This month’s Chartered Accountants Tax Case Digest looks at an Upper Tribunal (“UT”) case which examined whether a claim for terminal loss relief was a stand-alone claim or if it formed part of the corporation tax return for the final period of trading.

In its decision, the UT rejected the reasoning of the taxpayer and found that the key component of the terminal loss relief was the goodwill amortisation and without this being established, the loss relief claim failed.

Background

Spring Salmon and Seafood Ltd (“SSSL”) carried on business as seafood suppliers from 1998. The company was essentially controlled and operated by the Thomas family.

A partnership known as the S&R Partnership also began trading as consultants in 1998. In 2002, it sold/purported to sell its business to SSSL for £2,835,000 of which £2,800,000 was attributed to goodwill. £1.4m was paid by SSSL to each of the partners in July 2002. It is this goodwill which lies behind the terminal loss relief claim which is at issue.

Another Thomas family company, Spring Seafoods Ltd (“Seafoods”) began trading in March 2004. It was claimed that in September 2004, SSSL transferred its business to the partnership and that the partnership immediately transferred it to Seafoods at market value. Seafoods changed its name to Spring Capital Ltd in 2010. In a subsequent tax appeal by Spring Capital, the FTT refused to accept that these arrangements were genuine.

When SSSL finally ceased trading around the end of January 2005, Seafoods apparently took over SSSL’s business and carried on its trade.

In its corporation tax return for 2002 and 2003, SSSL claimed relief for amortisation of goodwill. In its returns for 2004/2005 SSSL claimed loss relief of £2,483,777. They also sought to carry this back and set it off against profits of the three preceding years under the terminal loss relief provisions.

HMRC subsequently opened an enquiry into the 2004/05 corporation tax returns after which they issued closure notices in 2011 refusing all the claims for amortisation of goodwill and terminal loss relief. The closure notices for 2004/05 returns concluded that SSSL was not entitled to relief for goodwill amortisation which was therefore disallowed in the calculation of corporation tax profits.

The terminal loss relief claim consisted of a claim to carry back the asserted loss of £2,819,065, based, principally, on the asserted claim for relief for goodwill amortisation of £2,394,521 in the final 18 month accounting period, and which HMRC had disallowed.

However the closure notices for 2004 and 2005 did not use the phrase terminal loss relief. What they said was that the loss reflected in the corporation tax computations submitted by SSSL for the 18 months to 31 January 2005 was £2,819,065, of which £2,394,521 was claimed to be for relief for goodwill amortisation.

The notices denied that relief for goodwill amortisation noting that the computations submitted by SSSL were on the basis of a claim to carry back any corporation tax loss on the cessation of trade. The conclusion in the notices was that the corporation tax loss for the 18 month period was £424,544 and not the sum of £2,891,065 reflected in SSSL’s tax computations.

The closure notices requested confirmation of how SSSL wished to utilise the amended loss of £424,544.

SSSL appealed to the First Tier Tribunal (“FTT”) against the closure notices issued by HMRC. The taxpayer argued that the claim to carry back terminal loss relief was a stand-alone claim that could not be correctly dealt with under Schedule 18 to Finance Act 1998 (the statutory provision which allows HMRC to open enquiries into what was contained or required to be contained in a return) but instead needed a separate enquiry under Schedule 1A to the Taxes Management Act 1970.

They also argued that the closure notices did not affect the claims at issue. The FTT rejected these arguments and decided that the enquiries were validly opened under the correct statutory provisions. The taxpayer appealed this decision to the Upper Tribunal (“UT”).

Upper Tribunal Decision

The UT noted that the claim for terminal loss relief arose principally from a deduction for goodwill amortisation, which was asserted to arise in the final 18 month accounting period and was properly to be contained in the returns for this period.

Counsel for the taxpayer had attempted to draw a distinction between the amortisation of goodwill which was the asserted foundation for the loss and the claim to carry this loss back, but the UT rejected this reasoning, finding that the key component of the terminal loss relief was the goodwill amortisation and without this being established, the loss relief claim failed.

The crux of the taxpayer’s argument was the decision of the Supreme Court in Cotter v HMRC (2013) UKSC 69. As the terminal loss claim does not impact on the liability for the final period, the taxpayer contended that it did not form part of the return and thus that HMRC were wrong to disallow it.

A second argument was also put forward by Counsel for the taxpayer was that the closure letters had not addressed the carry back claims within those letters and therefore had not properly closed those claims.

The UT rejected this argument, instead preferring the decision in R (on the application of De Silva) v Revenue and Customs Commissioners 2016 EWCA Civ 40.

The taxpayer made a single claim for terminal loss relief. That loss was said to arise out of amortisation of goodwill. The taxpayer sought to use the carry back provisions to carry that loss back to earlier years. That loss was asserted to arise in the final 18 month accounting period ending 31 January 2005. The claim for which the taxpayer sought relief “related” within the meaning of paragraph 58(1)(a) of Schedule 18 to the said period. Accordingly, the UT’s view was that it is properly contained in the 2004 and/or 2005 returns. As a result, it was it was properly open to HMRC to open an enquiry in terms of Schedule 18 and to issue closure notices in terms thereof. There was no requirement on them to open an enquiry in terms of Schedule 1A.

The UT therefore agreed with the FTT that the terminal loss relief claim could not be viewed as a stand-alone claim. The goodwill amortisation is the core of the taxpayer’s claim for relief. Without the establishment of the goodwill amortisation and thus a loss, the terminal loss relief failed.

The full judgment in this case is available from: – http://www.bailii.org/uk/cases/UKUT/TCC/2017/205.pdf