Archive for month: March, 2015

APN’S and other HMRC demands – act now!

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EXECUTIVE SUMMARY

HMRC may have failed to follow the correct procedures and taxpayers should not, without taking immediate advice, pay any tax due under an HMRC demand if they:

  • Have entered into tax efficient arrangements;
  • Have made a claim for relief in a tax return for a particular year for trading or share losses made in another year;
  • Have made that claim in such a way that it either stands as a claim in a return or a ‘stand alone’ claim.

An action group, the Cotter Solutions Action Group, has been formed to deal with these matters and to give those affected the benefit of being within a large, properly advised, group. The Group is led by David Rogers FCCA, FTA, Tax Consultant.  The Cotter Solutions Action Group is:

  • Taking judicial review action to protect taxpayers where HMRC have failed to follow correct procedures;
  • Taking defence action on behalf of taxpayers faced with demands for immediate payment of tax from HMRC in respect of trading or share losses.

For further information please email Nick Kent at nickk@cottersolutions.co.uk

This all follows on from two recent cases and these are analysed in detail below for those who want to know more about them.   

TAX ANALYSIS

Cotter

The facts of the case:

The Cotter decision is a judgement of the Supreme Court (Cotter (Respondent) v Commissioners for Her Majesty’s Revenue & Customs (Appellant) [2013] UKSC 69.

On 31 October 2008, Mr Cotter filed a tax return for the 2007/08 year of assessment. He made no claim for loss relief in the return, and let the Revenue calculate his tax for that tax year. This resulted in a calculation of income and capital gains tax of £211,927.77.

In January 2009, Mr Cotter’s accountants wrote to the Revenue enclosing a “provisional 2007/08 loss relief claim” and amendments to his 2007/08 return. These added various entries to boxes in the return intimating that Mr Cotter had sustained an employment-related loss of £710,000 in the following tax year 2008/09 for which he claimed relief in tax year 2007/08 under the Income Tax Act 2007. He acknowledged that his interpretation of the applicable tax law might not accord with that of the Revenue and stated, “for these reasons I assume you will open an enquiry” His accountants then sent a copy of the loss relief claim to a Revenue recovery office, stating: “As a result of this claim no further 2007/08 taxes will be payable by Mr Cotter.”

The Revenue wrote to Mr Cotter’s accountants to confirm that the tax return had been amended and that enquiries would be opened into the claim and the tax return. It indicated that it did not intend to give effect to any credit for the loss until those enquires were complete. On the same day, it issued a fresh tax calculation of £211,927.77. The Revenue then wrote to Mr Cotter intimating that it was enquiring into the amendment and the loss claim under Schedule 1A to the Taxes Management Act (TMA).

On 22 June 2009, the Revenue issued proceedings in the county court seeking recovery of £203,243, namely the income and capital gains tax for 2007/08 and the first payment of account for 2008/09. Mr Cotter argued that he was entitled to use his loss claim to reduce to nil the tax otherwise payable for 2007/08 and that the First-tier Tribunal (Tax Chamber) (“FTT”) had exclusive jurisdiction to determine whether that was the case. Consequently, no further taxes were payable for 2007/08 unless and until the enquiry in that year had been completed, and any subsequent appeal by the taxpayer hear by the FTT.

The Supreme Court’s decision

On 8 February 2012, the Court of Appeal (Arden, Richards and Patten LJJ) allowed Mr Cotter’s appeal. In their judgment, the Court of Appeal analysed the self assessment procedure and held that if the Revenue wished to dispute an item contained in a tax return, it had to follow the enquiry procedure set out in section 9A of TMA which would have given Mr Cotter a right of appeal to the First-tier Tribunal. Neither the county court nor the High Court had jurisdiction to determine whether the taxpayer was entitled to make his claim in his tax return for 2007/08 for an income loss incurred in 2008/09.

The Supreme Court, however, did not agree.

Lord Hodge gave the leading judgment. His Lordship began by analyzing Schedule 1B to TMA, which has effect in respect of claims for relief involving two or more years of assessment. It was not disputed that Schedule 1B applies to Mr Cotter’s claim for relief.

Paragraph 2 of Schedule 1B to TMA provides:

(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”).

 …(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”).

(5)Where effect has been given to one or more associated claims, amounts A and B above shall each be determined on the assumption that effect could have been, and had been, given to the associated claim or claims in relation to the earlier year.

(6)Effect shall be given to the claim in relation to the later year, whether by repayment or set-off, or by an increase in the aggregate amount given by section 59B(1)(b) of this Act, or otherwise. ….”

Lord Hodge considered that the scheme in Schedule 1B allows a taxpayer, who has suffered a loss in a later year (“year 2”) and seeks to attribute the loss to an earlier year of assessment (“year 1”), to obtain his relief by reducing his liability to pay tax in respect of year 2 or by obtaining a repayment of tax in year 2 and that the relief is quantified on the basis that the tax liability in year 1 has already been assessed.

Lord Hodge said:

Mr Gordon’s (Counsel for Mr Cotter) submission was attractive in its simplicity. The word “return” in the TMA should be given its ordinary meaning. It was defined in section 118 (unless the context otherwise required) as including “any statement or declaration under the Taxes Acts”. The claim was made in Mr Cotter’s tax return and soSchedule 1A could not apply. The Revenue could enquire only under section 9Aand it had not done so…

 I recognise the force of that submission, which found favour in the Court of Appeal. Treating everything in the tax return form as the tax return has the benefit of keeping simple both the process of self assessment and the jurisdictional boundary between the specialist tax tribunal and the courts. But, as Ms Simler explained on behalf of the Revenue, it exposes the Revenue to irrelevant claims made in the tax return form which have no merit and which serve only to postpone the payment of tax which is payable. There was, she suggested, a risk that the Court of Appeal’s decision would encourage marketed tax avoidance schemes which would give a cash flow advantage to taxpayers, even if the schemes were ultimately found to be ineffective.”

 Lord Hodge analysed the facts. Mr Cotter:

  • Gave information relating to his tax affairs in his initial return form but did not carry out the calculation of the tax which he was due to pay for 2007/08;
  • The Revenue made that calculation;
  • Mr Cotter then provided the information about his provisional loss relief claim in his amendment of the tax return;
  • The Revenue reviewed the return and confirmed its assessment of the tax due for 2007/08, treating the claimed relief as irrelevant to that assessment;
  • Mr Cotter’s advisers disagreed with the Revenue’s view but did not seek to amend the tax return (under section 9ZA of TMA) by carrying out their own calculation of tax. In particular, the letter of 30 January 2009 from Mr Cotter’s accountants could not be construed as an amendment of his tax return. The accountants did not purport to produce a self assessment calculation. Their amendment of the return was confined to the intimation of the claim.

 Lord Hodge concluded:

“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 2007/08.   Such information and self assessment would in my view fall within a “return” under section 9A of TMA 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 TMA) or instituting an enquiry under section 9A of TMA.

 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.”

 Lord Hodge concluded, therefore, that the tax return form for 2007/08 did not show a loss claim which reduced Mr Cotter’s liability to tax in respect of that tax year. The Revenue, therefore, lawfully commenced an enquiry under Schedule 1A of TMA and elected (under paragraph 4(3)(a) of that Schedule) not to give effect to the claim until the end of the enquiry. Consequently, there was no postponement of payment of the tax due on 31 January 2009 by giving effect to the claim in the interim. The taxpayer was obliged to pay the amount of tax which had been assessed less any payment to account (section 59B of TMA) and the Revenue was entitled to raise collection proceedings in the county court (section 66 of TMA). 

The key principle of the Cotter case 

For a brought back claim for loss relief in a tax return for a particular year, where a loss for the following year is claimed, to be made within that return for self-assessment, the taxpayer or his advisers must:

  • Calculate his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return;
  • In doing so, that will make a specific claim that specific sums or no sums are due as the tax chargeable and payable for the year of the return;
  • This will mean that the claim is duly included in a “return” under section 9A of TMA as it would be the taxpayer’s assessment of his liability in respect of the relevant tax year;
  • In turn this means that the Revenue will not be able to go behind the taxpayer’s self assessment without either amending the tax return (section 9ZB of TMA) or instituting an enquiry under section 9A of TMA;
  • The taxpayer will have a right of appeal against such an amendment or closure notice issued at the end of the enquiry;
  • This means that the Revenue will not be able to take enforcement proceedings until such an appeal is hear and determined.

 However, if the taxpayer does not reduce the tax payable box in the return, the brought back claim is not “within the return” for self-assessment and enquiry must be under Sch 1A. 

Judicial review action following Cotter

Derry

In contravention of the clear principles set out in Cotter, HMRC have taken action against a number of taxpayers and the Derry judicial review is to be heard to prevent HMRC from taking enforcement action where claims have properly been made in a return for one year based on a claim in one or more subsequent years. This is due to be heard in the UT on 30th and 31st March this year. In the meantime, the Cotter Solutions Action Group is taking appropriate action on behalf of member taxpayers to protect their interests.

De Silva 

The de Silva judicial view is proceeding and is to determine that HMRC have enquired incorrectly into carry back claims and the claims have become final. 

The facts of the case

This was a decisions of the Upper Tribunal (Tax and Chancery Chamber) (“UT”) in The Queen (Jorge Manuel De Silva and Bernard Alec Dokelman) v HMRC [2014] UKUT 0170 (TCC). The claimants, Mr De Silva and Mr Dokelman, sought a judicial review against HMRC’s decision refusing their claims for loss relief in relation to investments by them in certain film partnerships. The Claimants argued that the issues in the case had been resolved in their favour by the judgment of the Supreme Court in Cotter. 

Mr De Silva and Mr Dokelman were both members of a number of film partnerships of which Investing in Enterprise Limited was the general partner. Under the legislation in force at the time, losses or profits of a film partnership in any tax year are treated as divided between the partners.A partner may set off the losses of a film partnership in a particular year against his general income for that year or against the previous year or, in the early years of the trade, against the three previous years, by way of “carrying back” the losses to those previous years.

The relevant film partnerships lodged tax returns under section 12AA of the Taxes Management Act 1970 (“TMA”) in which they claimed they had suffered substantial trading losses for the tax years 1999/2000, 2000/2001 and 2001/2002, in relation to which they claimed relief for film expenditure under section 42 of the       Finance (No. 2) Act 1992. HMRC proceeded to challenge those claims by way of initiating an enquiry into the returns of the partnerships. On their enquiry, HMRC determined that those losses and those claims for relief should not be accepted and issued closure notices accordingly.

The partnerships appealed to the FTT against HMRC’s decision to disallow the claimed losses and reliefs. Those appeals and the partnerships’ claims for losses and relief for film expenditure under the 1992 Act were compromised by an agreement dated 22 August 2011 made pursuant to section 54 of the TMA between HMRC and each of the partnerships (“the partnership settlement agreement”). Under this agreement, the partnerships were allowed relief for film expenditure and had losses recognised at a considerably reduced level from that included in their tax returns. The individual members of the partnerships were not parties to the partnership settlement agreement.

Meanwhile, however, in his self-assessment tax return for 1998/1999, Mr De Silva included a claim to set off trading losses in respect of certain of the partnerships in other years, including 1999/2000, so as to reduce his payment in respect of tax due for 1998/1999 by £16,800, by including that figure in box 18.9 against the entry on the return form, “1999-2000 tax you are reclaiming now”. He also included additional information in his return to explain the detail of the carry back claims he was making              to give rise to that figure to off-set against his tax liability. The figure represented Mr De Silva’s share of relevant partnership losses, including those for 1999/2000 which it was already estimated that the relevant partnership in which he was invested would suffer for that year, as claimed by those partnerships (i.e. at the high rate of losses and reliefs asserted by the partnerships, which came to be challenged by HMRC).

In his self-assessment tax return for 1999/2000, Mr De Silva made similar carry-back claims to set off partnership losses in specified years against his income in earlier years (and so claim a repayment of tax against the tax due for those years), again at the high rate of losses and reliefs asserted by the partnerships, as challenged by HMRC. Mr Dokelman proceeded in a similar way.

Upon determination in accordance with the partnership settlement agreement of the partnerships’ claims for losses and reliefs, significantly reducing the amount of those losses and reliefs below the sums originally claimed by the partnerships, HMRC wrote to the partners to inform them that their carry back claims to set off their shares of the losses and reliefs claimed by the partnerships would now be amended in line with the lower figures agreed in the partnership settlement agreement in respect of those losses and reliefs. This had the effect of increasing the overall amount of tax payable by each partner. HMRC’s letters to this effect to Mr De Silva were dated 16 September 2011 and 17 November 2011. HMRC informed him that his relevant self-assessment returns were being amended to reflect his share of the agreed partnership losses, with the result that he was required to pay additional tax of £17,176.80 and £32,400.00. HMRC wrote to Mr Dokelman in a similar way on 28 October 2011.

The Claimants sought to quash HMRC’s decisions, communicated by these letters, to disallow their claims to carry back partnership trading losses at the original higher rate and to allow only claims to carry back partnership trading losses to reflect the losses agreed in the partnership settlement agreement.

The essence of the Claimants’ case was that their claims to carry back the tax reliefs in issue were not to be regarded as claims made in a personal tax return under section 8 of the TMA, but were properly to be regarded as stand alone claims for relief in respect of which HMRC are obliged to apply the challenge procedures contained in Schedule 1A to the TMA rather than the challenge procedures applicable in respect of a return made under section 8 of the TMA. HMRC failed, however, to operate the challenge procedures under Schedule 1A as they should have done, and are now out of time to do so. HMRC say that they were not obliged to use those procedures in order to rectify (as HMRC would say) the tax returns and claims for carry back relief made by the Claimants.

The UT’s decision

The UT, however, did not agree. The UT distinguished the present case from those in Cotter. The position in Cotter was the converse of the position in this case. HMRC maintained successfully that the taxpayer’s carry back claim was a “stand alone” claim, not required to be made in a return, and that their enquiry was made under paragraph 5(1) of Schedule 1A; while the taxpayer contended that the enquiry was made under section 9A, as an enquiry into a self-assessment return. But it is important to emphasise that the return which the taxpayer said was the subject of an enquiry under section 9A was his return for 2007/2008 (the earlier year), even though the relevant losses on which he sought to rely arose in 2008/2009 (the later year). Neither party invited attention to the possible application of section 9A in respect of the return for the later year. That would not have assisted the taxpayer in his efforts to postpone payment of his tax in relation to the earlier year and the Supreme Court did not have to address that question. By contrast, in the present case, HMRC maintained that their relevant enquiry (which is deemed to include an enquiry under section 9A) is into the partnership returns and corresponding individual partner returns in respect of the later years (i.e. the years in which the partnership losses actually arose and were reflected as required in the relevant returns), not into the individual partner returns for the earlier years. In Cotter, the Supreme Court was addressing a situation in which the taxpayer had not made a claim for brought back relief (from 2008/2009) in his original tax return for 2007/2008, but sought to make it later, in January 2009. Its ruling was that the claim for relief based on a loss in 2008/2009 did not afford a defence to HMRC’s demand for the payment of the tax assessed for 2007/2008. HMRC correctly interpreted the materials sent in by the taxpayer in January 2009 as a claim for relief in respect of losses for 2008/2009 which “did not alter the tax chargeable or payable in relation to [2007/2008]”.

The key principle of the De Silva decision

The De Silva case has been appealed and will be heard in Court of Appeal on 11th and 12th March 2015.   The judgment at the UT in this case is difficult to reconcile with the Supreme Court decision in Cotter for these reasons:

  • The Supreme Court have very clearly said that a claim in the earlier year will be made in a return provided that the tax payable is reduced in the tax calculation summary pages of the tax return; in doing so, the taxpayer will make a specific claim that specific sums or no sums are due as the tax chargeable and payable for the year of the return;
  • Mr De Silva did not fulfil the criteria for making a claim as set out in the Supreme Court, although he did provide more information that did Mr Cotter. This is because he did not reduce his tax liability for the earlier year of assessment by incorporating the Box 18.9 figure (forward losses) into the Box 18.3 figure (tax due for year of assessment);
  • Consequently, the Revenue should have commenced an enquiry under Schedule 1A of TMA and elected (under paragraph 4(3)(a) of that Schedule) not to give effect to the claim until the end of the enquiry. The did not do so, however and are out of time;
  • It therefore follows that Mr De Silva, under the authority of Cotter, should have been successful.

It is very possible, therefore, that the Court of Appeal will overturn the decision of the UT.

 

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