(Tax and Chancery Chamber)
London EC4A 1NL |
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Judgment Date: 3 June 2025 |
B e f o r e :
JUDGE RUPERT JONES
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ROGER MURPHY |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Respondents |
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For the Appellant: Mr Grierson of counsel as representative
For the Respondents: Mr Joshua Carey and Mr Sam Way of counsel instructed by the General Counsel and Solicitor for His Majesty's Revenue and Customs
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Crown Copyright ©
INCOME TAX –– share loss relief pursuant to s.574 Income and Corporation Tax Act 1988 – incurred in 2006-07 but claimed and carried back against income on 2005-06 return –Schedule 1B TMA 1970 applies so as to treat claim as relating to 2006-07 – standalone claim not made 'in' 05-06 return because information provided did not go to the calculation of tax - thus HMRC validly opened enquiries both into a) the claim made outside the 05-06 return pursuant to Schedule 1A TMA, and b) 06-07 return under section 9A TMA – both closure notices valid as reasonable recipient would understand them to deny all relief claimed despite incorrect figures included – Appellant's appeal dismissed and HMRC's cross-appeal allowed
INTRODUCTION
THE FTT DECISION
(1) the Appellant was entitled to make a claim for share loss relief under s.574 of the Income and Corporation Tax Act 1988 ("ICTA") for losses incurred in the 06-07 tax year carried back and included on his tax return for 05-06. The FTT decided in favour of HMRC that the Appellant was not entitled to carry back the claim in the 05-06 return and it was to be treated as relating to 06-07 by virtue of paragraph 2(3), Schedule 1B TMA.
(2) even if the Appellant was not so entitled, the Appellant had made such a claim "in" (as opposed to "on") his tax return for 05-06 such that HMRC could only enquire into it under s.9A TMA. The FTT decided in favour of the Appellant that the claim for share loss relief had been made in the return so that HMRC were required to have opened any enquiry under s.9A TMA and the enquiry they did open, under Schedule 1A TMA, was invalid.
(3) even if the Appellant had made the claim in his 05-06 tax return, the Appellant's claim was required to be included in his 06-07 tax return. The FTT found that this was required such that HMRC were entitled to enquire into the 06-07 return under s.9A TMA 1970 and the enquiry notice for 06-07 was valid.
THE GROUNDS OF APPEAL TO THE UPPER TRIBUNAL
(1) The FTT erred by holding that the Appellant was not permitted to make a claim for share loss relief in his tax return for 05-06 and it should be treated as relating to the 06-07 return. The ratio of the Supreme Court judgment in R (on the application of Derry) v HMRC [2019] UKSC 19 ("Derry SC") is binding and schedule 1B TMA does not apply to share loss relief claims under ICTA. The FTT was wrong to distinguish Derry SC on the basis that it only applied to share loss relief claims under s.132 Income Tax Act 2007 ("ITA"). Thus paragraph 2(3), Schedule 1B does not govern a share loss relief claim made under s.574 ICTA. The claim can be made in either the year incurred or the preceding tax year and does not have to be treated as relating to the later year (06-07). ("The First Share Relief Issue").
(2) The FTT erred in finding that there was a valid closure notice in respect of the 06-07 return pursuant to s.28A TMA when it was not sufficiently clear: the figures referred to in respect of the relief claimed and denied were incorrect. The FTT failed to apply Raftopoulou v HMRC [2018] EWCA Civ 818 ("Raftopoulou") in determining whether the closure notice of 25 July 2019 was valid, alternatively the FTT failed to give sufficient weight to the Appellant's written and oral evidence that he did not understand the meaning of the closure notice. ("The Closure Notice Issue").
"28(3) If the Respondent is seeking to persuade the FTT to make a different decision, it is likely to need permission to appeal. However, if the Respondent succeeded on a particular issue before the FTT because the FTT accepted one of a number of arguments while rejecting other arguments, the Respondent can raise those unsuccessful arguments in a Respondent's Notice (see [77] of Rose LJ's judgment [in SSE Generation]) because the Respondent would not, in so doing, be seeking a different decision."
THE HEARING
FACTUAL BACKGROUND
"7. As we have mentioned, the [share] loss for which relief was claimed by Mr Murphy arose from his participation in a tax avoidance scheme [Excalibur].
…
10. On 13 October 2006, Mr Murphy submitted his tax return for the tax year 2005/6 online[1]. The return included:
(1) in Box 18.3, the amount of £179,063.62 as total tax due for that year;
(2) in Box 18.8, a figure of £183,140.43 as "Any 2006-2007 tax you are reclaiming now";
(3) in Box 23.9 (the "white space"), an explanation of the entry in Box 18.8 in the following terms:
Box 18.8 - This refers to a tax credit arising on a loss from 2006/07 and claimed against income in 2005/06 under s574 ICTA. I claim under TA 1988 s574(1)(b) that an amount equal to the amount of the loss to be set against my income for 2005/06 but not, for the avoidance of doubt, set against my income for 2006/07. The loss is calculated as follows Sales Proceeds 24.22 Less Cost 763,763.98 Loss 763,739.76.
The figure at Box 18.8 was not taken into account in the calculation of the total tax entered at Box 18.3 because the on-line form populated the box automatically and did not take into account the relief claimed under section 574 ICTA. Mr Murphy did not disclose the DOTAS reference number of the scheme in his return.
11. In a letter dated 28 February 2007, HMRC gave notice to Mr Murphy of their intention to enquire into Mr Murphy's claim under section 574 ICTA. The notice was given under paragraph 5 of Schedule 1A to the Taxes Management Act 1970 ("TMA") on the basis that the claim had been made "outside of a return". The letter was headed "Enquiry under Paragraph 5 Schedule 1A Taxes Management Act 1970 – 2006/7". The letter stated:
Thank you for your tax return for the year ended 5 April 2006.
I am writing to tell you that I intend enquiring into your Return. My enquiry will cover your claim under Section 574 Income Corporation Taxes Act 1988.
The letter later continued:
Your claim has been made outside of a return and is, therefore governed by Schedule 1A TMA 1970. Para 5 of Schedule 1A allows for enquiries to be made into claims.
12. A letter of the same date to Mr Murphy's agent, Eaton & Co, confirmed that an enquiry was being opened under paragraph 5 Schedule 1A TMA.
13. On 31 January 2008, Mr Murphy submitted his tax return for the tax year 2006/7. This return was also submitted on-line. In that return:
(1) in Box 18.8, the total tax due was shown as £144,587.12;
(2) Box 23.9 contains the following additional information:
"During the tax year a loan that I received from Rose Harbour (BVI) Ltd was released at the discretion of the Board of that company. The loan was from a non-close and non resident company of which I was not a shareholder. The release does not give rise to a taxable receipt. During the tax year I gifted my entire shareholding in Harbour Trading Plc to Change4Change, a UK registered charity…."
(3) the capital gains pages show that shares in Harbour Trading Plc were acquired on 13 July 2006, and sold for £24 on 25 July 2006, generating a loss of £763,740.00, which appears in Box 8.2;
(4) Box 8.13B of the capital gains pages shows losses of £763,739 "claimed against income of 2005-06";
(5) in Box 8.22 of the capital gains pages, Mr Murphy entered the following additional information in the "white space":
"Additional Information: The shares in Harbour Trading Plc were originally subscribed for by me and then disposed of to a third party, Braye Finance Limited, for there (sic) full market value. Pursuant to an option agreement entered into with Braye Finance Limited, the shares were then sold back to me, within 30 days of the disposal. As a result of the share identification rules, the reacquisition of these shares generated a capital loss of 763,739.76. Claim for loss against the year ended April 5th 2006 was made on the return of income and submitted to the revenue on October 13, 2006".
Once again, Mr Murphy did not disclose the DOTAS reference number of the scheme in his return.
14. In a letter dated 20 May 2008, HMRC gave notice of intention to an enquire into Mr Murphy's return for the tax year 2006/7. A letter from HMRC to Mr Murphy's then agent, Meager Wood Locke & Co, of the same date confirms that the notice was given under section 9A TMA.
15. In a letter dated 31 July 2008, Mr Murphy's agent advised HMRC of the DOTAS scheme reference number in relation to the claim for relief under section 574 ICTA.
…
17. On 19 April 2017, the First-tier Tribunal issued a decision in Kerrison v HMRC [2017] UKFTT 322 (TC), in which the Excalibur scheme was considered and the appeal against the refusal of the taxpayer's claims for relief were dismissed. On 22 January 2019, the Upper Tribunal dismissed the taxpayer's appeal (Kerrison v HMRC [2019] UKUT 8 (TCC)).
18. On 25 July 2019, HMRC issued two closure notices to Mr Murphy.
(1) The first was intended to be a closure notice under paragraph 7 Schedule 1A TMA in respect of the claim for relief under section 574 ICTA denying Mr Murphy relief under that section. The notice stated:
Check of your claim for the year ended 5 April 2007
I have now completed my check of your claim for the year shown above.
My conclusion
•The total capital loss claimed in the sum of £763,740.00 is not allowable.
•The claim to set £48,244.79 of that capital loss against 2005-2006 income, is not allowable.
•Your claim showed that a credit was due to you of £134,895.64
•My check has shown that the actual credit due was £0.00
•The difference is £134,895.64.
…
(2) The second was intended to be a closure notice under section 28A TMA in respect of the enquiry into the return for the tax year 2006/7. The notice stated:
Information about our check of your Self-Assessment tax return for the year ended 5 April 2007
I have now completed my S9a check of your Self-Assessment tax return for the year shown above. This letter is a Closure Notice issued under Section 28A (1) & (2) Taxes Management Act 1970.
My conclusion
The capital loss claimed in the sum of £763,740.00 is not allowable.
I have amended your tax return in line with my decision.
The amount of tax you self-assessed for the year 2006-2007 has not changed.
The claim to set £763,739.00 of that capital loss against 2005-2006 income, is not allowable.
• Your claim showed that a credit was due to you of £48,244.79.
• My check has shown that the actual credit due was £0.00.
• The difference is £48,244.79.
…
19. The figures in the closure notices regarding the amount of the credit claimed by Mr Murphy were plainly wrong. The amount of share loss relief claimed by Mr Murphy was £183,140.43 and he had sought to set that full amount against his income for the tax year 2005/6 under section 574 ICTA.
20. Mr Murphy did not understand the notices that had been sent to him. He requested advice from his solicitors, Reid & Co in an email dated 29 July 2019. Reid & Co. wrote to HMRC on 16 September 2019. In that letter, Reid & Co. argued, inter alia, that Mr Murphy's claim to carry-back losses under section 574 ICTA was included in the return for the tax year 2005/6 and so any enquiry into that claim should have been made under section 9A TMA. The enquiry under paragraph 5 Schedule 1A TMA was invalid and so the purported closure notice was also invalid.
21. Reid & Co also wrote to HMRC on 16 October 2019. In that letter Reid & Co. reiterated their argument that the notice of intention to enquire into Mr Murphy's claim under section 574 ICTA under paragraph 5 Schedule 1A TMA was invalid. Reid & Co. also argued that the closure notices did not meet the test set out in Raftopoulou v HMRC [2018] EWCA Civ 818 ("Raftopoulou") at [20] and [36] and so were invalid.
22. Following correspondence between Reid & Co. and HMRC, Mr Murphy appealed against both closure notices on 28 November 2019, with the agreement of HMRC notwithstanding that the appeals were in strict terms out of time.
23. In a letter dated 14 January 2022, HMRC confirmed their view of the position and offered a review, which was accepted by Mr Murphy. The review was completed on 30 May 2022. In a letter of that date, HMRC varied the closure notices in the following terms:
(1) in relation to the closure notice given under paragraph 7 Schedule 1A TMA:
Closure of Enquiry under Sch1A TMA 1970
My conclusion
• The total capital loss claimed in the sun of £763.740.00 is not allowable.
• The claim to set £180,40.43 (sic) of that capital loss against 2005-2006 income is not allowable.
• Your claim showed that a credit was due to you of £183,140.43
• My check has shown that the actual credit due was £0.00
• The difference is £183,140.43.
(2) in relation to the closure notice for the tax year 2006/7 issued under section 28A TMA:
Closure of s9A Enquiry into 06/07 Return
The capital loss claimed in the sum of £763.740.00 is not allowable. The amount of tax that you self-assessed for the year 2006-2007 has not changed.
• The claim to set £763,739.00 of that capital loss against 2005-2006 income is not allowable.
• Your claim showed that a credit was due to you of £0.00
• My check has shown that the actual credit due was £0.00
• The difference is £0.00.
…"
FIRST SHARE LOSS RELIEF ISSUE
The FTT Decision
(1) Was Mr Murphy entitled as a matter of law to deduct the purported loss in computing his income tax liability for the tax year 2005/6 and to include the claim in his tax return for the 2005/6 tax year? (The "first issue")
"61. The wording of section 574 ICTA and section 380 ICTA in the form that they were in immediately before ITA is very similar once the wording that relates to the particular form of loss is removed. Whilst we acknowledge that there are some material differences in the nature of share loss relief as compared to the other forms of loss relief – for example, in the manner in which the provisions of section 574 ICTA isolate the loss arising from the relevant disposal from the general computation of gains and losses for the year – we have not been directed to any provision in the law before the introduction of ITA which would suggest that there was a material difference in the manner in which share loss relief and the other forms of loss relief were to be claimed and enquired into. We can only conclude – consistent with the implication from Lord Carnwath's judgment in Derry SC – that there was no material difference in the law applicable to the manner in which share loss relief and the other forms of loss relief prior to ITA (i.e. that Schedule 1B TMA applied) and that ITA made a material change to the law in that respect, but only in relation to claims for share loss relief.
62. On the first issue, we therefore agree with HMRC that Mr Murphy was not entitled to claim share loss relief "in" his return for the tax year 2005/6. Schedule 1B TMA applied and so the loss related to the tax year [2006/7]."
The Law
Legislation
"574.— Relief for individuals.
(1) Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares in any year of assessment, he may, by notice given within twelve months from the 31st January next following that year, make a claim for relief from income tax on—
(a) so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or
(b) so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income;
but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above. Where such relief is given in respect of the loss or any part of it, no deduction shall be made in respect of the loss or (as the case may be) that part under the 1992 Act.
(2) Any relief claimed under paragraph (a) of subsection (1) above in respect of any income shall be given in priority to any relief claimed in respect of that income under paragraph (b) of that subsection; and any relief claimed under either paragraph in respect of any income shall be given in priority to any relief claimed in respect of that income under section 380 or 381.
.."
"380.— Set-off against general income.
(1) Where in any year of assessment any person sustains a loss in any trade, profession, vocation or employment carried on by him either solely or in partnership, he may, by notice given within [twelve months from the 31st January next following that year, make a claim for relief from income tax on—
(a) so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or
(b) so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income; but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above.
(2) Any relief claimed under paragraph (a) of subsection (1) above in respect of any income shall be given in priority to any relief claimed in respect of that income under paragraph (b) of that subsection."
"42.— Procedure for making claims etc.
(1) Where any provision of the Taxes Acts provides for relief to be given, or any other thing to be done, on the making of a claim, this section shall, unless otherwise provided, have effect in relation to the claim.
(1A) Subject to subsection (3) below, a claim for a relief, an allowance or a repayment of tax shall be for an amount which is quantified at the time when the claim is made.
(2) … where notice has been given under section 8, 8A or 12AA of this Act, a claim shall not at any time be made otherwise than by being included in a return under that section if it could, at that or any subsequent time, be made by being so included.
…
(11) Schedule 1A to this Act shall apply as respects any claim or election which—
(a) is made otherwise than by being included in a return under section 8, 8A or 12AA of this Act,
…
(11A) Schedule 1B to this Act shall have effect as respects certain claims for relief involving two or more years of assessment.
…"
"2.—
(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").
…
(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.…"
"35. So where Schedule 1B applies to a claim for loss relief:
(1) the claim does not have to be made in the return (paragraph 2(2));
(2) the claim relates to the later year (i.e. the year in which the loss arises) and not the earlier year (the year to which the loss is being carried back) (paragraph 2(3)); and
(3) the amount of the claim is determined by reference to the reduction in the tax liability of the taxpayer in the earlier year on the assumption that effect were given to the claim (paragraph 2(4)).
36. Schedule 1B creates a separate and specific regime in which a claim that falls within paragraph 2 is treated as a standalone claim – in HMRC's terminology a "free-standing credit" – which although it affects the amount of tax actually paid in the earlier tax year is dealt with separately from the return for that year. It is HMRC's case that Mr Murphy's claim for the tax year 2005/6 falls within that regime."
"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."
"133 How relief works
(1) This subsection explains how the deductions are to be made.
The amount of the loss to be deducted at any step is limited in accordance with sections 24A and 25(4) and (5).
Step 1
Deduct the loss in calculating the individual's net income for the specified tax year.
Step 2
This step applies only if the claim is made in relation to both tax years.
Deduct the part of the loss not deducted at Step 1 in calculating the individual's net income for the other tax year.
(2) Subsection (1) is subject to sections 136(5) and 147 (which set limits on the amounts of share loss relief that may be obtained in particular cases).
(3) If an individual—
(a) makes a claim for share loss relief against income ("the first claim") in relation to the year of the loss, and
(b) makes a separate claim for share loss relief against income in respect of a loss made in the following tax year in relation to the same tax year as the first claim, priority is to be given to making deductions under the first claim.
(4) Any share loss relief claimed in respect of any income has priority over any relief claimed in respect of that income under section 64 (deduction of losses from general income) or 72 (early trade losses relief).
(5) A claim for share loss relief does not affect any claim for a deduction under TCGA 1992 for so much of the allowable loss as is not deducted under subsection (1)."
"This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years)."
Case law
Knibbs
45. Schedule 1B is headed "Claims for relief involving two or more years". As we have already noted, claims for loss relief involving two or more years, i.e. carry-back claims, are expressly made subject to paragraph 2 of Schedule 1B by section 60(2) of ITA.
46. Paragraph 2 of Schedule 1B is headed "Loss relief" and materially provides as follows:
"2(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').
…
(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."
47. It follows from these provisions that, where a taxpayer wishes to make a carry-back claim for loss relief, the claim does not need to be included in a return, because section 42(2) of TMA is disapplied by paragraph 2(2). The effect of sub-paragraphs (3) and (4) was explained by Lord Hodge JSC in De Silva [2017] 1 WLR 4384 , para 19:
"Paragraph 2 of Schedule 1B thus is concerned with relief sought for a loss incurred in the later year (which I will call 'Year 2') by carrying it back to the earlier year ('Year 1'). Significantly, paragraph 2(3) makes it clear that the claim relates to Year 2. The quantification of the claim is governed by paragraph 2(4): the claim is the difference between amount A and amount B on the counterfactual assumption that effect could have been and was given to the claim in Year 1. That assumption is counterfactual because paragraph 2(3) and paragraph 2(6) relate the claim and the giving effect to the claim to Year 2.""
Derry SC
"50. There were two issues before the Court:
(1) first, whether the taxpayer was entitled to deduct the relevant loss in calculating his net income for the tax year 2009/10 and his tax liability for that year under section 23 ITA or whether, as HMRC argued, that right was overridden by Schedule 1B TMA so that the loss, although claimed in the tax year 2009/10, was to be treated as "relating to" the tax year 2010/11; and
(2) second, whether, if it was an error of the taxpayer to make a claim for relief in his tax return for the tax year 2009/10, that claim was nonetheless part of the tax return for that year."
"51. The Supreme Court, with Lord Carnwath giving the leading judgment, found in favour of the taxpayer on the first issue. This was on the grounds that sections 131 to 133 ITA provided a "clear and self-contained code" for the making of claims to share loss relief. Under those provisions, the taxpayer was entitled to make a claim for loss relief and to specify the year in which it was to be applied. The computational provisions of ITA, in particular, section 23 ITA, were equally clear that the amount of the claim was to be taken into account in computing the taxpayer's "net income" for that year and accordingly in calculating his "tax liability" for that year. Lord Carnwath says this (at Derry [35]):
35. While it may be true, as Henderson LJ said, that modern tax legislation in general is much more complex than at the time of Lord Dunedin's classic statement, the purpose of the tax law rewrite was to restore a measure of simplicity and coherence to the principal tax statutes. In any event, one does not need high judicial authority to make the obvious point that the first step in the imposition of a tax is to establish (in Lord Dunedin's words) "what persons in respect of what property are liable". Taken together section 23 and sections 131-132 appear to constitute a clear and self-contained code for the treatment of a claim to share-loss relief such as that of Mr Derry. Sections 132-133 in terms give him 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. For good measure section 132(1) provides a specific signpost to Step 2 in section 23. That section in turn makes clear that the "result" of that, and the other steps there set out, is his "tax liability" for the tax year in question.
52. That entitlement was not overridden by Schedule 1B. The Court noted that there was no specific cross-reference in ITA to Schedule 1B in relation to the provisions regarding claims for share loss relief. This was in contrast to the provisions governing the other loss reliefs – where cross-references to paragraph 2 Schedule 1B are found in s.60(2) ITA in relation to trade loss relief and in s.128(7) ITA in relation to employment loss relief. Lord Carnwath says this (at Derry [36]-[37]):
36. 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. Section 1020 makes no specific reference to Schedule 1B, and in any event refers only to "information" in general terms, rather than anything likely to affect the substance of liability. By contrast sections 60(2) and 128(7) are more than mere "signposts", as the judges below characterised them. The words "subject to" are substantive in effect, imposing a qualification on the right otherwise conferred by those provisions. Applying ordinary principles of interpretation, the absence of similar words in section 132 would naturally be taken as indicating that this right is not subject to the same qualification.
37. Turning to the TMA, it is true that words of Schedule 1B taken on their own would be apt to apply to a claim under sections 132-133. However, I do not regard that as enough to displace the clear provisions of the ITA in respect of liability. I do not see this as turning so much on whether one set of provisions is more specific than the other, but rather on the fact that the ITA is in principle the governing statute in respect of tax liability, and as such should take precedence in the absence of any indication to the contrary. Further, unlike the judges below, I see a significant inconsistency between the two sets of provisions: the first gives the taxpayer an unqualified right to claim a deduction in the previous year; the second in effect removes that right by treating it as relating to the current year. I also see force in Ms McCarthy's reliance on the reference in section 42(11A) to "certain claims" for relief involving two or more years. As she says, this may be read as implying that not all such claims are covered, and that one needs to look elsewhere to identify which. (I do not forget that in Cotter para 14, Lord Hodge proceeded on the basis that section 42(11A) had the "same" effect in respect of employment loss relief as the specific provision in section 128(7), but the point was not in issue and does not seem to have been subject to argument.)"
"53. As can be seen from the above extracts, the Supreme Court decision is informed to a significant extent by the structure of ITA. Mr Hall, for HMRC, says that this is a critical factor, and that ITA made a change in the law in that respect, but only in relation to share loss relief. Mr Grierson, for Mr Murphy, says that it is not. He says that the statutes such as ITA which were part of the Tax Law Rewrite Project were intended to restate the law and not to make material changes (see the preamble to ITA). The ITA provisions were simply restating the position that obtained under the earlier provisions including section 574 ICTA.
54. Lord Carnwath commented on this question in his judgment in Derry SC. He said this (at Derry SC [38]):
38. The only countervailing consideration, to my mind, is the lack of any obvious explanation, in the statutory history or otherwise, of the different treatment of this form of loss relief. In a post-hearing note Mr Nawbatt gave a detailed account of the treatment of the various forms of loss relief under the previous legislation. This shows, as is common ground, that the pre-2007 law did not draw any material distinction between share loss relief (section 574 ICTA), and trade and employment loss relief (section 380 ICTA). Mr Nawbatt was also able to point to some indications in the ITA Explanatory Notes (e.g. in respect of section 1025, which is not directly relevant to the present case) that the authors of the notes may have assumed that share loss relief would be subject to TMA Schedule 1B, in the same way as the other forms of relief. However, taken at their highest, these indications are far from providing a basis for departing from the ordinary principles of statutory interpretation, absent any suggestion that they produce a result which is absurd or unworkable. Indeed, for the taxpayer's liability to be determined by reference to legal archaeology of this kind would negate the whole purpose of the tax law rewrite. It is neither necessary nor appropriate for the court to speculate as to Parliament's intentions to justify a departure from the natural interpretation of the statutory language.""
Outline of the Appellant's case
Discussion and Analysis
Prior to the ITA all loss relief claims under ICTA were to be made or treated in a similar way – Schedule 1B TMA applied
"16. This elaborate deeming provision has the effect (so far as it applies) that, where under section 380(1)(b) loss relief is claimed on income in the preceding year, the claim nonetheless "relates" to the later year (para 2(3)). The amount of the claim is computed using the formula in paragraph 2(4), based on the income in the previous year; but it does not affect the tax position in the earlier year (para 2(3)). It gives rise to a "free-standing credit" (in the Revenue's language) which can be used in any of the ways set out in paragraph 2(6)."
"28. If a taxpayer wished to carry back part of the losses incurred in Year 2 to set off against his income of Year 1 by invoking section 380(1)(b) of ICTA, he would also have to make the claim in his return for Year 2. This is the combined effect of section 8(1AA)(a) and Schedule 1B paragraphs 2(3) and (6). As shown in para 18 above, those paragraphs provide that the claim for relief relates to Year 2 and effect is to be given to that claim in relation to Year 2…"
"59. This reasoning therefore provides clear authority, at the highest level, that where a claim to carry back trading losses is made, the taxpayer must make a claim in his tax return in respect of Year 2, and state the extent to which the relief claimed has already been given: see [29]. This obligation, one might think, is a natural corollary (our wording, not Lord Hodge's) of the fact that the carry-back claim relates to Year 2, and effect must be given to it in relation to that year: ibid. The obligation is reinforced by the further fact that, if the taxpayer wishes to carry back only part of the losses incurred in Year 2, it is obviously necessary for him to make the claim in his Year 2 return, because only thus can the amount in which the taxpayer is chargeable to income tax in Year 2 be ascertained: see [28]. The same also applies even if the taxpayer has already received full relief in Year 1, by means of a claim under schedule 1A, because that information still forms a necessary part of the Year 2 return. Only in this way can the "net amounts" referred to in section 8(1AA)(a), for which the taxpayer is chargeable to tax in Year 2, be ascertained: ibid."
The ITA made a limited but material change in the law from ICTA on share loss relief claims
"86. So, ITA is not a pure or "straight" consolidation Act. However, as the Explanatory Notes cited by Lord Carnwath JSC confirm, it is not (except for the minor changes) intended to change the law. That is a matter which the courts must in my judgment respect when interpreting the new legislation. …"
Appellant's other arguments considered
"tax", where neither income tax nor capital gains tax nor corporation tax nor development land tax is specified, means any of those taxes .. ,
"the Taxes Acts" means this Act and—
(a) the Tax Acts ... and
(b)the Taxation of Chargeable Gains Act 1992 and all other enactments relating to capital gains tax…
Summary
Conclusion
SECOND SHARE LOSS RELIEF ISSUE
(2) If …it was an error for Mr Murphy to include the claim in his tax return for the tax year 2005/6 – was his claim nonetheless included "in" his return with the effect that HMRC could only enquire into it under section 9A TMA? (The "second issue")
"72. In the present case, we have decided that Mr Murphy was not entitled to make a claim for share loss relief in his return for the tax year 2005/6. Mr Murphy filed his return. The return refers to the loss relief in the parts of the return concerned with the carry-back of losses from later years. The amount of the claim is not reflected in the calculation of the tax due for 2005/6 because the box in the return was populated automatically. Nonetheless it is clear on the face of the return that Mr Murphy was claiming to set the loss arising on the disposal of the shares against his taxable income for the tax year 2005/6.
73. This is, of course, the issue that was addressed by the Court of Appeal in Derry CA. Henderson LJ expressed the view that, in these circumstances, the claim should be regarded as being included in the return and that HMRC must enquire into the return under section 9A TMA. As this was the ratio of the decision, the decision of the Court of Appeal on this issue is binding upon us. There are circumstances in which the Supreme Court can effectively overrule a decision of the Court of Appeal by an expression of opinion which is strictly obiter. However, those circumstances are very limited: it would in effect require a direction from the Supreme Court as whole that the relevant case was wrongly decided. The reservations expressed by Lord Carnwath together with the provisional view expressed by Lady Arden in Derry SC, cannot be taken as meeting that requirement.
74. We must therefore conclude – relying upon the obiter comments of Lord Hodge in Cotter as applied by the Court of Appeal in Derry CA – that, although Mr Murphy was not entitled to make his claim in his tax return for the tax year 2005/6, he made a claim for share loss relief "in" that return. HMRC were required to proceed with any enquiry under section 9A TMA. They did not do so. The enquiry into the claim under paragraph 5 Schedule 1A TMA was not valid and the relevant closure notice under paragraph 7 Schedule 1A TMA was equally not valid."
The Law
Legislation
89. S.42(11) TMA provides that "Schedule 1A to this Act shall apply as respects any claim or election which—(a) is made otherwise than by being included in a return under section 8, 8A or 12AA of this Act…".
8. — Personal return.
(1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by a notice given to him by an officer of the Board—
(a) to make and deliver to the officer, on or before the day mentioned in subsection (1A) below, a return containing such information as may reasonably be required in pursuance of the notice, and
(b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required.
(1A) The day referred to in subsection (1) above is—
(a) the 31st January next following the year of assessment, or
(b) where the notice under this section is given after the 31st October next following the year, the last day of the period of three months beginning with the day on which the notice is given.
(1AA) For the purposes of subsection (1) above—
(a) the amounts in which a person is chargeable to income tax and capital gains tax are net amounts, that is to say, amounts which take into account any relief or allowance a claim for which is included in the return; and
(b) the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) of ITTOIA 2005 applies.
...
9A Notice of enquiry
(1) An officer of the Board may enquire into a return under section 8 or 8A of this Act if he gives notice of his intention to do so ("notice of enquiry")–
(a) to the person whose return it is ("the taxpayer"),
(b) within the time allowed.
(2) The time allowed is–
(a) if the return was delivered on or before the filing date, up to the end of the period of twelve months after the filing date;
(b) if the return was delivered after the filing date, up to and including the quarter day next following the first anniversary of the day on which the return was delivered;
(c) if the return is amended under section 9ZA of this Act, up to and including the quarter day next following the first anniversary of the day on which the amendment was made.
For this purpose the quarter days are 31st January, 30th April, 31st July and 31st October.
…
(6) In this section "the filing date" means the day mentioned in section 8(1A) or, as the case may be, section 8A(1A) of this Act."
"5.—
(1) An officer of the Board may enquire into—
(a) a claim made by any person, or
(b) any amendment made by any person of a claim made by him, if, before the end of the period mentioned in sub-paragraph (2) below, he gives notice in writing of his intention to do so to that person or, in the case of a partnership claim, any successor of that person.
(2) The period referred to in sub-paragraph (1) above is whichever of the following ends the latest, namely—
(a) the period ending with the quarter day next following the first anniversary of the day on which the claim or amendment was made;
(b) where the claim or amendment relates to a year of assessment, the period ending with the first anniversary of the 31st January next following that year; and
(c) where the claim or amendment relates to a period other than a year of assessment, the period ending with the first anniversary of the end of that period;
and the quarter days for the purposes of this sub-paragraph are 31st January, 30th April, 31st July and 31st October.
..."
Case law
Cotter
64. In relation to the effect of the claim on Mr Murphy's return, we turn first to the Supreme Court decision in Cotter. That case involved a claim for employment loss relief for a loss sustained in the tax year 2008/9, but carried back to the tax year 2007/8. The taxpayer's return for the tax year 2007/8 was initially filed in paper form. In that return, the taxpayer did not claim the relevant loss and did not calculate his own tax liability for the year, but left it to HMRC to do so. The claim to carry back the loss to the tax year 2007/8 was subsequently made by the taxpayer's accountants on his behalf. The accountants also submitted an amended return for the tax year 2007/8. HMRC sought to enquire into the claim under Schedule 1A TMA.
24. Where, as in this case, the taxpayer has included information in his tax return but has left it to the Revenue to calculate the tax which he is due to pay, I think that the Revenue is entitled to treat as irrelevant to that calculation information and claims, which clearly do not as a matter of law affect the tax chargeable and payable in the relevant year of assessment. It is clear from sections 8(1) and 8(1AA) of TMA that the purpose of a tax return is to establish the amounts of income tax and capital gains tax chargeable for a year of assessment and the amount of income tax payable for that year. The Revenue's calculation of the tax due is made on behalf of the taxpayer and is treated as the taxpayer's self-assessment (section 9(3) and (3A) of TMA ).
25. The tax return form contains other requests, such as information about student loan repayments (page TR2), the transfer of the unused part of a taxpayer's blind person's allowance (page TR3) or claims for losses in the following tax year (box 3 on page Ai3) which do not affect the income tax chargeable in the tax year which the return form addresses. The word "return" may have a wider meaning in other contexts within TMA . But, in my view, in the context of sections 8(1), 9, 9A and 42(11)(a) of the TMA , a "return" refers to the information in the tax return form which is submitted for "the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax" for the relevant year of assessment and "the amount payable by him by way of income tax for that year" ( section 8(1) TMA ).
26. In this case, the figures in box 14 on page CG1 and in box 3 on page Ai3 were supplemented by the explanations which Mr Cotter gave of his claim in the boxes requesting "any other information" and "additional information" in the tax return. Those explanations alerted the Revenue to the nature of the claim for relief. It concluded, correctly, that the claim under section 128 of ITA in respect of losses incurred in 2008/09 did not alter the tax chargeable or payable in relation to 2007/08. The Revenue was accordingly entitled and indeed obliged to use Schedule 1A of TMA as the vehicle for its enquiry into the claim (section 42(11)(a)).
66. In this passage, Lord Hodge appears to make a distinction between information included in the tax return form, which is relevant for the purpose of establishing the amount on which the taxpayer is liable to tax for the relevant tax year, and other information which does not affect the amount chargeable in that tax year. Lord Hodge then went on to comment, albeit obiter, on the position that would have been reached if the taxpayer had calculated his own liability (incorrectly) taking account of the loss rather than rely upon the HMRC calculation. He says this (at Cotter [27]-[28]):
27. Matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return. In such circumstances the Revenue would have his assessment that, as a result of the claim, specific sums or no sums were due as the tax chargeable and payable for 2007/08. Such information and self-assessment would in my view fall within a "return" under section 9A of TMA as it would be the taxpayer's assessment of his liability in respect of the relevant tax year. The Revenue could not go behind the taxpayer's self-assessment without either amending the tax return (section 9ZB of TMA) or instituting an enquiry under section 9A of TMA.
28. It follows that a taxpayer may be able to delay the payment of tax by claims which turn out to be unfounded if he completes the assessment by calculating the tax which he is due to pay. Accordingly, the Revenue's interpretation of the expression "return" may not save it from tax avoidance schemes. But what persuades me that the Revenue is right in its interpretation of "return" is that income tax is an annual tax and that disputes about matters which are not relevant to a taxpayer's liability in a particular year should not postpone the finality of that year's assessment.
Derry CA
57. This part [[27]-[28]] of Lord Hodge's reasoning [in Derry SC] was obiter, but it followed from his careful analysis of the statutory scheme of schedule 1B and of the information which is properly to be regarded as "included in a return" for the purposes of the claims provisions in TMA 1970. There is a clear distinction between, on the one hand, the inclusion of information which is irrelevant in law to the taxpayer's liability for the year of assessment covered by the return, and, on the other hand, the taxpayer's self-assessment of the tax which he is due to pay. Irrelevant information of the former type, even if entered in the return at the implicit invitation of the Revenue, is not to be regarded as included in the return when it comes to enquiring into the taxpayer's liability for the relevant year. But a taxpayer's self-assessment is a different matter. Plainly, errors of many different kinds may be made in such an assessment, and they may include errors about the availability of a relief. If the Revenue is dissatisfied with the taxpayer's self-assessment, its remedy is either to amend the return or to open an enquiry into it under section 9A of TMA 1970. As pointed out at [20] above, such an enquiry may extend to anything contained (or required to be contained) in the return. The boxes on page TC 2 for "adjustments to tax due" must in my view be regarded as containing information required to be contained in the return, where the taxpayer elects to perform his own self-assessment, because such adjustments form an integral part of the calculation of the tax due to be paid by him for the year in accordance with sections 23 and 24 of ITA . It follows that the information contained in those boxes cannot be regarded as extraneous to the return. As I understand it, this is the essential point which Lord Hodge was making in Cotter at [27], and if I may respectfully say so, I agree with it.
[Emphasis added]
[Emphasis Added]
Derry SC
3…The second [question] relates to the effect of the inclusion of such a claim (even if erroneous) within Mr Derry's return for the previous year, in circumstances where the Revenue have failed to institute a timeous enquiry into the return under Taxes Management Act 1970 as amended ("TMA") section 9A ("the tax return issue")…The second raises issues as to the correct understanding and effect of Mr Derry's return, in the light of the law and practice relating to the self-assessment regime, having regard in particular to the guidance given by this court in Revenue and Customs Comrs v Cotter [2013] UKSC 69; [2013] 1 WLR 3514 ("Cotter").
68. I am not satisfied that these issues have been fully explored in argument before us, which has concentrated on the entitlement to relief rather than the means of enforcement. As has been seen, 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.
69. These are potentially important issues. Since we do not have to decide them in the context of the present case, I would prefer to leave them open for further consideration in an appropriate case with the benefit of full examination of the relevant law and practice.
82. The Court of Appeal reached the conclusion that the claim made by Mr Derry was relevant to the calculation of the tax due (see para 47 above) but they took no account of Mr Dean's evidence. However, if that evidence is accepted, it would seem to me provisionally to follow that that their conclusion was wrong and that the effect described by Lord Hodge in para 27 of Cotter (para 51 above) would apply only in this case to a paper return in which the taxpayer performed his calculation of tax due taking the claim into account. It follows that the Court of Appeal would be in error in applying Lord Hodge's reasoning to an online return (see per Henderson LJ cited at para 52 above).
83. If that is correct, then as I see it (as I have said) provisionally, unless the ratio in Cotter is to be in some way qualified for online tax return forms (which is not suggested), the relief claimed through Box 15 would not form part of the statutory "return" even if the true interpretation of Box 15 is that it is permitting an adjustment to the tax. I do not consider that a taxpayer would necessarily have been misled by this since he would see that his entry had no effect on the figure in Box 1. On that basis, HMRC would not have to open an enquiry into the return where the taxpayer had filled in Box 15 with an erroneous claim as opposed to an enquiry into the claim. I would provisionally so hold for the reasons that I have given.
[Emphasis Added]
HMRC's case in outline
(1) The share loss relief claim is not a claim which can affect the amount of tax chargeable and payable for the earlier year. The relevance of the earlier year is that the amount of the claim is calculated by nominally deducting the relief given from income in that earlier year, but it does not affect the tax chargeable and payable in that earlier year. According to HMRC v Cotter [2013] UKSC 69, as it does not affect the tax chargeable and payable in that earlier year, it is not a matter that may be included "in" the return for that year. The Appellant was obliged to include the claim in the tax return for the later year as it was a claim which related to the later year (para 2(3), Schedule 1B TMA 1970).
(2) The Appellant as a matter of fact made the claim on the face of his return for 05-06. Such a claim was not made "in" the Appellant's tax return for that year. By virtue of s.42(11) TMA, Schedule 1A applied to the claim.
(1) A decision of the Court of Appeal, such as Derry CA, on a point which has later been considered by the Supreme Court and expressly stated not to arise for decision is not binding according to the ordinary rules of precedent. In Al-Mehdawi v Secretary of State for the Home Department [1990] 1 AC 876 ("Al-Mehdawi) at 881F per Taylor LJ, the Court of Appeal decided that decisions of the Court of Appeal were not binding "where the House of Lords, in giving the final decision of a case, expressly indicates that on the true facts, the issue resolved by the Court of Appeal did not require to be decided."
(2) The present case should have been distinguished on its facts from Derry CA.
The Appellant's case in outline
Discussion and Analysis
Derry CA not binding: the ordinary rules of precedent
Distinguishing Derry CA
43. He also calculated his own tax and completed the tax calculation summary pages (pages TC1 and 2) in the 2009-10 return as follows. On page TCl (headed "self-assessment"), in Box 1 ("total tax … due before any payments on account"), the figure of £95,546.36 appeared automatically as a result of entries made elsewhere on the form. Page TC2 (headed "adjustments to tax due") stated –
"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 Box 15 ("Any 2010/11 repayment you are claiming now") Mr Derry inserted the figure of £165,800; and in Box 16 ("Any other information") the words:
"The reduction in tax payable in Box 15 of page TC2 relates to the loss carry back claim arising from the carry back of losses of GBP 414,500 as set out on page Ai3. 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%."
…
"free-standing credit"…
80. Again provisionally, there is no reason as it seems to me why the online form should not preclude an adjustment which would produce a result which was incompatible with the Taxes Acts. The objective in designing a tax return form, including an online form, is to help the taxpayer file a tax return which properly shows his liability, no more and no less. Indeed, Lord Hodge in Cotter specifically envisaged that HMRC could take steps to prevent a taxpayer making claims in the online form which he was not entitled to make: see para 24 set out by Lord Carnwath at para 51 above.
Remaking
THE CLOSURE NOTICE ISSUE
The FTT Decision
98. The notice itself meets the requirements of section 28A. A reasonable recipient of the notice in Mr Murphy's position could have no doubt that notice was being given of the closure of the enquiry into the return for the tax year 2006/7, that HMRC had concluded that the claim to set the capital loss that arose in that year against income in the tax year 2005/6 was not allowable, and that the consequence was that credit that had been claimed was being disallowed.
99. The question is whether the error in the notice (the incorrect figure of £48,244.79 for the credit) or the surrounding circumstances (the other closure notice and the errors in it) were sufficient to render the notice ineffective or limit its effect to the denial of the credit to which it referred. We have come to the conclusion that whether on the basis of the case law principles (e.g. in Mabbutt) or on the application of section 114 TMA the notice should be regarded as effective to deny the claim for relief. A reasonable taxpayer in Mr Murphy's position would have clearly understood that the intended effect of the notice was to disallow the entire claim. Mr Murphy had also received the notice under paragraph 7 Schedule 1A, which purported to deny the balance of the claim. Although there were two separate credits to Mr Murphy's self-assessment account (one in the amount of £48,244.79 and one in the amount of £134,895.64), the only figure that was included in Mr Murphy's return was the aggregate figure of £183,140.83. That credit was the credit generated by the claim to carry back the loss of £763,739 against income of the tax year 2005/6, all of which is referred to in the notice. The notice is clear that the entire loss is disallowed and the credit reduced to £0.
100. For these reasons, we conclude that the closure notice given under section 28A TMA in relation to the enquiry into Mr Murphy's return for the tax year 2006/7 was effective to disallow Mr Murphy's claim for share loss relief.
The Law
Legislation
"28A Completion of enquiry into personal or trustee return
(1) This section applies in relation to an enquiry under section 9A(1) of this Act.
...
(1B) The enquiry is completed when an officer of Revenue and Customs informs the taxpayer by notice (a "final closure notice")—
(a) in a case where no partial closure notice has been given, that the officer has completed his enquiries, or
(b) in a case where one or more partial closure notices have been given, that the officer has completed his remaining enquiries.
(2) A partial or final closure notice must state the officer's conclusions and –
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A partial or final closure notice takes effect when it is issued.
…"
"7 Completion of enquiry into claim
(1) An enquiry under paragraph 5 above is completed when an officer of the Board by notice (a "closure notice") informs the claimant that he has completed his enquiries and states his conclusions.
(2) In the case of a claim for discharge or repayment of tax, the closure notice must either–
(a) state that in the officer's opinion no amendment of the claim is required, or
(b) if in the officer's opinion the claim is insufficient or excessive, amend the claim so as to make good or eliminate the deficiency or excess.
...
(3) In the case of a claim that is not a claim for discharge or repayment of tax, the closure notice must either–
(a) allow the claim, or
(b) disallow the claim, wholly or to such extent as appears to the officer appropriate.
(4) A closure notice takes effect when it is issued…"
114.— Want of form or errors not to invalidate assessments, etc.
(1) An assessment or determination, warrant or other proceeding which purports to be made in pursuance of any provision of the Taxes Acts shall not be quashed, or deemed to be void or voidable, for want of form, or be affected by reason of a mistake, defect or omission therein, if the same is in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts, and if the person or property charged or intended to be charged or affected thereby is designated therein according to common intent and understanding.
(2) An assessment or determination shall not be impeached or affected—
(a) by reason of a mistake therein as to—
(i) the name or surname of a person liable, or
(ii) the description of any profits or property, or
(iii) the amount of the tax charged, or
(b) by reason of any variance between the notice and the assessment or determination.
Case law
20. It was common ground before the UT, and before us, that there was no prescribed form for an enquiry notice or a closure notice. To be effective, an enquiry notice or a closure notice must be understood by a reasonable person in the position of the intended recipient (the taxpayer in this case), having that person's knowledge of any relevant context, as giving notice of an intention to enquire into a claim or close an enquiry (as the case may be)
…
36. The UT said [2016] STC 656, para 103, that it will always be a question of fact whether HMRC have "enquired into" a claim. I do not consider that to be correct. There can be no enquiry into a claim without HMRC giving the notice required by paragraph 5. Whether the letter or other communication in question gave the necessary notice depends on whether it would be read by a reasonable recipient in the position of the taxpayer as doing so. The same is true of any document said to be a closure notice. These are questions of law.
45…The question whether the disputed notice sufficiently makes a taxpayer aware of HMRC's intention to open an enquiry into a particular tax return is an objective one. The test is whether a reasonable taxpayer, in the circumstances of the taxpayer in question, would have understood that HMRC intended to open an enquiry into a particular tax return. It is not a matter of the parties' intentions or actual knowledge. We consider that this objective test applies as much to the question whether certain documents could be said to form part of the notice as it does to the question whether the notice itself sufficiently informed the taxpayer of the intended enquiry to be a valid section 9A TMA notice…
…
79. In the light of our conclusion that the Mabbutt letter (either alone or taken together with the Dickinsons letter) constituted a valid section 9A notice it is, strictly, unnecessary for us to consider whether any alleged defect in the notice can be cured by section 114 TMA. Nonetheless, because the point was fully argued before us, we shall briefly give our views on this third ground of appeal. We necessarily assume in what follows that we are wrong in our conclusion on the second ground. It is convenient to deal with the cross-appeal at the same time.
…
89. In our view, if the mistaken reference to the "year ended 6 April 2009" in the Mabbutt letter vitiated the letter for the purposes of section 9A, the defect could be cured under section 114(1) TMA.
Outline of the Appellant's case
Discussion and Analysis
The Closure Notice under s.28A TMA in respect of the 06-07 return
89. First, we have been referred to case law principles governing the effectiveness of notices. Mr Grierson referred us to the Court of Appeal decision in Raftopoulou, Mr Hall to the Upper Tribunal decision in Mabbutt. In the present context, we do not find any material difference in the principles espoused in those cases. The relevant question for us is whether a reasonable recipient in the position of the taxpayer as giving the necessary notice (Raftopoulou [36], Mabbutt [79]). The test is clearly an objective one and, as the case law demonstrates, must be applied by reference to the context in which the taxpayer received the disputed notice.
89. In our view, if the mistaken reference to the "year ended 6 April 2009" in the Mabbutt letter vitiated the letter for the purposes of section 9A, the defect could be cured under section 114(1) TMA.
Closure notice in respect of Schedule 1A enquiry into the standalone claim made outside the 05-06 return in respect of share loss relief in 06-07
(1) Mr Murphy was not entitled to claim share loss relief "in" his return for the tax year 2005/6;…
(3) Mr Murphy was required to include information concerning the loss and the claim in his tax return for the tax year 2006/7 and HMRC was entitled to enquire into that loss and the related claim under section 9A TMA;
(4) the closure notice given under section 28A TMA in relation to the enquiry into Mr Murphy's return for the tax year 2006/7 was effective to disallow Mr Murphy's claim for share loss relief.
(2): however, Mr Murphy made a claim for share loss relief "in" his return for the tax year 2005/6; HMRC's enquiry into the claim under paragraph 5 Schedule 1A TMA was not valid and the relevant closure notice under paragraph 7 Schedule 1A TMA was also not valid
…
Check of your claim for the year ended 5 April 2007
I have now completed my check of your claim for the year shown above[4].
My conclusion
-The total capital loss claimed in the sum of £763,740.00 is not allowable.
…
The claim to set £48,244.79 of that capital loss against 2005-2006 income, is not allowable.
…
- My check has shown that the actual credit due was £0.00
…
My reasoning
You disclosed the use of the Excalibur arrangements along with the DoTAS number 61650101 on your tax return of 2006-07…
…
[Emphasis added]
a) The Appellant made his claim for share loss relief on the face of his 05-06 return even if it was in respect of the tax year 06-07 and he referred to this claim in his 06-07 return;
b) He had received two notices opening enquiries:
i) the first dated 28 February 2007 specifying that it related to the share loss relief claim relating to the 05-06 return under paragraph 5, Schedule 1A TMA; and
ii) the second dated 20 May 2008 specifying that it related to the return for the 06-07 tax year (with a covering letter explaining the enquiry was under s.9A TMA);
c) He had received a second closure notice on the same date, 25 July 2019, which specified that it was issued under s.28A TMA;
d) His authorised and instructed agent had received a covering letter of the same date which stated that "Please find enclosed S9A & Sch1A Closure Notice issued to your client today in respect of the Excalibur scheme".
i) the first enquiry had been opened on 28 February 2007 under Schedule 1A TMA in relation to the Appellant's claim for share loss relief in respect of 06-07 made on the 05-06 return and closed in the letter dated 25 July 2019 as set out above (the Schedule 1A TMA closure notice); and
ii) the second enquiry opened on 20 May 2008 under s.9A into his tax return for 06-07 and closed by the second letter dated 25 July 2019 which was a closure notice under s.28A TMA for the 06-07 return and specified as much.
a) the two contrasting enquiry notices received specifically referring to the different years of the tax returns and the differing types of enquiries under different provisions of the TMA as follows (differences underlined):
i) The letter dated 28 February 2007 states:
'Enquiry under Paragraph 5 Schedule 1A [TMA] - 2006-07
Thank you for your Tax Return for the year ended 5 April 2006
I am writing to tell you that I intend enquiring into your Return. My enquiry will cover your claim under section 574 [ICTA]].
ii) The letter dated 20 May 2008 states:
'Enquiry into your 2006-07 Self Assessment tax return.
Thank you for your Tax Return for the year ended 5 April 2007
I am writing to tell you that I intend enquiring into your Return. My enquiry is into the amount of your self assessment.
(This enquiry was accompanied by a letter of the same date, 20 May 2008 to the Appellant's then agent which stated 'I enclose a copy of the notice to enquire issued to Mr Murphy today. The enquiry is being conducted under S9A [TMA]);
b) the accompanying s.28A TMA closure notice of the same date, 25 July 2019, referred to the enquiry into the 06-07 return; and
c) the accompanying covering letter of the same date sent to its agent, Dains LLP, stated: 'Please find enclosed S9A & Sch1A Closure Notice issued to your client today in respect of the Excalibur scheme';
d) the closure notice letter itself referred to the 'check of your claim' and 'The claim ...of that capital loss against 2005-06 income.'
DISPOSITION
(1) Mr Murphy was not entitled to claim share loss relief "in" his return for the tax year 2005/6;
..;
(3) Mr Murphy was required to include information concerning the loss and the claim in his tax return for the tax year 2006/7 and HMRC was entitled to enquire into that loss and the related claim under section 9A TMA;
(4) the closure notice given under section 28A TMA in relation to the enquiry into Mr Murphy's return for the tax year 2006/7 was effective to disallow Mr Murphy's claim for share loss relief.
Annex A
S. 574 ICTA — Relief for individuals. (1) Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares in any year of assessment, … [see Cont. below] … (3) For the purposes of this section— (a) an individual subscribes for shares if they are issued to him by the company in consideration of money or money's worth; and (b) an individual shall be treated as having subscribed for shares if his spouse or civil partner did so and transferred them to him by a transaction inter vivos." [(1) Cont.] he may, by notice given within twelve months from the 31st January next following that year, make a claim for relief from income tax on— (a) so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or (b) so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income; but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above. Where such relief is given in respect of the loss or any part of it, no deduction shall be made in respect of the loss or (as the case may be) that part under the 1992 Act. (2)Any relief claimed under paragraph (a) of subsection (1) above in respect of any income shall be given in priority to any relief claimed in respect of that income under paragraph (b) of that subsection; and any relief claimed under either paragraph in respect of any income shall be given in priority to any relief claimed in respect of that income under section 380 or 381. |
SS. 131-133 ITA Section 131 Share Loss Relief Section 131(1) provides that 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" under (2) are defined to include shares in a "qualifying trading company", the conditions for which are set out in sections 134 to 143. "Disposal" is defined under (3) "Allowable loss" is limited by the conditions in (4) Section 132 provides: 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 ITA (headed "How the relief works") provided: "133 How relief works (1)This subsection explains how the deductions are to be made. The amount of the loss to be deducted at any step is limited in accordance with [F1sections 24A and 25(4) and (5)] . Step 1 Deduct the loss in calculating the individual's net income for the specified tax year. Step 2 This step applies only if the claim is made in relation to both tax years. Deduct the part of the loss not deducted at Step 1 in calculating the individual's net income for the other tax year. (2)Subsection (1) is subject to sections 136(5) and 147 (which set limits on the amounts of share loss relief that may be obtained in particular cases). (3)If an individual— (a)makes a claim for share loss relief against income ("the first claim") in relation to the year of the loss, and (b)makes a separate claim for share loss relief against income in respect of a loss made in the following tax year in relation to the same tax year as the first claim, priority is to be given to making deductions under the first claim. (4)Any share loss relief claimed in respect of any income has priority over any relief claimed in respect of that income under section 64 (deduction of losses from general income) or 72 (early trade losses relief). (5)A claim for share loss relief does not affect any claim for a deduction under TCGA 1992 for so much of the allowable loss as is not deducted under subsection (1)." |
Note 1 . The bundle included several versions of Mr Murphy’s return for the tax year 2005/6 and several versions of his return for the tax year [2006/7]. We have concluded (and find as a fact) that the correct returns are the versions filed on-line on 13 October 2006 and 31 January 2008 respectively as the figures used in those versions and the commentary in the white spaces are most consistent with the correspondence between the parties. [Back] Note 2 It might also provide a potential issue if trade and employment loss relief could only be claimed in the later year because Schedule 1B applied, but share loss relief could be claimed in respect of either year because Schedule 1B did not apply. This would then mean that the priority of share loss relief over other reliefs will not be effective in respect of the earlier year, because they are not claimable, but it will be for the later year. We accept that this potential issue also arises as a result of Derry SC because s.133(4) ITA provides for the priority of share relief over the trade loss reliefs in ss.64 and 72 ITA 2007. The latter reliefs would, for years since 2007, only be claimable in respect of the later year while share loss relief would be claimable in respect of either year. [Back] Note 3 It is also worth observing that paragraphs 2(4)-(7), Schedule 1B TMA arguably provide more detail than s.574(1) ICTA on how to calculate the amount of claim and give effect to it (they are closer to s.133(1)-(3) ITA) so it cannot even be said that s.574 ICTA provides a more complete code than paragraph 2, Schedule 1B.
[Back] Note 4 The wording is to be contrasted with the letter of the same date which was the closure notice under s.28A TMA. The relevant differences are underlined:
“…
Information about our check of your Self-Assessment tax return for the year ended 5 April 2007
I have now completed my s.9A check of your Self-Assessment tax return for the year shown above. This letter is a closure notice issued under section 28A(1) & (2) Taxes Management Act 1970.
My conclusion
-The total capital loss claimed in the sum of £763,740.00 is not allowable.
…
The claim to set £763,739.00 of that capital loss against 2005-2006 income, is not allowable.
…
-My check has shown that the actual credit due was £0.00
…
My reasoning
You disclosed the use of the Excalibur arrangements along with the DoTAS number 61650101 on your tax return of 2006-07…”
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