Michaelmas
Term
[2017] UKSC 74
On appeal from: [2016] EWCA Civ 40
JUDGMENT
R (on the application of De Silva and another)
(Appellants) v Commissioners for Her Majesty’s Revenue and Customs
(Respondent)
before
Lord Neuberger
Lord Kerr
Lord Reed
Lord Hughes
Lord Hodge
JUDGMENT GIVEN ON
15 November 2017
Heard on 22 June 2017
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Appellants
David Ewart QC
(Instructed by RPC
LLP)
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Respondent
Alison Foster QC
Aparna Nathan
(Instructed by HMRC
Solicitor’s Office)
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PTA Intervener
(Cotter Solutions Ltd)
(Written submissions only)
Amanda Hardy QC
(Instructed by GRM
Law)
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LORD HODGE: (with whom
Lord Neuberger, Lord Kerr, Lord Reed and Lord Hughes agree)
1.
This appeal concerns the interpretation of provisions of the Taxes
Management Act 1970 (“the TMA”). The principal issue is whether the
Commissioners of HM Revenue and Customs (“HMRC”) were entitled to open an
enquiry into the claims for relief from income tax, which the appellants (Mr De
Silva and Mr Dokelman or collectively “the taxpayers”) had made in their tax
return forms to carry back losses to earlier tax years, and, as a result, amend
their tax returns to deny the taxpayers the full relief which they claimed or
had been given. The taxpayers argue that HMRC were entitled to inquire into
their claims only under Schedule 1A and that, because the statutory time limit
for such an enquiry had expired, their claims had become unchallengeable.
Factual background
2.
The taxpayers were limited partners in various limited partnerships
established under the Limited Partnerships Act 1907. The general partner of the
partnerships was Investing in Enterprise Ltd (“IEL”). The taxpayers became
partners in these partnerships in implementation of marketed tax avoidance
schemes which were aimed at accruing trading losses through investment in films
in order to set off those losses against income of the same or earlier years.
The taxpayers invested in the partnerships in part by using their own money but
principally by taking out non-recourse or limited recourse loans. The schemes
aimed to take advantage of tax incentives under section 42 of the Finance (No
2) Act 1992 (as amended) (“the 1992 Act”) to encourage investment in the
production and acquisition of qualifying films. It is not necessary to give
details of the tax incentives. In the early years of trading a limited partner
could use the provisions of sections 380 and 381 of the Income and Corporation
Taxes Act 1988 (“ICTA”) to set off his allocated share of trading losses of a
partnership in a particular year against his general income for that year of
assessment or any of the previous three years of assessment. The ability to
carry back the losses in this way allowed the partner to choose to set off the
losses against his taxable income in one or more of those years in a way which
gave him the greatest advantage.
3.
The relevant film partnerships lodged tax returns, which IEL completed,
for the tax years 1998/99, 1999/2000, 2000/01 and 2001/02, in which the
partnerships claimed that they had suffered substantial trading losses, in
relation to which they claimed relief for film expenditure under section 42 of
the 1992 Act. HMRC did not accept those claims, but initiated inquiries into
the partnerships’ tax returns under section 12AC(1) of the TMA. After extensive
investigations, HMRC determined that the claims for losses should not be
accepted and issued closure notices on the inquiries in about July 2003. In
substance, HMRC disallowed the partnerships’ claims for expenditure funded by
the non-recourse or limited recourse loans to individual partners and also the
expenditure paid as fees to the promoters of the schemes. The partnerships
appealed to the Special Commissioners of Income Tax (the predecessors of the
First-tier Tribunal (Tax Chamber)) in August 2003. Those appeals and the
partnerships’ claims for losses and relief were compromised by an agreement
dated 22 August 2011 under section 54 of the TMA (“the partnership settlement
agreement”) under which the partnerships’ losses were stated at much reduced
levels.
4.
Mr De Silva in his self-assessment tax return form for 1998/99 included
a claim to set off his share of trading losses of certain partnerships in other
years, including 1999/2000, against his general income in several tax years,
including 1998/99, with the intention of reducing his payment in respect of tax
due for 1998/99 by £16,800. He included that figure in box 18.9 on the return
form against an entry, “1999-2000 tax you are reclaiming now”. Under the
heading “additional information” in his return he explained the detail of the
carry-back claims which he was making to give rise to that figure. The losses
which supported his claim to reduce his tax payment by £16,800 were his share
of partnership trading losses in the year 1999/2000, which it had already been
estimated that the relevant partnership would incur in that tax year.
5.
In his self-assessment tax return form for 1999/2000, Mr De Silva made
amended carry-back claims to set off his share of partnership losses in 1999/2000
against his general income in previous years so as to claim a repayment of tax
for those years.
6.
Mr Dokelman also claimed tax relief in a similar manner. In his
self-assessment tax return form for 2000/01 he made a claim for the losses
which he had incurred as a partner in some of the partnerships in the tax year
2000/01 against his general income in 1999/2000 and 1997/98.
7.
In each case the taxpayer claimed relief for his share of the
partnership losses as those losses had been stated in the partnership tax
returns before they were substantially reduced when HMRC amended the
partnership tax returns after entering into the partner settlement agreement.
8.
HMRC had initially accepted Mr De Silva’s claims for relief and credited
him with £22,400 and £42,000. After the partnership claims were determined in
the partnership settlement agreement, HMRC wrote to the taxpayers to intimate
that their carry-back claims in their personal tax returns would be amended in
line with the lower figures for the partnership losses which had been agreed in
the partnership settlement agreement. HMRC informed Mr De Silva that he had to
pay additional tax of £17,176.80 and £32,400. HMRC informed Mr Dokelman, who
had not been given credit for the partnership losses, that those losses
available for a claim for 2000/01 were reduced to the levels agreed in the
partnership settlement agreement. HMRC’s letters to Mr De Silva were dated 16
September 2011 and 17 November 2011. Their letter to Mr Dokelman was dated 28
October 2011.
The legal proceedings
9.
The taxpayers have challenged HMRC’s decisions which were set out in
those letters by a claim for judicial review. They assert that HMRC are obliged
to give effect in full to their claims to carry back the partnership losses
because HMRC did not open an enquiry into the claims under Schedule 1A to the
TMA in order to challenge them and are now barred by the passage of time from
doing so. They submit that their case is supported by a judgment of this court
in Revenue and Customs Comrs v Cotter [2013] UKSC 69; [2013] 1 WLR 3514;
[2013] STC 2480 (“Cotter”). The Upper Tribunal (Sales J) in a decision
dated 15 April 2014 ([2014] UKUT 170 (TCC); [2014] STC 2088) rejected their
claim. The Court of Appeal (Arden, Gloster and Simon LJJ) in a judgment dated 2
February 2016, in which Gloster LJ gave the leading judgment, dismissed the
taxpayers’ appeal ([2016] EWCA Civ 40; [2016] STC 1333).
The taxpayers’ challenge
10.
The taxpayers now appeal to this court. Their submission in summary is
that their claims for relief by carrying back losses are not claims made in
their self-assessment tax returns under section 8 of the TMA but are to be
regarded as “stand-alone” claims for relief which are not made in tax returns
and which HMRC could challenge only under Schedule 1A to the TMA. They renew
their submission that HMRC had failed to operate those procedures to challenge
their claims and are now out of time to do so. They submit that their claim for
relief is not affected by the power of HMRC to amend the partnerships’ tax
returns or their individual tax return forms to give effect to the partnership
settlement agreement.
Discussion
11.
The answer to this appeal lies in the provisions of the TMA (i) which
deal with the making and processing of claims for relief and (ii) which specify
what a taxpayer must include in his tax return. I will look first at those
provisions before summarising what HMRC have done in these cases. When I refer
to sections or Schedules below without specifying the Act, I refer to sections
of and Schedules to the TMA.
12.
The provisions of the TMA in so far as they concern income tax are
dealing with an annual tax and this court has held in Cotter that a tax
“return” in the context of sections 8(1), 9, 9A and 42(11)(a) refers to the
information in the tax return form which is submitted for “the purpose of
establishing the amounts in which a person is chargeable to income tax and
capital gains tax” for the relevant year of assessment and “the amount payable
by him by way of income tax for that year” (section 8(1) TMA). I will return to
section 8(1) when I address the provisions mentioned in (ii) in para 11 above.
The making and processing of claims
13.
The provisions which deal with the making and processing of claims for
relief are section 42 and Schedules 1A and 1B.
14.
Section 42(1) provides that, unless otherwise provided, section 42 shall
have effect in relation to a claim for relief to be given. Subsection (2)
provides that where an officer of HMRC has given a notice to a person, whether
an individual (section 8), a trustee (section 8A) or the partner of a
partnership (section 12AA), requiring him to make and deliver a tax return,
“a claim shall not at any time be
made otherwise than by being included in a return under that section if it
could, at that or any subsequent time, be made by being so included.”
This requirement that a claim be included in a tax return
was an innovation in the Finance Act 1994, which amended the TMA extensively to
provide for the introduction of self-assessment. Section 42 as initially
enacted had provided as a general rule that claims should be made to an
inspector of taxes within time limits specified in section 43, also as
initially enacted.
15.
Section 42(6) requires that in the case of a trade, profession or
business carried on by persons in partnership a claim under the provisions
specified in subsection (7), which include section 42 of the 1992 Act under
which the claims have been made in this case, shall, where subsection (2)
applies, be made by being included in a partnership return and in any other case,
by such one of those persons as may be nominated by them for the purpose.
16.
Section 42(11) provides:
“Schedule 1A to this Act shall
apply as respects any claim or election which - (a) is made otherwise than by
being included in a return under section 8, 8A or 12AA of this Act …”
17.
Section 42(11A) provides:
“Schedule 1B to this Act shall
have effect as respects certain claims for relief involving two or more years
of assessment.”
As a claim to carry back losses is a claim for relief
involving two or more years of assessment and as the taxpayers’ claims are of
that nature, I will examine Schedule 1B first.
18.
Schedule 1B is headed “Claims for relief involving two or more years”
and paragraph 2 of the Schedule addresses loss relief, which is the subject of
the claims in this case. Paragraph 2 provides so far as relevant:
“(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) … 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’). …
(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.”
(The aggregate amount given by section 59B(1)(b) is the aggregate
of payments on account of income tax deducted at source in respect of that tax
year.)
19.
Paragraph 2 of Schedule 1B thus is concerned with relief sought for a
loss incurred in the later year (which I will call “Year 2”) by carrying it
back to the earlier year (“Year 1”). Significantly, paragraph 2(3) makes it
clear that the claim relates to Year 2. The quantification of the claim is
governed by paragraph 2(4): the claim is the difference between amount A and
amount B on the counterfactual assumption that effect could have been and was given
to the claim in Year 1. That assumption is counterfactual because paragraph
2(3) and paragraph 2(6) relate the claim and the giving effect to the claim to
Year 2.
20.
Paragraph 2(2) of Schedule 1B disapplies section 42(2) in relation to
such a claim. That has the effect that a claim may be made under Schedule 1A, notwithstanding
that an officer of HMRC has required the provision of a tax return, for example
in Year 1 outside a tax return. But I agree with Sales J and the Court of Appeal
that HMRC are correct in their submission that that disapplication does not
mean that the taxpayer is released from making the claim in his tax return in
Year 2. As I will seek to show (paras 23-29 below), section 8(1) imposes that
requirement.
21.
Schedule 1A is headed “Claims etc not included in returns”. Paragraph 2
provides for a claim to be made to an officer of HMRC in such form as HMRC may
determine, but HMRC have not specified any particular form of claim and accept
claims made by letter. Paragraph 4(2) requires an officer of HMRC to give
effect as soon as practicable after a partnership claim is made under section
42(6) by a nominated person to such a claim as respects each of the relevant
partners by discharge or repayment of tax, unless HMRC inquire into the claim. Similar
provision is made in paragraph 4(1) for the prompt processing of
non-partnership claims. Schedule 1A therefore requires HMRC to respond promptly
to claims for relief and thus assist the cash flow of taxpayers who have
relevant and valid claims. But HMRC are also empowered to challenge claims:
paragraph 5 provides for inquiries into Schedule 1 claims and contains time limits
for the opening of such inquiries. Such an enquiry postpones the obligation to
give effect to the claim (paragraph 4(3)) and on completion of the inquiry HMRC
may by closure notice amend the claim (paragraph 7(1)).
22.
It is, as I have said, the taxpayers’ assertion that their claims were
stand- alone claims which were governed only by Schedule 1A and that HMRC, by
failing to open a paragraph 5 inquiry have allowed the claims to become unchallengeable.
I am satisfied that that assertion is incorrect because of the provisions of
the TMA which specify what a taxpayer must include in his return.
The content of a tax return
23.
Section 8 sets out what a person must produce when given a notice to make
and deliver a tax return. So far as relevant the section provides:
“(1) For the purpose of
establishing the amounts in which a person is chargeable to income tax and
capital gains tax for a year of assessment, and the amount payable by him by
way of income tax for that year, he may be required by a notice given to him by
an officer of the Board -
(a) to make and deliver to
the officer … a return containing such information as may reasonably be
required in pursuance of the notice, and
(b) to deliver with the
return such accounts, statements and documents, relating to information
contained in the return, as may reasonably be so required. …
(1AA) For the purposes of
subsection (1) above -
(a) the amounts in which a
person is chargeable to income tax and capital gains tax are net amounts, that
is to say, amounts which take into account any relief or allowance a claim for
which is included in the return; and
(b) the amount payable by a
person by way of income tax is the difference between the amount in which he is
chargeable to income tax and the aggregate amount of any income tax deducted at
source and any tax credits to which section 231 of the principal Act [ie ICTA]
applies.”
(The tax credits to which section
231 of ICTA referred were tax credits for advance corporation tax which the
recipient of qualifying distributions from a UK-resident company could claim.) It
is noteworthy that under subsection (1)(a) the information which is required is
not simply the amounts in which the person is chargeable to income tax and the
amounts payable by him for the year of assessment but information “for the
purpose of establishing” those amounts. That information includes the person’s
share of partnership income or losses for the period which falls within the
year of assessment as section 8 provides:
“(1B) In the case of a person who
carries on a trade, profession, or business in partnership with one or more
other persons, a return under this section shall include each amount which, in
any relevant statement, is stated to be equal to his share of any income, loss,
tax, credit or charge for the period in respect of which the statement is made.
(1C) In subsection (1B) above
‘relevant statement’ means a statement which, as respects the partnership,
falls to be made under section 12AB of this Act for a period which includes, or
includes any part of, the year of assessment or its basis period.”
24.
A person must therefore include in the return for Year 2 his share of
the losses of a partnership, of which he was a partner, which have been stated
in a relevant statement relating to Year 2.
25.
Section 9 provides for self-assessment. Unless the taxpayer makes and
delivers his tax return within time limits specified in section 9(2) and
subject to an exception in section 9(1A) which is not relevant, section 9(1)
provides:
“every return under section 8 or
8A of this Act shall include a self-assessment, that is to say - (a) an
assessment of the amounts in which, on the basis of the information contained
in the return and taking into account any relief or allowance a claim for which
is included in the return, the person making the return is chargeable to income
tax and capital gains tax for the year of assessment …”
Claims, reliefs and tax returns
26.
Whether a taxpayer submits his tax return for Year 2 within the time
limits of section 9(2), so that HMRC assess the sums in which he is chargeable
to income tax and the amount payable, or includes in the return the
self-assessment in terms of section 9(1)(a), he must provide information in his
return for Year 2 to establish what proportion, if any, of his share of the
partnership loss incurred in Year 2 is to be offset against his other income in
Year 2.
27.
If a taxpayer wished to claim to offset all of his share of partnership
losses in Year 2 against his other income in Year 2 by invoking section
380(1)(a) of ICTA, he would have to include that claim in his return for Year
2. Schedule 1B would not apply as the claim for relief would involve only one
year of assessment. Section 8(1AA)(a) would allow him relief, for which he had
included a claim in the return, giving rise to the net sum in which he would be
chargeable to income tax for that year.
28.
If a taxpayer wished to carry back part of the losses incurred in Year 2
to set off against his income of Year 1 by invoking section 380(1)(b) of ICTA,
he would also have to make the claim in his return for Year 2. This is the
combined effect of section 8(1AA)(a) and Schedule 1B paragraphs 2(3) and (6). As
shown in para 18 above, those paragraphs provide that the claim for relief
relates to Year 2 and effect is to be given to that claim in relation to Year
2. If HMRC had already given effect to part of the claim under Schedule 1A in
Year 1 by giving relief, for example by repayment, the return for Year 2 would
still have to state the loss, the claim and the relief already given in order
to establish the amounts in which the taxpayer is chargeable to income tax in
Year 2. Similarly, if the taxpayer had already received full relief under
Schedule 1A in Year 1, he would have to state the same information as to the
loss, the claim and the relief already given. By so doing he enables the return
to “take into account”, as section 8(1AA)(a) requires, both the relief which is
claimed in the return and that which he has already received. In each case that
information is a necessary part of his return for Year 2 as it is information
required “for the purpose of establishing the amounts” in which the taxpayer is
chargeable to income tax for that year of assessment: section 8(1).
29.
In summary, section 8(1AA)(a) defines the amounts in which a person is
chargeable to income tax in a year of assessment as net amounts taking account
of any relief, a claim for which has been included in the return. The claims to
carry back losses relate to Year 2 and effect is given to them in relation to
that year: Schedule 1B paragraph 2(3) and (6). It follows, therefore, that the
taxpayer must make a claim in his tax return in respect of Year 2 and state the
extent to which the relief claimed has already been given in order to establish
the amounts in which he is chargeable to income tax for that year of
assessment. If too much has already been given as relief, the self-assessment
can take that into account by adjusting the amount in which the taxpayer is
chargeable to income tax for Year 2: section 9(1)(a).
30.
HMRC may inquire into a return under section 8 or 8A if an officer gives
notice of his intention to do so (section 9A(1)) and that enquiry may extend to
anything contained in the return, or required to be contained in the return,
including any claim: section 9A(4). HMRC were therefore empowered under section
9A to inquire into the taxpayers’ carry back claims contained in their Year 2
tax returns. HMRC were not required to institute an enquiry under Schedule 1A
in order to challenge the taxpayers’ claims.
31.
In a written intervention Cotter Solutions Ltd have argued that the
interpretation of the relevant provisions of the TMA which Sales J and the
Court of Appeal favoured, by contrast with the straightforward provisions of
Schedule 1A, would not allow HMRC either to postpone giving effect to the claim
or to recover any tax relief which was subsequently found, following enquiry,
not to have been due. I do not agree for three reasons. First, in relation to a
Schedule 1B claim, the obligation in paragraph 4 of Schedule 1A to give effect
to the claim as soon as practicable after the claim is made applies to a claim to
which effect is given in relation to Year 2 and in relation to which HMRC can
institute an enquiry under section 9A. Schedules 1A and 1B operate in tandem in
this context. A claim to carry back loss relief made early under Schedule 1A
may need the Year 2 losses to be established before effect is given to the
claim. The relevant time limit for enquiring into the claim in paragraph 5 of
Schedule 1A operates from Year 2, to which the claim relates, and what is
practicable in giving prompt effect to a claim must be assessed in that
context. Secondly, the mechanisms in paragraph 2(6) of Schedule 1B for giving
effect to a claim in Year 2 are not confined to repayment, set off and the
increase in the aggregate of payments on account, none of which would alter the
tax chargeable for Year 2. Paragraph 2(6) includes the words “or otherwise”,
which open the door to an adjustment of the amount chargeable to income tax by
virtue of both section 8(1AA)(a), which provides that the amounts in which a
person is chargeable “take into account any relief … a claim for which is
included in the return” and section 9(1)(a) which makes similar provision for
the self-assessment. Where relief has already been given in error, it would in
my view be open to HMRC, in completing an enquiry, to amend the return (for
example, under section 28A(2) TMA) by altering the amount chargeable to income
tax for Year 2 in order to recover the sums which were wrongly paid as relief.
Thirdly, section 59B(5) provides for payment of income tax which is payable as
a result of an amendment of a self-assessment under section 28A on completion
of an enquiry into a personal tax return.
What HMRC did
32.
HMRC gave notice under section 12AC(1) of the opening of inquiries into
the partnerships’ tax returns for the tax years 1998/99, 1999/2000, 2000/01 and
2001/02. By virtue of section 12AC(6)(a), the giving of notice opening an
enquiry into a partnership return is deemed to include the giving of a notice
of enquiry “under section 9A(1) of this Act to each partner who at that time
has made a return under section 8 or 8A of this Act or at any subsequent time
makes such a return”. There were therefore deemed inquiries into the partners’
personal tax returns in respect of what I have called Year 2.
33.
Following the closure of the inquiries under section 28B, the
partnerships appealed under section 31 against the conclusions and amendments
made by the closure notices. Their compromise of the appeals by agreements
under section 54 had the same consequences as if the Special Commissioners (now
the First-tier Tribunal) had determined the appeal in the manner set out in the
agreement: section 54(1). The agreement therefore operates as if it were a
determination by the special commissioners under section 50(7).
34.
That deemed decision by the special commissioners empowered HMRC to
alter the taxpayers’ personal tax returns because section 50(9) provides:
“Where any amounts contained in a
partnership statement are reduced under subsection (6) above or increased under
subsection (7) above, an officer of the Board shall by notice to each of the
relevant partners amend -
(a) the partner’s return
under section 8 … of this Act or
(b) the partner’s company
tax return,
so as to give effect to the
reductions or increases of those amounts.”
HMRC’s letters, to which I referred
in para 8 above and which are the subject of this judicial review challenge,
amended the taxpayers’ tax returns in this way.
35.
Section 59B(5)(b) provides for the payment by the taxpayer of sums
payable as a result of the amendment of a partner’s tax return under section
50(9) and Schedule 3ZA paragraph 11 specifies the time limit for that payment.
36.
HMRC’s amendment of the taxpayers’ individual tax returns and the
decisions in the letters under challenge were therefore lawful and the judicial
review challenge fails.
Cotter
37.
Cotter was concerned with a claim made by an amendment of a tax
return form relating to Year 1 which intimated a claim for a loss that would
occur in Year 2. That claim had, and could have, no bearing on the amount of
tax chargeable and payable by Mr Cotter in respect of Year 1: paras 16 and 17
of Cotter. At that stage it was a stand-alone claim to which Schedule 1A
applied. The case did not address the possibility of a section 9A enquiry into
the tax return in Year 2. HMRC commenced their Schedule 1A enquiry into the
claim before the end of Year 2, thereby precluding any enquiry into the claim
under section 9A if it were (as it ought to have been) contained in the Year 2
tax return at a later date: Schedule 1A, paragraph 5(3)(b). By contrast, in
this case the taxpayers’ claims were made in their tax returns for Year 2
(paras 5 and 6 above). Cotter gives no support to the taxpayers in this
appeal.
Conclusion
38.
I would dismiss this appeal.
