedings in the County Court to recover the unpaid income tax and capital gains tax for 2007/08.
Mr Cotter argued that he was entitled to use the loss claim to reduce to nil the tax otherwise payable for 2007/08 and also that the First-tier Tribunal had exclusive jurisdiction to determine whether he could make the loss claim in his 2007/08 return and thereby reduce the tax payable for that year.
The Court of Appeal held, first, that if HMRC wished to dispute a figure in a return it had to follow the s.9A, TMA process and, secondly, that neither the County or High Courts had jurisdiction to determine whether Mr Cotter could make the loss claim in his 2007/08 return and thereby reduce the tax payable for that year.
HMRC were concerned that this could expose them to the risk of unmeritorious claims being made in tax return forms solely in order to postpone the payment of tax that would otherwise be payable. It would encourage taxpayers to participate in marketed tax avoidance schemes for the cash flow advantage (which would be available even if the scheme was, ultimately, found to be ineffective).
The Supreme Court overturned the Court of Appeal. It held that HMRC had taken the right approach in the particular circumstances of this case: the claim was not one made ‘in a return’ (although it was made on a tax return form) and thus Schedule 1A, TMA was correctly used. The conclusion of the Supreme Court was as follows:
• where a taxpayer makes a claim for relief in a tax return form which claim is relevant to the year of assessment (or where the taxpayer calculates the amount of tax he is due to pay, and allows for the relief for an earlier year in that calculation, when calculating his tax liability for a later year) HMRC can correct the calculation under s.9ZB, TMA. If the taxpayer rejects that correction, HMRC must enquire under s.9A, TMA with all the consequences that follow (including that HMRC cannot collect the tax, save where there is a s.9C, TMA amendment that is not appealed; but if a repayment is due they need not pay it until the conclusion of the enquiry);
• however, when the taxpayer lets HMRC calculate his tax bill, but includes a claim for tax relief not relevant to the calculation of tax payable for the year under assessment, then HMRC can ignore it as it is a claim made ‘other than in a return’ and Schedule 1A, TMA applies. If HMRC think the claim is valid they must give effect to it. If HMRC do not think it is valid then they must enquire into it and meanwhile HMRC can collect the tax due for the year of assessment.
• some entries in a tax return form are not part of a tax return for the purposes of ss.9 and 9A, TMA. This is where they relate not to the calculation of the tax due in the year of assessment but to another year of assessment.
Revenue & Customs Business Brief 28/13 warns that HMRC will withhold income tax repayments where the claims which produce them constitute (in their opinion) tax avoidance. But, self-employed taxpayers who calculate their own tax liabilities can continue to benefit from the cash flow advantage of using losses to avoid paying disputed tax until that dispute has been concluded. HMRC may be noting that which Plutarch said of Pyrrhus: “If we are victorious in one more battle …, we shall be utterly ruined.”