Writing for Tax Journal, David Whiscombe examines the case of Cotter v HMRC and tackles the question: When is a return not a return?
What is a tax return?
One cannot imagine a question much more
fundamental to the self-assessment regime,
so it is surprising that it took the Supreme
Court to answer it, in Cotter v HMRC [2013]
UKSC 69, and more surprising that the
answer remains ‘it depends’.
What was the context?
Mr Cotter claimed, through participation
in a tax avoidance scheme, to have sustained
a substantial loss for income tax purposes
in 2008/09, which he claimed to ‘carry back’
against income of 2007/08. !e question
before the court was not whether the
scheme worked: rather, it had to consider
the machinery for claiming the relief and,
speci”cally, whether tax had to be paid
pending resolution of HMRC’s enquiries
into the validity of the claim. Mr Cotter’s
is a test case; but the decision is of wide
application in relation to any claim which
involves carrying back a relief to an earlier
tax year.
Why did it matter?
If a claim is made by being included in a
tax return, it may be challenged by HMRC
only via an enquiry into the return under
TMA 1970 s 9A. At the closure of the
enquiry, further tax (together with interest)
may become payable, but during the course
of the enquiry the amount of tax payable
generally remains that disclosed by the self-assessment.
By contrast, if a claim is made
otherwise than by being included in a tax
return (a ‘free-standing claim’), any enquiry
into it is governed by TMA 1970 Sch 1A and
HMRC is empowered, on enquiring into the
claim, to decline to give it e$ect until the
enquiry is concluded.
What were the competing
arguments?
It was accepted by both sides that the claim
was governed by TMA 1970 Sch 1B para 2.
!is provides that where a claim involves a
‘carry-back’ of a loss or expense, the claim,
albeit quanti”ed by reference to the earlier
year, does not a$ect the tax payable for the
earlier year and is to be treated as a claim
for, and given e$ect in relation to, the later
year. It was thus agreed that, on any analysis,
the claim did not a$ect the tax payable for
2007/08.
HMRC therefore concluded that the claim,
being irrelevant to the tax liability for 2007/08,
could not be regarded as included in the tax
return for that year, and was therefore a ‘freestanding’
claim to which Sch 1A applied.
The taxpayer’s contrary argument was, in
the words of the Supreme Court, ‘attractive
in its simplicity’. Schedule 1A applied only
to ‘claims made otherwise than by being
included in a return’; there was a box on the
2007/08 tax return headed ‘relief now for
2008/09 trading or certain capital losses’, and
the loss was in fact entered in that box. !e
claim was, therefore, as a matter of simple
fact ‘included in the 2007/08 return’, and as a
result Sch 1A could not apply and any enquiry
could be made only under s 9A.
What was decided?
Effectively, the Supreme Court decided that
a carried-back loss claim is or is not part of
a taxpayer’s return, according to whether
the tax return does or does not include the
taxpayer’s own self-assessment of tax payable.
If the return does include such a selfassessment
which takes account of the claim
the self-assessment (and therefore the claim)
is part of the return; it can be challenged by
HMRC only by amending the return under
s 9B (which amendment could of course be
rejected by the taxpayer) or by enquiring into
it under s 9A. But if a taxpayer chooses to let
HMRC calculate the tax due, HMRC may
ignore any claim which (although physically
part of the return) is clearly not relevant to
the calculation of tax for the year and treat
it as a free-standing claim susceptible to
enquiry under Sch 1A.
What are the implications?
At first glance, the decision allows a
determined tax avoider to delay payment of
tax in carry-back cases by self-assessing his
liability so as to put himself outside Sch 1A,
and then sitting back while the substantive
test case trundles through the courts. But
further thought shows that this is not so.
!e carry-back claim will certainly not
a$ect the liability for the earlier year: any
self-assessment which is made on the basis
that it does will be manifestly wrong (and
even potentially negligent or worse). Any
appeal against a closure notice for the earlier
year would be doomed to certain failure,
regardless of the substantive merits of the
underlying loss claim. And whether, having
included the carry-back claim in the return
for the earlier year and (inevitably) lost
before the tribunal, the taxpayer could then
have a second bite of the cherry by making
an identical free-standing claim for the same
amount, must be open to some doubt. So the
Supreme Court decision, which at “rst looks
like a ‘Get out of jail free’ card may actually
turn out to be closer to ‘Do not pass go’.
Where now?
A solution is hinted at in the closing
paragraphs of the Supreme Court decision.
!ere, it is suggested that it would be open
to HMRC to amend the design of the
return form so as to make it clear which
parts of it request information relevant to
the calculation of tax for the relevant year
(and are therefore part of the return form
proper) and which parts merely provide for
the intimation of ‘free-standing’ claims. For
many reasons, the sooner HMRC takes the
hint, the better.
This article is also available as a pdf and via the Tax Journal website.