HM Revenue & Customs v Cotter

This appeal is about jurisdiction. It concerns a claim for tax relief made by a taxpayer in his self-assessment return, and the issue is whether the First-tier tribunal or the court has jurisdiction to adjudicate on it. The Commissioners for Her Majesty’s Revenue & Customs (“the Revenue”) have brought proceedings (“collection proceedings”) against the appellant to recover the tax payable according to his return on the basis that the claim for relief is left out of account. The dispute boils down to the correct procedure for the Revenue to use. The Revenue contends that the relief could not be claimed against income or gains for the year of assessment. Therefore it was bound to use the separate procedure for contesting loss relief claims made otherwise than in returns. The appellant contends that the Revenue should have followed the procedure for disputing items contained in a return under section 9A of the Taxes Management Act 1970 (“TMA”) (“the section 9A procedure”). If the Revenue had followed this course, the appellant would have had a right of appeal in the first instance to the First-tier tribunal to the exclusion of any court (section 31 of the TMA and see Autologic Holdings v IRC [2006] 1 AC 118).

This is a test case. There are other taxpayers who have made loss relief claims and who are resisting collection proceedings relying on the same defence as the appellant. Those proceedings have been stayed pending the outcome of this appeal.

This case is not concerned with the substantive question whether the appellant’s claim for loss relief should have been disallowed.

The claim arises out of the appellant’s 2007/8 return, which the appellant was required by the usual statutory notice to complete. As it happens, the relevant claim was made in an amendment to the return but nothing turns on that fact.

The return included income of about £440,000, together with net chargeable gains for capital gains tax purposes of some £315,000. On 24 December 2008 the Revenue produced a tax calculation showing an income and capital gains tax liability of £211,927.

Following this communication, the appellant appears to have entered into a tax avoidance scheme designed to eliminate his substantial liability to tax. That scheme involved making a loss relief claim. Accordingly, in January 2009, the appellant’s advisers amended his return in a number of respects. In particular, the pages dealing with “additional information” were amended. One of these pages contained a cross-heading “Other information”, with four boxes beneath dealing with income losses (boxes 1 and 2) and trading losses (boxes 3 and 4). Box 3 was headed “Relief now for 2008/9 trading or certain capital losses.” That was now completed with the figure of £395,417. Box 4 was headed “Tax year for which you are claiming relief in box 3.” This was completed, by amendment, with the information: “2007/08”. The boxes on the pages dealing with capital gains were different. There was a box headed “Income losses of 2007-8 set against gains”. This was amended to read £314,583. In the box headed “Additional Information” at the end of the pages in the return dealing with capital gains, the appellant explained that he had incurred an income loss in 2008/9 for which he was claiming relief against his liability to tax for 2007/8.

In the further box headed “Additional Information” at the very end of the return, an amendment was made to acknowledge that the appellant’s interpretation of the law might be at variance with that of the Revenue and, in effect, to invite the Revenue to open an enquiry. On 30 January 2009, the appellant’s accountants informed the Revenue that, as a result of the relief claimed, no further 2007/8 taxes would be payable by the appellant.

On 7 March 2009, the Revenue calculated the appellant’s tax at £211,927.77 in exercise, as they saw it, of their powers under section 9(3) of the TMA. This calculation ignored his loss relief claim.

The Revenue then opened an enquiry into the appellant’s loss relief claim under schedule 1A of the TMA. The Revenue’s action in this regard and that of the appellant in making his loss relief claim were as ‘ships passing in the night’. The taxpayer considered that he had made an effective claim in his return (as amended), and that any enquiry had to be opened under the section 9A procedure. The Revenue, on the other hand, thought his claim had to be treated as a “stand alone” claim under schedule 1A to the TMA, that is, as if it had not been made in a return but in a separate document. Their view was that relief could not be claimed in 2007/8. The Revenue also wished to enquire into the loss relief claim more generally. The enquiry is ongoing. The Revenue have never made any amendment to the appellant’s tax return.

In June 2009 the Revenue commenced proceedings against the appellant in the St Helens County Court to recover tax amounting to £203,342.77, plus interest, for the 2007/8 and 2008/9 tax years. (We are not concerned with the latter year). An amended defence was in due course filed challenging the court’s jurisdiction. The proceedings were transferred to the High Court to enable the point on jurisdiction to be decided there. These proceedings came before David Richards J. On 14 April 2011, the judge gave judgment against the appellant.

The legislation refers to the Board of the Inland Revenue but, for simplicity, I will throughout refer to the Revenue.

I would summarise the relevant features of the self-assessment regime for present purposes as follows (all references are to the TMA):

Accordingly, the self-assessment return has a pivotal role in the self-assessment regime. Where a self-assessment return is filed, it is used as the means of establishing liability to pay tax. If the Revenue wishes to dispute an item contained in a return, it must follow the section 9A procedure. The self-assessment regime is clearly intended to operate in a straightforward way.

The form of income loss relief claim made by the appellant was a claim for employment loss relief under section 128 of the Income Tax Act 2007 (“the ITA”). The requirements of that section are not relevant save for subsection (7). That subsection provides that such claims are subject to paragraph 2 of schedule 1B of the TMA.

Paragraph 2 of that schedule applies where a loss relief claim involves two (or more) years of assessment. Such claims are required to be treated as relating to the later year, defined (so far as relevant) as the year in which the loss was incurred. The appellant’s claim involved 2007/8 (the year in which relief was claimed) and 2008/9 (the year in which the loss was incurred). On this basis, he could not claim relief until 2008/9, as the heading to the box in the return suggested (but did not require).

Section 42(2) of the TMA requires that a claim must be made in a return under section 8 of the TMA where it can be so made. However, section 42(11A) provides that schedule 1B has effect where a claim involves two or more years of assessment. Paragraph 2 of that schedule states that section 42(2) does not apply to a claim within that paragraph.

Save where statute otherwise provides (as in section 42(2)), a claim for relief from tax can be made in a separate document from a tax return. If a taxpayer takes that course, the Revenue may enquire into his claim using powers conferred by schedule 1A of the TMA. A closure notice will again complete such an enquiry and the taxpayer has a right of appeal against any conclusion in a closure notice to the First-tier tribunal (paragraph 9 of schedule 1A of the TMA).

The argument for the Revenue is a very simple one. Mr Scott Redpath, for the Revenue, submits that by virtue of section 128(7) of the ITA and paragraph 2 of schedule 1B of the TMA the appellant was not entitled to make a claim in his 2007/8 tax return for loss relief arising out of the income loss incurred in 2008/9. Space is provided in the prescribed form of self-assessment tax return for details of a loss relief claim to be made, but this is simply for the convenience of the taxpayer and to avoid the need for him to make a separate claim. As the information provided by the appellant in this case did not “relate” to the period for which the tax return was prepared, it was not properly to be treated as part of it. The appellant should have made the claim either in his 2008/9 return or have made a separate “stand alone” claim. On that basis, the Revenue, on Mr Redpath’s submission, correctly took the view that it was the procedure in schedule 1A to the TMA that should be followed to challenge a claim in the circumstances of this case. A “return”, properly so called, on Mr Redpath’s submission, is limited to the information which is properly capable of being assessed in the tax year to which the return relates.

The judge accepted the Revenue’s arguments. After citing well-known passages from the speeches of the House of Lords in the Autologic case, above, he held that the section 9A procedure applied to any claim that might be included in a return and that it did not apply if the claim had to be made in some other way. He held that it followed that:

“in such circumstances the court has jurisdiction to determine in collection proceedings whether a taxpayer is entitled to include in his return a claim for relief and so rely on it as a defence to the claim for immediate payment. I emphasise that this does not enable the court to determine whether the claim is well-founded, but only to determine whether it can be included in the return at all or must instead be made in some other way.” (paragraph 39)

The judge, therefore, considered that the critical question was whether the claim could be made in the appellant’s 2007/8 return, that is, whether it could be set against the liability to tax shown by that return. He considered that that permission had to be found in “the statutory regime” (judgment, paragraph 37). He did not, therefore, consider that the form of the return was material.

Mr Gordon disputes the correctness of the judge’s conclusions and the Revenue’s contentions. The section 9A procedure, on his submission, applies to any claim actually made in a return. Indeed, on his primary case, he contends that the question was a purely factual one, and that it did not matter whether the claim was required or permitted to be so contained, so long as the information about the claim was in fact in the return.

In my judgment, the point is a short point of statutory construction of section 9A of the TMA. Section 9A(4) makes it clear that the Revenue’s enquiry may extend to “anything contained in the return, or required to be contained in the return”. The material words are “contained in”. Those words cannot mean “required to be contained in” because that would make the alternative words redundant, contrary to well-established canons of construction. The latter words are clearly used in order notionally to bring into the return information which the taxpayer has wrongly omitted.

The words “contained in” may, in some contexts, mean “permitted to be contained in” a document. The words may in other cases mean “actually contained in”. In my judgment, the latter meaning is too wide in the present context. It is inconsistent with the requirement in section 8 that the taxpayer must file a return “containing such information as may reasonably be required in pursuance of the notice”. That means that the taxpayer is not free to insert absolutely anything that he wants in a return. The notice will require him to complete a return in a particular form, and that form will indicate the required information.

The relevant boxes in the present case permitted the appellant to make a loss relief claim if he chose to do so. It also required him, if he did so, to give the information sought by the boxes, including the year in which he sought to take the relief. The Revenue does not contend that the form of the return did not entitle the appellant to complete the boxes as he did.

The Revenue’s argument amounts to saying that, despite apparently being permitted to insert the information which he inserted in his return, the appellant was in fact not to be treated as having done so because the relevant statutory provisions did not permit him to claim relief for a loss incurred in one year against a liability to tax for an earlier year. On this argument, the form was wrong to give him this opportunity.

If the Revenue is correct, in order to ascertain the statutory procedure for challenging a relief claimed in a return, the taxpayer has to go behind the return and ask whether he is entitled to make a claim for relief against the year of assessment under the applicable statutory provisions. That, in my judgment, would impose an intolerable burden on taxpayers, especially those who do not have accountants or tax advisers to help them complete their tax return. It should not be accepted unless it is clear that that was Parliament’s intention.

In my judgment, the statutory provisions demonstrate that that was not Parliament’s intention. This court, including myself, considered the general nature of the self-assessment regime in Langham v Veltema [2004] STC 544 (not cited to the judge). While I agree with Mr Redpath that the point in issue in that case is not directly relevant to this case, the decision does usefully emphasise that the purpose of the self-assessment regime is to simplify and bring early finality to liability to tax. The Revenue’s interpretation of section 9A of the TMA is inconsistent with this underlying purpose. It creates a need for the taxpayer and the Revenue to investigate whether a matter stated in a return ought under tax law to be there. This complicates the completion of the return and the challenge by the Revenue to its content. The Revenue’s interpretation is likely to lead to satellite litigation to determine whether the section 9A procedure applies. That litigation would have to be resolved before the substance of the claim could be determined. Parliament cannot have intended that result, with the inevitable delays in tax collection that would ensue.

The Revenue’s interpretation is also inconsistent with section 9(3). When an assessment is made by the Revenue under that provision, it has to be done “on the basis of the information contained in the return”. Where a word is used more than once in the same set of statutory provisions, it bears the same meaning unless it is clear it cannot do so. The Revenue’s interpretation would enable the procedure for enquiries and appeals laid down in sections 9A, 28A and 31 to be short-circuited by treating claims for relief made in a return as not so made.

The Revenue’s interpretation is also inconsistent with section 9(1). That section also provides that liability to pay tax is to be calculated “on the basis of information contained in the return”. This must mean the information actually included in the return in response to the form’s reasonable requirements. That is why the Revenue is given power not simply to challenge the contents of a return but also to amend the return (see sections 9C, 9ZB and 28(A)). Section 59B uses the same means of ascertaining liability to tax since it incorporates section 9(1) and section 9(3) by reference (section 59B(1)).

There is no substance in Mr Redpath’s submission that this conclusion is likely to cause operational difficulties for the Revenue. If the Revenue is uncertain as to whether to open an enquiry under section 9A or schedule 1A, it can, and should, open enquiries under both sets of provisions on a protective basis. It is the judge’s conclusion that is likely to create operational difficulties for the reasons already given.

In my judgment, to be “contained in” a return, a matter must be both actually contained in the return and be reasonably included in it in response to the particulars which the return seeks. The return should be read with any explanatory notes made available by the Revenue. However, we have not been shown any relevant notes in this case.

For the reasons given above, I conclude that the judge was wrong on the jurisdiction issue in this case. If the Revenue decides to challenge matters contained in the return in response to the boxes provided, it must use either the section 9A procedure or seek to make a correction to the return under section 9ZB (if applicable). This is so even if the Revenue is correct that, under the relevant statutory provisions governing loss relief claims, that claim could not be the subject of relief against liability to tax for the year to which the return relates. In that case, it is up to the Revenue, if it wishes to achieve the contrary result, to make sure that the form of the return does not permit such a claim to be made.

The judge went on to consider the further issue whether under the relevant provisions the taxpayer was entitled to make a claim in his tax return for 2007/8 for an income loss that was incurred in 2008/9. The essential difference between the parties on this issue is whether loss relief can be set off in this way, or whether it has to be claimed in the subsequent year, i.e. the year in which the loss was incurred, by way of a claim for a credit against tax paid in the previous year. Mr Redpath submits that the claim could not be made in the 2007/8 return. Mr Gordon submits, in essence, that under section 42(2) of the TMA a claim is required to be made in a tax return if it could be so made. Although this section is substituted by schedule 1B of the TMA where a claim involves more than one year, that schedule merely gives the taxpayer, on the appellant’s case, the right to elect to make a separate claim. There was nothing to require him to take this option if he could, in fact, make the claim in a return.

The judge accepted the arguments of the Revenue on this second issue. However, it follows from my conclusion that the Revenue should have followed the section 9A procedure in this case that the appellant should have had a right to appeal to the First-tier tribunal. In those circumstances, in my judgment, the right course is to leave this further issue open. It was a matter for the First-tier Tribunal. Neither the county court nor the High Court had any jurisdiction to determine it.

In the circumstances, I would allow this appeal.

I agree.

I also agree.