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8 Nov 2013 05:01pm

Supreme Court rejects Cotter

HMRC has won a significant victory in the Supreme Court which could see it claw back around £0.5bn in avoided tax

The unanimous ruling means that HMRC is entitled to enforce payment of a tax debt and to withhold tax relief arising from a tax avoidance scheme while it is investigating the scheme.

In Cotter v Commissioners for HMRC, Maurice Cotter filed a tax return for the 2007/2008 year of assessment which made no claim for loss relief in the return. He let HMRC calculate his tax for the year which amounted to income and capital gains tax of £211,927.77.

In January 2009, his accountants wrote to HMRC enclosing a “provisional 2007/08 loss relief claim” and amendments to his return which implied that he had suffered an employment related loss of £710,000 in the tax year 2008/09 for which he claimed relief in 2007/08 under the Income Tax Act 2007.

Cotter admitted that his interpretation of the law might lead to an HMRC enquiry. The accountants sent a copy of the relief claim to an HMRC recovery office, stating that “As a result of this claim, no further 2007/08 taxes will be payable by Mr Cotter”.

HMRC amended the tax return, opened an enquiry and issued a fresh tax calculation of £211,927.77. In June 2009, HMRC issued proceedings in the County Court seeking recovery of £203,243 which was the income tax and CGT for 2007/08 and the first payment of account for 2008/09.

Cotter argued in reply that he was entitled to use his loss claim to reduce to nil the tax otherwise payable for 2007/08 and that the first tier tribunal had exclusive jurisdiction to determine whether this was the case.

The High Court decided that it did have jurisdiction and it found that Cotter was not entitled to rely on his claim for loss relief as a defence to HMRC’s claim. Cotter’s appeal was upheld by the Court of Appeal and eventually made its way to the Supreme Court.

The judges said that the central question was whether HMRC was right to have carried out its enquiry under Sch 1A to the Taxes Management Act 1970 which allowed for postponement of the relief until the end of the enquiry, or whether it should have been carried out under s9A which would have allowed the claim in the meantime.

In their judgment, where a taxpayer makes a claim for relief in a tax return form which is relevant to that particular year of assessment, or where he chooses to calculate the amount payable and allows for the relief in his calculation, HMRC may correct the tax return if it disagrees with the relief claim.

If the taxpayer then rejects the amendment, HMRC can launch a s9A enquiry. When the enquiry is completed, the taxpayer will have a right of appeal to the tribunal. In the meantime, effect is given to the loss relief claim.

If, however, the taxpayer chooses to let HMRC calculate his tax but includes a claim for relief in a tax return form which is clearly not relevant to the calculation of tax for that particular year of assessment, HMRC may ignore the claim in its calculation.

On those grounds, having concluded correctly that the claim in respect of losses incurred in 2008/09 did not alter the tax chargeable or payable in relation to 2007/08, HMRC was entitled – indeed obliged – to carry out the enquiry under Sch 1A.

The County Court and the High Court had jurisdiction in this case as it was not an appeal against an assessment to tax in respect of a particular year of assessment (which would be for the tribunal to decide).

Rather it was a question of whether a claim for relief for losses incurred in 2008/09, which the taxpayer had made in his tax return form for 2007/08, constituted a defence to the Revenue’s claim for immediate payment of the tax it had calculated as payable in respect of 2007/08.    

HMRC welcomed the decision as a significant deterrent against the “cash flow” advantages which might otherwise be open to users of personal tax avoidance schemes.

It believes that around 200 users of the Cotter scheme will be caught by the Supreme Court decision, leading to “a saving of £60m, rising to £500m for similar cases”.

Julia Irvine

 

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