Supreme Court upholds HMRC refusal to reduce tax payable pending appeal

The Supreme Court ruling in Cotter v HMRC quashes attempts to gain an advantage by postponing payment of an earlier year’s tax by reference to a claim for loss relief.

The case concerned a claim for loss relief arising from a tax avoidance scheme to create an employment related loss in 2008/9 which could be related back to 2007/8. Whilst the 2007/8 tax liability was not actually affected, as it is treated as a claim for/ relieved in the later year (ie 2008/9). The claim was made in a box in the 2007/8 return ‘relief now for 2008/9 trading or certain capital losses’ along with additional disclosure in the white space. The taxpayer claimed that HMRC could not enforce collection of the tax due until the enquiry into the claim had been completed, enabling the taxpayer to keep his money for longer, while only paying the modest official interest on tax paid late. The case turned on whether the claim was included in the ‘return’ or not. 

Where a taxpayer self-assesses, HMRC can only collect the tax shown on the self –assessment, and the taxpayer may reduce the tax payable by amending the return. In such a case, HMRC cannot alter the tax payable until after any s 9A enquiry has been determined. On closure of the enquiry, additional tax and interest may of course become due, but in the meantime, the taxpayer has enjoyed a cash flow benefit. In contrast, if a paper return is made (as in this case) and HMRC prepare the assessment, the claim is not made “in the return”. Instead it is a free-standing relief claim which HMRC do not have to include in the self-assessment and may enquire into instead under TMA 1970 Sch. 1A. The distinction is important because in this situation HMRC do not give effect to the claim during the period of enquiry.

The Court ruled that the claim made in the relevant box noted above was not itself a claim made in a ‘return’ which would then have been subject to enquiry under TMA 1970 s 9A. Instead, it was governed by Sch 1A. However, the court noted that if a claim also “feeds through” to the calculation of tax included in the return and self assessment, that has the effect of requiring it to be treated as a claim made in a return which means HMRC may enquire under s 9A.

Cotter v HMRC

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