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|Neutral Citation Number:  EWCA Civ 435
|Case No: A3/2015/3856(Y)
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE MORGAN
 UKUT 0416 (TCC)
|Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LONGMORE
LORD JUSTICE McFARLANE
LORD JUSTICE HENDERSON
| THE QUEEN (ON THE APPLICATION OF JAMES DERRY)
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
Ms Hui Ling McCarthy (instructed by GRM Law) for the Appellant
Ms Aparna Nathan (instructed by the General Counsel and Solicitor for HMRC) for the Respondents
Hearing date: 4 April 2017
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Henderson:
- This is an appeal by the taxpayer, Mr Derry, from the decision and order of the Upper Tribunal (Tax and Chancery Chamber) (Morgan J), dismissing Mr Derry's claim for judicial review of a demand for tax in the sum of £95,546.30 together with interest of £14,096.35 made on him by the respondents ("HMRC" or the "Revenue") on 6 June 2014 in respect of the tax year ended 5 April 2010 ("2009/10").
- The decision of the Upper Tribunal ("the Decision") was released on 28 July 2015, following a three day hearing in London between 30 March and 1 April 2015: see  UKUT 0416 (TCC), reported at  STC 334 as R (Derry) v HMRC. The order giving effect to the Decision was made on 22 October 2015.
- The appeal raises technical questions of some difficulty about the correct procedure for making a claim, as Mr Derry purported to do in his self-assessment tax return for 2009/10, to carry back and set off against his taxable income for that year share loss relief in the amount of £165,800, which arose from a disposal of shares made by him in the following tax year ending 5 April 2011 ("2010/11").
- The legislation governing share loss relief is contained in Chapter 6 of Part 4 of the Income Tax Act 2007 ("ITA 2007", sections 131 to 151). Under section 131(1), 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", broadly speaking, are shares which either qualify for Enterprise Investment Scheme ("EIS") relief under Part 5 of ITA 2007, or are shares in a "qualifying trading company" for which the individual has subscribed. As one would expect, a "qualifying trading company" has to satisfy a number of conditions: these are set out in sections 134 to 143. The disposal of the shares must also be of a kind specified in section 131(3), which includes disposals by way of a bargain at arm's length.
- Section 132 provides as follows:
"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 then explains how the relief works. For present purposes, it is only necessary to note Step 1, which says:
"Deduct the loss in calculating the individual's net income for the specified tax year."
The "specified tax year" will be the year specified under section 132(2) or (3).
- In his statement of facts in support of his application for judicial review, Mr Derry says that on 22 March 2010 he bought 500,000 shares at a cost of £500,000 in a company called "Media Pro Four Limited" which was a qualifying trading company for the purposes of section 131 of ITA 2007. On 4 November 2010, he sold the shares to "Island House Private Charitable Trust" for £85,500, resulting in a capital loss to him of £414,500. This loss was therefore incurred in 2010/11. Accordingly, says Mr Derry, he was entitled to claim share loss relief under Chapter 6 of Part 4 of ITA 2007, and to carry back the relief for one year to 2009/10, thereby reducing his taxable income for that year by £414,500.
- On 24 January 2011, Mr Derry through his accountants submitted his tax return for 2009/10 ("the 2010 Return") on line. In the pages for additional information, he filled in boxes 3 and 4 on page Ai 3 which are headed "Trading losses". In box 3, he entered £414,500 as the amount for which he was claiming relief, and in box 4 he specified 2009/10 as the tax year for which he was claiming the relief. In box 19, on the following page, which contained a blank space for additional information, he said:
"Box 3 of page Ai 3 shows capital losses realised on disposal of subscriber shares in an unlisted trading company in year ended 5 April 2011. These losses have been carried back to year ended 5 April 2010 and relief claimed under s 131, s 132 ITA 2007."
- Mr Derry also calculated his own tax and completed pages TC 1 and 2 on the return. Box 1, which was filled in automatically as a result of entries made elsewhere in the return, showed the amount of tax due before any payments on account as £95,546.36. On page TC 2, there was a section headed "Adjustments to tax due" with the rubric:
"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 this section, Mr Derry made a manual entry of £165,800 in box 15, headed "Any 2010/11 repayment you are claiming now". In the blank box 16, headed "Any other information", he said:
"The reduction in tax payable in box 15 of page TC 2 relates to the loss carry back claim arising from the carry back of losses of GBP 414,500 as set out on page Ai 3. 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 per cent."
- Since Mr Derry had already suffered tax deducted at source of £102,233.64 on his income for 2009/10 (which mainly comprised employment income of £497,120), the effect of his claim for loss relief carried back from 2010/11 was to generate a significant repayment of tax due to him. This was quantified in his personal tax computation generated by the 2010 Return as a refund due to him of £70,253.64.
- On 18 October 2011, HMRC repaid a sum of £70,487.90 to Mr Derry. It is unclear why HMRC refunded this slightly higher amount, but the payment was clearly intended to include the amount claimed by Mr Derry, albeit HMRC now say that the payment was made in error because full checks had yet to be completed in relation to the loss relief claim.
- On 16 December 2011, Mr Derry through his accountants submitted his online tax return for 2010/11. On the pages relating to capital gains, he entered the figure of £414,500 in a box headed "Losses used against income – amount claimed against 2009-10 income", and in the blank information box on page CG 2 he gave the following explanation:
"I have incurred a capital gains loss of GBP 414,500 on the sale of unlisted shares in 2010/11 and claim the loss under s132(B) [sic], ITA 2007 against my income in 2009/10. This loss relief has already been claimed and relief obtained in 2009/10."
- On 4 January 2012, HMRC opened an enquiry into Mr Derry's claim for share loss relief for 2009/10. This enquiry was opened on the express footing that the claim was one made "outside of a return" by virtue of paragraph 2(3) of schedule 1B to the Taxes Management Act 1970 ("TMA 1970"). This enquiry remains open.
- On 16 February 2012, HMRC opened a further enquiry into Mr Derry's tax return for 2010/11 under section 9A of TMA 1970. In his covering letter, the Inspector of Taxes said that this enquiry would run in tandem with the enquiry into the loss relief claim, and that in order to be satisfied about Mr Derry's entitlement to the relief claimed, it would be necessary for HMRC to look at all of the arrangements surrounding the claim. A particular area of concern was "that the claimed losses may have arisen from a marketed scheme or arrangements with purpose of avoiding tax". This enquiry, too, remains open.
- Importantly, however, no enquiry was ever opened under section 9A of TMA 1970 into the 2010 Return, and HMRC would now be out of time to do so.
- Mr Derry's claim for judicial review was issued in response to an amended demand made by HMRC on 6 June 2014 for payment of tax which it was alleged he had self-assessed but not paid. The demand was made on the footing that Mr Derry was not entitled to claim the disputed share loss relief as a deduction from his taxable income for 2009/10. The Upper Tribunal thought it was inappropriate to challenge the demand by way of judicial review, and that Mr Derry should have waited to be sued in the County Court or the High Court and then defended the claim on the footing that he was not liable for the amount claimed: see the Decision at  to . Nevertheless, the Tribunal did not dismiss the application on that ground, and dealt with all the points which the parties argued before it. No procedural point has been taken on the appeal to this court, and I therefore express no view on whether the Upper Tribunal was right to say that this was not an appropriate case for judicial review.
The procedure relating to the making and investigation of claims under TMA 1970
- The procedure relating to the making by taxpayers, and the investigation by HMRC, of claims under TMA 1970 has become rather complicated under the modern regime of self-assessment as it applies to individual taxpayers.
- Section 8(1) of TMA 1970 empowers an officer of HMRC to give a notice requiring a person who is chargeable to income tax and capital gains tax for a year of assessment:
"(a) to make and deliver to the officer … 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."
By virtue of subsection (1AA), 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 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" together with certain tax credits.
- Section 9(1) provides that, subject to immaterial exceptions, every return under section 8:
"… shall include a self-assessment, that is to say –
(a) an assessment of the amount in which, on the basis of the information contained in the return and taking into account any relief or allowance a claim for which is included in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment; and
(b) an assessment of the amount payable by him by way of income tax …"
- Section 9A(1) empowers an officer of HMRC to enquire into a return under section 8 if he gives notice of his intention to do so ("notice of enquiry") to the taxpayer whose return it is within the time allowed. The time allowed is 12 months from the date of delivery, for returns delivered on or before the filing date, and up to 15 months for returns delivered after the filing date. By virtue of subsection (4)(a), an enquiry may extend to anything contained (or required to be contained) in the return, "including any claim … included in the return".
- The basic provision relating to the making of claims is section 42 of TMA 1970. As amended and in force in 2009/10, it provided as follows:
"(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.
(2) … where notice has been given under section 8 … 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 consequent time, be made by being so included.
(5) The references in this section to a claim being included in a return include references to a claim being so included by virtue of an amendment of the return;
(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 … 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.
- The effect of section 42(2) is that where a claim could be made by being included in a tax return under section 8, it must be so made. It is common ground that a claim for share loss relief is a claim of this nature. Accordingly, in the absence of any provision to the contrary, a claim for share loss relief could only have been made by Mr Derry by including it in his tax return, and the only way in which HMRC could have investigated the claim would have been by opening an enquiry into the return under section 9A(1) and (4)(a).
- Schedule 1A deals with claims which are not included in a return. By virtue of paragraph 2(3), such a claim "shall be made in such form as the Board may determine". Paragraph 5 gives power to enquire into the claim within a specified period. Paragraph 4(1) says that as soon as practicable after a claim is made, HMRC shall give effect to it "by discharge or repayment of tax". This obligation is subject, however, to paragraph 4(3), which applies where an enquiry has been opened into the claim. In those circumstances, paragraph 4(1) does not apply until the enquiry is completed, although there is power to give effect to all or part of the claim before then on a provisional basis.
- Schedule 1B is headed "Claims for relief involving two or more years". It was inserted by the Finance Act 1996 section 128(2) and schedule 17 with effect in relation to claims made (or deemed to be made) from the tax year 1996/1997.
- Paragraph 2 of schedule 1B deals with loss relief, and provides materially 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 otherwise.
- If paragraph 2 of schedule 1B is read in isolation, its terms are clearly apt to apply to a claim for share loss relief made under section 131 of ITA 2007 if the taxpayer making the claim specifies (as Mr Derry did) the previous tax year as the year for which the relief is claimed. Those are precisely the circumstances envisaged in paragraph 2(1). If that is right, two important consequences follow. First, section 42(2) of TMA 1970 is disapplied by paragraph 2(2). This means that the claim no longer has to be made in the taxpayer's tax return under section 8, and the provisions of schedule 1A (which apply with regard to claims made otherwise than by being included in a return) potentially come into play. Secondly, by virtue of sub-paragraph (3), the claim "shall relate to the later year", that is to say the year in which the relevant loss was incurred, not the year in relation to which the relief is to be given. The machinery for giving effect to the claim in the later year is then set out in sub-paragraphs (4) and (6). In short, the taxpayer is given credit in the later year for the difference between the amount in which he is (actually) chargeable to tax for the earlier year, and the amount in which he would (notionally) be chargeable to tax in that year on the assumption that effect could be given to the claim in that year.
- The way in which these provisions operate was explained by Lord Hodge JSC (with whom the other members of the court agreed) in Revenue and Customs Commissioners v Cotter  UKSC 69,  1 WLR 3514, at . The context in which the question arose was a claim by the taxpayer, Mr Cotter, to carry back to 2007/08 a different form of loss relief which he claimed to have sustained in 2008/09, namely employment loss relief under Chapter 5 of Part 4 of ITA 2007 (sections 128 to 130). Mr Cotter had entered into a tax avoidance scheme which was designed to generate an employment-related loss within Chapter 5, and the purpose of carrying it back was to eliminate his liability to income tax for 2007/08. The provisions enabling the loss to be carried back were materially identical to those relating to share loss relief under Chapter 6. There is, however, one potentially crucial difference between the two chapters. In relation to employment loss relief (Chapter 5), section 128(7) expressly states:
"This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years)."
By contrast, there is no equivalent express provision in Chapter 6 (share loss relief). Because of the express provision in section 128(7), it was common ground in Cotter that schedule 1B applied to Mr Cotter's claim for relief: see the judgment of Lord Hodge at .
- Lord Hodge then set out the provisions of paragraph 2 of schedule 1B, and continued:
"16. In my view it is clear, in particular from paragraphs 2(3)(6), that the scheme in Schedule 1B allows a taxpayer, who has suffered a loss in a later year ("year 2") and seeks to attribute the loss to an earlier year of assessment ("year 1"), to obtain his relief by reducing his liability to pay tax in respect of year 2 or by obtaining a repayment of tax in year 2. It does not countenance by virtue of the relief any alteration of the tax chargeable and payable in respect of year 1. On the contrary, the sum for which the taxpayer receives relief in year 2 is the difference between what was chargeable in year 1 and what would have been chargeable "on the assumption that effect could be, and were, given to the claim in relation to that year": paragraph 2(4). In other words, the relief is quantified on the basis that the tax liability in year 1 has already been assessed.
17. Income tax is an annual tax, and liability to such tax is calculated in relation to a particular tax year: sections 4 and 23 of the 2007 Act. Mr Gordon, who appeared for Mr Cotter, did not argue in this court that he was entitled to deduct the relief against income and gains in 2007/2008. He accepted that paragraph 2(6) of Schedule 1B to the 1970 Act provides that effect is to be given to the claim in year 2. He was correct to make that concession. Accordingly, the claim did not affect the amount of tax which was chargeable or payable in relation to 2007/2008. There was therefore no issue between the parties as to the correct assessment to tax in that year."
When is a claim "included in a return" for the purposes of section 42 of TMA 1970?
- This question is of central importance, because the answer to it determines whether an enquiry by HMRC into the claim has to be made by opening an enquiry into the return under section 9A (if it is so included), or by opening an enquiry into the claim itself under paragraph 5 of schedule 1A (if it is not). Common sense might be thought to suggest that a claim is "included in a return" within the meaning of section 42(11)(a) if it is to be found in the relevant tax return, and particularly so if it is made by filling in boxes which HMRC have prescribed as part of the return. In this area, however, common sense is not a reliable guide. As the Supreme Court explained in Cotter at  to , the attractive simplicity of treating "everything in the tax return form as the tax return" for the purposes of section 42(11) would (as Ms Simler QC for the Revenue submitted) expose it "to irrelevant claims made in the tax return form which have no merit and which serve only to postpone the payment of tax which is payable": see . Accordingly, the Revenue's argument was that a claim was "included in a return" for the purposes of sections 8(1), 9, 9A and 42 of TMA 1970 "only if it affected or as Ms Simler put it, could "feed into", the calculation of tax payable in respect of the particular year of assessment": see .
- After setting out the relevant chronology at , Lord Hodge continued at :
"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 the 1970 Act … 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)(3A) of the 1970 Act …
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 the 1970 Act. But, in my view, in the context of sections 8(1), 9, 9A and 42(11)(a) of the 1970 Act, 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) [of] the 1970 Act, as substituted firstly by section 178(1) of the Finance Act 1994 and then further amended by section 121(1) of the Finance Act 1996 and by section 114 of and Schedule 27 to the Finance Act 2007.
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 the 2007 Act in respect of losses incurred in 2008/2009 did not alter the tax chargeable or payable in relation to 2007/2008. The revenue was accordingly entitled and indeed obliged to use Schedule 1A of the 1970 Act as the vehicle for its enquiry into the claim: section 42(11)(a)."
- The reasoning in the passage which I have quoted is in my judgment binding on this court in any case where (a) the claim is for employment loss relief under section 128 of ITA 2007, (b) the claim is for the loss to be deducted in calculating the taxpayer's net income for the previous tax year, pursuant to section 128(2)(b), and (c) the taxpayer has left it to HMRC to calculate the tax which he is due to pay (even though the calculation is made on behalf of the taxpayer, and is treated as his self-assessment: see Cotter at ). It can be seen, therefore, that there are two potentially relevant distinctions between the position in Cotter and the circumstances of the present case. First, the present case concerns share loss relief under Chapter 6 of Part 4 of ITA 2007, not employment loss relief under Chapter 5. Secondly, this is not a case where the taxpayer left it to the Revenue to calculate the tax due on his behalf. Mr Derry requested and completed the tax calculation summary pages of the tax return, and his accountants worked out the repayment of tax due to him on the assumptions that the carried back relief affected his liability to tax for 2009/10, and that the provisions of schedule 1B to TMA 1970 were not engaged.
- These two distinctions lie at the heart of the two grounds of appeal, which I will now consider in turn.
Ground 1: was Mr Derry's claim to share loss relief subject to schedule 1B to TMA 1970?
- The Upper Tribunal held that Mr Derry's claim to share loss relief under Chapter 6 of Part 4 of ITA 2007 was subject to schedule 1B, and in particular to the provisions of paragraph 2 of schedule 1B. Morgan J gave his reasons for reaching this conclusion at  to  of the Decision. Mr Derry appeals to this court on the ground that the Upper Tribunal erred in law in so concluding, and should have held that his liability to tax for 2009/10 was reduced by the share loss relief claimed in the 2010 Return under sections 23, 24 and 132-133 of ITA 2007, and that these provisions were not overridden by schedule 1B to TMA 1970.
- In granting permission to appeal on this ground, Morgan J considered that it raises an important point of statutory interpretation: see paragraph 3 of his decision on permission to appeal released on 22 October 2015.
- If Chapter 6 of Part 4 contained an express provision saying that it was subject to paragraph 2 of schedule 1B, in the same way as Chapter 2 (trade losses) and Chapter 5 (employment loss relief) do, there would be no doubt about the answer to this question. Thus, section 60(2), at the beginning of Chapter 2, states explicitly:
"This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years)."
Exactly the same provision is then made in relation to employment loss relief, in Chapter 5, by section 128(7). The difficulty arises because no similar provision is made in relation to share loss relief in Chapter 6, even though claims for such relief may involve two or more years in much the same way as claims for trade loss relief and employment loss relief. I should add that the question does not arise in relation to the other forms of loss relief contained in Part 4, because none of them enables the relief to be claimed for an earlier tax year than the year in which the claim is made. The critical issue, therefore, is whether the omission from Chapter 6 of a provision equivalent to section 60(2) or section 128(7) reflects a legislative intention that schedule 1B should not apply to Chapter 6, even though (as I have already pointed out) the language of paragraph 2 of schedule 1B would be entirely apt to apply to Chapter 6 in the same way as it applies to Chapters 2 and 5.
- In considering this question, there is one further statutory provision which I need to mention. In the "Final provisions" at the end of ITA 2007, section 1020 stated at the material time:
"(1) In the Act any reference to a claim or election is to a claim or election in writing or in any form authorised (in relation to the case in question) by directions under section 118 of FA 1998.
(2) For further information about claims and elections, see TMA 1970 (in particular, section 42(2), (10) and (11) and Schedule 1A)."
It may be noted that there is no reference to schedule 1B in section 1020(2). On the other hand, the reference to TMA 1970 is general, and the words "in particular" show that the provisions mentioned are not intended to be exhaustive. In my opinion, therefore, this section throws no light on the issue. The Upper Tribunal thought likewise: see the Decision at .
The reasoning of the Upper Tribunal
- Having set out the relevant statutory provisions, and noted that section 42 of TMA 1970 applies in relation to a claim "unless otherwise provided", the Upper Tribunal concluded at  that there was nothing to disapply section 42 in relation to the claim which Mr Derry was permitted to make under section 132 of ITA 2007. No challenge is made to that conclusion, which seems to me clearly correct.
- At , the Upper Tribunal observed that neither side had "put forward any persuasive policy reason for a difference in the treatment of claims under Chapters 2, 5 and 6" in relation to the application (or otherwise) of schedule 1B. The Upper Tribunal continued:
"The difference in treatment certainly suggests the possibility that whereas paragraph 2 of Schedule 1B was to apply to Chapters 2 and 5, it was not to apply to Chapter 6. However, I consider that the difference in the statutory provisions is not clear enough to [amount to] it being "otherwise provided" for the purposes of section 42(1). I consider that the provisions of section 60(2) and 128(7) are in the nature of signposts to paragraph 2 of Schedule 1B. The fact that there is no similar signpost in Chapter 6 gives one reason to reflect on the possible reasons for that but in the end I do not regard this matter as clear enough to amount to it being otherwise provided for the purposes of section 42(1)."
- The Upper Tribunal then considered, in , whether the detailed provisions of sections 132 and 133 of ITA 2007, taken together with section 23, were inconsistent with the operation of paragraph 2 of schedule 1B, and concluded that they were not. Again, this conclusion seems to me clearly correct, and it is not challenged by Mr Derry.
- On the further question whether those provisions might amount to specific provisions overriding the general provisions of paragraph 2 of schedule 1B, the Upper Tribunal said at  that it considered both sets of provisions to be specific in character:
"Sections 132 and 133 of ITA are specific as to the entitlement to make a claim to deduct capital losses from income; section 42 and Schedule 1B of TMA are specific as to the procedure for making claims and as to the effect of claims."
- The Upper Tribunal then addressed the argument that the reference to "certain claims for relief including two or more years of assessment" in section 42(11A) of TMA 1970 should be read as meaning that the provisions of schedule 1B were engaged only where the claim in question was designated as one to which schedule 1B was to apply. Morgan J rejected this argument, saying at :
"I consider that those words are used because Schedule 1B identifies "the certain claims" to which it applies. I do not read the words of section 42(11A) as if they provided that Schedule 1B only applies to claims which are identified in some other statute as claims to which Schedule 1B is to apply."
- Although this argument was repeated before us by Ms McCarthy, appearing as she did before the Upper Tribunal for Mr Derry, and although it featured prominently in her written submissions, I feel little doubt that the judge was correct on this point. The structure of schedule 1B is that it applies to certain specified claims for relief involving two or more years. The provisions relating to loss relief are contained in paragraph 2. The remaining paragraphs deal with entirely separate claims, for example relief for fluctuating profits of farming etc in paragraph 3, and the carry-back of post-cessation receipts in paragraph 5. It is therefore entirely natural for the provision in the body of TMA 1970 which gives effect to schedule 1B to say that it "shall have effect as respects certain claims for relief involving two or more years of assessment", that is to say the various claims for relief which are dealt with in the schedule. Much clearer language would in my judgment have been needed if Parliament had intended to stipulate that the provisions contained in schedule 1B were to apply only to claims expressly identified elsewhere in the Taxes Acts as ones to which schedule 1B applied. Another way of making the same point is to say that the subject matter of schedule 1B is to be ascertained by looking at its provisions, which are given effect (but not circumscribed) by section 42(11A).
- The Upper Tribunal next considered the decision of the Supreme Court in Cotter, finding in it, at , strong support for the reasoning which I have summarised above, while recognising that Chapter 6 of Part 4 of ITA 2007 might conceivably be distinguished from Chapter 5 in the absence of an express provision equivalent to section 128(7).
- The Upper Tribunal then said, at :
"In any case, the decision in Cotter is helpful in that it contains, in particular at  and , a detailed explanation of how paragraph 2 of Schedule 1B of TMA works even when it is read in conjunction with sections 128 and 129 of ITA, which refer to making a deduction from income in a previous tax year; as I have stated more than once, sections 128 and 129 are similar to sections 132 and 133."
- At , the Upper Tribunal referred to the two decisions of the Upper Tribunal (Tax and Chancery Chamber) in R (Rouse) v Revenue and Customs Commissioners  UKUT 383 (TCC) and  UKUT 615 (TCC), reported at  STC 2452 and  STC 230 respectively. As Morgan J explained:
"The first decision was reached following the decision of the Court of Appeal in Cotter and the second decision involved a review of the earlier decision following the decision of the Supreme Court in Cotter. The Upper Tribunal considered in detail whether it was appropriate for HMRC to open its enquiry under section 9A of TMA or under Schedule 1A of TMA. What is said to be relevant about the decisions is that the taxpayer claimed relief under both Chapter 2 and Chapter 6 of Part 4 and the argument and the decisions proceeded on the basis that section 42(11A) and paragraph 2 of Schedule 1B to TMA applied to a claim to relief under Chapter 6 of Part 4 of ITA. However, because there was no argument on that point, the decisions do not constitute an authority on that point."
- Finally, the Upper Tribunal recorded that, at its request, counsel had made detailed submissions on the legislative history of section 42 of, and schedule 1B to, TMA 1970, and Part 4 of ITA 2007. Morgan J said he had given careful consideration to this material, but found in it nothing sufficiently clear to assist him.
- The Upper Tribunal therefore concluded, at , that Mr Derry's claim to relief under Chapter 6 of Part 4 was subject to the provisions of section 42 dealing with claims, and in particular to paragraph 2 of schedule 1B.
- Ms McCarthy prefaced her submissions on this part of the case by reminding us of the well-known statement by Lord Dunedin in Whitney v Inland Revenue Commissioners  AC 37 (HL) at 52 that:
"… there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay."
She submitted that Mr Derry's liability to income tax for 2009/10 was fixed by the relevant provisions of ITA 2007, including in particular the provisions of Chapter 6 of Part 4 which entitled him to carry back to that year the share loss relief which he claimed in 2010/11. That entitlement, she submitted, could not be displaced or overridden by provisions relating to the second (assessment) stage, unless an express provision to that effect can be found in ITA 2007 itself. She accepts that such provision is indeed made in those cases where individual Chapters are expressly made subject to schedule 1B to TMA 1970, which operates in the way explained by Lord Hodge in Cotter and requires the carried back relief to be given effect in year 2. But that is an exception to the general rule that questions of liability are determined at stage one, and cannot subsequently be usurped by provisions relating to assessment.
- This submission depends on the proposition that Parliament cannot have intended the loss relief provisions in paragraph 2 of schedule 1B to apply to share loss relief in the absence of an express provision in the body of ITA 2007 applying those provisions to it. As I have already explained, however, I am unable to accept that proposition: see  above. The language of paragraph 2 is clearly apt to cover Mr Derry's claim, and I cannot regard the absence of an express signpost in Chapter 6 itself as a sufficiently strong counter-indication. Nor do I derive much assistance in the present context from Lord Dunedin's classic statement of the three stages in the imposition of a tax. The present UK tax system is vastly more complex than it was a century ago, and one cannot always expect today to find that provisions relating to the imposition and calculation of liability are unaffected by provisions relating to the machinery of assessment. Indeed, Ms McCarthy rightly accepts that the normal provisions for calculating liability in ITA 2007 are overridden by paragraph 2 of schedule 1B where that paragraph was intended by Parliament to apply. Thus the real question is whether Parliament intended paragraph 2 of schedule 1B to apply to Chapter 6 of Part 4 of ITA 2007; and in answering that question, I find the language of paragraph 2 itself, read with section 42(11A) of TMA 1970, a much surer guide than the absence of a declaratory signpost in Chapter 6 itself. I agree with the Upper Tribunal that, while the absence of such a provision should give one pause for thought, it cannot be regarded as conclusive.
- I am equally unpersuaded by Ms McCarthy's argument that the computational tax liability provisions of ITA 2007 constitute a more specific statutory regime which was enacted later than schedule 1B, and should therefore take precedence over the general provisions of paragraph 2 of schedule 1B unless those provisions are expressly engaged. It is true that the steps prescribed for calculation of a person's income tax liability in sections 23 and 24 of ITA 2007 provide a specific regime for the deduction of reliefs (including share loss relief under Chapter 6 of Part 4) which replaced less precise previous legislation concerned with ascertainment of a taxpayer's total income and deductions from it. In that respect, the 2007 legislation introduced a welcome degree of precision and clarity in place of the previous non-statutory concept of "net statutory income" representing total income less allowable deductions. Nevertheless, I do not find it helpful to approach the present question as though it involved a conflict between a general regime in paragraph 2 of schedule 1B and a more specific later enactment. Paragraph 2 itself introduced a specific regime for loss relief carry back claims, which displaced the normal rule that such claims had to be made in the return and directed that effect be given to the claim in the later year. Thus paragraph 2 was itself highly specific, and it seems to me unrealistic to suppose that in enacting sections 23 and 24 of ITA 2007 Parliament intended to override or detract from that specific regime. Furthermore, when the share loss relief provisions were re-enacted in Chapter 6 of Part 4 of ITA 2007, Parliament was at pains to explain in sections 132 and 133 how the claim was to be made in the context of the calculation required by section 23 and how the relevant deductions were to be made, but without indicating any intention to depart from the specific rules in paragraph 2 of schedule 1B were they to apply. The problem posed is thus one of the interaction between two specific regimes, not one where it can safely be inferred that Parliament intended a specific later provision to supersede a general earlier one.
- With regard to the legislative history more generally, I agree with the Upper Tribunal that there is nothing which casts useful light on the question one way or the other. Before the income tax legislation was re-written in ITA 2007 (and, before then, in relation to trading and certain other categories of income, in the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005")) entitlement to both trade loss relief and employment loss relief was conferred, in significantly different form, by section 380 of the Income and Corporation Taxes Act 1988 ("ICTA 1988"). Share loss relief was conferred by sections 305A, 574 and 575 of ICTA 1988. The other forms of relief dealt with in schedule 1B to TMA 1970 had their origins in sections 96 and 108 of ICTA 1988, which were then replaced by equivalent provisions in sections 223, 224 and 257 of ITTOIA 2005, in each case with a cross-reference to the relevant paragraph of schedule 1B. In the case of both trade loss relief and employment loss relief under ITA 2007, there is also a cross-reference (or signpost) to schedule 1B. Thus share loss relief appears to be the only form of relief capable of being carried back to a previous year for which no cross-reference or signpost to schedule 1B exists. But the reason for the omission remains obscure, and the possibility that it was simply an oversight certainly cannot be excluded.
- It may perhaps be relevant, as Ms McCarthy submitted, that in 2003 a case concerning the interaction between relief under section 380 of ICTA 1988 and the PAYE system went to the Court of Appeal: see Blackburn v Keeling  EWCA Civ 1221,  STC 1162. One of the arguments for the taxpayer was that schedule 1B applied to the relevant claim for loss relief: see the judgment of Carnwath LJ (with whom the other members of the Court agreed) at  and  to . The Court found it unnecessary, however, to rule on the arguments addressed to it about the effect of schedule 1B: see  to . The actual decision in that case is therefore of no assistance in the present case, but it may perhaps explain why the draftsman of ITA 2007 provided express signposts to schedule 1B in relation to trade loss relief and employment loss relief, both of which fell within section 380 of ICTA 1988. But no question of share loss relief arose in Blackburn v Keeling, so once again no inference can safely be drawn as to why no signpost was provided in Chapter 6 of Part 4.
- To conclude, therefore, I remain unpersuaded that Mr Derry's claim to share loss relief falls outside the scope of paragraph 2 of schedule 1B, and I would therefore dismiss the first ground of appeal.
Ground 2: what was the effect of Mr Derry's self-assessment for 2009/10?
- Mr Derry's second ground of appeal is freestanding, in the sense that it does not depend on his first ground of appeal succeeding. It asserts that the Upper Tribunal was wrong to conclude that the 2010 Return should be construed as assessing his liability to tax for 2009/10 in the sum of £95,546.36. Instead, his self-assessment was in the sum of £95,546.36 reduced by £165,800, thereby generating a repayment due to him of £70,253.64. Reliance is placed on the entries which Mr Derry made in boxes 1 and 15 of the tax calculation pages of his return, read with the explanation given in box 16: see  above. The effect of those entries, submits Mr Derry, is clear. Box 1 showed the amount of tax which he assessed to be due before adjustment. As I have already mentioned, this box was filled in automatically on the basis of his earlier entries of his taxable income. Box 15 then contained the amount of share loss relief which he claimed to be entitled to carry back to 2009/10 from the following year. The purpose of the claim, self-evidently, was to reduce the amount of tax due in 2009/10. That is why box 15 appears in a section headed "Adjustments to tax due", and the rubric under the heading expressly refers to "carrying back to 2009-10 certain losses from 2010-11". This was then confirmed by the information entered in box 16.
- It is at this point that the second of the distinctions from the position in Cotter (see  above) becomes important. Mr Cotter and his accountants left it to the Revenue to calculate the tax which he was due to pay. Mr Derry and his accountants did not: they filled in the tax calculation pages on the return, and prepared a separate personal tax computation (for which there is no prescribed form) setting out the calculation. The refund of £70,253.64 was simply arrived at by deducting the relief claimed (£165,800) from the total tax due for the year (as shown in box 1 on page TC 1) of £95,546.36. Even without the calculation, submits Mr Derry, it is perfectly clear from boxes 1, 15 and 16 that this is what he intended to do. Moreover, that must be what the Revenue understood him to be doing, because he was repaid £70,487.90 on 18 October 2011: see  above.
- Furthermore, he submits, this result is entirely in accord with the reasoning of Lord Hodge in Cotter, where at  to  he went on to consider what the position would have been if Mr Cotter had performed a self-assessment of the tax due from him for year 1. Lord Hodge said this:
"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 2007/2008. Such information and self-assessment would in my view fall within a "return" under section 9A of the 1970 Act 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 the 1970 Act …) or instituting an inquiry under section 9A of the 1970 Act.
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."
- This part of Lord Hodge's reasoning 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  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 2007. 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 , and if I may respectfully say so, I agree with it.
- The difficulty for the Revenue in the present case is that no enquiry into the 2010 Return was opened within the statutory time limit. Had that obvious step been taken, the Revenue would then have been able to challenge the repayment of tax claimed by Mr Derry at the same time as it pursued the enquiries which it opened into the claim itself (correctly instituted under schedule 1A, as an enquiry into a claim not included in a return) and into his 2011 return. The fact that this step was not taken means, in my view, that the Revenue has by default permitted Mr Derry to obtain at least the cash flow advantage of obtaining a repayment of tax for 2009/10 on the erroneous footing that his claim for share loss relief could be carried back and given effect in that year.
- The Upper Tribunal reached the opposite conclusion, for reasons which it shortly expressed in the Decision at :
"52. I consider that it is clear that Mr Derry's tax return for 2009-2010 assessed his liability to tax in the sum of £95,546.36. That is the figure stated in the appropriate place in the return for the amount of tax payable. It is also clear that Mr Derry wished to claim relief for what he said were his capital losses. I consider that the tax return should be construed against the background of the relevant legal provisions. Under Chapter 6 of Part 4 of ITA, Mr Derry is able to make a claim in relation to such capital losses against the income in the year 2010-2011 and also the year 2009-2010 but such a claim relates to the year 2010-2011 and does not reduce the tax payable for the year 2009-2010. Against that background, I consider that the presence of the claim for capital losses does not displace the clear assessment to tax in the sum of £95,546.36."
- I find this reasoning unconvincing, for the following main reasons. First, it fails to recognise the clear distinction between the claim itself, which (as the Upper Tribunal rightly held) could only be given effect in 2010/11, and the self-assessment which Mr Derry performed, albeit on an erroneous basis, for 2009/10. Secondly, the Upper Tribunal concentrated only on the figure entered in box 1 on page TC 1, while ignoring the adjustment to the tax due shown in box 15 and explained in box 16 on the following page. Thirdly, the Upper Tribunal failed to consider and apply the reasoning of the Supreme Court in Cotter at  to , quoted above.
- On behalf of the Revenue, Ms Nathan submitted that it would be inappropriate to give effect to the loss claimed by Mr Derry until such time as his entitlement to the loss is finally established. In support of this submission, she relied on the decisions of the Upper Tribunal (Sales J, as he then was) and this Court in R (De Silva) v Revenue and Customs Commissioners  UKUT 170 (TCC),  STC 2088 and  EWCA Civ 40,  STC 1333. However, the facts of that case were very different from those of the present case, and neither the Upper Tribunal nor this court expressed any disagreement with Lord Hodge's analysis in Cotter at : see in particular the decision of the Upper Tribunal at , and in this Court the judgment of Gloster LJ, with whom Simon and Arden LJJ agreed, at , endorsing the reasoning of the Upper Tribunal at  to .
- I would add that the taxpayer's appeal to the Supreme Court in De Silva is due to be heard in the near future. Only a week before the date fixed for the hearing of the present appeal, an application was made by Mr Derry (and unopposed by HMRC) asking for the hearing to be postponed until after the Supreme Court has given its judgment in De Silva. We refused the application, partly because it was made so late, but principally because the issues in De Silva appeared to us to be different from those in the present case, and in particular did not include the central question whether the provisions of schedule 1B to TMA 1970 apply to claims for share loss relief.
- Ms Nathan also submitted that the entry in box 15 on page TC 2 of the 2010 Return went no further than indicating the repayment which Mr Derry was claiming, and should not be construed as forming part of a calculation of his liability to tax for 2009/10. In my opinion, however, this is an impossible contention. The purpose of the tax calculation is to calculate the tax due for the year of assessment. The rubric above boxes 13 to 15 refers to the need to make "an adjustment to increase or decrease your tax for 2009-10", because of claims (inter alia) to carry back to 2009/10 certain losses from 2010/11. In this context, although the wording of box 15 itself ("Any 2010-11 repayment you are claiming now") is on any view rather imprecise, it can only sensibly be understood as referring to a carry back of losses from 2010/11 in reduction of the tax actually due for 2009/10. This is what Mr Derry purported to do, and this was the basis on which he calculated the repayment of tax due to him. In those circumstances, I can see no escape from the conclusion that, if HMRC wished to challenge his self-assessment, they had to do so either by amending the 2010 Return or by opening an enquiry into it.
- The Upper Tribunal refused Mr Derry permission to appeal on ground 2 as a separate ground, and his application to this court for permission was in effect left to be dealt with at the hearing of the appeal. In my view, ground 2 clearly raises an important point of principle or practice within the meaning of article 2 of the Appeals from the Upper Tribunal to the Court of Appeal Order 2008. For the reasons which I have given, and if the other members of the court agree, I would grant Mr Derry permission to appeal on ground 2, and would also allow his appeal on that ground.
Lord Justice McFarlane:
- I agree.
Lord Justice Longmore:
- I also agree.
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