The Queen (on the Application of James Derry) v The Commissioners for HM Revenue and Customs

Hearing date: 4 April 2017

Approved Judgment

Introduction

This is an appeal by the taxpayer, Mr Derry, from the decision and order of the Upper Tribunal (Tax and Chancery Chamber) (Morgan J), dismissing Mr Derry's claim for judicial review of a demand for tax in the sum of £95,546.30 together with interest of £14,096.35 made on him by the respondents ("HMRC" or the "Revenue") on 6 June 2014 in respect of the tax year ended 5 April 2010 ("2009/10").

The decision of the Upper Tribunal ("the Decision") was released on 28 July 2015, following a three day hearing in London between 30 March and 1 April 2015: see [2015] UKUT 0416 (TCC), reported at [2016] STC 334 as R (Derry) v HMRC. The order giving effect to the Decision was made on 22 October 2015.

The appeal raises technical questions of some difficulty about the correct procedure for making a claim, as Mr Derry purported to do in his self-assessment tax return for 2009/10, to carry back and set off against his taxable income for that year share loss relief in the amount of £165,800, which arose from a disposal of shares made by him in the following tax year ending 5 April 2011 ("2010/11").

The legislation governing share loss relief is contained in Chapter 6 of Part 4 of the Income Tax Act 2007 ("ITA 2007", sections 131 to 151). Under section 131(1), an individual is eligible for share loss relief if he incurs "an allowable loss for capital gains tax purposes" on the disposal of any "qualifying shares" in "any tax year", defined as "the year of the loss". "Qualifying shares", broadly speaking, are shares which either qualify for Enterprise Investment Scheme ("EIS") relief under Part 5 of ITA 2007, or are shares in a "qualifying trading company" for which the individual has subscribed. As one would expect, a "qualifying trading company" has to satisfy a number of conditions: these are set out in sections 134 to 143. The disposal of the shares must also be of a kind specified in section 131(3), which includes disposals by way of a bargain at arm's length.

Section 132 provides as follows:

" Entitlement to claim

(1) An individual who is eligible for share loss relief may make a claim for the loss to be deducted in calculating the individual's net income –

(a) for the year of the loss,

(b) for the previous tax year, or

(c) for both tax years.

(See Step 2 of the calculation in section 23.)

(2) 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.

(3) Otherwise the claim must specify either the year of the loss or the previous tax year.

(4) The claim must be made on or before the first anniversary of the normal self-assessment filing date for the year of the loss."

Section 133 then explains how the relief works. For present purposes, it is only necessary to note Step 1, which says:

"Deduct the loss in calculating the individual's net income for the specified tax year."

The "specified tax year" will be the year specified under section 132( 2) or (3).

In his statement of facts in support of his application for judicial review, Mr Derry says that on 22 March 2010 he bought 500,000 shares at a cost of £500,000 in a company called "Media Pro Four Limited" which was a qualifying trading company for the purposes of section 131 of ITA 2007. On 4 November 2010, he sold the shares to "Island House Private Charitable Trust" for £85,500, resulting in a capital loss to him of £414,500. This loss was therefore incurred in 2010/11. Accordingly, says Mr Derry, he was entitled to claim share loss relief under Chapter 6 of Part 4 of ITA 2007, and to carry back the relief for one year to 2009/10, thereby reducing his taxable income for that year by £414,500.

On 24 January 2011, Mr Derry through his accountants submitted his tax return for 2009/10 ("the 2010 Return") on line. In the pages for additional information, he filled in boxes 3 and 4 on page Ai 3 which are headed "Trading losses". In box 3, he entered £414,500 as the amount for which he was claiming relief, and in box 4 he specified 2009/10 as the tax year for which he was claiming the relief. In box 19, on the following page, which contained a blank space for additional information, he said:

"Box 3 of page Ai 3 shows capital losses realised on disposal of subscriber shares in an unlisted trading company in year ended 5 April 2011. These losses have been carried back to year ended 5 April 2010 and relief claimed under s 131, s 132 ITA 2007."

Mr Derry also calculated his own tax and completed pages TC 1 and 2 on the return. Box 1, which was filled in automatically as a result of entries made elsewhere in the return, showed the amount of tax due before any payments on account as £95,546.36. On page TC 2, there was a section headed "Adjustments to tax due" with the rubric:

"You may need to make an adjustment to increase or decrease your tax for 2009–10 because you are … carrying back to 2009–10 certain losses from 2010–11 …"

In this section, Mr Derry made a manual entry of £165,800 in box 15, headed "Any 2010/11 repayment you are claiming now". In the blank box 16, headed "Any other information", he said:

"The reduction in tax payable in box 15 of page TC 2 relates to the loss carry back claim arising from the carry back of losses of GBP 414,500 as set out on page Ai 3. The corresponding reduction in tax payable in the year ended 5 April 2010 following this loss carry back claim is GBP 165,800 being GBP 414,500 at 40 per cent."

Since Mr Derry had already suffered tax deducted at source of £102,233.64 on his income for 2009/10 (which mainly comprised employment income of £497,120), the effect of his claim for loss relief carried back from 2010/11 was to generate a significant repayment of tax due to him. This was quantified in his personal tax computation generated by the 2010 Return as a refund due to him of £70,253.64.

On 18 October 2011, HMRC repaid a sum of £70,487.90 to Mr Derry. It is unclear why HMRC refunded this slightly higher amount, but the payment was clearly intended to include the amount claimed by Mr Derry, albeit HMRC now say that the payment was made in error because full checks had yet to be completed in relation to the loss relief claim.

On 16 December 2011, Mr Derry through his accountants submitted his online tax return for 2010/11. On the pages relating to capital gains, he entered the figure of £414,500 in a box headed "Losses used against income – amount claimed against 2009–10 income", and in the blank information box on page CG 2 he gave the following explanation:

"I have incurred a capital gains loss of GBP 414,500 on the sale of unlisted shares in 2010/11 and claim the loss under s132(B) [ sic], ITA 2007 against my income in 2009/10. This loss relief has already been claimed and relief obtained in 2009/10."

On 4 January 2012, HMRC opened an enquiry into Mr Derry's claim for share loss relief for 2009/10. This enquiry was opened on the express footing that the claim was one made "outside of a return" by virtue of paragraph 2(3) of schedule 1B to the Taxes Management Act 1970 (" TMA 1970"). This enquiry remains open.

On 16 February 2012, HMRC opened a further enquiry into Mr Derry's tax return for 2010/11 under section 9A of TMA 1970. In his covering letter, the Inspector of Taxes said that this enquiry would run in tandem with the enquiry into the loss relief claim, and that in order to be satisfied about Mr Derry's entitlement to the relief claimed, it would be necessary for HMRC to look at all of the arrangements surrounding the claim. A particular area of concern was "that the claimed losses may have arisen from a marketed scheme or arrangements with purpose of avoiding tax". This enquiry, too, remains open.

Importantly, however, no enquiry was ever opened under section 9A of TMA 1970 into the 2010 Return, and HMRC would now be out of time to do so.

Mr Derry's claim for judicial review was issued in response to an amended demand made by HMRC on 6 June 2014 for payment of tax which it was alleged he had self-assessed but not paid. The demand was made on the footing that Mr Derry was not entitled to claim the disputed share loss relief as a deduction from his taxable income for 2009/10. The Upper Tribunal thought it was inappropriate to challenge the demand by way of judicial review, and that Mr Derry should have waited to be sued in the County Court or the High Court and then defended the claim on the footing that he was not liable for the amount claimed: see the Decision at [66] to [72]. Nevertheless, the Tribunal did not dismiss the application on that ground, and dealt with all the points which the parties argued before it. No procedural point has been taken on the appeal to this court, and I therefore express no view on whether the Upper Tribunal was right to say that this was not an appropriate case for judicial review.

The procedure relating to the making and investigation of claims under TMA 1970

The procedure relating to the making by taxpayers, and the investigation by HMRC, of claims under TMA 1970 has become rather complicated under the modern regime of self-assessment as it applies to individual taxpayers.

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