Paul Henley v The Commissioners for HMRC

The Appellant (“Mr Henley”) has applied to this Tribunal for a stay of proceedings in his appeal under rule 5(3)(j) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2099 (“the Rules”).

The reason Mr Henley gives for his application is that an issue (which, for reasons which will become clear, I will refer to as “Derry Ground 2”) to which his appeal gives rise is also raised in proceedings (the “Parallel Proceedings”) recently commenced in the High Court, where other taxpayers are seeking declaratory relief to the effect that HMRC’s position on Derry Ground 2 is wrong, and the outcome of those proceedings (being a decision of a court the judgments of which are binding on this Tribunal) will determine the outcome of this appeal. On that basis, submits Mr Henley, it would be expedient for this Tribunal to stay proceedings in this appeal pending the outcome of the Parallel Proceedings.

Mr Henley has appealed against a closure notice issued by HMRC on 20 September 2018 under paragraph 7, Schedule 1A to the Taxes Management Act 1970 (“TMA”). The closure notice disallows trading losses of some £980,216 in the tax year 2011/12. It does this by removing box 78 (losses to be carried back to previous years) from Mr Henley’s self-assessment tax return for that year. Mr Henley’s tax calculation for 2011/12 did not reflect the losses and so the tax Mr Henley calculated as due for 2011/12 is unaffected by the closure notice. This is because the trading losses were carried back and used in the 2009/10 tax year. The closure notice also said that “HMRC have dealt with the loss carry-back claim as follows – The carry back claims have not been given”.

These losses were said to have arisen from Mr Henley’s participation in a marketed tax avoidance scheme, which involved transactions in film distribution and other rights, which were said to be trading transactions giving rise to the losses. HMRC challenged the loss claims on various grounds. Mr Henley has abandoned his defence of the losses and accepts that they were not validly claimed. His appeal now focuses only on HMRC’s challenge to his carry back of the losses to the 2009/10 tax year. As we have just seen, the closure notice stated that “The carry back claims have not been given”, but Mr Henley says that the closure notice cannot have this effect and it is now too late for HMRC to deny the carry back of the (non-existent) losses into the 2009/10 tax year.

It may seem odd, at first sight, that non-existent losses (Mr Henley accepts that the losses he claimed were not generated in 2011/12 (or indeed ever)) can have an enduring tax effect. Someone approaching this issue for the first time might expect that the disallowance of the losses would automatically cause any tax effect of the loss claims to be reversed. That, however, is not how the tax system works. Putting the point very broadly, there are detailed rules governing the submission of tax returns (and the making of claims for tax purposes) and HMRC’s ability to enquire into returns (and claims). If HMRC do not enquire into a return in time, or do so and then close their enquiry, the relevant matter (so, for example, a taxpayer’s liability to tax in a particular year) is considered closed unless HMRC discover something of which they were not aware at the relevant time. This is to summarise a very complicated code at a very high level, but it is what lies behind Mr Henley’s submission that the way this code works means that his tax position in 2009/10, so far as the losses are concerned, has become final and the discovery (in a non-technical sense) that the losses were never there in the first place can have no effect on that.

A similar situation arose in R (oao Derry) v HMRC. Mr Derry claimed to have incurred a capital loss on the disposal of some shares in November 2010 and to carry that loss back into the 2009/10 tax year under section 132 Income Tax Act 2007 (“ITA”). In January 2011 Mr Derry submitted his self-assessment tax return (“SATR”) for 2009/10, claimed this loss relief and reduced the amount of tax he calculated as being due for that year in his SATR; he showed the tax due for the year in isolation and then reduced it by the tax relief for the capital loss. In December 2011 he submitted his 2010/11 SATR, identified the capital loss and claimed the loss against his 2009/10 income. HMRC subsequently opened an enquiry into his claim for loss relief under Schedule 1B TMA and that enquiry remained open. They also opened an enquiry into his 2010/11 SATR. However, HMRC never opened an enquiry into Mr Derry’s 2009/10 SATR and it became too late for them to do so. HMRC issued a demand for payment of tax which HMRC said Mr Henley had self-assessed (his calculation of his 2009/10 tax liability before share loss relief) but not paid, on the ground that he was not entitled to deduct the share loss relief (which HMRC disputed) from his self-assessment.

Two issues were raised in the Court of Appeal, [2017] EWCA Civ 435, and Supreme Court, [2019] UKSC 19. The first of these (“Derry Ground 1”) was whether Mr Derry’s claim for loss relief fell within Schedule 1B, TMA because of the way sections 132 and 133 ITA were drafted. If it did not and the claim was properly made within the return for 2009/10, the enquiry under Schedule 1A had no statutory basis.

The second issue (“Derry Ground 2”) was whether, even if Ground 1 were determined against Mr Derry, he should be construed as having self-assessed a liability in his SATR of some £95k for 2009/10. Mr Derry completed his SATR for 2009/10 showing a liability of some £95k, reduced by a tax credit (for the share disposal losses) generating a net tax repayment of some £70k. He completed his SATR making entries in boxes 1 and 15. Box 1 showed the amount of tax which he assessed to be due before adjustment. This box was filled in automatically on the basis of his earlier entries of his taxable income for the year. Box 15 then contained the amount of share loss relief which he claimed to be entitled to carry back to 2009/10 from the following year. Box 15 appears in a section headed “Adjustments to tax due”, and the rubric under the heading expressly refers to “carrying back to 2009-10 certain losses from 2010-11”. This was then confirmed by the information entered in box 16 and a separate personal tax computation (for which there is no prescribed form) setting out the calculation. The refund of £70k was simply arrived at by deducting the share loss relief claimed from the total tax due for the year (as shown in box 1 of the SATR) of £95k. The point here is that there is a difference (at least for the purposes of section 9A TMA) between a tax return and a tax return form. If an item is not taken into account for the purposes of calculating the tax payable for the year by the taxpayer submitting the form, it is not part of the “return” for section 9A purposes. Mr Derry’s argument was that boxes 15 and 16 were part of his “return” (because they were how he self-assessed, albeit wrongly, his tax liability for 2009/10), so he had not self-assessed a tax liability of £95k at all, and, if HMRC were going to challenge his computation, they had to do so under section 9A TMA, but they had failed to do so and it was now too late to start.

In the Court of Appeal Mr Derry lost on Derry Ground 1 but won on Derry Ground 2. In the Supreme Court he won on Derry Ground 1, with the result that the Supreme Court did not reach a conclusion on Derry Ground 2. They did not, however, endorse the decision of the Court of Appeal on Derry Ground 2. Lord Carnwath (with whom three of the other Supreme Court justices agreed) said this at [68]:

Lady Arden went further and expressed a “provisional” view that the Court of Appeal was wrong on Derry Ground 2.

As this was the ratio of its decision, the decision of the Court of Appeal on Derry Ground 2 is binding on this Tribunal, the Upper Tribunal and the High Court, but not the Court of Appeal; R v Secretary of State for the Home Department ex parte Al-Mehdawi, [1989] 1 All ER 777. The Supreme Court can effectively overrule a decision of the Court of Appeal by an expression of opinion, as well as by reaching a decision inconsistent with that arrived at by the Court of Appeal. However, the threshold for this is very high and requires an expression of opinion on the part of the court as a whole that the case was wrongly decided and is not to be treated as authority; Consett Industrial and Provident Society Limited v Consett Iron Company Limited, [1922] 2 Ch 135, and more recently R v Barton and Booth, [2020] EWCA Crim 575. Whilst the Supreme Court in Derry do not appear to have been wholly persuaded by the decision of the Court of Appeal on Derry Ground 2, the terms in which they expressed themselves do not come anywhere near the Consett/Barton and Booth threshold and I do not regard them as having overruled it.

A significant amount of time was spent in the hearing analysing Derry and, to a lesser extent, two other Supreme Court cases, HMRC v Cotter, [2013] UKSC 69, and R (oao de Silva) v HMRC, [2017] UKSC 74. It is very important that this decision does not become (as the hearing occasionally threatened to become) a discussion of the merits of these decisions and the relative strengths of HMRC’s and Mr Henley’s cases. We do, however, need to understand Derry, in particular, in order to form a view on its relevance to this case and the Parallel Proceedings and properly to understand Mr Avient’s submissions.

Mr Henley (like Mr Derry) included tax relief for the losses he claimed in box 15 of his 2009/10 SATR. He says:

In point (3) above lies a difference between Mr Derry and Mr Henley. In Mr Henley’s case, HMRC’s enquiry into his standalone claim for loss relief remained open; see Henderson LJ at paragraph [13] in the Court of Appeal. In Mr Henley’s case, as we have seen, HMRC issued a closure notice. We should pause here and consider the procedure for making claims such as Mr Henley’s, where a loss incurred in one year of assessment (the “later year”) is to be given in an earlier year of assessment (“the earlier year”). In such a case Schedule 1B TMA disapplies section 42(2) TMA (which states that, where a person is required to submit a tax return, they must wherever possible include claims in the return). It goes on to provide that the claim is to relate to the later year and is to be for an amount equal to the difference between the tax paid in the earlier year and the tax that would have been paid on the assumption that effect could have been, and was, given to the claim in the earlier year.

Schedule 1A sets out how these claims are to be made and allows HMRC to enquire into them. On the conclusion of their enquiry HMRC are required to issue a closure notice. Paragraph 7 provides that the closure notice must either allow the claim or, in the case of a claim for a discharge or repayment of tax, “amend the claim so as to make good or eliminate the deficiency or excess” or, in any other case, “disallow the claim, wholly or to such extent as appears to the officer appropriate”. Paragraph 8 allows HMRC, within 30 days of issuing a closure notice under paragraph 7 amending a claim for a repayment of tax, to give effect to the amendment by making “such adjustment as may be necessary” including by way of assessment on the claimant.

The conclusions I draw from all of this are:

In a witness statement before the tribunal Mr David Rogers (a principal in the firm of chartered accountants representing Mr Henley and others) explained that his firm had represented Mr Derry in his litigation and goes on to say:

Mr Rogers explains that, whenever Derry Ground 2 is raised, HMRC’s “stock response” is to say that the Derry litigation only determined Derry Ground 1. He goes on to say that,

This has been an issue for a number of his firm’s clients, and he concludes by saying:

One of his firm’s clients has filed a claim seeking declaratory relief in the High Court as to the validity and effect of a demand for tax issued by HMRC. The relevant facts (which are extracted from the claim form filed by this claimant on 26 July 2023) are described as follows:

The remedies being sought are:

I was told that 16 pre-action letters have been served on HMRC asserting that their view on Derry Ground 2 is wrong. Injunctive relief is also being sought to prevent HMRC seeking to collect the amounts they say are owing pending resolution of these issues.

Clearly, there are a number of cases pending in the High Court where it would appear that the correctness (or not) of the decision of the Court of Appeal on Derry Ground 2 will likely turn out to be very important. However, my attention was not drawn to any case where the particular issue in this case (the effect of a closure notice under paragraph 7 of Schedule 1A TMA as outlined in [16](3) above) arises.

The approach to be taken to an application to stay proceedings pending (in that case) the conclusion of HMRC enquiries and another appeal (in that case involving a partnership of which the appellant was a member) was set out by this Tribunal in Badzyan v HMRC, [2017] UKFTT 0439 (TC), where (at [11]-[12]) Judge Scott observed:

In that case the other decision which might arguably be of “material assistance” in determining Mr Badzyan’s appeal was an appeal by a partnership of which he was a member against an assessment on it. No such appeal had yet been filed with the Tribunal, as HMRC’s enquiries were continuing. HMRC expected to uphold the partnership’s assessment on review, and then the partnership would appeal that decision. Judge Scott considered that a decision in relation to the partnership assessment might well not resolve all the issues in Mr Badzyan’s appeal, but it would be of material assistance. In addition, it would “expedient” to stay Mr Badzyan’s case. The case against Mr Badzyan raised the same factual and legal issues as the case against the partnership, although Mr Badzyan had some additional arguments. Litigating the same issues in parallel proceedings would not be dealing with the case in a way that was “proportionate” within the overriding objective, as parallel litigation would entail HMRC and the Tribunal using considerable resources unnecessarily.

The final issue we need to explore is the “tax exclusivity principle”. This was raised by Mr Hopkins but not really replied to by Mr Avient. The “tax exclusivity” principle starts from the premise that it is for this Tribunal to determine the matters allocated to it by Parliament and in consequence it is an abuse for a taxpayer to seek to have a matter allocated to the Tribunal decided in the courts. The classic expression of this approach is to be found in the speech of Lord Nicholls in Autologic Holdings plc and others v IRC, [2005] UKHL 54, at [11]-[13]:

There are limits to this approach, most obviously where for some reason an appeal to this Tribunal is not open to the affected person or an appeal does not provide an adequate remedy. The many cases where companies have sought to enforce directly effective EU rights provide examples of this. The tax exclusivity principle was explored in some detail with extensive reference to numerous cases by Master Dagnall in Donatis Labeikis and others v HMRC, [2021] EWHC 237 (QB). Looking just at domestic law he observed (at [128]-[130]) as follows:

The important point noted by the Master in [129] is that it is not always possible to bring a tax-related dispute before this Tribunal, as the Tribunal is a creature of statute and only has the jurisdiction Parliament has conferred on it. While it may be an abuse to seek to challenge an existing or anticipated tax assessment outside the Tribunal, because that would be to ignore the allocation of such disputes to the Tribunal by Parliament, it would clearly not be an abuse to seek to litigate a tax-related dispute with HMRC elsewhere if the matter is one which cannot be entertained by the Tribunal.

Park J explained the position in The Claimants under the Loss Relief GLO v IRC, [2004] EWHC 3588 (Ch) like this (at [24] and [25]):

As Robert Walker J put it in Glaxo Group Ltd v IRC, [1995] STC 1075:

Mr Derry took his case to the High Court, claiming judicial review of HMRC’s demand for tax allegedly due. The Administrative Court transferred his claim to the Upper Tribunal. Morgan J (in the Upper Tribunal, [2015] UKUT 0416 (TCC),) considered that Mr Derry should have sought declaratory relief rather than judicial review and proceeded to make appropriate declarations. The “tax exclusivity” principle was not at issue in that case as HMRC had not raised an assessment or issued a closure notice; they had simply demanded payment of tax allegedly due. I understand that this is the case in the Parallel Proceedings too; none of the taxpayers in that case has an assessment or a closure notice to appeal against and bring their dispute within the jurisdiction of this Tribunal. Their only remedy is to seek declaratory relief (and an interim injunction to put a stop HMRC’s collection activities) in the High Court. Their dispute is essentially about whether tax is due from them, but there is nothing which would bring their dispute into this Tribunal (which is where Parliament ordinarily expects disputes about the amount of tax owed to be heard).

That, of course, is not the case with Mr Henley. HMRC have issued him with a closure notice which purports to prevent him carrying back his trading losses to 2009/10. That closure notice was issued under paragraph 7, Schedule 1A TMA and paragraph 9 of that Schedule allocates appeals against such closure notices to this Tribunal.

Mr Avient’s arguments as to why the proceedings should be stayed are broadly as follows. He says that the factual differences between this case and the Parallel Proceedings are immaterial, the remedies sought in the Parallel Proceedings mirror the grounds of appeal in Mr Henley’s case and will result in declarations of law applicable to the issues in this appeal. Any decision in the Parallel Proceedings (being a decision of the High Court) will be binding on the Tribunal and will, therefore, be of material assistance, whether or not necessarily determinative of the appeal.

In that light, he said that it would be expedient to stay the appeal in this case because litigation in the High Court is a more appropriate and efficient method of dealing with what he described as the complexity of the multiple issues covering multiple years and enforcement as well as assessment. He accuses HMRC of seeking to overturn Derry Ground 2 and that the absence of cost shifting in the Tribunal means that Mr Henley would necessarily suffer the costs of HMRC seeking to overturn Derry Ground 2 at least at the level of this Tribunal, even if he were to prevail elsewhere.

Any delay in the conduct of the appeal is he says entirely compatible with superior courts considering the issues at stake here and a stay would avoid the danger of the Tribunal reaching a different conclusion to superior courts. HMRC would not suffer prejudice as they are the party trying to reverse a binding precedent (Derry Ground 2) and they must accept that this is going to take a lot of effort and a long time.

Mr Hopkins says that HMRC are not trying to overturn Derry Ground 2 at all. He says that another decision of the Supreme Court, R (oao de Silva) v HMRC, [2017] UKSC 74, is more relevant. He did, however, raise the applicability of the tax exclusivity principle.

As we have already identified, Derry Ground 2 is potentially relevant to Mr Henley. Not knowing the full details of all of the Parallel Proceedings, I do not know for sure that the correctness (or not) of Derry Ground 2 is relevant in all of those cases, but I will assume for present purposes that it is.

There is, as we have seen, a difference between Mr Henley’s case (where HMRC have issued him with a closure notice in relation to his claim) and the facts of Derry and the Parallel Proceedings, so that Derry Ground 2 may not be determinative in Mr Henley’s case.

It may also be the case that the dispute with HMRC in the Parallel Proceedings ranges more widely than a narrow, technical discussion and extends to much broader questions such as whether HMRC can assert and seek to collect a tax liability outside the assessment machinery in TMA.

I do not regard the question of costs in this Tribunal as being relevant one way or the other. If the Parallel Proceedings had not been started, Mr Henley would have been at risk of costs in this Tribunal in any event. Mr Henley lodged his notice of appeal on 4 April 2019, whereas the first (and, as far as I know, the only) claim form to be filed in any case in the Parallel Proceedings was only filed on 26 July this year. This case was listed for a three-day hearing before me and a member beginning on 8 August. It was only turned into a hearing to consider the stay application on 27 July, the day after the first claim form was filed. Mr Henley has been living with the costs risk of his appeal for a considerable time. If his appeal is stayed behind the Parallel Proceedings and the position on Derry Ground 2 is finally determined, this will take away his costs risk so far as arguing Derry Ground 2 is concerned, but it will not take the costs risk away completely as HMRC might still seek to run an argument based on the closure notice even if Derry Ground 2 continues to be determined against them.

Mr Avient says that a decision in the High Court would be binding on this Tribunal, which is of course correct. However, so far as Derry Ground 2 is concerned, the High Court, as well as this Tribunal, is already bound by the decision of the Court of Appeal in Derry. In effect, what Mr Avient is saying is that this appeal should be stayed until the Parallel Proceedings have produced a final determination of Derry Ground 2 one way or another. In the context of a case which is ready for trial, that could be a very long stay indeed.

Mr Avient says that litigation in the High Court is more appropriate to deal with what he describes as the complexity of the issues raised. As we have already noted, the Parallel Proceedings may come to raise issues which go beyond those raised in Mr Henley’s case. This is because there is no question here of HMRC seeking to collect tax from Mr Henley outside the TMA machinery. The fact that the Parallel Proceedings may raise wider issues that go beyond those raised by the appeal is not a ground for staying the appeal.

We are concerned with a technical dispute about a closure notice. It is not obvious what ‘enforcement’ or other wider issue is presented in this case. In Knibbs v HMRC, [2019] EWCA Civ 1719, the Court of Appeal considered that this Tribunal’s jurisdiction extends to procedural issues around matters such as the issue of closure notices and similar acts, commenting:

If, by “enforcement” Mr Avient means no more than working out how much tax is payable (see the final passage from the extract of Mr Rogers’ witness statement at [17]), that is exactly what this Tribunal does every day; it determines appeals which are to do with how much tax is payable. As far as Mr Henley’s appeal is concerned, the conclusions it reaches and the amendments it proposes, as well as the process by which it was issued, are well within the scope of this Tribunal’s jurisdiction.

HMRC have issued Mr Henley with a closure notice and Parliament has allocated appeals against such closure notices to this Tribunal. It would be an abuse of process for Mr Henley to seek to challenge the closure notice in the High Court. By asking for this appeal to be stayed, he is effectively seeking to do this by proxy. Mr Henley would not be allowed to abandon his appeal in this Tribunal and commence proceedings in the High Court designed to achieve a similar outcome (challenging the closure notice). That would be an abuse. It is equally abusive for Mr Henley to seek a stay of these proceedings whilst another party prosecutes proceedings in the High Court which are designed to have a similar effect.

As far as timing is concerned, as I have mentioned, this case was listed for a three-day substantive hearing before me and a member beginning on 8 August. HMRC expressed surprise and disappointment when they realised that the substantive hearing was not going ahead. They are clearly ready for a substantive hearing. Mr Henley has, of course, already abandoned any attempt to justify his claim for trading losses; his appeal is concerned only with the narrow (but important) tax administration procedural points outlined in this decision. The fluency with which Mr Avient took the Tribunal through his arguments on those issues makes me sure that Mr Henley too is ready for a substantive hearing.

Bearing in mind that questions of liability to tax (including procedural issues around the issue of closure notices) are allocated by Parliament to this Tribunal and that the parties to this appeal are ready for a substantive hearing on the focused issues it presents, I consider that, rather than waiting for the High Court to consider the Parallel Proceedings, it would be more expedient for all concerned if Mr Henley’s appeal proceeded in this Tribunal and the High Court determined the Parallel Proceedings with the benefit of that decision. I accept that this may require determination of the Parallel Proceedings to wait on any appeal to the Court of Appeal or the Supreme Court. One set of proceedings (this appeal or the Parallel Proceedings) needs to go first and be the vehicle for resolving the question of tax liability in the light of the procedures in TMA for assessing and collecting tax. It seems to me that a set of proceedings which begins in a specialist tax tribunal is not only likely to be more helpful, but (more importantly) is in line with the will of Parliament. To the extent that the Parallel Proceedings raise other, wider issues, these can, if necessary, be dealt with once the tax technical issues presented by this appeal have been resolved.

For all of these reasons I have concluded that not staying the appeal and proceeding to a substantive hearing of this appeal as soon as possible would both avoid delay in dealing with this appeal and be wholly compatible with a proper consideration of the issues it presents. One set of proceedings needs to go first. This appeal is ready to be heard. It will not put Mr Henley to any greater cost than if the Parallel Proceedings had not come along, which they have only done very recently. This approach enables the special expertise of the Tribunal to be used effectively (indirectly for the benefit of the claimants in the Parallel Proceedings too).

I understand that the claimants in the Parallel Proceedings are seeking interim injunctive relief to stop HMRC’s premature collection activities. Assuming they can obtain this, and there was no suggestion before me that any difficulty had been encountered or was expected here, they should not be prejudiced by waiting behind Mr Henley.

I do not, of course, know what position the High Court will take as regards the Parallel Proceedings and whether they will agree with my approach, but I consider that the decision I have reached, so far as not staying this appeal is concerned, best gives effect to the will of Parliament and to the overriding objective in the Rules and that is the question I am concerned with.

For the reasons set out above, this application is dismissed and the proceedings in this appeal will not be stayed.

I direct that, within five business days of the release of this decision, the parties are to notify the Tribunal of their dates to avoid for a two-day substantive hearing of this appeal in the window Monday, 4 September 2023 to Friday, 22 December 2023.

I will ask the Tribunal administration to try to list the substantive hearing as soon as possible. Much as I have enjoyed and learned from Mr Avient’s and Mr Hopkins’ submissions and our discussions, I think it better that they should start the substantive hearing afresh. Although the 8 August substantive hearing was listed before me, I will ask the Tribunal to list the new substantive hearing before another judge.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.