Roger Murphy v The Commissioners for HMRC

This is an appeal by the appellant, Mr Roger Murphy against two closure notices: the first in the relation to the tax year 2005/6; and the second in relation to the tax year 2006/7.

The two closures notices were issued by the respondents, the Commissioners for His Majesty’s Revenue and Customs (“HMRC”), and together seek to deny relief under section 574 of the Income and Corporation Tax Act 1988 (“ICTA”) claimed by Mr Murphy for a loss made in the tax year 2006/7, but carried back to the tax year 2005/6. The tax at issue is £183,140.43.

The loss arose from transactions undertaken by Mr Murphy as part of a tax avoidance scheme known as “Excalibur”. The steps in that scheme have been the subject of decisions in the tribunals (Footnote: ¹), which have found that the scheme did not succeed in creating the anticipated loss. Mr Murphy does not challenge those decisions. The matters that are before the tribunal in this appeal concern whether HMRC opened valid enquiries into Mr Murphy’s returns and whether the closure notices are valid.

For the hearing, we were provided with a bundle of documents comprising 811 pages and a bundle of authorities. The bundle of documents included a witness statement given by Mr Murphy. Mr Murphy gave evidence and was cross-examined on his statement.

Much of Mr Murphy’s evidence concerned the manner in which the claim for relief was reflected in his returns. We will address those issues later in this decision, but, as we understand it, there is little dispute between the parties as to the way in which the claim was made. The remainder of his witness statement contained opinions and complaints about the manner in which HMRC had handled his affairs and the delays he had experienced.

We have set out our findings of fact in this section.

As we have mentioned, the loss for which relief was claimed by Mr Murphy arose from his participation in a tax avoidance scheme. The details of the steps in the scheme are not material to our decision, but, in outline, they were as follows:

The intended tax analysis was that Mr Murphy’s sale and repurchase of the Harbour shares to and from Braye would fall within section 106A Taxation of Chargeable Gains Act 1992 (“TCGA”), such that the shares acquired from Braye would be identified with the shares sold to Braye for capital gains tax (“CGT”) purposes, giving rise to a substantial capital loss on the basis that Mr Murphy had acquired shares for a significant sum and sold them for a nominal amount. The aim was that Mr Murphy would be entitled to claim relief against income tax for that loss under s 574 ICTA.

These arrangements were part of a tax avoidance scheme, known as Excalibur, which was marketed by Premier Strategies Ltd. A scheme reference number was allocated to the scheme under the rules governing the Disclosure of Tax Avoidance Schemes in Part 7 of the Finance Act 2004 (“DOTAS”).

On 13 October 2006, Mr Murphy submitted his tax return for the tax year 2005/6 on-line (Footnote: ²). The return included:

In a letter dated 28 February 2007, HMRC gave notice to Mr Murphy of their intention to enquire into Mr Murphy’s claim under section 574 ICTA. The notice was given under paragraph 5 of Schedule 1A to the Taxes Management Act 1970 (“TMA”) on the basis that the claim had been made “outside of a return”. The letter was headed “Enquiry under Paragraph 5 Schedule 1A Taxes Management Act 1970 – 2006/7”. The letter stated:

A letter of the same date to Mr Murphy’s agent, Eaton & Co, confirmed that an enquiry was being opened under paragraph 5 Schedule 1A TMA.

On 31 January 2008, Mr Murphy submitted his tax return for the tax year 2006/7. This return was also submitted on-line. In that return:

In a letter dated 20 May 2008, HMRC gave notice of intention to an enquire into Mr Murphy’s return for the tax year 2006/7. A letter from HMRC to Mr Murphy’s then agent, Meager Wood Locke & Co, of the same date confirms that the notice was given under section 9A TMA.

In a letter dated 31 July 2008, Mr Murphy’s agent advised HMRC of the DOTAS scheme reference number in relation to the claim for relief under section 574 ICTA.

Following the issue by HMRC of an Accelerated Payment Notice (“APN”) to Mr Murphy in August 2015, Mr Murphy became a claimant in in judicial review proceedings against HMRC. The matters relating to the APN are no longer in issue between the parties and we will not refer to them further in this decision notice.

On 19 April 2017, the First-tier Tribunal issued a decision in Kerrison v HMRC [2017] UKFTT 322 (TC), in which the Excalibur scheme was considered and the appeal against the refusal of the taxpayer’s claims for relief were dismissed. On 22 January 2019, the Upper Tribunal dismissed the taxpayer’s appeal (Kerrison v HMRC [2019] UKUT 0008 (TCC)).

On 25 July 2019, HMRC issued two closure notices to Mr Murphy.

The figures in the closure notices regarding the amount of the credit claimed by Mr Murphy were plainly wrong. The amount of share loss relief claimed by Mr Murphy was £183,140.43 and he had sought to set that full amount against his income for the tax year 2005/6 under section 574 ICTA.

Mr Murphy did not understand the notices that had been sent to him. He requested advice from his solicitors, Reid & Co in an email dated 29 July 2019. Reid & Co. wrote to HMRC on 16 September 2019. In that letter, Reid & Co. argued, inter alia, that Mr Murphy’s claim to carry-back losses under section 574 ICTA was included in the return for the tax year 2005/6 and so any enquiry into that claim should have been made under section 9A TMA. The enquiry under paragraph 5 Schedule 1A TMA was invalid and so the purported closure notice was also invalid.

Reid & Co also wrote to HMRC on 16 October 2019. In that letter Reid & Co. reiterated their argument that the notice of intention to enquire into Mr Murphy’s claim under section 574 ICTA under paragraph 5 Schedule 1A TMA was invalid. Reid & Co. also argued that the closure notices did not meet the test set out in Raftopoulou v HMRC [2018] EWCA Civ 818 (“Raftopoulou”) at [20] and [36] and so were invalid.

Following correspondence between Reid & Co. and HMRC, Mr Murphy appealed against both closure notices on 28 November 2019, with the agreement of HMRC notwithstanding that the appeals were in strict terms out of time.

In a letter dated 14 January 2022, HMRC confirmed their view of the position and offered a review, which was accepted by Mr Murphy. The review was completed on 30 May 2022. In a letter of that date, HMRC varied the closure notices in the following terms:

Mr Murphy notified his appeal against both closure notices to the tribunal on 23 June 2022.

The issues before the tribunal fall into two broad categories.

We will begin with the share loss relief issues. It will assist our explanation is we first set out the relevant statutory background.

Mr Murphy’s claim to “share loss relief” was made under section 574 ICTA. At the time, section 574 was in the following form:

The references to sections 380 and 381 ICTA in subsection (2) of section 574 are to relief given for losses incurred by an individual in a trade, profession, or vocation or an employment. Sections 380 and 381 ICTA in the form that they were in at the time are set out in the Appendix to this decision notice.

Section 574 ICTA was repealed with effect from 5 April 2007. For the tax year 2007/8 onwards, the provisions governing share loss relief, including section 574 ICTA, were rewritten as part of the Tax Law Rewrite Project and incorporated in the Income Tax Act 2007 (“ITA”). They are now found in chapter 6 Part 4 ITA (principally, sections 131 to 133 ITA). The provisions relating to the other forms of loss relief in sections 380 and 381 ICTA were also repealed and rewritten as chapter 2 Part 4 ITA – in relation to losses from a trade, profession or vocation (“trade loss relief”) – and chapter 5 Part 4 ITA in relation to losses from an employment (“employment loss relief”).

As can be seen from section 574(1) ICTA, an individual was entitled to make a claim for share loss relief to set a capital loss against income of the tax year in which the loss accrued (sub-paragraph (a)) or the preceding tax year (sub-paragraph (b)).

The manner in which claims can be made is governed by section 42 TMA. At the relevant time, it provided, so far as relevant:

The effect of Mr Murphy’s claim for relief is a matter of dispute between the parties to which we will return later in this decision notice. For present purposes, it is sufficient to note that:

As we describe later in this decision notice, HMRC’s case is that the directions in section 42(11) and (11A) to Schedule 1A and Schedule 1B apply to Mr Murphy’s claim to carry back losses, whereas it is Mr Murphy’s case that they do not.

We will deal first with Schedule 1B TMA. Schedule 1B is headed “Claims for relief involving two or more years”. Paragraph 2 of the Schedule addresses loss relief. It provided, so far as relevant:

So where Schedule 1B applies to a claim for loss relief:

Schedule 1B creates a separate and specific regime in which a claim that falls within paragraph 2 is treated as a standalone claim – in HMRC’s terminology a “free-standing credit” – which although it affects the amount of tax actually paid in the earlier tax year is dealt with separately from the return for that year. It is HMRC’s case that Mr Murphy’s claim for the tax year 2005/6 falls within that regime.

Schedule 1A contains provisions governing the making of claims that are not included in a return, enquiries into those claims and the closure of those enquiries. Paragraph 5 contains HMRC’s power to enquire into such claims. It provided:

Paragraph 7 contains the relevant provisions governing the completion of those enquiries. It provided, so far as relevant:

Mr Murphy’s case on other hand is that Schedule 1A TMA and Schedule 1B TMA do not apply to his claim for relief. He says that the general provisions applicable to enquiries into tax returns apply. The starting point for these purposes is section 8 TMA which sets out the circumstances in which HMRC may require an individual to make a return for the purposes of income tax and capital gains tax. For the relevant periods, it was in the following form:

Mr Murphy says his claim was included in his return for the 2005/6 tax year and the enquiry into the claim should have been undertaken under section 9A TMA in that return. At the time, section 9A provided, so far as relevant:

An enquiry commenced under section 9A TMA is closed by a closure notice under section 28A TMA. It provides, so far as relevant:

We will deal with some of the more specific issues arising from the parties’ submissions in our discussion below. But we will first summarize their positions.

Mr Murphy’s case is, in summary, as follows.

HMRC’s case is, in outline, as follows.

The parties’ arguments in relation to the share loss relief issues engage principles derived from the decisions of the courts and tribunals in a series of cases involving claims for loss relief - share loss relief, trade loss relief and employment loss relief. Those cases are the Supreme Court decisions in HMRC v Cotter [2013] UKSC 69 (“Cotter”), R (on the application of de Silva) v HMRC [2017] UKSC 74 (“de Silva”), and R (on the application of Derry) v HMRC [2019] UKSC 19 (“Derry SC”), and the Court of Appeal decision in Knibbs v HMRC [2019] EWCA Civ 1719 (“Knibbs”).

Mr Murphy’s case in relation to the share loss relief issues relies heavily on the decision of the Supreme Court in Derry SC. Mr Murphy says that the cases on which HMRC relies – principally, Cotter, de Silva and Knibbs – do not affect the analysis because they relate to other forms of loss relief (trade loss relief and employment loss relief). Following the decision in Derry SC, it is clear that separate principles apply to claims to share loss relief. Although Derry SC concerned a claim for share loss relief in relation to periods after the introduction of ITA, Mr Grierson, for Mr Murphy, submits that the introduction of ITA did not affect the position.

HMRC say that the decision of the Supreme Court in Derry SC does not apply to a claim for share loss relief relating to periods before the introduction of ITA. For claims made in relation to tax years before the tax year 2007/8, such as the claim in this case, the rules governing claims for share loss relief were the same as the other forms of loss relief. The principles in Cotter, de Silva and Knibbs therefore apply.

The parties’ submissions were wide-ranging, but they raise the following essential questions which we will deal with in turn:

Mr Murphy’s case in relation to the first issue relies on the Supreme Court decision in Derry SC. Derry SC involved a claim for share loss relief under section 132 ITA arising from a disposal of shares made in the tax year 2010/11. The taxpayer made a claim on the face of his tax return for the tax year 2009/10 for share loss relief against his income for that year in relation to the loss made on that disposal. In his return for the tax year 2010/11, the taxpayer stated that the relief for the loss had already been claimed and relief obtained in 2009/10. HMRC opened an enquiry into the claim under Schedule 1A TMA. They also opened an enquiry into the tax return for the tax year 2010/11 under section 9A TMA.

There were two issues before the Court:

The Supreme Court, with Lord Carnwath giving the leading judgment, found in favour of the taxpayer on the first issue. This was on the grounds that sections 131 to 133 ITA provided a “clear and self-contained code” for the making of claims to share loss relief. Under those provisions, the taxpayer was entitled to make a claim for loss relief and to specify the year in which it was to be applied. The computational provisions of ITA, in particular, section 23 ITA, were equally clear that the amount of the claim was to be taken into account in computing the taxpayer’s “net income” for that year and accordingly in calculating his “tax liability” for that year. Lord Carnwath says this (at Derry [35]):

That entitlement was not overridden by Schedule 1B. The Court noted that there was no specific cross-reference in ITA to Schedule 1B in relation to the provisions regarding claims for share loss relief. This was in contrast to the provisions governing the other loss reliefs – where cross-references to paragraph 2 Schedule 1B are found in section 60(2) ITA in relation to trade loss relief and in section 128(7) ITA in relation to employment loss relief. Lord Carnwath says this (at Derry [36]-[37]):

As can be seen from the above extracts, the Supreme Court decision is informed to a significant extent by the structure of ITA. Mr Hall, for HMRC, says that this is a critical factor, and that ITA made a change in the law in that respect, but only in relation to share loss relief. Mr Grierson, for Mr Murphy, says that it is not. He says that the statutes such as ITA which were part of the Tax Law Rewrite Project were intended to restate the law and not to make material changes (see the preamble to ITA). The ITA provisions were simply restating the position that obtained under the earlier provisions including section 574 ICTA.

Lord Carnwath commented on this question in his judgment in Derry SC. He said this (at Derry SC [38]):

As can be seen from that passage it was common ground between the parties before the Supreme Court in Derry SC that “the pre-2007 law did not draw any material distinction” between share loss relief and other forms of loss relief. The implication of this passage is that Lord Carnwath acknowledged that the introduction of ITA may well have changed the law on this issue. However, the Supreme Court made no express finding to that effect.

We were referred by Mr Grierson to the decision of the Court of Appeal in Blackburn v Keeling [2003] EWCA Civ 1221 (“Blackburn”). That case concerned a claim for trade loss relief under what was then section 380 ICTA to be taken into account in computing the taxpayer’s tax code under the regulations that applied to PAYE income tax. The Court of Appeal found, allowing HMRC’s appeal, that the right to claim trade loss relief was triggered by reference to the tax year in which the loss was made, and the taxpayer could not claim relief for the loss (through his tax code) before the loss was established.

Mr Grierson directed us in particular to Blackburn [16], where Carnwath LJ says this in relation to the application of Schedule 1B TMA:

This description reflects HMRC’s case on this appeal. Mr Grierson says, however, that it demonstrates that the cross-references to Schedule 1B TMA in section 60(2) ITA and section 128(7) ITA were included in ITA to reflect the decision in Blackburn in relation to claims under section 380 ICTA. The cross-references preserve the pre-ITA position for claims to trade loss relief and employment loss relief in relation to post-ITA periods (see Knibbs [74]). In Mr Grierson’s submission, the reason why there is no cross-reference to Schedule 1B TMA in the ITA provisions relating to share loss relief is that rationale did not apply to claims under section 574 ICTA.

We are not persuaded that the decision in Blackburn takes us any further. It may confirm that Schedule 1B TMA could apply to claims made under section 380 ICTA before the introduction of ITA. But it tells us nothing about the operation of claims for share loss relief under section 574 ICTA prior to the introduction of ITA. Furthermore, in Blackburn, section 42(2) TMA could not, in any event, apply because of the nature of the relief that was claimed (see section 42(3) TMA and Blackburn [14]).

We have not had the benefit of the kind of “legal archaeology” that was clearly before the Supreme Court in Derry SC. We have been taken by the parties to section 1029 and Schedule 1 ITA, which contains details of minor and consequential amendments made by ITA. The provisions in that Schedule contain no reference to differences in the manner in which share loss relief and other forms of loss relief should be claimed. We have also been taken to the Explanatory Notes to ITA. Once again, we cannot discern from them any indication as to whether the law regarding claims for share loss relief was considered to be the same as or different from the law for claiming other forms of loss relief before ITA and/or whether there was intended to be a change in the law in ITA.

The wording of section 574 ICTA and section 380 ICTA in the form that they were in immediately before ITA is very similar once the wording that relates to the particular form of loss is removed. Whilst we acknowledge that there are some material differences in the nature of share loss relief as compared to the other forms of loss relief – for example, in the manner in which the provisions of section 574 ICTA isolate the loss arising from the relevant disposal from the general computation of gains and losses for the year – we have not been directed to any provision in the law before the introduction of ITA which would suggest that there was a material difference in the manner in which share loss relief and the other forms of loss relief were to be claimed and enquired into. We can only conclude – consistent with the implication from Lord Carnwath’s judgment in Derry SC – that there was no material difference in the law applicable to the manner in which share loss relief and the other forms of loss relief prior to ITA (i.e. that Schedule 1B TMA applied) and that ITA made a material change to the law in that respect, but only in relation to claims for share loss relief.

On the first issue, we therefore agree with HMRC that Mr Murphy was not entitled to claim share loss relief “in” his return for the tax year 2005/6. Schedule 1B TMA applied and so the loss related to the tax year 2007/8.

That leads us to the second issue, that is, even if it was an error for Mr Murphy to make a claim for relief in his tax return for the tax year 2005/6, was the claim nonetheless part of the tax return for that year so that HMRC was required to enquire into the claim as part of an enquiry into his return under section 9A TMA?

In relation to the effect of the claim on Mr Murphy’s return, we turn first to the Supreme Court decision in Cotter. That case involved a claim for employment loss relief for a loss sustained in the tax year 2008/9, but carried back to the tax year 2007/8. The taxpayer’s return for the tax year 2007/8 was initially filed in paper form. In that return, the taxpayer did not claim the relevant loss and did not calculate his own tax liability for the year, but left it to HMRC to do so. The claim to carry back the loss to the tax year 2007/8 was subsequently made by the taxpayer’s accountants on his behalf. The accountants also submitted an amended return for the tax year 2007/8. HMRC sought to enquire into the claim under Schedule 1A TMA.

The Supreme Court rejected the taxpayer’s argument that the claim was made “in” the return. The only judgment was given by Lord Hodge. He says this (at Cotter [24]-[26]):

In this passage, Lord Hodge appears to make a distinction between information included in the tax return form, which is relevant for the purpose of establishing the amount on which the taxpayer is liable to tax for the relevant tax year, and other information which does not affect the amount chargeable in that tax year. Lord Hodge then went on to comment, albeit obiter, on the position that would have been reached if the taxpayer had calculated his own liability (incorrectly) taking account of the loss rather than rely upon the HMRC calculation. He says this (at Cotter [27]-[28]):

These comments are obiter, but they suggest that, if a claim is erroneously included in a tax return in a manner which affects the taxpayer’s self-assessment, the claim would nonetheless be regarded as included in the return so that HMRC would have to proceed with any enquiry into it under section 9A TMA rather than Schedule 1A TMA.

Lord Hodge’s comments were made in the context of a taxpayer who had filed a paper return. There has been some discussion in the case law as to how (and whether) Lord Hodge’s comments apply to a taxpayer who has filed a return on-line and, in particular, where the on-line form does not permit a loss that has been carried back from a later year to be reflected in the calculation of the tax liability for the tax year.

This issue was addressed by the Court of Appeal in R (on the application of Derry) v HMRC [2017] EWCA Civ 435 (“Derry CA”). The Court of Appeal decided the question as to whether the taxpayer was entitled to deduct the relevant loss in calculating his net income for the earlier tax year in favour of HMRC. As we have seen, its decision on that point was then reversed by the Supreme Court, but it then went on to consider the effect of the claim that the taxpayer had erroneously made. On that issue, the Court of Appeal, relying upon the obiter dicta of Lord Hodge in Cotter, decided that references to the carried-back loss in the tax return form albeit not in the tax computation should be regarded as being included “in” the return. This was the case even though the claim was not reflected in the calculation of the total tax due – it could not be because the on-line form automatically calculated the tax without taking into account the carried-back loss – and the claim was otherwise referred to in the part of the return that related to the carry back of losses from later years.

Referring to Lord Hodge’s comments at Cotter [27]-[28], Henderson LJ said this at [57]:

As we have discussed, in Derry SC, the Supreme Court did not have to address this issue because it decided the case on the other issue before it. Lord Carnwath, with whom all the members of the Court other than Lady Arden agreed, identified the point (Derry SC [66]), expressed some concerns about the effect of the Court of Appeal’s conclusion (Derry SC [68]), but ultimately chose to the leave the issue open “for further consideration in an appropriate case” (Derry SC [69]). Lady Arden, on the other hand, “provisionally” expressed the view that the Court of Appeal was wrong on this issue (Derry SC [82]). In her “provisional” view, the obiter comments of Lord Hodge in Cotter should be regarded as limited to taxpayers who filed a paper return and performed a calculation of the tax due which reflected the loss that had been claimed (Derry SC [82]). In a case where a taxpayer completed an on-line return, which prevented the relief being taken into account in reducing the total tax, but the “erroneous” claim was referred to elsewhere in the return, the claim for relief did not form part of the return (Derry SC [73] and [83]). HMRC was entitled to enquire into the claim under Schedule 1A TMA.

In the present case, we have decided that Mr Murphy was not entitled to make a claim for share loss relief in his return for the tax year 2005/6. Mr Murphy filed his return. The return refers to the loss relief in the parts of the return concerned with the carry-back of losses from later years. The amount of the claim is not reflected in the calculation of the tax due for 2005/6 because the box in the return was populated automatically. Nonetheless it is clear on the face of the return that Mr Murphy was claiming to set the loss arising on the disposal of the shares against his taxable income for the tax year 2005/6.

This is, of course, the issue that was addressed by the Court of Appeal in Derry CA. Henderson LJ expressed the view that, in these circumstances, the claim should be regarded as being included in the return and that HMRC must enquire into the return under section 9A TMA. As this was the ratio of the decision, the decision of the Court of Appeal on this issue is binding upon us. There are circumstances in which the Supreme Court can effectively overrule a decision of the Court of Appeal by an expression of opinion which is strictly obiter. However, those circumstances are very limited: it would in effect require a direction from the Supreme Court as whole that the relevant case was wrongly decided (Footnote: ³). The reservations expressed by Lord Carnwath together with the provisional view expressed by Lady Arden in Derry SC, cannot be taken as meeting that requirement.

We must therefore conclude – relying upon the obiter comments of Lord Hodge in Cotter as applied by the Court of Appeal in Derry CA – that, although Mr Murphy was not entitled to make his claim in his tax return for the tax year 2005/6, he made a claim for share loss relief “in” that return. HMRC were required to proceed with any enquiry under section 9A TMA. They did not do so. The enquiry into the claim under paragraph 5 Schedule 1A TMA was not valid and the relevant closure notice under paragraph 7 Schedule 1A TMA was equally not valid.

We must therefore turn to the third issue, which is whether HMRC were entitled to enquire into the claim for share loss relief for the tax year 2005/6 through an enquiry into the tax return for the year in which the loss arose, the tax year 2006/7.

On this issue, HMRC rely primarily on the decision of the Supreme Court in de Silva. De Silva concerned claims made by taxpayers, who were partners in limited partnerships, for relief for partnership trade losses carried-back from a later year. The facts are complicated by the involvement of the partnerships, but in summary, HMRC enquired into the partnership returns under section 12AC TMA for the years in which the losses arose (i.e. the later year). Those enquiries were treated as enquiries into the individual partners’ personal returns under section 9A TMA by section 12AC(6)(a) TMA. HMRC sought to amend the taxpayers’ personal returns to reduce the claims following the completion of those enquiries. The taxpayers argued – relying on the Supreme Court decision in Cotter – that the carry-back claims were stand-alone claims rather than claims made in their returns, and so HMRC could only challenge those claims by opening an enquiry into the claims under paragraph 5 Schedule 1A TMA.

The Supreme Court decided that HMRC were not required to open an enquiry under Schedule 1A TMA and were entitled to enquire into the loss under section 12AC TMA. Once again, the only judgment was given by Lord Hodge. In his judgment, Lord Hodge notes that the legislation requires that the taxpayers must include in their returns for the year in which the loss is incurred (which he refers to as “Year 2”) information to establish what proportion (if any) of their share of a partnership loss is to be set against income of that year (de Silva [26]). Having noted (at de Silva [27]) that Schedule 1B would not apply if all the loss was claimed in Year 2, as the claim for relief would only involve one year, Lord Hodge went on to address the position in relation to carry-back claims.

The critical passage for our purposes is at de Silva [28]-[31], where Lord Hodge says this:

Lord Hodge went on (at de Silva [37]) to explain that the decision in Cotter did not assist the taxpayers in de Silva in the following terms:

We take the following principles from these passages from Lord Hodge’s judgment.

De Silva concerned claims for trade losses in relation to tax years before the introduction of ITA. There is a question as to whether and to what extent the principles set out in Lord Hodge’s judgment in de Silva apply to claims for share loss relief for periods to which ITA applies (and to which Derry SC applies). However, we do not need to address that issue in this case. As we decided in relation to the first issue, the decision in Derry SC does not affect claims for share loss relief in periods prior to the introduction of ITA. The case law concerning claims to other forms of loss relief applies equally to claims for share loss relief in such periods.

It follows that the principles derived from Lord Hodge’s judgment in de Silva apply to the claims made by Mr Murphy in this case. We therefore agree with HMRC on this issue. Mr Murphy was required to include information concerning the loss and the claim in his tax return for the tax year 2006/7. HMRC was entitled to enquire into that loss and the related claim under section 9A TMA.

We note that, in his judgement (de Silva [37]), Lord Hodge refers to paragraph 5(3) Schedule 1A TMA, which prevents a further notice of intention to enquire being given under section 9A TMA in relation to a claim where notice has previously been given under paragraph 5 Schedule 1A. That is an important limitation, which prevents the same claim being subject to enquiry (and potentially a closure notice) under both regimes. But it does not apply in this case. Although HMRC purported to give notice of intention to enquire into the claim under paragraph 5 Schedule 1A TMA, that notice (as we have decided in relation to the second issue) was invalid. In our view, paragraph 5(3) Schedule 1A TMA cannot be read to preclude a notice being given under section 9A where the prior notice under paragraph 5 Schedule 1A was invalid and could not lead to the issue of a valid closure notice.

We acknowledge that our conclusion on this issue leaves open the possibility that a valid enquiry might, in some circumstances, be opened under section 9A TMA in relation to the same claim in two tax years. However, it only arises in a case where the claim has been included “in” the return for two tax years – the tax year in which the loss arose and the tax year to which the loss is carried back. We suspect that is a very limited number of cases. The theoretical possibility only arises in this case because, as we have found in relation to the second issue, Mr Murphy’s “erroneous” claim in the tax year 2005/6 has to be treated as included in the return for that year following the decision of the Court of Appeal in Derry CA. It does not in practice arise in this case because HMRC have not opened an enquiry under section 9A TMA in relation to the return for the tax year 2005/6.

Our conclusion on that issue brings us to the final issue that we need to decide in this case: whether the closure notices issued by HMRC were effective to reject the claims for relief.

Mr Grierson, for Mr Murphy, refers to the test set out by the Court of Appeal in Raftopoulou that for a closure notice to be effective “depends on whether it would be read by a reasonable recipient in the position of the taxpayer as [giving the necessary notice]” (Raftopoulou [36]). He submits that the closure notice failed to meet that test. Mr Murphy did not understand it and had to seek advice from his solicitors.

Mr Hall, for HMRC, says that the closure notice met the test in Raftopoulou. Mr Hall referred to the decision of the Upper Tribunal in HMRC v Mabbutt [2017] UKUT 289 (TCC) (“Mabbutt”). He says the test is objective. It does not matter that Mr Murphy says that he did not understand the notices. The notices were understandable by a reasonable recipient; a reasonable taxpayer reading the notices would have concluded that HMRC were intending to close an enquiry and to disallow the claim in its entirety. In any event, he says, section 114 TMA applies to cure any defect in the notice. Furthermore, if the closure notice is invalid, the enquiry remains open and HMRC can issue a further closure notice to correct any error.

There are two sets of principles that are potentially engaged by the parties’ arguments.

First, we have been referred to case law principles governing the effectiveness of notices. Mr Grierson referred us to the Court of Appeal decision in Raftopoulou, Mr Hall to the Upper Tribunal decision in Mabbutt. In the present context, we do not find any material difference in the principles espoused in those cases. The relevant question for us is whether a reasonable recipient in the position of the taxpayer as giving the necessary notice (Raftopoulou [36], Mabbutt [79]). The test is clearly an objective one and, as the case law demonstrates, must be applied by reference to the context in which the taxpayer received the disputed notice.

Second, Mr Hall referred us to section 114 TMA, which he says can cure any defects in the notices. Section 114 TMA provides as follows:

Mr Grierson disputes the assertion that section 114 can apply in these circumstances.

As a starting point, we have already decided that notice of intention to enquire in to the claim under paragraph 5 Schedule 1A TMA was not valid and the closure notice issued by HMRC under paragraph 7 Schedule 1A TMA in relation to that enquiry into the claim was not valid. Section 114 TMA cannot, in our view, apply to overcome these defects. This issue can only arise in relation to the closure notice issued by HMRC under section 28A TMA following the enquiry into the return for the tax year 2006/7.

As we have described, the closure notice issued under section 28A TMA contains a clear error in that it refers to a credit of £48,244.79 as having been claimed by Mr Murphy, when the only credit claimed was the credit of £183,140.83 referred to in Mr Murphy’s tax return for the tax year 2005/6. It does state that the actual credit due was £0.

The notice has, of course, to be read in context. Part of that context is that, at the same time, Mr Murphy also received the closure notice under paragraph 7 Schedule 1A TMA. That notice – even if it had been valid – also contained errors. It stated that Mr Murphy had claimed to set £48,244.79 of his purported capital loss against income in the tax year 2005/6 when he had claimed to set £763,739. It refers to a credit of £134,895.64 as having been claimed by Mr Murphy as a result of the claim to carry back losses, when the credit claimed was the credit of £183,140.83. It also states that the actual credit due was £0.

These errors were recognized by the reviewing officer on review. The reviewing officer, however, proceeded on the assumption that the claim for share loss relief could be disallowed by variations to the closure notice given under paragraph 7 Schedule 1A TMA and so does not seek to address the effect of the disallowance of the claim under section 574 ICTA in the variations to the closure notice under section 28A TMA. Those conclusions assumed that the closure notice given under paragraph 7 Schedule 1A TMA was valid. We have found that is not the case for the reasons that we have given above in relation to the “second issue” of the share loss relief issues.

The appeal before us is against the conclusions in the closure notice not the conclusions of the review. If the taxpayer does not accept the conclusions of the review and pursues his or her appeal, the appeal remains an appeal against the conclusions stated or the amendments made by the closure notice (section 31(1) TMA).

The question for us therefore is whether the incorrect reference in the closure notice to the credit of £48,244.79 rather than the credit of £183,140.83 can be ignored and the notice can be given effect as disallowing the entire credit claimed by Mr Murphy either on the grounds that a reasonable recipient of the notice in the position of Mr Murphy would have recognized and fully understood that that the notice contained an error and was intended to refer to the full amount of the credit; or that section 114 TMA might apply to correct the error in the notice.

The notice itself meets the requirements of section 28A. A reasonable recipient of the notice in Mr Murphy’s position could have no doubt that notice was being given of the closure of the enquiry into the return for the tax year 2006/7, that HMRC had concluded that the claim to set the capital loss that arose in that year against income in the tax year 2005/6 was not allowable, and that the consequence was that credit that had been claimed was being disallowed.

The question is whether the error in the notice (the incorrect figure of £48,244.79 for the credit) or the surrounding circumstances (the other closure notice and the errors in it) were sufficient to render the notice ineffective or limit its effect to the denial of the credit to which it referred. We have come to the conclusion that whether on the basis of the case law principles (e.g. in Mabbutt) or on the application of section 114 TMA the notice should be regarded as effective to deny the claim for relief. A reasonable taxpayer in Mr Murphy’s position would have clearly understood that the intended effect of the notice was to disallow the entire claim. Mr Murphy had also received the notice under paragraph 7 Schedule 1A, which purported to deny the balance of the claim. Although there were two separate credits to Mr Murphy’s self-assessment account (one in the amount of £48,244.79 and one in the amount of £134,895.64), the only figure that was included in Mr Murphy’s return was the aggregate figure of £183,140.83. That credit was the credit generated by the claim to carry back the loss of £763,739 against income of the tax year 2005/6, all of which is referred to in the notice. The notice is clear that the entire loss is disallowed and the credit reduced to £0.

For these reasons, we conclude that the closure notice given under section 28A TMA in relation to the enquiry into Mr Murphy’s return for the tax year 2006/7 was effective to disallow Mr Murphy’s claim for share loss relief.

For the reasons that we have given above, we conclude that:

We dismiss this appeal.

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.