Revenue & Customs Commissioners v Cotter
| Jurisdiction | England & Wales |
| Judge | Lord Sumption,Lord Reed,Lord Hodge,Lord Toulson,Lord Neuberger |
| Judgment Date | 06 November 2013 |
| Neutral Citation | [2013] UKSC 69 |
| Date | 06 November 2013 |
| Court | Supreme Court |
[2013] UKSC 69
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Toulson
Lord Hodge
Appellant
Ingrid Simler QC
Scott Redpath
(Instructed by Her Majesty's Revenue and Customs)
Respondent
Keith Gordon
Ximena Mantes Manzano
(Instructed by JMW Solicitors)
Heard on 3 October 2013
Lord Hodge (with whom Lord Neuberger, Lord Sumption, Lord Reed and Lord Toulson agree)
This appeal raises a question about the boundary between the jurisdiction of the First-tier Tribunal (Tax Chamber) and that of the county court or the High Court. Underlying that issue is a question of the legality of the approach which Her Majesty's Commissioners of Revenue and Customs ("the Revenue") have taken to entries which a taxpayer, Mr Cotter, made in a tax return. This is a test case as we have been told that about 200 taxpayers have used the tax scheme which Mr Cotter has used. The case turns on the proper interpretation of provisions in the Taxes Management Act 1970 (" TMA").
Mr Cotter filed his tax return for the 2007/08 year of assessment on 31 October 2008. In his return he made no claim for loss relief. As he is entitled to do, he left it to the Revenue to calculate the tax due for that tax year. On 24 December 2008 the Revenue produced a tax calculation based on Mr Cotter's return. It showed income and capital gains tax due of £211,927.77.
On 29 January 2009 Mr Cotter's accountants wrote to the Revenue and enclosed a "provisional 2007/08 loss relief claim" and amendments to his 2007/08 tax return. The amendments added various entries to boxes in the tax return intimating that Mr Cotter had sustained an employment-related loss of £710,000 in the tax year 2008/09 for which he claimed relief under sections 128 and 130 of the Income Tax Act 2007 ("ITA"). In particular, the claim for relief was made in:
(i) the main tax return in box 19 on page TR6 under "Any other information";
(ii) the capital gains summary in box 14 on page CG1 in which the figure of £314,583 was inserted, and under "Any other information" in box 35 on page CG2; and
(iii) the "Additional Information" pages.
In the "Additional Information" pages, Mr Cotter inserted "£395,417" in Box 3 on page Ai3 ("Relief now for 2008–09 trading, or certain capital, losses") and "2007–08" in box 4 on that page ("and the tax year for which you are claiming relief"). On page Ai4, box 17 ("Additional Information") he explained, as he had done on box 19 on page TR6 and in box 35 on page CG2, that his claim was made under sections 128 and 130 of ITA for an employment-related loss which he had sustained in the tax year 2008/09.
The provisional loss relief claim ended with these words:
"I acknowledge that my interpretation of the tax law applicable to the above transactions and the loss (and the manner in which I have reported them) may be at variance with that of [the Revenue]. Further please note that although I have reported (and hereby claim the loss pursuant to section 128 ITA 2007) in box 3 above I wish to make it clear that the deduction I am claiming on my return is not necessarily what you may regard as 'relief now for 2008–09 trading, and certain capital losses' — for these reasons I assume you will open an enquiry."
On 30 January 2009 the accountants sent a copy of the loss relief claim to the Revenue's West Cheshire recovery office. They stated: "As a result of this claim no further 2007/08 taxes will be payable by Mr Cotter".
After sending a holding reply, the Revenue responded on 5 March 2009 to confirm that the tax return had been amended and to state that enquiries would be opened into the claim and the tax return. The letter stated that the Revenue did not intend to give effect to any credit for the loss until those enquiries were complete. On the same date the Revenue issued a fresh tax calculation which again stated Mr Cotter's liability for the tax year 2007/08 at £211,927.77. On 11 March 2009 the Revenue wrote to Mr Cotter to intimate that it was enquiring into the amendment and the 2008/09 loss claim under Schedule 1A to TMA. In a further letter on the same date the Revenue asked Mr Cotter to provide specified information and documents. On 24 March 2009 Mr Cotter's accountants wrote to the Revenue's recovery office to inform it that they had asked the Revenue to amend the self assessment calculation and that as a result "no further 2007/08 taxes will be payable by Mr Cotter."
Mr Cotter's accountants asserted in correspondence (i) that no further taxes were payable for 2007/08 because of the loss claim which was the subject of enquiry and (ii) that if tax were due as a result of an enquiry under section 9A of TMA, that tax was not payable until the enquiry had been completed. Mr Cotter also instructed NT Advisors LLP ("NT") to respond to the Revenue's recovery unit and to the threat of legal proceedings. In an undated letter which that unit received on 14 May 2009, NT contended that legal proceedings would be unlawful because (i) Mr Cotter's self assessment showed that no tax was payable as at 31 January 2009 and (ii) the Revenue had not amended the self assessment return.
After further correspondence about, among other things, the tax avoidance scheme which had been used to generate the loss claim, the Revenue issued legal proceedings in St Helens County Court on 22 June 2009. Its claim was for the income tax and capital gains tax for 2007/08 and the first payment to account for the year of assessment 2008/09 in the sum of £203,342, together with statutory interest. In his defence Mr Cotter argued (a) that he was entitled to use his loss claim to reduce to nil the tax otherwise payable for 2007/08 and (b) that the Tax Chamber of the First-tier Tribunal had exclusive jurisdiction to determine whether he could make the loss claim in his 2007/08 tax return and thereby reduce the tax payable for that year.
On 12 February 2010 the proceedings were transferred to the Chancery Division of the High Court, Manchester District Registry to determine the issue of jurisdiction. In a judgment handed down on 14 April 2011, David Richards J, the Vice-Chancellor of the County Palatine of Lancaster, held (a) that the court had jurisdiction to determine in collection proceedings whether the taxpayer was entitled to rely on the claim for relief as a defence to a demand by the Revenue for immediate payment and (b) that Mr Cotter was not entitled to rely on his claim for loss relief as a defence to the Revenue's demand for payment of the tax due in respect of 2007/08. The Vice-Chancellor granted Mr Cotter permission to appeal.
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 Revenue appealed to this court.
Section 128 of ITA provides for employment loss relief. It provides:
"128 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.)"
Sub-section (7) provides:
"This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years)".
Section 42(11A) of TMA provides the same: Schedule 1B to TMA has effect in respect of claims for relief involving two or more years of assessment. It is 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").
(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").
(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. …."
In my view it is clear, in particular from paragraphs 2(3) and (6), 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...
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