HM Revenue and Customs v Cotter

This appeal is about jurisdiction. It concerns a claim for tax relief made by a taxpayer in his self-assessment return, and the issue is whether the First-tier tribunal or the court has jurisdiction to adjudicate on it. The Commissioners for Her Majesty's Revenue & Customs ("the Revenue") have brought proceedings ("collection proceedings") against the appellant to recover the tax payable according to his return on the basis that the claim for relief is left out of account. The dispute boils down to the correct procedure for the Revenue to use. The Revenue contends that the relief could not be claimed against income or gains for the year of assessment. Therefore it was bound to use the separate procedure for contesting loss relief claims made otherwise than in returns. The appellant contends that the Revenue should have followed the procedure for disputing items contained in a return under section 9A of the Taxes Management Act 1970 (" TMA") ("the section 9A procedure"). If the Revenue had followed this course, the appellant would have had a right of appeal in the first instance to the First-tier tribunal to the exclusion of any court ( section 31 of the TMA and seeAutologic Holdings v IRC [2006] 1 AC 118).

This is a test case. There are other taxpayers who have made loss relief claims and who are resisting collection proceedings relying on the same defence as the appellant. Those proceedings have been stayed pending the outcome of this appeal.

This case is not concerned with the substantive question whether the appellant's claim for loss relief should have been disallowed.

The claim arises out of the appellant's 2007/8 return, which the appellant was required by the usual statutory notice to complete. As it happens, the relevant claim was made in an amendment to the return but nothing turns on that fact.

The return included income of about £440,000, together with net chargeable gains for capital gains tax purposes of some £315,000. On 24 December 2008 the Revenue produced a tax calculation showing an income and capital gains tax liability of £211,927.

Following this communication, the appellant appears to have entered into a tax avoidance scheme designed to eliminate his substantial liability to tax. That scheme involved making a loss relief claim. Accordingly, in January 2009, the appellant's advisers amended his return in a number of respects. In particular, the pages dealing with "additional information" were amended. One of these pages contained a cross-heading "Other information", with four boxes beneath dealing with income losses (boxes 1 and 2) and trading losses (boxes 3 and 4). Box 3 was headed "Relief now for 2008/9 trading or certain capital losses." That was now completed with the figure of £395,417. Box 4 was headed "Tax year for which you are claiming relief in box 3." This was completed, by amendment, with the information: "2007/08". The boxes on the pages dealing with capital gains were different. There was a box headed "Income losses of 2007–8 set against gains". This was amended to read £314,583. In the box headed "Additional Information" at the end of the pages in the return dealing with capital gains, the appellant explained that he had incurred an income loss in 2008/9 for which he was claiming relief against his liability to tax for 2007/8.

In the further box headed "Additional Information" at the very end of the return, an amendment was made to acknowledge that the appellant's interpretation of the law might be at variance with that of the Revenue and, in effect, to invite the Revenue to open an enquiry. On 30 January 2009, the appellant's accountants informed the Revenue that, as a result of the relief claimed, no further 2007/8 taxes would be payable by the appellant.

On 7 March 2009, the Revenue calculated the appellant's tax at £211,927.77 in exercise, as they saw it, of their powers under section 9(3) of the TMA. This calculation ignored his loss relief claim.

The Revenue then opened an enquiry into the appellant's loss relief claim under schedule 1A of the TMA. The Revenue's action in this regard and that of the appellant in making his loss relief claim were as 'ships passing in the night'. The taxpayer considered that he had made an effective claim in his return (as amended), and that any enquiry had to be opened under the section 9A procedure. The Revenue, on the other hand, thought his claim had to be treated as a "stand alone" claim under schedule 1A to the TMA, that is, as if it had not been made in a return but in a separate document. Their view was that relief could not be claimed in 2007/8. The Revenue also wished to enquire into the loss relief claim more generally. The enquiry is ongoing. The Revenue have never made any amendment to the appellant's tax return.

In June 2009 the Revenue commenced proceedings against the appellant in the St Helens County Court to recover tax amounting to £203,342.77, plus interest, for the 2007/ 8 and 2008/9 tax years. (We are not concerned with the latter year). An amended defence was in due course filed challenging the court's jurisdiction. The proceedings were transferred to the High Court to enable the point on jurisdiction to be decided there. These proceedings came before David Richards J. On 14 April 2011, the judge gave judgment against the appellant.

The legislation refers to the Board of the Inland Revenue but, for simplicity, I will throughout refer to the Revenue.

I would summarise the relevant features of the self-assessment regime for present purposes as follows (all references are to the TMA):

a) A person may be required by notice to file a return for a fiscal year: section 8. The return must be in the form prescribed by the Revenue for that year: section 113. The taxpayer has to declare that the information is correct and complete to the best of his knowledge, information and belief. If it is not, he may be liable to serious penalties.

b) The return is used to establish the tax payable for that year. The taxpayer must assess his own tax: section 9(1). He need not, however, do so if he files a return in hard copy (as opposed to electronically) by 31 October following the completion of the year to which the return relates: section 9(2). If he does not assess his own tax, the Revenuewill do so for him on the basis of the information contained in the return: section 9(3).

c) The taxpayer may make an amendment to his return within specified time limits: section 9ZA.

d) The Revenue may correct obvious errors in his return: section 9ZB.

e) The Revenue may within specified time limits open an enquiry into a return and amend the figures in it: section 9A(1). That enquiry extends to "anything contained in the return, or required to be contained in the return": section 9A(4). The Revenue may amend the self-assessment contained in the return in the course of the enquiry under section 9C.

f) The enquiry is completed by a closure notice served by the Revenue: section 28A(1). This must state the Revenue's conclusions and any amendments to the return required to give effect to those conclusions: section 28(A)( 1) and (2).

g) A taxpayer may appeal to the First-tier Tribunal against any amendment under section 9C or conclusion stated in a closure notice: section 31.

h) The taxpayer has to pay the amount of tax shown in his return less any payment on account: section 59B.

i) If there is no enquiry or appeal, the Revenue may, if necessary, take collection proceedings in the County Court or High Court as appropriate: sections 66 and 68.

Accordingly, the self-assessment return has a pivotal role in the self-assessment regime. Where a self-assessment return is filed, it is used as the means of establishing liability to pay tax. If the Revenue wishes to dispute an item contained in a return, it must follow the section 9A procedure. The self-assessment regime is clearly intended to operate in a straightforward way.

The form of income loss relief claim made by the appellant was a claim for employment loss relief under section 128 of the Income Tax Act 2007 ("the ITA"). The requirements of that section are not relevant save for subsection (7). That subsection provides that such claims are subject to paragraph 2 of schedule 1B of the TMA.

Paragraph 2 of that schedule applies where a loss relief claim involves two (or more) years of assessment. Such claims are required to be treated as relating to the later year, defined (so far as relevant) as the year in which the loss was incurred. The appellant's claim involved 2007/8 (the year in which relief was claimed) and 2008/9 (the year in which the loss was incurred). On this basis, he could not claim relief until 2008/9, as the heading to the box in the return suggested (but did not require).

Section 42(2) of the TMA requires that a claim mus section 8 of the TMAn under section 8 of the TMA where it can be so made. However, section 42(11A) provides that schedule 1B has effect where a claim involves two or more years of assessment. Paragraph 2 of that schedule states that section 42(2) does not apply to a claim within that paragraph.

Save where statute otherwise provides (as in section 42(2)), a claim for relief from tax can be made in a separate document from a tax return. If a taxpayer takes that course, the...