Revenue & Customs v Cotter [2011] EWHC 896 (Ch)

[2011] EWHC 896 (Ch)Case No 9SW01042
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue MANCHESTER DISTRICT REGISTRY, Royal Courts of Justice, Strand, London, WC2A 2LLDate 14/04/2011
Before
MR JUSTICE DAVID RICHARDSVICE-CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER
Between
THE COMMISSIONERS FOR HM REVENUE & CUSTOMSClaimantsMAURICE DAVID COTTERDefendant
Mr Jonathan Cannan (instructed by The Solicitor for HMRC) for the ClaimantsMr Rupert Baldry QC (instructed by Ralli Solicitors) for DefendantHearing Hearing date: 10 February 2011
Judgment

Introduction

[1]These proceedings are brought by HMRC to recover income tax and capital gains tax which they say is due from the defendant, Maurice David Cotter, for the 2007/08 year of assessment. The proceedings were issued in the St Helens County Court but transferred to the High Court to determine the issue of principle raised by Mr Cotter in his defence. The amount claimed was £203,342 plus statutory interest, now reduced to £l34,954 plus interest to take account of subsequent credits and payments.[2]I am told that the present case is by way of a test case. Mr Cotter is one of about 60 taxpayers who in 2008/09 entered into a scheme designed to create an employment loss which could be set against income and capital gains for tax purposes in both 2007/08 and 2008/09. HMRC have issued similar claims in county courts against about 5 other taxpayers, which have been stayed pending a decision in the present case, and potential claims against the remainder have informally been put on hold.[3]It is common ground that in these proceedings the court is not concerned with the fiscal efficacy of the tax scheme used by Mr Cotter and others and whether it gave rise to a valid claim for employment loss relief. That is the subject of an enquiry by HMRC, although I understand the taxpayers contend that it was not validly initiated. If HMRC rejects the claim for relief, the taxpayers concerned will be entitled to challenge the decision in the Tax Chamber of the First-tier Tribunal. This statutory procedure is the exclusive procedure for the determination of that issue: Autologic Holdings plc v IRC [2006] 1 AC 118.[4]The defence raised by Mr Cotter, and as I understand it by the defendants in the county court proceedings presently stayed, is that he is entitled to set off his claim for loss relief against the tax otherwise payable on 31 January 2009 unless and until it is disallowed under the statutory procedure. He submits that he was entitled to include the claim, by way of amendment, in his return for 2007/08 and because he did so before 31 January 2009 he was and remains entitled to rely on it unless and until disallowed. If the claim is held in due course not to be well-founded, he will then be obliged to pay the tax otherwise due for 2007/08 with statutory interest from 1 February 2009.[5]It is HMRC’s case that Mr Cotter was obliged to pay the assessed tax by 31 January 2009 and, if and when his claim for loss relief is established in accordance with the statutory procedure, he would be entitled to a repayment of the tax with interest.[6]This issue in turn depends upon the statutory provisions for making claims for relief in circumstances such as exist in this case. Mr Cotter’s case is that he was entitled to include a claim for relief in his self-assessment tax return for 2007/08 and so take it into account in his self-assessment of the net tax due, notwithstanding that the loss for which relief is claimed arose in the 2008/09 year of assessment. He says that the loss had occurred by the time he included it in his tax return for 2007/08. HMRC say that, whether or not the loss had by then occurred, a claim for relief could not as a matter of law be included in his tax return for 2007/08 and, unless the claim was accepted by HMRC, could not operate to reduce the amount of tax then payable in respect of 2007/08. The issue is not whether the claim was well-founded, which remains a matter for determination in accordance with the statutory procedure, but whether the claim could be made by Mr Cotter in his return for 2007/08.[7]Mr Cotter submits that this issue itself lies within the exclusive jurisdiction of the statutory procedure, involving if necessary appeals to the Tribunal. The court accordingly has no jurisdiction to determine it and the present proceedings should be struck out as an abuse of the process of the court. At a late stage, and some considerable time after the trial of the action had been fixed, those acting for Mr Cotter issued an application to strike out. For some time they sought to insist that it was listed separately for an earlier hearing, a course which was repeatedly, and in my judgment rightly, refused by HHJ Hodge QC. This trial involved no dispute of fact and the case turns exclusively on a consideration of the relevant statutory provisions. The issue raised by the application to strike out is so closely bound up with the substantive issue as to make it impracticable, and in any event a waste of costs and resources, to deal with them separately. Very sensibly, Mr Baldry QC for Mr Cotter has not sought to do so.

Facts

[8]The relevant facts are as follows: 1. Mr Cotter filed his personal tax return for 2007/08 on 31 October 2008 pursuant to s.8 of the Taxes Management Act 1970 (TMA) following a notice requiring a return to be made. It included UK interest, dividends and other income of about £340,000 together with net chargeable gains for capital gains tax purposes of some £315,000. No claim for loss relief was made in the return. 2. On 24 December 2008 HMRC produced a tax calculation (a self assessment) based on the original return. This showed income and capital gains tax due of £211,927. 3. On 29 January Mr Cotter’s accountants wrote to HMRC enclosing “ a provisional 2007/08 Loss Relief Claim…The claim shows the amendments required to our client’s 2007/08 Income Tax Return”. The enclosure showed various amendments by reference to the box numbers on the original return. It included a claim for loss relief in the sum of £710,000. It also acknowledged that the claim might be at variance with HMRC’s interpretation of tax law and ended “for all these reasons I assume you will open an enquiry”. HMRC accept that nothing turns on the fact that the claim was included by amendment to the return than by inclusion when the return was originally submitted. 4. In a letter to HMRC West Cheshire Recovery Office dated 30 January 2009 the accountants stated “as a result of this claim no further 2007/08 taxes will be payable by Mr Cotter”. 5. In March 2009 HMRC notified Mr Cotter that they intended to enquire into his claim for loss relief.

Employment Loss relief

[9]The claim made by Mr Cotter is in respect of employment loss relief, which is governed by s.128 of the Income Tax Act 2007 (ITA). Section 128 provides: “Employment loss relief against general income(1) A person may make a claim for employment loss relief against general income if the person— (a) is in employment or holds an office in a tax year, and (b) makes a loss in the employment or office in the tax year (“the loss-making year”).(2) The claim is for the loss to be deducted in calculating the person's net income— (a) for the loss-making year, (b) for the previous tax year, or (c) for both tax years. (See Step 2 of the calculation in section 23.) (3 )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. (4) Otherwise the claim must specify either the loss-making year or the previous tax year. (5) The claim must be made on or before the first anniversary of the normal self-assessment filing date for the loss-making year. (6) Nothing in this section prevents a person who makes a claim specifying a particular tax year in respect of a loss from making a further claim specifying the other tax year in respect of the unused part of the loss. (7) This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years). (8) This section needs to be read with section 129 (how relief works).” (a) is in employment or holds an office in a tax year, and (b) makes a loss in the employment or office in the tax year (“the loss-making year”). (a) for the loss-making year, (b) for the previous tax year, or (c) for both tax years.[10]Neither party relied on s.129 to support their case. Section 130 provides that if the taxpayer cannot deduct all of the loss against general income he may be able to treat the unused part as an allowable loss for capital gains tax purposes.[11]There are, in particular, two relevant points to note in s.128. First, the claim for employment loss relief is “for the loss to be deducted in calculating the person’s net income” either for the loss-making year or for the previous tax year or for both years. Secondly, s.128 is subject to para 2 of sch. 1B to the Taxes Management Act 1970 which deal with claims for loss relief involving two or more years.

Taxes Management Act

[12]The other provisions relevant to this case are contained in the Taxes Management Act 1970 (as amended) (TMA).[13]Since 1994 income tax and capital gains tax has for the most part been dealt with under the system of self-assessment. The liability to pay income tax and capital gains tax arises under s.59B:
“(1) Subject to subsection (2) below, the difference between - a) the amount of income tax and capital gains tax contained in a person’s self-assessment under section 9 of this Act for any year of assessment, and b) the aggregate of any payments on account made by him in respect of that year (whether under section 59A of this Act or otherwise) and any income tax which in respect of that year has been deducted at source, shall be payable by him … (2)… (3)… (4) In any other case, the difference shall be payable or repayable on or before the 31 January next following the year of assessment.”
If, following an enquiry, HMRC amends an assessment so as to impose or increase a charge to tax, the tax is payable 30 days after the closure notice which makes the amendment: s.59B(5) and sch 3ZA, para 5. a) the amount of income tax and capital gains tax contained in a person’s self-assessment under section 9 of this Act for any year of assessment, and b) the aggregate of any payments on account made by him in respect of that year (whether under section 59A of this Act or otherwise) and any income tax which in respect of that year has been deducted at source,[14]Under Part VI of TMA, HMRC is authorised to take various steps to collect and enforce the payment of tax, including by taking proceedings for recovery of tax as a debt due to the Crown in a county court (s.66) or in the High Court (s.68).[15]For taxpayers in the position of Mr Cotter, the principal mechanism for establishing the amount of any tax due is through the submission of a personal tax return. Section 8(1) and s.8(1AA) of TMA provide that:
“(1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by a notice given to him by an officer of the Board - a) to make and deliver to the officer… a return containing such information as may reasonably be required in pursuance of the notice, and b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required. (1AA) For the purposes of subsection (1) above- 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; and (b) the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) or 397A(1) of 1TTOIA 2005 applies.” a) to make and deliver to the officer… a return containing such information as may reasonably be required in pursuance of the notice, and b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required. (1AA) For the purposes of subsection (1) above- 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; and (b) the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) or 397A(1) of 1TTOIA 2005 applies.”
[16]Section 9 makes provision for self-assessment:
“(1) Subject to subsections (1A) and (2), every return under section 8 or 8A of this Act 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, that is to say, the difference between the amount in which he is assessed to income tax under paragraph (a) above and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) or 397A(1) of 1TTOIA 2005 applies…”
The exceptions in s.9(1A) and (2) are not relevant in this case. (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, that is to say, the difference between the amount in which he is assessed to income tax under paragraph (a) above and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) or 397A(1) of 1TTOIA 2005 applies…”[17]Section 9ZA provides that a person may by notice amend his return under s.8, not later than a year after the relevant filing date for the return.[18]The effect of these provisions is to fix the amounts in which the person making the return is chargeable to income tax and capital gains tax for the year of assessment “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” and the amount payable by way of income tax, unless HMRC opens an enquiry into the return.[19]Section 9A(1) empowers HMRC to enquire into a return if notice to do so is given within the time allowed, which in the case of a return delivered on or before the filing date is 12 months after the date of delivery or, where it is amended, up to the quarter day following the first anniversary of the amendment. Section 9A(4) provides that an enquiry extends to “anything contained in the return, or required to be contained in the return, including any claim or election included in the return.”[20]Section 28A provides for completion of an enquiry by giving a closure notice to the taxpayer, which takes effect when it is issued. Section 28A(2) provides:
“(2) A closure notice must either- a) state that in the officer’s opinion no amendment of the return is required, or b) make the amendments of the return required to give effect to his conclusions.” a) state that in the officer’s opinion no amendment of the return is required, or b) make the amendments of the return required to give effect to his conclusions.”
[21]The taxpayer has a right of appeal under s.31(1) against any conclusion stated or amendment made by a closure notice. The appeal lies to the First-tier Tribunal.[22]Mr Cotter relies on the provisions referred to above, in addition to others to which I refer below, for his first or threshold submission that the only means by which HMRC can challenge a claim for any relief included in a tax return, whether as originally submitted or as subsequently amended, is by an enquiry of which notice is duly given under s.9 and leading to a closure notice which, if adverse to the taxpayer, can be the subject of an appeal to the tribunal. Unless varied by these means, the tax due and payable is as determined by the self-assessment return, in accordance with s.9(1).[23]Both Mr Cotter and HMRC agree that reference must also be made to s.42. Section 42(1) 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. ”
Section 42(2) provides that where notice has been given under s.8, “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.” Section 42(5) provides that references to a claim being included in a return include references to a claim included by virtue of an amendment.[24]Mr Cotter relies on those provisions of s.42, but HMRC relies on s.42(11) and (11A): “(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, 8A, or 12AA 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.” a) is made otherwise than by being included in a return under section 8, 8A, or 12AA of this Act …[25]Schedule 1A, which by reason of s.42(11) applies to any claim which is not included in a return, provides in para 2 for the form in which any such claim is to be made. HMRC may either give effect to the claim (para 4(1)) or enquire into it under para 5. An enquiry is brought to completion by the issue of a closure notice under para 7. If the closure notice is adverse to the taxpayer, he may appeal to the tribunal under para 9.[26]Schedule 1B deals specifically with certain claims for relief involving two or more years. The parties are agreed that paragraph 2 applies to the claim for employment loss relief made by Mr Cotter, by virtue of both s.42(11A) of TMA and s.128(7) of ITA. Paragraph 2 provides as follows: “2(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(2) Section 42(2) of this Act shall not apply in relation to the claim. 2(3) The claim shall relate to the later year. 2(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”). 2(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. 2(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..” (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”).[27]HMRC’s case is that by virtue of this paragraph, including its disapplication in para 2(2) of s.42(2) of TMA, Mr Cotter’s claim for relief to be given in 2007/08 for a loss incurred in 2008/09 cannot be made in his return for 2007/08. Mr Cotter submits that sch.1B does not have this mandatory effect, but permitted, while not requiring, him to make the claim in his return for 2007/08.[28]There are significant differences as to both the liability to pay tax and the time for an enquiry by HMRC, depending on whether the claim is made in the return or in a separate claim to which sch.1A would apply.[29]If the claim is properly made in a return or by an amendment to a return, the time allowed for an enquiry is fixed by s.9A(2) as: “9A(2)The time allowed is–(a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the day on which the return was delivered;(b) if the return was delivered after the filing date, up to and including the quarter day next following the first anniversary of the day on which the return was delivered;(c) if the return is amended under section 9ZA of this Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made. For this purpose the quarter days are 31st January, 30th April, 31st July and 31st October.” (a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the day on which the return was delivered; (b) if the return was delivered after the filing date, up to and including the quarter day next following the first anniversary of the day on which the return was delivered; (c) if the return is amended under section 9ZA of this Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made.[30]The amendment to Mr Cotter’s return was made by the letter dated 29 January 2009 from his accountants. Accordingly, under s.9A(2)(c), the time limit for an enquiry would be 31 January 2010. By contrast, if sch. 1A applies to the claim, the time limit for an enquiry is as provided in para 5(2):
“5(2) The period referred to in sub-paragraph (1) above is whichever of the following ends the latest, namely– (a) the period ending with the quarter day next following the first anniversary of the day on which the claim or amendment was made; (b) where the claim or amendment relates to a year of assessment, the period ending with the first anniversary of the 31st January next following that year; and (c) where the claim or amendment relates to a period other than a year of assessment, the period ending with the first anniversary of the end of that period; and the quarter days for the purposes of this sub- paragraph are 31st January, 30th April, 31st July and 31st October.”
Schedule 1B para 2(3) provides that a claim for a loss incurred in a later year of assessment to be given in an earlier year of assessment “shall relate to the later year”. Accordingly, in this case, the time limit for an enquiry into Mr Cotter’s claim, if not made in a return, would under para 5(2)(b) of sch. 1A be 31 January 2011. (a) the period ending with the quarter day next following the first anniversary of the day on which the claim or amendment was made; (b) where the claim or amendment relates to a year of assessment, the period ending with the first anniversary of the 31st January next following that year; and (c) where the claim or amendment relates to a period other than a year of assessment, the period ending with the first anniversary of the end of that period;[31]As to the liability to pay tax, if the claim was properly included in the return for 2007/08 and there is an enquiry which disallows the claim, the resulting tax would not fall due for payment until 30 days after the closure notice: s.59B(5) and sch. 3ZA para 5. It is true that interest would run from 31 January 2009 to the date of payment, under s.86 of TMA. On appeal, the Tribunal has power to postpone payment of the tax pending determination of the appeal. By contrast, if the claim for relief is not made in a return, there is no postponement of the due date for payment of the tax due by reference to a return.

Jurisdiction of the court

[32]I turn now to the first issue, as to whether the court has jurisdiction to determine the issue raised by Mr Cotter’s defence. Given that, in fact, Mr Cotter has by amendment included his claim for relief in his return for 2007/08, does the court have jurisdiction to determine a claim for payment of tax which does not take account of the claim, or does the validity of including the claim in the return, as well as whether or not the claim is well-founded, fall within the exclusive jurisdiction of the tribunal on an appeal following the closure of an enquiry?[33]Mr Baldry QC, appearing for Mr Cotter, relied on the well-established principle of exclusivity in this area, which gives to the statutory procedure of enquiry and appeal, formerly to the general or special commissioners and now to the tribunal, the sole authority to determine the validity of assessments and the computation of liability to tax. Mr Baldry observed that it was usually HMRC who relied on this principle to preclude challenges to assessments in collection proceedings. He referred to the decision of the House of Lords in Autologic Holdings plc v IRC [2006] 1 AC 118. Lord Nicholls of Birkenhead said:
“12 Clearly the purpose intended to be achieved by this elaborate, long established statutory scheme would be defeated if it were open to a taxpayer to leave undisturbed an assessment with which he is dissatisfied and adopt the expedient of applying to the High Court for a declaration of how much tax he owes and, if he has already paid the tax, an order for repayment of the amount he claims was wrongly assessed. In substance, although not in form, that would be an appeal against an assessment. In such a case the effect of the relief sought in the High Court, if granted, would be to negative an assessment otherwise than in accordance with the statutory code. Thus in such a case the High Court proceedings will be struck out as an abuse of the court's process. The proceedings would be an abuse because the dispute presented to the court for decision would be a dispute Parliament has assigned for resolution exclusively to a specialist tribunal. The dissatisfied taxpayer should have recourse to the appeal procedure provided by Parliament. He should follow the statutory route. 13 I question whether in this straightforward type of case the court has any real discretion to exercise. Rather, the conclusion that the proceedings are an abuse follows automatically once the court is satisfied the taxpayer's court claim is an indirect way of seeking to achieve the same result as it would be open to the taxpayer to achieve directly by appealing to the appeal commissioners. The taxpayer must use the remedies provided by the tax legislation…”
At [23] Lord Nicholls said:
“In my view these claims in the High Court are prima facie a misuse of the court's process. These claims cover the same ground in all respects as the appeals pending before the appeal commissioners. The remedy sought is co-extensive with adjudicating upon existing, open assessments. The essence of the High Court claims is that these assessments were wrong, that the court should so hold, and that the court should itself calculate the amounts which ought to have been assessed and order repayment of the overpaid excess. There could hardly be a more obvious example of seeking to sidestep the statutory procedure.”
[34]Lord Millett said at [62] that “the computation of a taxpayer’s taxable profits for the purpose of determining his liability to tax is within the exclusive jurisdiction of the commissioners”. At [84], Lord Walker of Gestingthorpe referred to:
“the general principle embodied in tax law before self-assessment, that any dispute with the revenue about an individual's liability to income tax or a company's liability to corporation tax is to be determined in the first instance by the general commissioners or the special commissioners.”
[35]These statements, and statements and decisions to similar effect in many other cases, are clear authority that the validity of a claim for loss relief is subject to the statutory procedure and appeal to the tribunal. It is not within the jurisdiction of the county courts or the High Court.[36]The validity of a claim for loss relief is not, however, the issue which arises for decision in these proceedings. The issue is quite different. It is whether Mr Cotter was entitled to include his claim for relief in his return for 2007/08 or whether he was obliged to make it the subject of a separate claim. Whichever route is correct, the validity of the claim for loss relief would stand to be determined in accordance with the statutory procedure of enquiry and appeal to the tribunal, either under ss.9A, 28A and 31 of TMA or under sch. 1A to TMA.[37]The statutory procedure under ss. 9A, 28A and 31 as it applies to a claim for relief is triggered when, under ss.8 (1AA) and 9(1), the taxpayer includes in his return a claim for any relief or allowance. In my judgment, that necessarily refers only to a claim or type of claim which, if it is to be made anywhere, may under the statutory regime be included in a return. If it is a claim which may be included in a return, then its validity and amount must be challenged through the enquiry process. However, if under the statutory regime, it is a claim which must be made by some other means and cannot be included in the relevant return, it is not in my judgment a claim to which ss.8 (1AA) and 9(1)(a) refer. Section 9A(4) provides that an enquiry extends to “anything contained in the return, or required to be contained in the return, including any claim or election included in the return” which cannot, in my view, apply to claims which are required to be made by some other means and which are not permitted to be included in the return in question. Otherwise, the taxpayer could sidestep the statutory requirements simply by including the claim in his return.[38]It follows that in such circumstances the court has jurisdiction to determine in collection proceedings whether a taxpayer is entitled to include in his return a claim for relief and so rely on it as a defence to the claim for immediate payment. I emphasise that this does not enable the court to determine whether the claim is well-founded, but only to determine whether it can be included in the return at all or must instead be made in some other way.

Is Mr Cotter’s defence well-founded?

[39]The issue then is therefore whether Mr Cotter was entitled to include his claim for loss relief in his return for 2007/08. I put it that way because Mr Baldry, on behalf of Mr Cotter, does not submit that Mr Cotter was obliged to include the claim in his return, but he does submit that he was permitted to do so. Mr Cannan for HMRC submits that Mr Cotter was not entitled to include the claim in his return, but could make it only as a separate claim to which sch.1A applies.[40]This issue turns on the effect of para 2 of sch.1B, which applies, as para 2(1) states, where a person makes a claim requiring relief for a loss incurred in one year of assessment (“the later year”) to be given in an earlier year of assessment (“the earlier year”). In the present case the loss is said to have been incurred in 2008/09 and Mr Cotter seeks relief in the preceding year, 2007/08. Crucially, although relief is sought in the earlier year, para 2(3) provides that the claim “shall relate to the later year”. The effect of this provision is carried through in the subsequent sub-paragraphs. Paragraph 2(4) provides the amount of the claim is by reference to the amount in which the taxpayer would be chargeable to tax for the earlier year “on the assumption that effect could be, and were, given to the claim in relation to that year”. This is a deeming provision: the claim does not relate to the earlier year but it is treated as if it did for the purpose of determining its amount. The same formula is repeated in para 2(5) as regards “associated claims”. Paragraph 2(6) provides that “Effect shall be given to the claim in relation to the later year”.[41]Mr Cannan for the HMRC submits that the claim for relief cannot be included in the return for the earlier year because it relates to the later year. Each year of assessment is considered individually and, while the relief can be obtained against income chargeable to tax in the earlier year, the provisions of para 2 make clear that the claim for relief relates to the later year and, by virtue of para 2(6), is given effect to as such.[42]Consistently with this, para 2(2) disapplies s.42(2) which would otherwise require the claim to be included in a return. Mr Baldry submits that while para 2(2) removes the requirement to make the claim in a return, it does not prohibit the taxpayer from doing so. He submits that it leaves the taxpayer with a choice between including it in the return for the earlier year or making it the subject of a separate claim to which sch.1A applies. Given the stark differences as regards the time when tax becomes payable and the time limits for an enquiry into the claim, depending on whether the claim is made in the return or as a separate return, I agree with Mr Cannan that it would be a surprising result if the taxpayer had this choice.[43]Mr Baldry relies on s.128(2) of ITA which provides that the claim is for the loss to be deducted “in calculating the person’s net income” for either or both of the earlier or later years. He submits that if the claim for the loss is to be deducted in calculating the net income in the earlier year, it shows that the claim can be included in the return for that year. Standing on its own, I would see force in this point, but s.128(7) provides that ss.128-130 are subject to para 2 of sch.1B, so referring one back to para 2 and resolving any conflict which might otherwise exist between s.128 and para 2 in favour of the latter.[44]Building on his submission that the disapplication of s.42(2) by para 2(2) nevertheless leaves it open to a taxpayer to include a claim for loss relief in his return for the earlier year, Mr Baldry submits para 2(3) does not apply to those cases where the taxpayer includes the claim in his return for the earlier year, but is restricted by necessary implication to those cases in which a separate claim is made to which sch.1A applies. I can see no basis for reading para 2(3) in this sense. It refers without qualification to “The claim”, which in turn refers back to para 2(1). Para 2(1) refers generally to any claim requiring relief for a loss incurred in a later year to be given in an earlier year. Likewise, Mr Baldry submits that para 2(6) is, by necessary implication, to be read as qualified by words to the effect of “if effect has not been given to it in relation to the earlier year”. There is nothing in sch.1B to justify this implication which, as it seems to me, is contrary to para 2 as a whole.[45]Mr Cannan relies on the analysis of para 2 of sch.1B in the judgment of Carnwarth LJ in Blackburn v Keeling [2003] STC 1162 at [16]:
“This elaborate deeming provision has the effect (so far as it applies) that, where under section 380(1)(b) loss relief is claimed on income in the preceding year, the claim nonetheless ‘relates’ to the later year (para 2(3)). The amount of the claim is computed using the formula in paragraph 2(4), based on the income in the previous year; but it does not affect the tax position in the earlier year (para 2(3)). It gives rise to a ‘free-standing credit’ (in the Revenue's language) which can be used in any of the ways set out in paragraph 2(6).”
[46]While not part of the reasoning for the decision in that case, this analysis is the only discussion of sch.1B in the higher courts to which I have been referred and provides support for HMRC’s position. I accept, however, Mr Baldry’s point that it must be treated with some caution in its application to the present case because, first, it is expressly linked to a claim for loss relief under different legislation which provided for the claim to be made by notice and, secondly, HMRC’s reliance on sch.1B raised issues as to its relationship with the PAYE system which do not arise in this case and which the Court of Appeal did not need to decide: see [39] – [41].[47]In my judgment, for the reasons given above, HMRC are correct in their submission that Mr Cotter’s claim for loss relief related to the 2008/09 year of assessment and so could not be included in his return for 2007/08.[48]Reference was made in the course of argument to the standard “Additional information” form produced by HMRC for use as part of tax returns for the 2007/08 year of assessment. Box 3 in the “Other information: Income Tax Losses” is headed “Relief now for 2008-09 trading, or certain capital, losses”. Insofar as this is inconsistent with sch.1B, it may be embarrassing to HMRC, but it is not a statutorily prescribed form nor can it affect the proper construction of legislation such as sch. 1B.[49]Accordingly, in my judgment, Mr Cotter is not entitled to rely on his claim for employment loss relief as a defence to HMRC’s claim for the payment of tax due in respect of the 2007/08 year of assessment. HMRC is in principle entitled to judgment, but the amount may depend on the tax certificate which it appears Mr Cotter has purchased. I will invite counsel to agree, if possible, the terms of the order to be made.

Cited in 3 later judgments