This Supreme Court case examined an issue about the boundary between the jurisdiction of the First-tier Tribunal (Tax Chamber) and that of the county court/High Court. Underlying that issue was a question on the legality of HMRC’s approach to entries which the taxpayer made in his self-assessment tax return. The case was viewed as a test case because approximately 200 taxpayers had used the same tax scheme in question and thus the case turned on the proper interpretation of provisions in the Taxes Management Act 1970 (“TMA”).

Background

The taxpayer, in his return for the 2007/08 year made no claim for loss relief, he left it to HMRC to calculate the tax due. Later that year HMRC produced a tax calculation based on that return showing income and capital gains tax due of almost £212,000.

Accountants for the taxpayer submitted to HMRC a “provisional 2007/08 loss relief claim” and amendments to his 2007/08 tax return. The amendments added various entries to boxes in the tax return intimating that the taxpayer had sustained an employment-related loss of £710,000 in the tax year 2008/09 for which he claimed relief under sections 128 and 130 of the Income Tax Act 2007 (“ITA”) against his 2007/08 self-assessment.

The accountants also stated in the submission to HMRC that “As a result of this claim no further 2007/08 taxes will be payable”.

After sending a holding reply, HMRC responded confirming that the tax return had been amended and that enquiries would be opened into the claim and the tax return. The letter stated that HMRC did not intend to give effect to any credit for the loss until those enquiries were complete. On the same date HMRC issued a fresh tax calculation which corresponded to the same calculation issued prior showing a liability of almost £212,000.

HMRC wrote to the taxpayer to intimate that it was enquiring into the amendment and the 2008/09 loss claim, under Schedule 1A to TMA and in a further letter the taxpayer was asked to provide specified information and documents. This was followed by correspondence by the taxpayer’s accountants who wrote to HMRC’s Recovery office advising that they had asked HMRC to amend the self-assessment calculation and that as a result “no further 2007/08 taxes will be payable.”

This was on the basis of the loss claim which was the subject of enquiry and that if tax were due as a result of an enquiry under section 9A of TMA, that tax was not payable until the enquiry had been completed.

Advisors to the taxpayer submitted a letter to HMRC contending that legal proceedings would be unlawful because;

1. the taxpayer’s self-assessment showed that no tax was payable as at 31 January 2009; and
2. HMRC had not amended the self-assessment return.

HMRC issued legal proceedings claiming for the income tax and capital gains tax for 2007/08 and the first payment to account for the year of assessment 2008/09, together with statutory interest.

The taxpayer argued in defence that;

1. that he was entitled to use his loss claim to reduce to nil the tax otherwise payable for 2007/08; and
2. that the Tax Chamber of the First-tier Tribunal had exclusive jurisdiction to determine whether he could make the loss claim in his 2007/08 tax return and thereby reduce the tax payable for that year.

Proceedings were then transferred to the Chancery Division of the High Court to determine the issue of jurisdiction. In a judgment handed down in April 2011, it was held that

1. the court had jurisdiction to determine in collection proceedings whether the taxpayer was entitled to rely on the claim for relief as a defence to a demand by HMRC for immediate payment; and
2. the taxpayer was not entitled to rely on his claim for loss relief as a defence to HMRC’s demand for payment of the tax due in respect of 2007/08.

The taxpayer appealed to the Court of Appeal and in their judgement the Court analysed the self-assessment procedure and held that if HMRC wished to dispute an item contained in a tax return, it had to follow the enquiry procedure set out in section 9A of TMA which would have given a right of appeal to the First-tier Tribunal.

Neither the county court nor the High Court had jurisdiction to determine whether the taxpayer was entitled to make his claim in his tax return for 2007/08 for an income loss incurred in 2008/09.

HMRC subsequently appealed that decision to the Supreme Court.

Decision

Section 128 and Section 130 ITA 2007 were both scrutinised by the Supreme Court as was paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years) and it was not disputed that Schedule 1B applied to the taxpayer’s claim for relief.

Paragraph 2 of Schedule 1B to TMA provides:

“(1)This paragraph applies where a person makes a claim requiring relief for a loss incurred or treated as incurred, or a payment made, in one year of assessment (“the later year”) to be given in an earlier year of assessment (“the earlier year”).

(2) Section 42(2) of this Act shall not apply in relation to the claim.

(3)The claim shall relate to the later year.

(4) Subject to sub-paragraph (5) below, the claim shall be for an amount equal to the difference between –

(a) the amount in which the person is chargeable to tax for the earlier year (“amount A”); and

(b) the amount in which he would be so chargeable on the assumption that effect could be, and were, given to the claim in relation to that year (“amount B”).

(5)Where effect has been given to one or more associated claims, amounts A and B above shall each be determined on the assumption that effect could have been, and had been, given to the associated claim or claims in relation to the earlier year.

(6)Effect shall be given to the claim in relation to the later year, whether by repayment or set-off, or by an increase in the aggregate amount given by section 59B(1)(b) of this Act, or otherwise. ....”

In the view of the Supreme Court it was clear, that the scheme in Schedule 1B allows a taxpayer, who has suffered a loss in a later year (“year 2”) and seeks to attribute the loss to an earlier year of assessment (“year 1”), to obtain his relief by reducing his liability to pay tax in respect of year 2 or by obtaining a repayment of tax in year 2.

The sum for which the taxpayer receives relief in year 2 is the difference between what was chargeable in year 1 and what would have been chargeable “on the assumption that effect could be, and were, given to the claim in relation to that year”. Or put simply, the relief is quantified on the basis that the tax liability in year 1 has already been assessed.

Jurisdiction

The First-tier Tribunal, as the successor of the general and special commissioners, has exclusive jurisdiction to hear taxpayers’ appeals against assessments to tax. However in the present case the Court was not dealing with an assessment to tax in respect of a particular year of assessment, but how HMRC dealt with a loss relief claim relating to a later year.

HMRC did not need to amend the taxpayer’s return in order to calculate the tax which it assessed as payable for 2007/08. HMRC did not have to amend the self-assessment under section 9C of TMA during such an enquiry and there was no appeal against such an amendment of the return by HMRC (under section 31 of TMA). The only appeal made was an appeal by letter against a late payment surcharge because the taxpayer claimed that his losses meant that no tax was due. As a result, the only issue for the tribunal was the late payment surcharge. Nothing else occurred to engage the jurisdiction of the tribunal.

HMRC’s position that its calculation, based on the information included in the tax return form, showed that he was due to pay tax in the sum it assessed on his behalf for 2007/08. The tax return form for 2007/08 did not show a loss claim which reduced the taxpayer’s liability to tax in respect of that tax year.

As HMRC lawfully commenced an enquiry under Schedule 1A of TMA and elected (under paragraph 4(3)(a) of that Schedule) not to give effect to the claim until the end of the enquiry, there was no postponement of payment of the tax due on 31 January 2009 by giving effect to the claim in the interim. The taxpayer was obliged to pay the amount of tax which had been assessed less any payment on account and HMRC was entitled to raise collection proceedings in the county court.

In this case, the county court was asked to determine in collection proceedings whether the taxpayer’s claim for relief for losses incurred in 2008/09, which he had made in his tax return form for 2007/08, constituted a defence to HMRC’s claim for immediate payment of the tax which it had calculated as payable in respect of 2007/08.

In the Supreme Court’s view, the county court and the High Court had jurisdiction to determine that issue which did not trench upon the First Tier Tribunal’s exclusive jurisdiction.

The Court of Appeal expressed concern about the risk of satellite litigation and delays in tax collection if HMRC were correct in its submission on the meaning of “return” in the relevant provisions. For that reason, the Supreme Court mentioned some salient points on how the UK tax system works.

Where a taxpayer makes a claim for relief in a tax return form which is on its face relevant to the year of assessment = or where the taxpayer chooses under section 9(1) of TMA to calculate the amount of tax that he is due to pay, and allows for the relief in his calculation, HMRC, if it disagrees, will have the option of correcting the return under section 9ZB of TMA, which extends to errors of principle.

If the taxpayer rejects the correction (under section 9ZB(4)), that correction has no effect. HMRC may give notice of an enquiry under section 9A. When HMRC completes the enquiry by issuing a closure notice under section 28A, the taxpayer may appeal a conclusion stated or amendment made in the closure notice (under section 31(1)(b) of TMA).

Similarly if HMRC amends the self-assessment during the enquiry under section 9C to prevent loss of tax, the taxpayer may appeal to the tribunal (section 31(1)(a)). Until this procedure is complete, effect is given to the claim, unless it results in a repayment (section 59B(4A) of TMA).

Where the taxpayer chooses to let the HMRC calculate the tax due but includes a claim for relief in a tax return form (whether from the outset or by amendment) which is clearly not relevant to the calculation of tax for the particular year of assessment, HMRC may ignore the claim in its calculation of the tax under section 9(3) of TMA. It treats it as a claim made otherwise than in a return and Schedule 1A to TMA applies (section 42(11)(a) of TMA).

In the procedure under that Schedule, if HMRC considers that the claim contains obvious errors, it can amend the claim. If satisfied that the claim is valid, HMRC is to give effect to the claim promptly. If not so satisfied, HMRC may enquire into the claim and not give effect to it until the enquiry is completed. Thus HMRC may collect the tax due for a year of assessment on the basis that the claim is not effective.

On completion of the enquiry, the taxpayer can notify HMRC of an appeal and thus place the dispute before the tribunal.

HMRC’s submission, which the Supreme Court accepted, that some entries in a tax return form are not part of the tax return for the purposes of, among others, sections 9 and 9A of TMA, may create avoidable uncertainty to taxpayers and their advisers. But that uncertainty can be removed if the return form which HMRC prescribes were to make clear which boxes requesting information were not relevant to the calculation of tax due in the particular year of assessment. In particular, HMRC could make this clear where the form provides for the intimation of “stand-alone” claims which relate to another tax year.

Finally, it was concluded that HMRC did not have to give effect to the claim for relief before the conclusion of the enquiry. The claim for relief based on an employment-related loss in 2008/09 did not provide a defence to HMRC’s demand for the payment of the tax assessed for 2007/08. HMRC’s appeal was allowed.

The full text of the case is available at

http://www.bailii.org/uk/cases/UKSC/2013/69.html