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
Appellants Respondent
David Ewart QC Alison Foster QC
Aparna Nathan
(Instructed by RPC LLP
) (Instructed by HMRC
Solicitor’s Office
)
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
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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 selfassessment 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
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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 selfassessment tax returns under section 8 of the TMA but are to be regarded as “standalone” 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
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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.
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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
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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
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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.”
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(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
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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).
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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 selfassessment 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
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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.
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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.
