Hilary
Term
[2019] UKSC 19
On appeal from: [2017] EWCA Civ 435
JUDGMENT
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R
(on the application of Derry) (Respondent) v Commissioners for Her
Majesty’s Revenue and Customs (Appellant)
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before
Lord Reed, Deputy President
Lord Carnwath
Lady Black
Lady Arden
Lord Kitchin
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JUDGMENT GIVEN ON
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10 April 2019
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Heard on 12 December 2018
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Appellant
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Respondent
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Akash Nawbatt QC
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Hui Ling McCarthy
QC
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Aparna Nathan
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Michael Ripley
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(Instructed by HMRC
Solicitor’s Office (London))
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(Instructed by Greenwoods
GRM LLP)
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LORD CARNWATH: (with whom
Lord Reed, Lady Black and Lord Kitchin agree)
Introduction
1.
This appeal concerns the correct treatment for income tax purposes of
the respondent’s (Mr Derry’s) claim for share loss relief under section 132 of
the Income Tax Act 2007 (“ITA”).
2.
The claimed loss arose in this way. On 22 March 2010 (tax year 2009/10)
Mr Derry bought 500,000 shares, at a cost of £500,000, in a company called
Media Pro Four Ltd. On 4 November 2010 (tax year 2010/11) he sold them to the
“Island House Private Charitable Trust” for £85,500, thereby realising a
capital loss of £414,500. In his return for 2009/10, submitted by his
accountants on 24 January 2011, he claimed share loss relief for that amount
against his income for that year under ITA section 132, with the aim of
reducing to that extent his taxable income for that year. The appellant (“the
Revenue”) has identified the claim as a case of possible tax avoidance, but
whether that is so is not an issue presently before us.
3.
The appeal raises two questions. The first relates to the effect in law
of such a claim to set the relief against the income for the previous year
(“the loss relief issue”). The second relates to the effect of the inclusion of
such a claim (even if erroneous) within Mr Derry’s return for the previous
year, in circumstances where the Revenue have failed to institute a timeous enquiry
into the return under Taxes Management Act 1970 as amended (“TMA”) section 9A
(“the tax return issue”). The first is an issue of pure statutory
interpretation, depending on the interaction of the certain provisions of the
ITA and of the TMA. The second raises issues as to the correct understanding and
effect of Mr Derry’s return, in the light of the law and practice relating to
the self-assessment regime, having regard in particular to the guidance given
by this court in Revenue and Customs Comrs v Cotter [2013] UKSC 69;
[2013] 1 WLR 3514 (“Cotter”).
4.
The procedural background is as follows. In December 2011, Mr Derry’s
accountants submitted his tax return for 2010/11 online, which (consistently
with the position as stated in his 2009/10 return) said of the loss of
£414,500:
“This loss relief has already been
claimed and relief obtained in 2009/10.”
Nothing turns on the detail of this return.
5.
The Revenue responded by three steps:
i)
On 4 January 2012, the Revenue gave notice of their intention to open an
enquiry into the claim for share loss relief for 2009/10. This notice was
issued under TMA Schedule lA, on the footing that the claim had been made
“outside of a return” by virtue of paragraph 2(3) of Schedule 1B. That enquiry
remains open. However, if, as Mr Derry submits, Schedule 1B had no application
and the claim was properly made within the return for 2009/10, then (as is
common ground) the enquiry under Schedule 1A had no statutory basis.
ii)
On 16 February 2012, the Revenue gave notice of their intention to open
an enquiry under TMA section 9A into the return for 2010/11. The accompanying
letter indicated that it would be necessary to look at all the arrangements
surrounding the claim, an area of concern being that the claimed losses might
have arisen from “a marketed scheme of arrangements with the purpose of
avoiding tax”. That enquiry also remains open.
iii)
On 21 February 2014, the Revenue issued a demand under TMA section 60
for tax allegedly due for the tax year 2009/10 in the sum of £166,044.26 with
interest. On 6 June 2014, this was replaced by a demand for £95,546.36 with
interest.
6.
On 21 May 2014, Mr Derry began the present judicial review proceedings,
which were treated by agreement as relating to the replacement demand of 6 June
2014. He failed on both issues before the Upper Tribunal but succeeded on the
second issue before the Court of Appeal (and therefore succeeded overall). The
Revenue appeal on that issue with the permission of this court; Mr Derry resists
the appeal on that issue but seeks to uphold the decision in any event on Issue
1.
The statutory framework
The Tax Law Rewrite project
7.
As noted above, the relevant provisions are contained in the ITA and the
TMA. In considering the interpretation of the ITA it is necessary in my view to
have in mind its genesis as part of the Tax Law Rewrite project. The main
purpose of that project, as stated in the ITA Explanatory Notes (paras 5 and 7)
was -
“… to rewrite the income tax
legislation that has not so far been rewritten so as to make it clearer and
easier to use …
The Act does not generally change
the meaning of the law when rewriting it. The minor changes which it does make
are within the remit of the Tax Law Rewrite project and the Parliamentary
process for the Act. In the main, such minor changes are intended to clarify
existing provisions, make them consistent or bring the law into line with
established practice.”
For a useful description and evaluation of the project,
see David Salter “The tax law rewrite in the United Kingdom: plus ç change plus
c’est la meme chose?” [2010] BTR 671.
8.
I would also refer to the explanation of the drafting approach for the
project, given by Stephen Timms MP, then Financial Secretary to the Treasury,
in 2009 in the course of opening the Second Reading Committee debate on the
second Corporation Tax Bill:
“The project now has a
well-established approach to rewriting legislation, developed with the help of
people whom it has consulted over a number of years. It restructures
legislation to bring related provisions together and to provide more logical
ordering. It also helps users by providing navigational aids, such as
signposts, to make relevant parts of the legislation easier to find, and it has
introductory provisions to set the scene. It unpacks dense source legislation
by using shorter sentences and, where possible, it harmonises definitions. It
uses modern language and helps the reader with aids such as formulae, tables
and method statements, when appropriate.” (Hansard, HC, col 3, Second Reading
Committee, Corporation Tax Bill, 2008-2009 (January 15, 2009) (HC General
Committee Debates, Session 2008-09) cited by David Salter op cit p 680.)
9.
In Eclipse Film Partners (No 35) LLP v Comrs of Her Majesty’s Revenue
and Customs [2013] UKUT 639 (TCC); [2014] STC 1114 Sales J, likened the
correct approach to statutory interpretation to that appropriate to a
consolidation statute (as explained by the House of Lords in Farrell v
Alexander [1977] AC 59):
“When construing a consolidating
statute, which is intended to operate as a coherent code or scheme governing
some subject matter, the principal inference as to the intention of Parliament
is that it should be construed as a single integrated body of law, without any
need for reference back to the same provisions as they appeared in earlier
legislative versions. … An important part of the objective of a consolidating
statute or a project like the Tax Law Rewrite Project is to gather disparate
provisions into a single, easily accessible code. That objective would be
undermined if, in order to interpret the consolidating legislation, there was a
constant need to refer back to the previous disparate provisions and construe
them …” (para 97)
10.
I would respectfully endorse this guidance, which should be read with
Lady Arden’s comments (paras 84-90) on the relevance of prior case law. At the
same time I would emphasise that the task should be approached from the
standpoint that the resulting statutes are intended to be relatively easy to
use, not just by professionals but also by the reasonably informed taxpayer,
and that the signposts are there for a purpose, in particular to give clear
pointers to each stage of the taxpayer’s journey to fiscal enlightenment.
Income Tax Act 2007
11.
The ITA clearly reflects these principles (as will be readily apparent
from a comparison with its immediate predecessor, the Income and Corporation
Taxes Act 1988 - “ICTA 1988”). It starts in section 2 with an “Overview of the
Act”, designed to give specific guidance as to what follows. Thus, the reader
is told that the Act has 17 Parts, the effect of each of which is then
summarised with references to the corresponding chapters. Relevant in the
present context are Part 2, which “contains basic provisions about income tax”,
including “(a) provision about the annual nature of income tax (Chapter 1)” and
“(c) the calculation of income tax liability (Chapter 3)”; and Part 4 which “is
about loss relief including relief for … (d) losses on disposal of shares
(Chapter 6) …”.
12.
In Part 2, section 4 establishes income tax as an annual tax, charged
for a tax year running from 6 April to 5 April in the following year. Chapter
3, headed “Calculation of Income Tax Liability” provides in section 23 a
step-by-step guide to the process:
“23. The calculation of
income tax liability
To find the liability of a person
(‘the taxpayer’) to income tax for a tax year, take the following steps.
Step 1
Identify the amounts of income on
which the taxpayer is charged to income tax for the tax year. The sum of those
amounts is ‘total income’. Each of those amounts is a ‘component’ of total
income.
Step 2
Deduct from the components the
amount of any relief under a provision listed in relation to the taxpayer in
section 24 to which the taxpayer is entitled for the tax year. See sections 24A
and 25 for further provision about the deduction of those reliefs. The sum of
the amounts of the components left after this step is ‘net income’.
…”
Steps 3 to 7 (not relevant to the present dispute) set
out further steps in the calculation process, leading to the conclusion:
“The result is the taxpayer’s
liability to income tax for the tax year.”
As Henderson LJ noted (para 50) the introduction of the
statutory concept of “net income” under Step 2 was an innovation, bringing
about (in his words):
“… a welcome degree of precision
and clarity in place of the previous non-statutory concept of ‘net statutory
income’ representing total income less allowable deductions.”
13.
In the present case Step 2 would have pointed a taxpayer in Mr Derry’s
position to sections 24 and 25 for guidance on the reliefs there mentioned,
including (under section 24(1)(a)) “Chapter 6 of Part 4 (share loss relief)”.
Section 25(2) would have told him to deduct such reliefs “in the way which will
result in the greatest reduction” in his tax liability. Moving on, as directed,
to Part 4 (“Loss relief”), he would have found in section 59 an “Overview” of
that Part, including a reference to “losses on a disposal of certain shares
(see Chapter 6)” (section 59(1)(d)); and (in case he had forgotten) reminding him
that “this Part needs to be read with Chapter 3 of Part 2 (calculation of
income tax liability)” (section 59(2)).
14.
Section 131 is the first of a group of sections under Chapter 6, dealing
with “Share loss relief against general income”. An individual is eligible for
share loss relief if he incurs “an allowable loss for capital gains tax
purposes” on the disposal of any “qualifying shares” in “any tax year”, defined
as “the year of the loss”. “Qualifying shares” include shares in a “qualifying
trading company”, the conditions for which are set out in sections 134 to 143.
15.
Section 132 provides:
“Entitlement to claim
(1) An individual who is
eligible for share loss relief may make a claim for the loss to be deducted in
calculating the individual’s net income -
(a) for the year of the
loss,
(b) for the previous tax
year, or
(c) for both tax years.
(See Step 2 of the calculation in
section 23.)
(2) If the claim is made in
relation to both tax years, the claim must specify the year for which a
deduction is to be made first.
(3) Otherwise the claim must
specify either the year of the loss or the previous tax year.
(4) The claim must be made
on or before the first anniversary of the normal self-assessment filing date
for the year of the loss.”
Notable here again is the specific reference back to Step
2 in the calculation of liability under section 23.
16.
Section 133 (headed “How the relief works”) provides:
“(1) This subsection explains
how the deductions are to be made.
…
Step 1 Deduct the loss in
calculating the individual’s net income for the specified tax year …”
The reference to “net income” again takes the reader back
to section 23 where that concept is defined.
17.
At this point, in relation to the first issue, I note Ms McCarthy QC’s
submission, for Mr Derry, that the provisions of the ITA so far considered give
clear and conclusive guidance as to the treatment of his claim to share loss
relief for the purposes of assessing his liability for the tax year 2009/10,
which is not overridden by anything elsewhere in the ITA or in the TMA.
18.
On the other side, for the Revenue Mr Nawbatt QC submits that this is
only part of the story. He refers to ITA section 1020(2) which, as he says,
would have pointed the taxpayer in the direction of TMA in these terms:
“For further information about
claims and elections, see TMA 1970 (in particular section 42(2), (10) and (11)
and Schedule 1A).”
Although there is no specific reference to TMA Schedule
1B, that as he submits is to be taken as encompassed in the general reference
to the TMA itself.
19.
He also relies by way of analogy on more specific references to the TMA
in other chapters of Part 4. They are in Chapter 2 (“Trade losses”) and Chapter
5 (“Employment loss relief”). The legislative pattern in each case is very
similar to the provisions relating to share loss relief, but in each case,
there appear (respectively in section 60(2) and section 128(7)) the following
words:
“This Chapter is subject to
paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or
more years).”
There is no equivalent reservation in the sections
relating to share loss relief. However, Mr Nawbatt submits that the analogy
indicates the appropriate relationship between the loss relief provisions and
the TMA; and that, even without such a specific reference, section 1020 is
sufficient to point the taxpayer in that direction; or alternatively that the
terms of Schedule 1B are sufficiently clear in themselves to make such a
signpost unnecessary.
TMA
20.
The TMA, as its title implies, is concerned principally with the
management of the tax rather than fixing liability. Although it dates back to
1970, it has been subject to substantial amendment since then, in particular in
connection with the introduction of self-assessment (under the Finance Act
1994) with effect from the year 1996-1997. The following provisions are those
in force in the relevant tax year, that is 2009/10.
21.
I refer first to those relating to tax returns and self-assessment,
which are relevant principally to the second issue. Section 8(1) empowers an
officer of HMRC to give a notice requiring a person chargeable to income tax
and capital gains tax for a year of assessment to make and deliver, on or
before the date specified in subsection (1A), a return containing the
information required by the notice, supported by such accounts and other
relevant material as may reasonably be so required. The date so specified (for
present purposes) is 31 January next following the year of assessment. By
subsection (1AA)(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;”
By subsection (1AA)(b) the “amount payable” by way of
income tax is the difference between the chargeable amount and the aggregate
amount of any income tax deducted at source and certain tax credits. Subsection
(1H) requires the Commissioners to “prescribe what constitutes an electronic
return”. (See also section 113 which provides generally for “any returns” to be
in “such form as the Board prescribe”.)
22.
Section 9(1) provides that, subject to immaterial exceptions, every
return under section 8:
“… 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; and
(b) an assessment of the
amount payable by him by way of income tax …”
Section 9A enables an officer of the Board to give notice
of his intention to enquire into a return under section 8 within the time
allowed, that is 12 months from the date of delivery for returns delivered on
or before the date specified in the previous section. By subsection (4)(a), an
enquiry may extend to anything contained (or required to be contained) in the
return, “including any claim … included in the return”.
23.
Returning to the first (loss relief) issue, section 42 (headed
“Procedure for making claims etc”) provides:
“(1) Where any provision of
the Taxes Acts provides for relief to be given, or any other thing to be done,
on the making of a claim, this section shall, unless otherwise provided, have
effect in relation to the claim.
…
(2) … where notice has been
given under section 8 … of this Act, 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.
…
(11) 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 … of this Act, …
(11A) Schedule 1B to this Act
shall have effect as respects certain claims for relief involving two or more
years of assessment.
…”
24.
Thus subsections (11) and (11A) take the reader on to Schedules 1A and
1B. The latter is most directly relevant to the first issue. Schedule 1A (headed
“Claims etc not included in returns”) provides for any such claim to be made
“in such form as the Board may determine” (paragraph 2(3)), and provides power
to enquire into the claim within a specified period (paragraph 5). The Board is
required to give effect to a claim as soon as practicable “by discharge or
repayment of tax” (paragraph 4(1)), save that, if an enquiry has been opened
into the claim, this obligation is postponed until the enquiry is completed,
subject to power before then to give effect to all or part of the claim on a
provisional basis (paragraph 4(3)).
25.
Schedule 1B (headed “Claims for relief involving two or more years”)
provides in paragraph 2 (headed “Loss relief”):
“(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) Subject to sub-paragraph
(5) below, the claim shall be for an amount equal to the difference between -
(a) the amount in which the
person is chargeable to tax for the earlier year (‘amount A’); and
(b) the amount in which he
would be so chargeable on the assumption that effect could be, and were, given
to the claim in relation to that year (‘amount B’).
…
(6) Effect shall be given to
the claim in relation to the later year, whether by repayment or set-off, … or
otherwise.”
The loss-relief issue
26.
The issue in short is whether, having exercised his right (under section
132) to claim the relevant loss relief in the previous year (2009/10), Mr Derry
was correct to deduct that loss in calculating his net income and consequent
tax liability for that year (under section 23); or whether, as the Revenue
contend, that right was in effect overridden by TMA Schedule 1B, with the
result that the loss, though claimed in year 2009/10, was to be treated as
“relating to” the following year.
The decisions below
27.
Both the Upper Tribunal and Court of Appeal decided this issue in favour
of the Revenue. It is not possible to do justice to their reasoning without
relatively full reference to the leading judgment of Henderson LJ in the Court
of Appeal (agreed by the other members of the court), which in turn refers with
general approval to that of Morgan J in the Upper Tribunal. It also provides a
useful summary of the respective contentions of the parties, which have been
substantially repeated in this court.
28.
Having set out the relevant provisions of the TMA, Henderson LJ observed
(paras 26-28) that the terms of paragraph 2 of Schedule 1B, read in isolation,
were apt to apply to a claim for loss relief under section 131, and as such
would have the same consequences as explained (in respect of employment loss
relief) by Lord Hodge in Cotter. He identified the “critical issue” as
being -
“… whether the omission from
Chapter 6 of a provision equivalent to section 60(2) or section 128(7) reflects
a legislative intention that Schedule 1B should not apply to Chapter 6, even
though (as I have already pointed out) the language of paragraph 2 of Schedule
1B would be entirely apt to apply to Chapter 6 in the same way as it applies to
Chapters 2 and 5.” (para 35)
29.
He recorded (paras 37ff) that Morgan J had begun by observing that TMA
section 42 applied “unless otherwise provided” and asking whether there was
anything to disapply the section in respect of Mr Derry’s claim under section
132. He had answered that question in the negative, noting also that neither
side had put forward “any persuasive reason” for the difference of treatment
between claims under Chapters 2 and 5 as compared to Chapter 6. He had
described the specific references in the former to Schedule 1B as “signposts”;
but he did not regard the lack of a similar signpost in Chapter 6 as clear
enough to be “otherwise provided” for the purposes of section 42(1). He had
also concluded that there was no inconsistency between the “detailed provisions
of sections 132 and 133 of ITA 2007, taken together with the operation of
section 23” and paragraph 2 of Schedule 1B. Henderson LJ regarded this
observation as “clearly correct”, adding that it “(was) not challenged by Mr
Derry”. (The latter understanding appears to have been mistaken, having regard
to an extract we were shown by Ms McCarthy from Mr Derry’s Replacement Skeleton
Argument in the Court of Appeal.)
30.
Morgan J had also considered and rejected an argument for Mr Derry based
on the reference in section 42(11A) to its application only to “certain
claims”. Again, Henderson LJ agreed commenting:
“The structure of Schedule 1B is
that it applies to certain specified claims for relief involving two or more
years. The provisions relating to loss relief are contained in paragraph 2. The
remaining paragraphs deal with entirely separate claims, for example relief for
fluctuating profits of farming etc in paragraph 3, and the carry-back of
post-cessation receipts in paragraph 5. It is therefore entirely natural for
the provision in the body of TMA 1970 which gives effect to Schedule 1B to say
that it ‘shall have effect as respects certain claims for relief involving two
or more years of assessment’, that is to say the various claims for relief
which are dealt with in the Schedule. Much clearer language would in my
judgment have been needed if Parliament had intended to stipulate that the
provisions contained in Schedule 1B were to apply only to claims expressly
identified elsewhere in the Taxes Acts as ones to which Schedule 1B applied.
Another way of making the same point is to say that the subject matter of
Schedule 1B is to be ascertained by looking at its provisions, which are given
effect (but not circumscribed) by section 42(11A).” (para 42)
31.
Turning to the submissions in the Court of Appeal, he noted Ms
McCarthy’s reliance on Lord Dunedin’s well-known enumeration of the “three
stages in the imposition of a tax” - that is, declaration of liability,
assessment, and methods of recovery (Whitney v Inland Revenue Comrs
[1926] AC 37, 52). The first (in Lord Dunedin’s words) was -
“… the part of the statute which
determines what persons in respect of what property are liable. … Liability
does not depend on assessment. That, ex hypothesi, has already been fixed.”
She submitted that Mr Derry’s liability was fixed by the
provisions of Chapter 6 and could not be overridden by provisions relating to
the assessment stage, other than by clear words as found in Chapters 2 and 5 of
ITA Part 4.
32.
Henderson LJ disagreed (para 49). Lord Dunedin’s classic statement was
of little assistance in respect of the present UK tax system which is “vastly
more complex than it was a century ago”:
“one cannot always expect today to
find that provisions relating to the imposition and calculation of liability
are unaffected by provisions relating to the machinery of assessment.”
The language of Schedule 1B paragraph 2 was clearly apt
to cover Mr Derry’s claim, and the absence of “an express signpost” in Chapter
6 was not a sufficiently strong counter-indication. He also rejected (para 50)
an argument that sections 132-133 constituted a more specific statutory regime,
enacted later than Schedule 1B, and should therefore take precedence.
33.
Finally, he agreed with the Upper Tribunal that there was nothing in the
legislative history which cast useful light on the question (paras 51-52). He
noted Ms McCarthy’s submission that the inclusion of signposts in respect of
trade loss relief and employment loss relief may have been connected with the
treatment of the predecessor provision (section 380 of ICTA 1988) by the Court
of Appeal in Blackburn v Keeling [2003] EWCA Civ 1221. But the reason
for the absence in sections 132-133 of a similar cross-reference remained
obscure; “the possibility that it was simply an oversight certainly cannot be
excluded”.
Comment on Issue 1
34.
With respect to the carefully developed reasoning of the judges below,
they seem to me not only to have paid too little regard to the legislative
purpose and scheme of the ITA, but also to have started from the wrong point.
It is notable that the introductory paragraphs of Henderson LJ’s judgment make
only passing reference to the opening sections of the ITA discussed above, and
in particular to section 23, by which (on its face) Mr Derry’s liability for
the relevant tax year 2009/10 was fixed. Instead, his reasoning on this part of
the case starts from the proposition that the words of TMA Schedule 1B
paragraph 2 “read in isolation” are apt to cover Mr Derry’s claim, and only
then refers to the governing provisions of the ITA, asking whether the omission
of a specific signpost in ITA Chapter 6 reflects a “legislative intention” that
it should not apply (paras 26, 35).
35.
While it may be true, as Henderson LJ said, that modern tax legislation
in general is much more complex than at the time of Lord Dunedin’s classic
statement, the purpose of the tax law rewrite was to restore a measure of
simplicity and coherence to the principal tax statutes. In any event, one does
not need high judicial authority to make the obvious point that the first step
in the imposition of a tax is to establish (in Lord Dunedin’s words) “what
persons in respect of what property are liable”. Taken together section 23 and
sections 131-132 appear to constitute a clear and self-contained code for the
treatment of a claim to share-loss relief such as that of Mr Derry. Sections
132-133 in terms give him an “entitlement” to make the claim, to specify the
tax year to which it is to be applied, and to do so by deducting it in the
calculation of his “net income” for the purpose of section 23. For good measure
section 132(1) provides a specific signpost to Step 2 in section 23. That
section in turn makes clear that the “result” of that, and the other steps
there set out, is his “tax liability” for the tax year in question.
36.
Having taken such care to walk the taxpayer through the process of
giving effect to his entitlement as part of his tax liability for the year
specified by him, it would seem extraordinary for that to be taken away,
without any direct reference or signpost, by a provision in a relatively
obscure Schedule of another statute concerned principally, not with liability,
but with management of the tax. Section 1020 makes no specific reference to Schedule
1B, and in any event refers only to “information” in general terms, rather than
anything likely to affect the substance of liability. By contrast sections
60(2) and 128(7) are more than mere “signposts”, as the judges below
characterised them. The words “subject to” are substantive in effect, imposing
a qualification on the right otherwise conferred by those provisions. Applying
ordinary principles of interpretation, the absence of similar words in section
132 would naturally be taken as indicating that this right is not subject to
the same qualification.
37.
Turning to the TMA, it is true that words of Schedule 1B taken on their
own would be apt to apply to a claim under sections 132-133. However, I do not
regard that as enough to displace the clear provisions of the ITA in respect of
liability. I do not see this as turning so much on whether one set of
provisions is more specific than the other, but rather on the fact that the ITA
is in principle the governing statute in respect of tax liability, and as such
should take precedence in the absence of any indication to the contrary.
Further, unlike the judges below, I see a significant inconsistency between the
two sets of provisions: the first gives the taxpayer an unqualified right to
claim a deduction in the previous year; the second in effect removes that right
by treating it as relating to the current year. I also see force in Ms
McCarthy’s reliance on the reference in section 42(11A) to “certain claims” for
relief involving two or more years. As she says, this may be read as implying
that not all such claims are covered, and that one needs to look elsewhere to
identify which. (I do not forget that in Cotter para 14, Lord Hodge
proceeded on the basis that section 42(11A) had the “same” effect in respect of
employment loss relief as the specific provision in section 128(7), but the
point was not in issue and does not seem to have been subject to argument.)
38.
The only countervailing consideration, to my mind, is the lack of any
obvious explanation, in the statutory history or otherwise, of the different
treatment of this form of loss relief. In a post-hearing note Mr Nawbatt gave a
detailed account of the treatment of the various forms of loss relief under the
previous legislation. This shows, as is common ground, that the pre-2007 law
did not draw any material distinction between share loss relief (section 574
ICTA 1988), and trade and employment loss relief (section 380 ICTA 1988). Mr
Nawbatt was also able to point to some indications in the ITA Explanatory Notes
(eg in respect of section 1025, which is not directly relevant to the present
case) that the authors of the notes may have assumed that share loss relief
would be subject to TMA Schedule 1B, in the same way as the other forms of
relief. However, taken at their highest, these indications are far from
providing a basis for departing from the ordinary principles of statutory
interpretation, absent any suggestion that they produce a result which is
absurd or unworkable. Indeed, for the taxpayer’s liability to be determined by
reference to legal archaeology of this kind would negate the whole purpose of
the tax law rewrite. It is neither necessary nor appropriate for the court to
speculate as to Parliament’s intentions to justify a departure from the natural
interpretation of the statutory language.
39.
For these reasons, in respectful disagreement with the Upper Tribunal
and the Court of Appeal, I would hold that Mr Derry was entitled to make his
claim to share loss relief in the year 2009/10.
The tax return issue
40.
The view I have reached on the first issue makes it strictly unnecessary
to reach a conclusion on the second issue. So much was conceded by Mr Nawbatt
for the Revenue in response to a question from the court early in the hearing
but see para 65 below. Consistently with that concession, if (as I have
decided) Mr Derry succeeds on Issue 1, then the claim properly formed part of
Mr Derry’s return for the year 2009/10, and that it could only be challenged by
a notice served within time under TMA section 9A. However, the second issue is
of some difficulty and of general importance. It may be helpful therefore for
us to express some views on the respective submissions. This issue has to be
approached on the assumption that Mr Derry was wrong on the first issue, and
that the inclusion of the loss relief claim in the assessment of his liability
for 2009/10 was in error.
41.
Before further considering this issue, it is necessary to refer in more
detail to the factual background.
The sequence of events
42.
On 24 January 2011 Mr Derry’s accountants filed his 2009/10
self-assessment tax return (“the 2010 return”). The Additional Information
pages (Ai3 and Ai4) were completed as follows. In Boxes 3 and 4 (headed
“Trading Losses”) he put £414,500.00 as the amount for which he was claiming
relief, and 2009/10 as the tax year for which it was claimed. Box 19 (which was
a blank space for additional information) contained the following entry:
“Box 3 of page Ai3 shows capital
losses realised on disposal of subscriber shares in an unlisted trading company
in year ended 5 April 2011. These losses have been carried back to year ended 5
April 2010 and relief claimed under section 131, section 132 ITA 2007.”
43.
He also calculated his own tax and completed the tax calculation summary
pages (pages TC1 and 2) in the 2009-10 return as follows. On page TCl (headed
“self-assessment”), in Box 1 (“total tax … due before any payments on
account”), the figure of £95,546.36 appeared automatically as a result of
entries made elsewhere on the form. Page TC2 (headed “adjustments to tax due”)
stated -
“You may need to make an
adjustment to increase or decrease your tax for 2009-10 because you are ...
carrying back to 2009-10 certain losses from 2010-11 ...”
In Box 15 (“Any 2010/11 repayment you are claiming now”)
Mr Derry inserted the figure of £165,800; and in Box 16 (“Any other
information”) the words:
“The reduction in tax payable in Box
15 of page TC2 relates to the loss carry back claim arising from the carry back
of losses of GBP 414,500 as set out on page Ai3. The corresponding reduction in
tax payable in the year ended 5 April 2010 following this loss carry back claim
is GBP 165, 800 being GBP 414,500 at 40%.”
44.
Mr Derry had already suffered tax deducted at source of £102,233.64 on
his income for 2009/10 (made up principally of employment income of £497,120).
What followed was described by Henderson LJ:
“10. … the effect of his claim
for loss relief carried back from 2010/11 was to generate a significant
repayment of tax due to him. This was quantified in his personal tax
computation, generated by the 2010 Return, as a refund due to him of
£70,253.64.
11. On 18 October 2011, HMRC
repaid a sum of £70,487.90 to Mr Derry. It is unclear why HMRC refunded this
slightly higher amount, but the payment was clearly intended to include the
amount claimed by Mr Derry, albeit HMRC now say that the payment was made in
error because full checks had yet to be completed in relation to the loss
relief claim.”
45.
The legal effect of these entries is a matter of dispute. In the first
place the Revenue do not accept that the personal tax computation is properly
to be characterised as “generated by the 2010 Return” (in Henderson LJ’s
words). They accept that Mr Derry self-assessed his own tax liability for
2009/10, but their position is that his self-assessed liability was in the sum
of (plus) £95,546.36, given in Box 1 on page TC1, not the figure after taking
account of loss relief. The reference to the loss relief claim was to be
treated as additional information in respect of a “free-standing credit” or
“FSC” (a non-statutory term: see Upper Tribunal para 61), but not as directly
relevant to his liability for the year 2009/10.
The judgments below
46.
On this issue there was a difference between the Upper Tribunal and the
Court of Appeal. Morgan J agreed with the Revenue’s interpretation:
“I consider that the tax return
should be construed against the background of the relevant legal provisions.
Under Chapter 6 of Part 4 of ITA, Mr Derry is able to make a claim in relation
to such capital losses against the income in the year 2010-2011 and also the
year 2009-2010 but such a claim relates to the year 2010-2011 and does not
reduce the tax payable for the year 2009-2010. Against that background, I
consider that the presence of the claim for capital losses does not displace
the clear assessment to tax in the sum of £95,546.36.” (UT para 52)
47.
Henderson LJ disagreed with this reasoning (CA para 60). It failed to
recognise the distinction between “the claim itself, which … could only be
given effect in 2010/11, and the self-assessment which Mr Derry performed,
albeit on an erroneous basis, for 2009/10”; and also failed to give effect to
the adjustment made and explained in Boxes 15 and 16 on page TC2. Further it
was inconsistent with parts of Lord Hodge’s reasoning in Cotter. He also
rejected as “an impossible contention” the submission for HMRC that the entry
in Box 15 should not be construed as forming part of the calculation of
liability to tax for 2009/10:
“The purpose of the tax
calculation is to calculate the tax due for the year of assessment. The rubric
above boxes 13 to 15 refers to the need to make ‘an adjustment to increase or
decrease your tax for 2009-10’, because of claims (inter alia) to carry back to
2009/10 certain losses from 2010/11. In this context, although the wording of
Box 15 itself (‘Any 2010-11 repayment you are claiming now’) is on any view
rather imprecise, it can only sensibly be understood as referring to a carry
back of losses from 2010/11 in reduction of the tax actually due for 2009/10.
This is what Mr Derry purported to do, and this was the basis on which he
calculated the repayment of tax due to him …” (para 63)
Cotter
48.
At this stage it is necessary to refer in more detail to the leading
judgment of Lord Hodge in Cotter itself. Mr Cotter had claimed to carry
back to the previous year (2007/08) loss relief allegedly sustained in 2008/09.
He had originally submitted his return for 2007/08 without a claim for loss
relief and had left it to the Revenue to calculate the tax due. That had led to
a calculation of his tax liability for the year based on the return as it then
stood. He later entered into a tax avoidance scheme intended to eliminate that
liability, for which purpose his accountants submitted a provisional 2007/08
loss relief claim and proposed amendments to his 2007/08 self-assessment form
relying on his loss relief claim. The Revenue opened an enquiry into the claim
under Schedule 1A, and in the meantime refused to give effect to the claim. In
due course they instituted county court proceedings for the tax due.
49.
In his defence Mr Cotter challenged the jurisdiction of the court, on
the grounds that he had made an effective claim for relief in his tax return
for 2007/08 which could only be challenged by an enquiry under section 9A, and
in relation to which the First-tier Tribunal had exclusive jurisdiction. The
proceedings were transferred on this issue to the Chancery Division of the High
Court, which rejected his defence. Although his appeal to the Court of Appeal
was successful, their decision was reversed by the Supreme Court (the single
judgment being given by Lord Hodge).
50.
It was held that by virtue of Schedule 1B his claim, though referred to
in his amended 2007/08 tax return, must be treated as relating to the following
tax year, and not therefore as part of the “return” in the relevant sense, that
being limited to the information required to establish his liability for the
year in question. More directly relevant to the present case, however, is a
passage in Lord Hodge’s judgment commenting (obiter) on the position if
Mr Cotter had made the calculation of liability himself, rather than leaving it
to HMRC to do so.
51.
In order to set this passage in the context of Lord Hodge’s discussion
of the interaction of the relevant provisions and the tax return form, it is
appropriate to quote the relevant paragraphs in full:
“24. Where, as in this case,
the taxpayer has included information in his tax return but has left it to the
revenue to calculate the tax which he is due to pay, I think that the revenue
is entitled to treat as irrelevant to that calculation information and claims, which
clearly do not as a matter of law affect the tax chargeable and payable in the
relevant year of assessment. It is clear from section 8(1) and 8(1AA) of the
1970 Act … that the purpose of a tax return is to establish the amounts of
income tax and capital gains tax chargeable for a year of assessment and the
amount of income tax payable for that year. The revenue’s calculation of the
tax due is made on behalf of the taxpayer and is treated as the taxpayer’s
self-assessment: section 9(3)(3A) of the 1970 Act …
25. The tax return form
contains other requests, such as information about student loan repayments (page
TR2), the transfer of the unused part of a taxpayer’s blind person’s allowance
(page TR3) or claims for losses in the following tax year (Box 3 on page Ai3)
which do not affect the income tax chargeable in the tax year which the return
form addresses. The word ‘return’ may have a wider meaning in other contexts
within the 1970 Act. But, in my view, in the context of sections 8(1), 9, 9A
and 42(11)(a) of the 1970 Act, a ‘return’ refers to the information in the tax
return form which is submitted for ‘the purpose of establishing the amounts in
which a person is chargeable to income tax and capital gains tax’ for the
relevant year of assessment and ‘the amount payable by him by way of income tax
for that year’: section 8(1) [of] the 1970 Act, as substituted firstly by
section 178(1) of the Finance Act 1994 and then further amended by section
121(1) of the Finance Act 1996 and by section 114 of and Schedule 27 to the
Finance Act 2007.
26. In this case, the
figures in Box 14 on page CG1 and in Box 3 on page Ai3 were supplemented by the
explanations which Mr Cotter gave of his claim in the boxes requesting ‘any
other information’ and ‘additional information’ in the tax return. Those
explanations alerted the revenue to the nature of the claim for relief. It concluded,
correctly, that the claim under section 128 of the 2007 Act in respect of
losses incurred in 2008/2009 did not alter the tax chargeable or payable in
relation to 2007/2008. The revenue was accordingly entitled and indeed obliged
to use Schedule 1A of the 1970 Act as the vehicle for its enquiry into the
claim: section 42(11)(a).
27. Matters would have been
different if the taxpayer had calculated his liability to
income and capital gains tax by requesting and completing the tax calculation
summary pages of the tax return. In such circumstances the revenue would have
his assessment that, as a result of the claim, specific sums or no sums were
due as the tax chargeable and payable for 2007/2008. Such information and
self-assessment would in my view fall within a ‘return’ under section 9A of the
1970 Act as it would be the taxpayer’s assessment of his liability in respect
of the relevant tax year. The revenue could not go behind the taxpayer’s
self-assessment without either amending the tax return (section 9ZB of the 1970
Act …) or instituting an enquiry under section 9A of the 1970 Act.
28. It follows that a
taxpayer may be able to delay the payment of tax by claims which turn out to be
unfounded if he completes the assessment by calculating the tax which he is due
to pay. Accordingly, the revenue’s interpretation of the expression ‘return’
may not save it from tax avoidance schemes. But what persuades me that the
revenue is right in its interpretation of ‘return’ is that income tax is an
annual tax and that disputes about matters which are not relevant to a
taxpayer’s liability in a particular year should not postpone the finality of
that year’s assessment.”
52.
While recognising that the last two paragraphs were not binding,
Henderson LJ regarded them as following logically from Lord Hodge’s earlier
analysis. He saw a clear distinction between the inclusion in the return of
information which is irrelevant in law to the taxpayer’s liability for that
year (even if included by implicit invitation of the Revenue), and the
taxpayer’s self-assessment of the tax which he is due to pay:
“… a taxpayer’s self-assessment is
a different matter. Plainly, errors of many different kinds may be made in such
an assessment, and they may include errors about the availability of a relief.
If the Revenue is dissatisfied with the taxpayer’s self-assessment, its remedy
is either to amend the return or to open an enquiry into it under section 9A of
TMA 1970. …, such an enquiry may extend to anything contained (or required to
be contained) in the return. The boxes on page TC2 for ‘adjustments to tax due’
must in my view be regarded as containing information required to be contained
in the return, where the taxpayer elects to perform his own self-assessment,
because such adjustments form an integral part of the calculation of the tax
due to be paid by him for the year in accordance with sections 23 and 24 of ITA
2007. It follows that the information contained in those boxes cannot be
regarded as extraneous to the return. As I understand it, this is the essential
point which Lord Hodge was making in Cotter at para 27, and if I may
respectfully say so, I agree with it.” (para 57)
The Revenue’s difficulty in the present case arose simply
from their failure to take “the obvious step” of opening an enquiry into the
2010 return within the statutory time limit.
The submissions in the appeal
53.
Ms McCarthy generally supported the reasoning of the Court of Appeal on
this issue, and relied in particular on Lord Hodge’s observations in paras
27-28 as directly applicable to Mr Derry’s claim.
54.
For the Revenue, Mr Nawbatt submitted that the obiter observations
in Cotter cannot be taken as suggesting that “reliefs may be forced into
year 1 where they do not in law relate to year 1”. Lord Hodge’s observations should
not be taken as intended to create a situation where a taxpayer can
“erroneously (or perhaps deliberately)” make a claim as part of his
self-assessment exercise and expect to benefit from the error unless noticed
and acted upon by the Revenue. The Court of Appeal’s reasoning in the present
case, he submitted, turned on a misunderstanding of the correct meaning of
self-assessment, which relates solely to the action required to establish the
amounts in which a person is chargeable to tax for the year, as reflected in
the “total tax” figure given in the self-assessment Box. It is wrong to regard
other parts of the Tax Calculation Summary pages as part of that exercise if,
as explained in Cotter (para 25) they do not affect the assessment of
income tax chargeable for the year.
Mr Dean’s evidence
55.
At this point I should refer to the witness statement of Mr Graham Dean,
a Senior Investigator with the Revenue, which was admitted before the Upper
Tribunal and referred to by Morgan J on other matters (see UT paras 47, 59ff).
56.
Mr Dean’s evidence was not mentioned by the Court of Appeal. Nor was it
included in the original papers for this court or referred to in the written
submissions; it was only produced at the request of the court. He speaks with
experience as an Inspector of Taxes for more than 25 years, and particular
experience of leading investigations into share loss relief avoidance.
57.
Mr Dean explains the procedures governing the submission of tax returns
online, by use either of the Revenue’s own software, or software provided by
other suppliers complying with the Revenue’s technical specifications and
designed to produce the same computations (paras 5-6). He comments on the
significance of different parts of the return:
“As well as the mandatory
information relating to income and gains and the self-assessment for the year
in question (as required under sections 8 and 9), the tax return also provides
spaces to allow the taxpayer, if he wishes, to provide other information or to
make claims not related to the year in question. These are provided for
administrative convenience and customer service but, being optional, are not
subject to the consistency checks described above.
One such matter is the ability to
submit an early claim to relieve trading or capital losses arising in the
immediately following tax year (‘year 2’) by reference to income for the
current year (‘year 1’) or an earlier year. If the taxpayer wishes to make such
a claim effective, he would also need to compute the amount of the tax
repayment that he considers will arise from the claim and enter this in the box
labelled ‘Any [year 2] payment you are reclaiming now’ within the
section headed ‘adjustments to tax due’. As these claims are not part of the
year 1 return and do not affect the self-assessment for that year, they are
frequently referred to as ‘stand-alone claims’.” (paras 12-13)
He explains that such a year 2 repayment claim is shown
on the taxpayer’s “self-assessment statement of account” as a “Free Standing
Credit” or “FSC”. This, he says, “simply records what the taxpayer has claimed.
It does not represent HMRC’s approval of the claim”. Referring to Box 15 on page
TC2, he says “that is not part of the return, so it is not subject to any of
the automated tax consistency checks …” (para 16).
58.
Commenting on Mr Derry’s own return, and the entry in Box 15, he says
that the effect of entering the figure of £165,800 in this box was “to
automatically generate an FSC of the same amount …”; and that, when it was set
against the balancing payment of £95,546.36 due on 31 January 2011, the
“computer automatically allocated the FSC against that liability first” showing
the balance as a “repayment pending” of £70,253.64 (paras 25, 28). Although he
has been unable to ascertain the precise circumstances of the repayment made to
Mr Derry before the conclusion of the enquiry, his own view, given the size of
the claim and the fact that the company in question had not been identified,
was that it had been made “if not in error, then prematurely” (para 31). Finally,
he mentions the “operational problems” caused for the Revenue by the Court of
Appeal’s decision in Cotter. But notes without further comment that the
Revenue’s appeal was allowed by the Supreme Court. It does not appear that any
similar evidence was before the court in Cotter.
59.
There was some uncertainty at the end of the hearing about the precise
status of Mr Dean’s evidence, or the extent to which it was relied on in
support of the Revenue’s submissions. Although we invited further submissions
on certain questions apparently arising from it, I do not think the evidence
itself is critical to our consideration of this issue. It is of some interest
in explaining, not only the background to the present appeal, but more
generally aspects of the Revenue’s approach to the self-assessment process, and
the workings of its internal systems. However, as Ms McCarthy rightly submits,
neither the Revenue’s internal management systems, nor Mr Dean’s subjective
understanding of them, can ultimately be determinative of the issue before us.
That must turn on the correct interpretation of the law, and an objective
reading of the tax return within its statutory framework.
60.
It may be, as Lady Arden suggests, that the relevant statutory framework
should be taken as including the terms in which the relevant return forms,
paper or electronic, are prescribed by the Revenue (under sections 8(1H) and
113 of the 1970 Act). That may in turn raise a question whether, in respect of
the on-line forms, those prescribed terms include, or are to be taken as
including, the automatic adjustments built into the Revenue’s software,
including the calculation in Box 1. Mr Dean’s evidence provides no direct
assistance on the point, and neither party based any submissions on it. On the
limited material before us, it is difficult to draw any firm conclusions.
Post-hearing submissions on Cotter
61.
One point on which we asked for clarification was the Revenue’s position
on Lord Hodge’s obiter comments in Cotter, and in particular
whether it mattered that the return in that case was in paper form rather than
on-line as in the present case. I quote Mr Nawbatt’s response:
“The material difference between
submitting a paper return (including the tax calculation pages) and an on-line
return is that because the tax calculation pages on the paper return are
completed manually it is physically possible for the taxpayer to enter into Box
1 TC1 a figure that is not the sum of the relevant boxes that feed into the
self-assessment for the year. As explained in Rouse 2 [R (Rouse) v
HMRC [2014] STC 230], at para 14, if HMRC wanted to enquire into that Box 1
figure it would have to open a section 9A enquiry …
Mr Cotter’s case involved a paper
return and had he requested the tax calculation pages he would have completed
the Box 1 TC1 calculation manually rather than leaving it to HMRC to carry out
the calculation. It is HMRC’s position that Lord Hodge’s obiter comments in
para 27 were addressing a hypothetical scenario in which Mr Cotter’s manual
calculation of the Box 1 figure had involved the deduction of the year 2 loss
relief, ie the figure Mr Cotter had manually inserted into Box 1 had been
arrived at after deducting the year 2 relief ...”
62.
This interpretation, he submitted, is supported by Lord Hodge’s
reference to Mr Cotter having “calculated his liability” to income tax by
completing the tax calculation summary pages, giving the Revenue his assessment
that “specific sums or no sums were due as the tax chargeable …” for that year.
The equivalent pages of the on-line form used by Mr Derry did not permit such a
specific calculation. To establish his claim he would have needed to complete
the capital gains pages on the year 1 return, which it is said would have “fed
into” the figure in Box 1.
63.
Ms McCarthy rejected this narrow view of Lord Hodge’s comments, and also
the Revenue’s attempt to distinguish between the different parts of the Tax
Calculation Summary. As she points out, Box 1 includes a reference to “student
loan repayment”, which as Lord Hodge accepted (para 25) is extraneous to the
chargeable income tax of the year. On the other hand, the Revenue accept that
some other parts of the summary (Boxes 11 and 12: “Blind person’s surplus
allowance and married couple’s surplus allowance”) do “feed into” the tax for
the current year. As Ms McCarthy submits, it is impossible to draw any clear
distinction based simply on the printed entries in the form itself. She rejects
as “absurd” the novel suggestion that, in order to claim a relief relevant to
his income tax liability, he should have to fill in a part of the return
dealing with capital gains.
Comment on Issue 2
64.
Ms McCarthy’s submission, like the Court of Appeal’s reasoning, appears
consistent with the natural reading of the statutory provisions. Section 9
requires the taxpayer to make a self-assessment of the chargeable amount of tax
“on the basis of the information contained in the return and taking into
account any relief … a claim for which is included in the return”
(emphasis added). On its face, this implies that the return is treated as
including the relief as claimed by the taxpayer in his return, whether or not
the claim ultimately proves well-founded. The Revenue’s case rests on the
assertion that the process of “self-assessment” is defined by the figure which
appears in Box 1 under that title, and that other “claims”, including in
particular in Box 15, are irrelevant in so far as they “do not feed into” the
self-assessment for the current year.
65.
Although, as already noted (para 40 above), Mr Nawbatt had conceded that
this issue would not arise if Mr Derry succeeded on the first issue, his
post-hearing submission appeared to go back on that. Mr Nawbatt has not in
terms sought permission to withdraw his concession and I agree with Ms McCarthy
that it is much too late for him to do so. But in any event, the submission
seems to me misconceived. It implies that, by prescribing an on-line form which
makes it impossible to make the necessary adjustment to the self-assessment
figure, the Revenue can deprive a taxpayer of a relief to which he is lawfully
entitled and to which a claim has been clearly included on the face of his
return. That cannot be right. It may be, as Mr Dean seems to be saying, that it
would have bypassed the Revenue’s “automated tax consistency checks”. However,
that is not the fault or the concern of the taxpayer.
66.
Whether the same would apply if the taxpayer had no such lawful
entitlement raises more difficult issues. As already noted (para 52 above), the
Court of Appeal proceeded on the basis that, even if the claim was made in
error in that year, it would still be part of the self-assessment. As Henderson
LJ said:
“Plainly, errors of many different
kinds may be made in such an assessment, and they may include errors about the availability
of a relief. If the Revenue is dissatisfied with the taxpayer’s
self-assessment, its remedy is either to amend the return or to open an enquiry
into it under section 9A of TMA 1970 …” (para 57)
As he saw it, the Revenue’s difficulty was of their own
making, in that they had failed to take “the obvious step” of opening a timely enquiry
into the 2010 Return, so enabling them to challenge the repayment of tax
claimed by Mr Derry at the same time as pursuing enquiries into the claim
itself and into his 2011 return (para 58).
67.
Ms McCarthy in substance adopts the same reasoning. The fact that the
taxpayer’s self-assessment may be erroneous in some respect does not impact on
the procedural means available to the Revenue to challenge it. Mr Nawbatt on the
other side submits that, if the inclusion of the claim for that year was
invalid in law, it could not be relied on to create an immunity from challenge
which would not otherwise be available.
68.
I am not satisfied that these issues have been fully explored in
argument before us, which has concentrated on the entitlement to relief rather
than the means of enforcement. As has been seen, there remain unresolved
uncertainties as to the correct interpretation of the entries in the on-line
form and their treatment by the Revenue. In addition, we heard little
discussion of the relationship of the enquiries respectively under section 9A
and Schedule 1A paragraph 5. Apart from timing, I did not understand it to be
suggested that there was any material difference between the processes. While
it may be prudent for the Revenue to institute an enquiry under the former
section, if there is any doubt about what is properly to be treated as part of
the return, it does not necessarily follow that the Revenue is thereafter bound
by the contents of the return for all purposes. If it later emerges that a
claim was wrongly included in the return for that year (for example, because it
should have been treated as subject to TMA Schedule 1B), it may at least be
arguable that the Revenue should not be precluded at that later stage from
opening an enquiry on the correct basis.
69.
These are potentially important issues. Since we do not have to decide
them in the context of the present case, I would prefer to leave them
open for further consideration in an appropriate case with the benefit of full
examination of the relevant law and practice.
Conclusion
70.
For the reasons given under Issue 1 I would dismiss the Revenue’s appeal,
and confirm the order of the Court of Appeal.
71.
Finally, I repeat Lord Hodge’s concluding comment in Cotter:
“36 The revenue’s submission,
which I have accepted, that some entries in a tax return form are not part of
the tax return for the purposes of, among others, section 9 and 9A of the 1970
Act, may create avoidable uncertainty to taxpayers and their advisers. But that
uncertainty could be removed if the return form which the revenue prescribes
(section 113 the 1970 Act) were to make clear which boxes requesting
information were not relevant to the calculation of tax due in the particular
year of assessment. In particular, the revenue could make this clear where the
form provides for the intimation of ‘stand-alone’ claims which relate to
another tax year.”
We were not told what action, if any, has been taken in
response to this advice. The uncertainties revealed by the submissions in the
present case have underlined its importance. There is an urgent need for
clarification, not only of the precise legal status of the different parts of
the return, but also of any relevant differences between the paper and
electronic versions of the return, and their practical consequences.
LADY ARDEN:
72.
I am most grateful to Lord Carnwath for his judgment. I agree that this
appeal should be dismissed as a result of Issue 1, subject to the observations
on interpreting consolidation statutes made below. But on the second issue I
have respectfully reached a different conclusion and so I will take that issue
first.
73.
In summary on Issue 2, I would provisionally express the view that in
consequence of this court’s decision in Revenue and Customs Comrs v Cotter [2013] 1 WLR 3514 and the evidence of Mr Graham Dean on behalf of HMRC, which Lord
Carnwath summarises at paras 57-58 above, the erroneous entry of a loss relief
claim which a taxpayer was not entitled to make in that year (not this case) in
Box 15 of the prescribed online tax return does not make that tax return form a
“tax return” for enquiry purposes. That (provisionally) means that in those
circumstances HMRC would be right to open an enquiry into the claim and not the
return.
74.
Because this appeal is principally about which enquiry HMRC must open, I
will take Issue 2 first.
Issue 2: would making
an erroneous claim for relief in an online tax return make that claim part of
the tax return?
75.
Issue 2 arises where a taxpayer has a claim for relief which relates to
two years and Taxes Management Act 1970 (“TMA”), Schedule 1B applies to it (“a
year 2-related claim”). Under TMA, section 9(1) he must include in his return
an assessment of the amount for which he is liable to pay tax taking in to
account any relief or claim included in the return (see paras 22 and 64 above)
(“the tax calculation pages”). Suppose that the taxpayer submits a return
online for the year and claims in it relief for a loss which relates to the
following year. His return will contain Box 15 (described by Lord Carnwath at
para 43 above). Will his entry of a claim in Box 15 form part of that return
for the purposes of the enquiry provisions of the TMA so that if HMRC wish to
open an enquiry into that claim for relief they must open an enquiry into the
return and not the claim? There needs to be a clear answer to this question to
avoid unnecessary service of numerous precautionary enquiry notices.
76.
The relevant part of the tax calculation pages of the tax return is Box
1, which set out the total tax due, and Boxes 13-15 and the narrative above all
three boxes, namely Boxes 13-15. Lord Carnwath has described Box 15 and that
narrative in para 43 above. Box 13 is for “increase in tax due because of
adjustments in an earlier year” and Box 14 is for “decrease in tax due because
of adjustments in an earlier year.”
77.
HMRC has filed the evidence of Mr Dean. According to Mr Dean, once the
information in the tax return (apart from the tax calculation pages) has been
completed, the software “presents” a tax calculation from that information. Mr
Dean further explains that, when a claim is inserted into Box 15, the tax
payable by the individual and shown in Box 1 is unaffected. Using my own words,
there is no reconciliation or adjustment between Box 15 and Box 1: the figure
for the tax due for the year covered by the return remains exactly the same.
What Box 15 on Mr Dean’s evidence enables the taxpayer to do is to make an
early claim for the relief and to adjust his liability for tax for the following
year in accordance with HMRC’s understanding of the law.
78.
There is a dispute between the parties as to the extent to which Mr
Dean’s evidence forms part of the evidence in these proceedings but the Upper
Tribunal noted that it was accepted by both parties save in relation to a point
which is no longer material (see [2016] STC 334, para 46). In those
circumstances I propose to deal with the issue on the basis of Mr Dean’s
evidence, but on a provisional basis only because this matter needs to be
argued between HMRC and a taxpayer who is interested to argue otherwise. I
agree with Lord Carnwath that it is not open to HMRC to argue that the online
form prevented Mr Derry from making an adjustment to his calculation of the tax
due if that is what he is entitled to do. They can, however, raise that
argument against taxpayers with year-2 related claims.
79.
It is pertinent here to note that HMRC must not simply prescribe a
separate form of tax return for use online - they must also prescribe “what
constitutes an electronic return”: see Taxes Management Act, section 8(1H), as
amended by the Finance Act 2007. This power is conferred by primary legislation
and therefore sections 9(1) and 8(1H) must be read harmoniously together. The
form is in fact available for use only through HMRC’s online services or with third
party software approved by HMRC. It seems reasonable to infer that the
automatic calculations and inhibitors on reconciliations built into the
software and, it may be assumed, HMRC’s online return form constitute part of
the prescribed return and are included in what constitutes the return, but this
point has not been the subject of argument.
80.
Again provisionally, there is no reason as it seems to me why the online
form should not preclude an adjustment which would produce a result which was
incompatible with the Taxes Acts. The objective in designing a tax return form,
including an online form, is to help the taxpayer file a tax return which
properly shows his liability, no more and no less. Indeed, Lord Hodge in Cotter
specifically envisaged that HMRC could take steps to prevent a taxpayer making
claims in the online form which he was not entitled to make: see para 24 set
out by Lord Carnwath at para 51 above.
81.
It is now necessary to go back to Cotter. As I see it, Cotter
teaches us that there is a difference, for the purposes of the TMA sections
8(1), 9, 9A and 42(11)(a) at least, between a tax return and a tax return form.
This may be seen from paras 25 and 36 of Lord Hodge’s judgment in Cotter,
cited by Lord Carnwath at paras 51 and 52 above. This court there held that, if
an item does not fall to be taken into account for the purpose of calculating
the tax payable by the taxpayer submitting the form, it is to be left out of
account and does not constitute part of the “return” for the purposes
mentioned. Mr Dean supplies the evidence as to how the relevant item in this
case (the entry in Box 15) is treated in the online form, and that is only to
notify HMRC of the claim and not to affect the tax payable.
82.
The Court of Appeal reached the conclusion that the claim made by Mr
Derry was relevant to the calculation of the tax due (see para 47 above) but
they took no account of the Mr Dean’s evidence. However, if that evidence is
accepted, it would seem to me provisionally to follow that that their
conclusion was wrong and that the effect described by Lord Hodge in para 27 of
Cotter (para 51 above) would apply only in this case to a paper return in which
the taxpayer performed his calculation of tax due taking the claim into
account. It follows that the Court of Appeal would be in error in applying Lord
Hodge’s reasoning to an online return (see per Henderson LJ cited at para 52
above).
83.
If that is correct, then as I see it (as I have said) provisionally,
unless the ratio in Cotter is to be in some way qualified for online tax
return forms (which is not suggested), the relief claimed through Box 15 would
not form part of the statutory “return” even if the true interpretation of Box
15 is that it is permitting an adjustment to the tax. I do not consider that a
taxpayer would necessarily have been misled by this since he would see that his
entry had no effect on the figure in Box 1. On that basis, HMRC would not have
to open an enquiry into the return where the taxpayer had filled in Box 15 with
an erroneous claim as opposed to an enquiry into the claim. I would
provisionally so hold for the reasons that I have given.
Issue 1: approach to
interpretation of tax rewrite statutes
84.
On Issue 1, while agreeing with all that Lord Carnwath has said, I add
some observations about the approach to interpretation of the ITA and
consolidation statutes in general to provide the context in which the passage
from the judgment of Sales J approved by this court should be applied.
85.
In deciding how the court should interpret a statute, the type of
statute as set out in the statute’s preamble is a relevant consideration. In
the case of the Income Tax Act 2007 (“ITA”), the preamble provides that the Act
is
“to
restate, with minor changes, certain enactments relating to income tax; and for
connected purposes.”
86.
So, ITA is not a pure or “straight” consolidation Act. However, as the
Explanatory Notes cited by Lord Carnwath confirm, it is not (except for the
minor changes) intended to change the law. That is a matter which the courts
must in my judgment respect when interpreting the new legislation. In this
regard it is of some significance in interpreting consolidation statutes that
they receive less Parliamentary scrutiny than other primary legislation. The
respect to which I have referred for giving effect to Parliament’s intention where
it is possible to do so is often expressed in terms of a presumption, in
relation to consolidating statutes, that Parliament did not intend to change
the law.
87.
It would often be laborious for a court to investigate what provisions
had been consolidated in any particular provision of a consolidating statute.
It would be wrong in general for it to do so. The process of drafting a
consolidation statute requires specialist techniques and skills and can be very
complex.
88.
But the position is different in relation to prior case law. The
restraint required by the House of Lords in Farrell v Alexander [1977] AC 59 relates to legislative history, and not to relevant antecedent case law.
Moreover, in practice, even where a statute is a consolidation statute, courts
often look at previous case law on provisions that are consolidated to assist
them interpret the new provision where there is any doubt or simply to confirm
the view that they have formed. This is good sense in the interest of the
consistency of the law, the fulfilment of Parliament’s presumed intention and
the efficient use of judicial resources.
89.
There is a further issue, yet to be resolved, as to the application of
the doctrine of precedent where there is a previous binding decision on the
same provision in the earlier enactment: see the discussion in Bentine v
Bentine [2016] Ch 489.
90.
Reference back to the earlier case law does not undo the good work done
by the consolidation, or run counter to it, since Parliament is likely to have
had the previous case law in mind in any event when enacting the consolidating
statute without any pre-consolidation amendment.
91.
I agree that HMRC’s appeal should be dismissed.
