Derry - HMRC challenge to share loss relief claim flawed
In R (on the application of Derry) v HMRC [2019] UKSC 19, the Supreme Court has dismissed HMRC's appeal and confirmed that the taxpayer was entitled to claim share loss relief in the year in which the loss was incurred, rather than the following year.
Background
On 22 March 2010, Mr Derry bought 500,000 shares at a cost of £500,000 in a company called Media Pro Four Ltd. On 4 November 2010 (i.e. in the following tax year), he sold the shares to the ‘Island House Private Charitable Trust’ for £85,500, realising a loss of £414,500. In his tax return for 2009/10, Mr Derry claimed share loss relief for that amount against his income for that year under section 132, Income Taxes Act 2007 (ITA), thus carrying back the relief, and therefore reducing his tax liability for that year.
In December 2011, Mr Derry’s accountants submitted his tax return for 2010/11 online, which stated that the relief for £414,500 had already been claimed and obtained in 2009/10 (i.e. the preceding tax year).
On 4 January 2012, HMRC opened an enquiry into the claim for share loss relief for 2009/10, under Schedule 1A, Taxes Management Act 1970 (TMA), on the footing that the claim had been made 'outside of a return' by virtue of paragraph 2(3), Schedule 1B. Mr Derry submitted that Schedule 1B had no application and the claim was therefore properly made within the return for 2009/10, and the enquiry under Schedule 1A had no statutory basis.
On 16 February 2012, HMRC opened an enquiry into the return for 2010/11, under section 9A, TMA. The accompanying letter indicated that it would be necessary to look at all the arrangements surrounding the claim.
On 21 February 2014, HMRC issued a demand under section 60, TMA, for tax allegedly due for the tax year 2009/10, in the sum of £166,044.26, together with interest. On 6 June 2014, this was replaced by a demand for £95,546.36, together with interest.
Mr Derry challenged HMRC's decision to issue the demand by way of judicial review proceedings. The two issues in the claim were whether:
- having exercised his right to claim the relevant loss relief in 2009/10, Mr Derry was correct to deduct that loss in calculating his net income for 2010/11, or whether, as HMRC contended, that right was overridden by Schedule 1B, TMA, such that the loss, although claimed in year 2009/10, was to be treated as 'relating to' the following year; and
- if it was an error for Mr Derry to make a claim for relief in his tax return for 2009/10, that claim was nonetheless part of the tax return for that year.
Mr Derry failed on both issues in the Upper Tribunal and the matter proceeded on appeal to the Court of Appeal. On the first issue, the Court of Appeal found in favour of HMRC and on the second issue, it found in favour of Mr Derry (i.e. that the claim for relief was part of his 2009/10 return). As HMRC had failed to open an enquiry into Mr Derry's 2009/10 return within the statutory time limit, it allowed his claim for judicial review.
HMRC appealed the decision on the second issue. Mr Derry resisted the appeal on that issue and sought to uphold the decision in any event on the first issue.
Supreme Court judgment
The Supreme Court unanimously dismissed HMRC's appeal and found in favour of Mr Derry on whether loss relief was correctly deducted from his net income in 2009/10.
1. Whether the loss relief was correctly deducted from the net income in 2009/10.
The Court held that sections 23 and 131-132, ITA, create a clear and self-contained code for the treatment of a claim to share-loss relief. Sections 132 and133 give a taxpayer an 'entitlement' to make the claim, to specify the tax year to which it is to be applied, and to do so by deducting it in the calculation of his 'net income' for the purpose of section 23.
The Supreme Court noted that:
"Having taken such care to walk the taxpayer through the process of giving effect to his entitlement as part of his tax liability for the year specified by him, it would seem extraordinary for that to be taken away, without any direct reference or signpost, by a provision in a relatively obscure Schedule of another statute concerned principally, not with liability, but with management of the tax."
The Court stated that while sections 60(2) and 128(7), ITA (which relate to claims for trade and employment loss relief), refer to Schedule 1B, TMA, as a qualification of the rights otherwise conferred by those provisions, the absence of similar words in section 132, ITA, indicates that this right is not subject to the same qualification.
In the view of the Court, the words of Schedule 1B are not sufficient to displace the clear statutory provisions in ITA in respect of liability. As the governing statute in respect of tax liability, ITA should take precedence in the absence of any indication to the contrary.
2. Whether an erroneous claim for loss relief would be part of the 2009/10 tax return.
Lord Carnwath, giving the leading judgement of the Court, was of the view that as the issues were not fully explored in argument, which concentrated on the entitlement to relief rather than the means of enforcement, he should not decide this issue. He commented:
"… there remain unresolved uncertainties as to the correct interpretation of the entries in the on-line form and their treatment by the Revenue. In addition, we heard little discussion of the relationship of the enquiries respectively under section 9A and Schedule 1A paragraph 5. Apart from timing, I did not understand it to be suggested that there was any material difference between the processes. While it may be prudent for the Revenue to institute an enquiry under the former section, if there is any doubt about what is properly to be treated as part of the return, it does not necessarily follow that the Revenue is thereafter bound by the contents of the return for all purposes. If it later emerges that a claim was wrongly included in the return for that year (for example, because it should have been treated as subject to TMA Schedule 1B), it may at least be arguable that the Revenue should not be precluded at that later stage from opening an enquiry on the correct basis."
In a separate judgment, Lady Arden expressed the provisional view that in light of (i) the Supreme Court’s decision in Cotter v HMRC [2013] UKSC 69; (ii) the provisions of the legislation; (iii) the prescribed online tax return form; and (iv) the evidence provided on behalf of HMRC, the erroneous entry of a loss relief claim (which a taxpayer was not entitled to make in that year’s return) does not form part of the tax return for enquiry purposes. On that basis, Lady Arden was of the view that HMRC would be correct to open an enquiry into the claim and not the return.
Comment
HMRC's reliance on the argument that Schedule 1B overrode the relevant statutory provisions contained in ITA was rejected by the Supreme Court. It was of the view that ITA, as the governing statute in respect of liability, should take precedence in the absence of any indication to the contrary.
The Court said that any indications in the legislative history or the explanatory notes to ITA, do not provide a basis for departing from the ordinary principles of statutory interpretation. The Court noted that there was no suggestion that they produce an absurd or unworkable result, and it was not appropriate for Mr Derry's liability to be determined by reference to legal archaeology.
Questions surrounding whether HMRC has commenced valid enquiries under the correct statutory procedures have occupied a great deal of the Supreme Court's time in recent years (see Cotter (supra) and De Silva v HMRC [2017] UKSC 74). At the conclusion of his judgment, Lord Carnwath referred back to Lord Hodge's judgment in Cotter, which highlighted the uncertainty surrounding the way in which tax returns prescribed and requested certain information. In Cotter, Lord Hodge suggested that this uncertainty could be removed if the return form, which HMRC prescribe (see section 113, TMA), were to make clear which boxes requesting information were not relevant to the calculation of tax due in the particular year of assessment. In particular, HMRC could make this clear where the form provides for the intimation of ‘stand-alone’ claims which relate to another tax year. In reflecting on this, Lord Carnwath commented:
"We were not told what action, if any, has been taken in response to this advice. The uncertainties revealed by the submissions in the present case have underlined its importance. There is an urgent need for clarification, not only of the precise legal status of the different parts of the return, but also of any relevant differences between the paper and electronic versions of the return, and their practical consequences."
It remains to be seen whether HMRC will now, after two Supreme Court decisions highlighting the issue, seek to rectify these matters which, in the words of Lord Carnwath, require urgent clarification. Without such clarification (and, indeed, simplification) it is likely that further judicial time will be taken up in considering such issues.
The judgment can be viewed here.