R (on the application of Silva and another) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 April 2014 |
| Neutral Citation | [2014] UKUT 170 (TCC) |
| Date | 15 April 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0170 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Honourable Mr Justice Sales.
David Southern, instructed by Reynolds Porter Chamberlain LLP, appeared for the Claimant
Alison Foster QC and Aparna Nathan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Defendants
Film partnerships - Partnership trading losses - Inclusion of trading losses in partners' self-assessment tax returns - Claims to utilise those losses for carry back relief - Means of challenge available to HMRC.
The Upper Tribunal (UT) has dismissed the taxpayers' application for judicial review of an HMRC decision to reduce their carry back claims for film partnership trading loss relief finding that the carry back claims were not "stand-alone" claims to be dealt with under TMA 1970, Taxes Management Act 1970 schedule 1A schedule 1BSch. 1A and 1B and HMRC were correct to amend the taxpayers' returns that included the partnership losses to reflect the settlement agreed with the partnership, which correspondingly reduced the amount of the carry back claims.
The taxpayers applied for judicial review of HMRC's decision to reduce their claims for relief for film partnership losses pursuant to a compromise agreement entered into between the film partnerships and HMRC which considerably reduced the film partnerships' claims for relief for film expenditure under Finance (No. 2) Act 1992, Finance (No. 2) Act 1992 section 42s. 42. The taxpayers contended that their claims for carry back relief were not claims made in a personal tax return under TMA 1970, Taxes Management Act 1970 section 8s. 8 but were instead "stand alone" claims for relief which could only be challenged under TMA 1970, Taxes Management Act 1970 schedule 1ASch. 1A rather than through procedures relating to returns under TMA 1970, Taxes Management Act 1970 section 8s. 8. HMRC had not proceeded under Taxes Management Act 1970 schedule 1ASch. 1A and were now out of time to do so.
The UT noted that HMRC had opened an enquiry into the film partnerships' returns under Taxes Management Act 1970 section 12ACs. 12AC in good time and that Taxes Management Act 1970 section 12AC subsec-or-para 3s. 12AC(3) provided that where a notice of enquiry into a partnership return was issued under Taxes Management Act 1970 section 12ACs. 12AC, a notice of enquiry was also deemed to be given to each partner under Taxes Management Act 1970 section 9As. 9A. Taxes Management Act 1970 section 28B subsec-or-para 4Section 28B(4) also provided that upon the closure of an enquiry into a partnership return, HMRC "shall by notice to each of the partners amend…the partner's self-assessment under Taxes Management Act 1970 section 9s. 9…". HMRC had issued closure notices to the partnerships, which had been appealed to the Tribunal under Taxes Management Act 1970 section 31 subsec-or-para 1s. 31(1)(b) but settled by agreement, and then informed the taxpayers that their returns were being amended to reflect the agreed partnership losses.
The UT further noted that pursuant to Taxes Management Act 1970 section 54 subsec-or-para 1s. 54(1), a settlement agreement had the same effect as a decision by the Tribunals and that had the decision to reduce the partnerships' losses been made by the Tribunal, Taxes Management Act 1970 section 50 subsec-or-para 9s. 50(9) would have required HMRC to amend the partners' individual returns accordingly, which meant that following the settlement agreement, HMRC were also required to amend the amounts that had been included in the partners' returns (and then carried back).
In relation to the claims themselves, Taxes Management Act 1970 schedule 1BSch. 1B dealt with stand-alone claims relating to more than one year and expressly stated at para. 2(3) that "The claim shall relate to the later year" and at para. 2(6) that "Effect shall be given to the claim in relation to the later year", which meant that the claims to have the partnership losses brought into account were to be treated as claims in respect of the later years (in which the losses arose) and not the earlier years to which the losses were carried back. As a partner could only claim to have partnership losses brought into account for the purposes of his tax affairs by including them in his individual tax return for the year in which the loss arose, the relevant challenge to that claim was by enquiry into the return for that year and that enquiry had been deemed to have been opened by Taxes Management Act 1970 section 12AC subsec-or-para 3s. 12AC(3). HMRC were, therefore, not confined to challenging the carry back claims under Taxes Management Act 1970 schedule 1ASch. 1A and the appropriate and legitimate means for HMRC to challenge the claims was by challenging the partnership returns for the year in which losses arose, as they had done.
The UT further rejected the taxpayers' argument that the case of Cotter supported the claims being dealt with under Taxes Management Act 1970 schedule 1ASch. 1A because Cotter could be distinguished. In Cotter, the issue was whether an employment loss carry back claim ought to be challenged by enquiry under Taxes Management Act 1970 section 9As. 9A into the earlier year (not the later year of the loss as was the case here) or under Taxes Management Act 1970 schedule 1ASch. 1A and although the Supreme Court had found that Taxes Management Act 1970 schedule 1ASch. 1A applied, they also noted that had the taxpayer made his own assessment to his liability to tax rather than requiring HMRC to do so by filing in October, that any challenge would then have fallen within the remit Taxes Management Act 1970 section 9ZBs. 9ZB or Taxes Management Act 1970 section 9As. 9A in relation to the earlier year, rather than Taxes Management Act 1970 schedule 1ASch. 1A.
The UT concluded, therefore, that where an entry for carry back relief is made in a return for a particular year, in this case, the entry showing the partnership losses included in the later years returns, an, if not the, appropriate means of challenge by HMRC to that entry and claim for carry back relief was by way of an enquiry into the return itself rather than an enquiry under Taxes Management Act 1970 schedule 1ASch. 1A. Accordingly, the claim for judicial review was dismissed.
This case considers the operation of Taxes Management Act 1970 in terms of enquiries into the partnership returns and the consequential effect on the returns and claims of the individual partners in respect of the partnerships' losses, with the taxpayers in this case arguing that their carry back claims were immune for any reduction in the partnership losses at partnership level on the basis that they were stand-alone claims that could only be challenged under TMA 1970, Taxes Management Act 1970 schedule 1ASch. 1A. The UT concludes that in the context of a claim for the carry back of losses where the losses are included on a return as partnership losses are, the appropriate method of challenging the claim is by way of an enquiry into the return and that the claims are, therefore, affected by any consequential amendments that result there from.
[1]This is a claim for judicial review of decisions of the Defendants ("HMRC") by which they declined to accept claims by the Claimants (Mr De Silva and Mr Dokelman) for loss relief in relation to investments by them in certain film partnerships. Permission to apply for judicial review was granted by the High Court, which also ordered the claim to be transferred to the Upper Tribunal.
[2]The Claimants submit that the issue of law in the case, which arises on the application of complex provisions of the tax code, has been resolved in their favour by the judgment of the Supreme Court in R & C Commrs v CotterTAX[2013] BTC 837. HMRC dispute this.
[3]As appears from the judgment below, I do not accept the Claimants' submission regarding the effect of Cotter. I find that HMRC acted correctly and according to law.
[4]Mr De Silva and Mr Dokelman were at the material times both members of a number of film partnerships of which Investing in Enterprise Limited was the general partner.
[5]Under the tax code, losses or profits of a film partnership in any tax year are treated as divided between the partners. In the early years of trading, a partner may set off the losses of a film partnership in a particular year against his general income for that year or any of three previous years, by way of "carrying back" the losses to any of those previous years. The opportunity to carry back partnership losses in this way is potentially of considerable value to the partner, in that it allows him to choose to use the losses to offset taxable income across a range of years, depending on when it is most advantageous to him to use the losses in that way.
[6]The relevant film partnerships lodged tax returns pursuant to Taxes Management Act 1970 section 12AAsection 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 Finance (No. 2) Act 1992 section 42section 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.
[7]The partnerships appealed to the First-tier Tribunal (Tax Chamber) against HMRC's decision to disallow the claimed losses and reliefs.
[8]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...
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