Michaelmas Term [2013] UKSC 69 On appeal from: [2012] EWCA Civ 81

JUDGMENT
Cotter (Respondent) v Commissioners for Her
Majesty’s Revenue & Customs (Appellant)
before
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Toulson
Lord Hodge

JUDGMENT GIVEN ON
6 November 2013
Heard on 3 October 2013
Appellant Respondent
Ingrid Simler QC Keith Gordon
Scott Redpath Ximena Mantes Manzano
(Instructed by Her (Instructed by JMW
Majesty’s Revenue and Solicitors)
Customs)

LORD HODGE (with whom Lord Neuberger, Lord Sumption, Lord Reed
and Lord Toulson agree)
1. This appeal raises a question about the boundary between the jurisdiction of
the First-tier Tribunal (Tax Chamber) and that of the county court or the High
Court. Underlying that issue is a question of the legality of the approach which Her
Majesty’s Commissioners of Revenue and Customs (“the Revenue”) have taken to
entries which a taxpayer, Mr Cotter, made in a tax return. This is a test case as we
have been told that about 200 taxpayers have used the tax scheme which Mr Cotter
has used. The case turns on the proper interpretation of provisions in the Taxes
Management Act 1970 (“TMA”).
The facts
2. Mr Cotter filed his tax return for the 2007/08 year of assessment on 31
October 2008. In his return he made no claim for loss relief. As he is entitled to
do, he left it to the Revenue to calculate the tax due for that tax year. On 24
December 2008 the Revenue produced a tax calculation based on Mr Cotter’s
return. It showed income and capital gains tax due of £211,927.77.
3. On 29 January 2009 Mr Cotter’s accountants wrote to the Revenue and
enclosed 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 Mr Cotter 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”). In particular, the claim for relief was made in:
(i) the main tax return in box 19 on page TR6 under “Any other
information”;
(ii) the capital gains summary in box 14 on page CG1 in which the
figure of £314,583 was inserted, and under “Any other information”
in box 35 on page CG2; and
(iii) the “Additional Information” pages.
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4. In the “Additional Information” pages, Mr Cotter inserted “£395,417” in
Box 3 on page Ai3 (“Relief now for 2008-09 trading, or certain capital, losses”)
and “2007-08” in box 4 on that page (“and the tax year for which you are claiming
relief”). On page Ai4, box 17 (“Additional Information”) he explained, as he had
done on box 19 on page TR6 and in box 35 on page CG2, that his claim was made
under sections 128 and 130 of ITA for an employment-related loss which he had
sustained in the tax year 2008/09.
5. The provisional loss relief claim ended with these words:
“I acknowledge that my interpretation of the tax law applicable to
the above transactions and the loss (and the manner in which I have
reported them) may be at variance with that of [the Revenue].
Further please note that although I have reported (and hereby claim
the loss pursuant to section 128 ITA 2007) in box 3 above I wish to
make it clear that the deduction I am claiming on my return is not
necessarily what you may regard as ‘relief now for 2008-09 trading,
and certain capital losses’ – for these reasons I assume you will open
an enquiry.”
6. On 30 January 2009 the accountants sent a copy of the loss relief claim to
the Revenue’s West Cheshire recovery office. They stated: “As a result of this
claim no further 2007/08 taxes will be payable by Mr Cotter”.
7. After sending a holding reply, the Revenue responded on 5 March 2009 to
confirm that the tax return had been amended and to state that enquiries would be
opened into the claim and the tax return. The letter stated that the Revenue did not
intend to give effect to any credit for the loss until those enquiries were complete.
On the same date the Revenue issued a fresh tax calculation which again stated Mr
Cotter’s liability for the tax year 2007/08 at £211,927.77. On 11 March 2009 the
Revenue wrote to Mr Cotter to intimate that it was enquiring into the amendment
and the 2008/09 loss claim under Schedule 1A to TMA. In a further letter on the
same date the Revenue asked Mr Cotter to provide specified information and
documents. On 24 March 2009 Mr Cotter’s accountants wrote to the Revenue’s
recovery office to inform it that they had asked the Revenue to amend the self
assessment calculation and that as a result “no further 2007/08 taxes will be
payable by Mr Cotter.”
8. Mr Cotter’s accountants asserted in correspondence (i) that no further taxes
were payable for 2007/08 because of the loss claim which was the subject of
enquiry and (ii) 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. Mr Cotter
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also instructed NT Advisors LLP (“NT”) to respond to the Revenue’s recovery
unit and to the threat of legal proceedings. In an undated letter which that unit
received on 14 May 2009, NT contended that legal proceedings would be unlawful
because (i) Mr Cotter’s self assessment showed that no tax was payable as at 31
January 2009 and (ii) the Revenue had not amended the self assessment return.
9. After further correspondence about, among other things, the tax avoidance
scheme which had been used to generate the loss claim, the Revenue issued legal
proceedings in St Helens County Court on 22 June 2009. Its claim was for the
income tax and capital gains tax for 2007/08 and the first payment to account for
the year of assessment 2008/09 in the sum of £203,342, together with statutory
interest. In his defence Mr Cotter argued (a) that he was entitled to use his loss
claim to reduce to nil the tax otherwise payable for 2007/08 and (b) 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.
10. On 12 February 2010 the proceedings were transferred to the Chancery
Division of the High Court, Manchester District Registry to determine the issue of
jurisdiction. In a judgment handed down on 14 April 2011, David Richards J, the
Vice-Chancellor of the County Palatine of Lancaster, held (a) that 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 the Revenue for
immediate payment and (b) that Mr Cotter was not entitled to rely on his claim for
loss relief as a defence to the Revenue’s demand for payment of the tax due in
respect of 2007/08. The Vice-Chancellor granted Mr Cotter permission to appeal.
11. On 8 February 2012, the Court of Appeal (Arden, Richards and Patten LJJ)
allowed Mr Cotter’s appeal. In their judgment, the Court of Appeal analysed the
self assessment procedure and held that if the Revenue 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 Mr Cotter 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.
12. The Revenue appealed to this court.
The tax provisions governing employment loss relief
13. Section 128 of ITA provides for employment loss relief. It provides:
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“128 Employment loss relief against general income
(1) A person may make a claim for employment loss relief
against general income if the person –
(a) is in employment or holds an office in a tax year,
and
(b) makes a loss in the employment or office in the tax
year (“the loss-making year”).
(2) The claim is for the loss to be deducted in calculating the
person’s net income –
(a) for the loss-making year,
(b) for the previous tax year, or
(c) for both tax years.
(See Step 2 of the calculation in section 23.)”
14. Sub-section (7) provides:
“This Chapter is subject to paragraph 2 of Schedule 1B to TMA
1970 (claims for loss relief involving two or more years)”.
Section 42(11A) of TMA provides the same: Schedule 1B to TMA has effect in
respect of claims for relief involving two or more years of assessment. It is not
disputed that Schedule 1B applies to Mr Cotter’s claim for relief.
15. 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
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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. ….”
16. In my view it is clear, in particular from paragraphs 2(3) and (6), 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. It does not countenance by virtue of the
relief any alteration of the tax chargeable and payable in respect of year 1. On the
contrary, 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” (paragraph 2(4)). In other words, the relief is quantified on the basis that the
tax liability in year 1 has already been assessed.
17. Income tax is an annual tax, and liability to such tax is calculated in relation
to a particular tax year: sections 4 and 23 of ITA. Mr Gordon, who appeared for
Mr Cotter, did not argue in this court that he was entitled to deduct the relief
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against income and gains in 2007/08. He accepted that paragraph 2(6) of Schedule
1B to TMA provides that effect is to be given to the claim in year 2. He was
correct to make that concession. Accordingly, the claim did not affect the amount
of tax which was chargeable or payable in relation to 2007/08. There was therefore
no issue between the parties as to the correct assessment to tax in that year.
18. The Revenue’s use of the taxpayer’s income tax liability in 2007/08 in
quantifying his obligation to make payments to account for 2008/09 on 31 January
and 31 July 2009 (section 59A(1) and (2) of TMA) does not affect the finality of
the 2007/08 assessment. Whatever rights the claim for relief might have given the
taxpayer in relation to a payment to account for 2008/09, if the Revenue had
accepted its validity, it did not affect his obligation to pay the tax payable for
2007/08.
Whether the Revenue acted legally by instituting an enquiry under Schedule 1A
19. The conclusion that the relief could not diminish the tax chargeable and
payable for 2007/08 is central to the Revenue’s contention that it was entitled to
initiate an enquiry under Schedule 1A to TMA, which allowed the postponement
of relief until the completion of the enquiry (Schedule 1A, paragraph 4(3)). But Mr
Gordon submitted that the Revenue might enquire only under section 9A of TMA,
which allows an officer to “enquire into a return” or an amendment of the return
(section 9A(1) and (5)). That enquiry extends to:
“anything contained in the return, or required to be contained in the
return, including any claim or election included in the return,”
(Schedule 9A, paragraph (4)).
He argued that section 42(11) excluded the possibility of a Schedule 1A enquiry.
That sub-section provides:
“Schedule 1A to this Act shall apply as respects any claim which –
(a) is made otherwise than by being included in a return under
section 8, 8A or 12AA of this Act”.
20. Mr Gordon’s submission was attractive in its simplicity. The word “return”
in the TMA should be given its ordinary meaning. It was defined in section 118
(unless the context otherwise required) as including “any statement or declaration
under the Taxes Acts”. The claim was made in Mr Cotter’s tax return and so
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Schedule 1A could not apply. The Revenue could enquire only under section 9A
and it had not done so.
21. I recognise the force of that submission, which found favour in the Court of
Appeal. Treating everything in the tax return form as the tax return has the benefit
of keeping simple both the process of self assessment and the jurisdictional
boundary between the specialist tax tribunal and the courts. But, as Ms Simler
explained on behalf of the Revenue, it exposes the Revenue to irrelevant claims
made in the tax return form which have no merit and which serve only to postpone
the payment of tax which is payable. There was, she suggested, a risk that the
Court of Appeal’s decision would encourage marketed tax avoidance schemes
which would give a cash flow advantage to taxpayers, even if the schemes were
ultimately found to be ineffective.
22. The Revenue’s argument was that a claim was included in a “return” for the
purposes of sections 8(1), 9, 9A and 42 of TMA only if it affected or as Ms Simler
put it, could “feed into”, the calculation of tax payable in respect of the particular
year of assessment.
23. In judging the rival contentions it is in my view important to recall the
sequence of events which I set out in paragraphs 2 – 7 above. First, Mr Cotter gave
information relating to his tax affairs in his initial return form. But he did not
carry out the calculation of the tax which he was due to pay for 2007/08.
Secondly, the Revenue made that calculation. Thirdly, Mr Cotter then provided
the information about his provisional loss relief claim in his amendment of the tax
return. Fourthly, the Revenue reviewed the return and confirmed its assessment of
the tax due for 2007/08, treating the claimed relief as irrelevant to that assessment.
Finally, Mr Cotter’s advisers disagreed with the Revenue’s view but did not seek
to amend the tax return (under section 9ZA of TMA) by carrying out their own
calculation of tax. In particular, I do not construe the letter of 30 January 2009
from Mr Cotter’s accountants as an amendment of his tax return. The accountants
did not purport to produce a self assessment calculation. Their amendment of the
return was confined to the intimation of the claim. The statement in the letter of
30 January 2009 that no further 2007/08 taxes would be payable was merely an
assertion in a covering letter.
24. Where, as in this case, the taxpayer has included information in his tax
return but has left it to the Revenue to calculate the tax which he is due to pay, I
think that the Revenue is entitled to treat as irrelevant to that calculation
information and claims, which clearly do not as a matter of law affect the tax
chargeable and payable in the relevant year of assessment. It is clear from sections
8(1) and 8(1AA) of TMA that the purpose of a tax return is to establish the
amounts of income tax and capital gains tax chargeable for a year of assessment
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and the amount of income tax payable for that year. The Revenue’s calculation of
the tax due is made on behalf of the taxpayer and is treated as the taxpayer’s self
assessment (section 9(3) and (3A) of TMA).
25. The tax return form contains other requests, such as information about
student loan repayments (page TR2), the transfer of the unused part of a taxpayer’s
blind person’s allowance (page TR3) or claims for losses in the following tax year
(box 3 on page Ai3) which do not affect the income tax chargeable in the tax year
which the return form addresses. The word “return” may have a wider meaning in
other contexts within TMA. But, in my view, in the context of sections 8(1), 9, 9A
and 42(11)(a) of the TMA, a “return” 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).
26. In this case, the figures in box 14 on page CG1 and in box 3 on page Ai3
were supplemented by the explanations which Mr Cotter gave of his claim in the
boxes requesting “any other information” and “additional information” in the tax
return. Those explanations alerted the Revenue to the nature of the claim for relief.
It concluded, correctly, that the claim under section 128 of ITA in respect of losses
incurred in 2008/09 did not alter the tax chargeable or payable in relation to
2007/08. The Revenue was accordingly entitled and indeed obliged to use
Schedule 1A of TMA as the vehicle for its enquiry into the claim (section
42(11)(a)).
27. Matters would have been different if the taxpayer had calculated his
liability to income and capital gains tax by requesting and completing the tax
calculation summary pages of the tax return. In such circumstances the Revenue
would have his assessment that, as a result of the claim, specific sums or no sums
were due as the tax chargeable and payable for 2007/08. Such information and
self assessment would in my view fall within a “return” under section 9A of TMA
as it would be the taxpayer’s assessment of his liability in respect of the relevant
tax year. The Revenue could not go behind the taxpayer’s self assessment without
either amending the tax return (section 9ZB of TMA) or instituting an enquiry
under section 9A of TMA.
28. It follows that a taxpayer may be able to delay the payment of tax by claims
which turn out to be unfounded if he completes the assessment by calculating the
tax which he is due to pay. Accordingly, the Revenue’s interpretation of the
expression “return” may not save it from tax avoidance schemes. But what
persuades me that the Revenue is right in its interpretation of “return” is that
income tax is an annual tax and that disputes about matters which are not relevant
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to a taxpayer’s liability in a particular year should not postpone the finality of that
year’s assessment.
Jurisdiction
29. The First-tier Tribunal (“the tribunal”), as the successor of the general and
special commissioners, has exclusive jurisdiction to hear taxpayers’ appeals
against assessments to tax (Autologic Holdings plc v Inland Revenue
Commissioners [2006] 1 AC 118, Lord Nicholls of Birkenhead at paras 12-15,
Lord Millett at para 62 and Lord Walker of Gestingthorpe at para 84). But, as
explained below, we are not dealing in the present case with an assessment to tax
in respect of a particular year of assessment, but how the Revenue has dealt with a
loss relief claim relating to a later year.
30. The Revenue did not need to amend Mr Cotter’s return form (under section
9ZB of TMA) in order to calculate the tax which it assessed as payable for
2007/08. There was therefore no rejection by Mr Cotter of a Revenue correction
(under section 9ZB(4) of TMA). There was no section 9A enquiry. The Revenue
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 the
Revenue (under section 31 of TMA). The only appeal which Mr Cotter’s
accountants made was an appeal by letter of 17 April 2009 against a late payment
surcharge (under section 59C(7) of TMA), because he 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.
31. The Revenue’s position was simple: its calculation, based on the
information which Mr Cotter had included in his 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 Mr Cotter’s liability to
tax in respect of that tax year. As the Revenue 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 to account (section 59B of TMA) and the Revenue
was entitled to raise collection proceedings in the county court (section 66 of
TMA). I agree with that position.
32. In this case, the county court was not asked to rule on the validity of the
claim for loss relief. Nor was it concerned with any appeal against the assessment
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to tax. It 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 the Revenue’s claim for immediate
payment of the tax which it had calculated as payable in respect of 2007/08. In my
view, the county court and the High Court had jurisdiction to determine that issue
which did not trench upon the tribunal’s exclusive jurisdiction.
How the system works
33. The Court of Appeal expressed concern about the risk of satellite litigation
and delays in tax collection if the Revenue were correct in its submission on the
meaning of “return” in the relevant provisions. For that reason, it is appropriate
that I should say something about how, as I see it, the system works.
34. Where a taxpayer makes a claim for relief in a tax return form which is on
its face relevant to the year of assessment (as, for example, when he claims
employment loss relief in year 2) 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, the Revenue, 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. The Revenue may give notice of an enquiry under section
9A. When the Revenue 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 the Revenue
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).
35. Where the taxpayer chooses to let the Revenue 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, the Revenue 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 the Revenue considers that the claim contains obvious
errors, it can amend the claim (paragraph 3). If satisfied that the claim is valid, the
Revenue is to give effect to the claim promptly (paragraph 4). If not so satisfied,
the Revenue may enquire into the claim and not give effect to it until the enquiry is
completed (paragraphs 4(3) and 5). Thus the Revenue may collect the tax due for
a year of assessment on the basis that the claim is not effective. On completion of
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the enquiry (paragraph 7), the taxpayer can notify the Revenue of an appeal
(paragraph 9) and thus place the dispute before the tribunal.
36. The Revenue’s submission, which I have 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 could be removed if the return form which the
Revenue prescribes (section 113 TMA) 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, the Revenue could make this clear where the form
provides for the intimation of “stand-alone” claims which relate to another tax
year.
Conclusion
37. As I have concluded that the Revenue did not have to give effect to the
claim for relief before the conclusion of the enquiry, I do not need to consider a
submission, which the Revenue sought to raise late in the day, that section 35 of
the Crown Proceedings Act 1947 and CPR Rule 66.4 prevent a taxpayer from
pleading set off against the Crown.
38. The claim for relief based on an employment-related loss in 2008/09 did not
provide a defence to the Revenue’s demand for the payment of the tax assessed for
2007/08. I would therefore allow the appeal so as to restore paragraphs 1 and 2 of
David Richards J’s order of 5 May 2011.
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