Mr Justice Warren :
Introduction
- I am directly concerned with two sets of proceedings, each concerning several claimants, in which the Defendants ("HMRC") seek to strike out the claimants' claims for declarations requiring HMRC to give immediate effect to various tax claims which the claimants have made and for declarations, that where repayments and discharges of tax have already been made, they cannot be recovered or otherwise reversed by HMRC. The claimants seek, further, an order that HMRC pay any money due as a result of giving effect to the tax claims. An alternative claim is made for damages for breach of statutory duty.
- The first set of proceedings comprises eight claims consolidated under the claims brought by Barry Knibbs ("the Consolidated Claims" and "Mr Knibbs"). Those eight claims with the exception of two claims brought by Trevor Sinclair, each involve a number of claimants so that there are several hundred overall. The second set of proceedings, following various procedural steps, now comprises a claim to like effect by a single claimant, Stephen Barrett ("the Barrett Claim" and "Mr Barrett"). I shall refer to the claimants in the Consolidated Claims as "the Claimants" which, where the context makes it appropriate, is also to include Mr Barrett.
- Each of the Claimants in the Consolidated Claims has sought to carry back losses ("carry-back claims") incurred, in many cases, as partners in various film partnerships and in other cases as a result of participation in other arrangements. They have done so by claims which have, in some cases, been made in the relevant person's self-assessment tax return either for the year in which the loss was made or the previous year. In other cases, they have done so by claims made outside such returns, typically in letters to HMRC. Mr Barrett has sought relief under the Gift Aid provisions and has elected to be treated as if certain donations made by him in 2010/11 had been made in 2009/10.
- HMRC have made strike out applications in both sets of claims. In the Consolidated Claims, it was made by an application dated 14 September 2016 and in the Barrett Claim, it was made by an application dated 2 February 2017.
- The applications came on for hearing before me on 4 October 2017 for a 4-day hearing. At that time, there was ongoing litigation in the case of R (De Silva) v HMRC which I shall refer to generally as De Silva. The case had originally been heard by Sales J sitting in the Upper Tribunal: see [2014] UKUT 170 (TCC), [2014] STC 2088 ("De Silva (UT)"). His decision rejecting the taxpayers' case was upheld by the Court of Appeal, Gloster LJ giving the only judgment, with which the other judges agreed: see [2016] EWCA Civ 40, [2016] STC 1333 ("De Silva (CA)"). The Supreme Court had heard an appeal from that decision but had not delivered its decision, which was subsequently delivered on 15 November 2017, Lord Hodge giving the only judgment, with which the other justices agreed: see [2017] UKSC 74, [2017] 1 WLR 4384 ("De Silva (SC)"). The decision of the Supreme Court was, on any view, going to be important to the resolution of the present proceedings. If the decision of the Court of Appeal in favour of HMRC were upheld, it was quite possible (to put it at its lowest) that the decision would be determinative of the present proceedings in favour of HMRC.
- Accordingly, the Claimants sought an adjournment of the strike-out applications on 28 September 2017, to await the outcome of De Silva in the Supreme Court. HMRC did not agree to an adjournment. One reason for their refusal was that the hearing had taken over a year to fix due to problems concerning the availability of the parties' chosen counsel. It was clearly not desirable to lose the hearing date when to refix it might take months, with the decision in De Silva imminent. Accordingly, the hearing before me proceeded, with the parties being at liberty to make further submission on the impact of De Silva when the decision of the Supreme Court was known.
- HMRC's summary of their case at the hearing before me included the following:
i) The claims should not have been brought in actions seeking declarations. The issues should have been brought by way of appeal in the First-tier Tribunal.
ii) It was an abuse of process for individual actions to have been commenced in the Chancery Division: the First-tier Tribunal and/or the Administrative Court have exclusive jurisdiction.
iii) Alternatively,
a) Declaratory relief is inherently discretionary, and the Chancery Division should decline jurisdiction where the real reason for failing to appeal or claim judicial review is to evade the procedural protections (including strict time limits) enjoyed by HMRC under those procedures.
b) An unknown number of the Claimants are bringing their cases prematurely, and the court is being asked to make a ruling in hypothetical cases where HMRC are yet to take any action.
c) There are an unknown number of claimants who are bringing essentially the same challenge in different courts or tribunals; on any view that is an abuse of process, and must be stopped.
d) The claims are for declarations, which are a discretionary remedy, and the court should refuse declarations as a matter of discretion (and indeed decline jurisdiction).
e) None of the claims amount to a cause of action in law. They are pleaded in general terms only, and the facts pleaded are not capable of amounting to a claim for relief for any individual Claimant.
f) The decision of the Court of Appeal in De Silva (CA) was conclusive in favour of HMRC (unless and until overruled by the Supreme Court).
- The Claimants' case at the hearing was in summary as follows:
i) It was not open to HMRC to make the strike-out applications. Chief Master Marsh had made an order on 13 July 2015, that, if HMRC intended to make a strike-out application, they should do so by 20 August 2015. HMRC were way out of time in making their applications in February 2017.
ii) Further, Chief Master Marsh had also made an order on 3 May 2016 that the parties in the Consolidated Claims should use best endeavours to agree which individuals will act as test claimants for the purposes of determining all issues raised by the claims and which are the issues to be tried in respect of each test claimant, within 28 days of the date of the order. It would be inconsistent with that order now to strike-out those proceedings.
iii) The Chancery Division does, contrary to HMRC's case, have jurisdiction to entertain the Claimants' claims and to grant declaratory relief. Whether it should or should not grant declaratory relief is not a matter which is suitable to be resolved on a strike-out application.
iv) Although the claims are pleaded generally, the pleadings are sufficient to comply with the rules of pleading. In any case, the central issue is an issue of law, namely the way in which HMRC are able to challenge a claim for loss relief made by a taxpayer in the position of the Claimants. Nothing turns on the detailed facts of each particular case in the sense that there is no distinction between those facts so far as material to the point of law in issue.
- As to the substance, the essence of the Claimants' case before me was that HMRC could only have challenged the carry-back claims by opening an enquiry into those claims under the procedure set out in Schedule 1A of the Taxes Management Act 1970 ("TMA" and "Schedule 1A"). Since HMRC had failed to open enquiries within the relevant time limits, the Claimants say it follows that HMRC are obliged to give effect to the carry-back claims or, to the extent that effect had already been given to those claims, that HMRC are not entitled to reverse that effect.
- Further, even if the Claimants are wrong on that general point (so that HMRC could challenge the carry-back claims by means of enquiries under section 9A TMA ("Section 9A"), those Claimants whose carry-back claims have previously been given effect (by discharge or repayment of tax) contend that HMRC are not entitled to reverse that effect. That is because none of the provisions of TMA that impose an obligation on taxpayers to pay amounts to HMRC apply in the circumstances. HMRC, of course, reject that contention.
- In contrast, HMRC maintain that they had power to challenge the carry-back claims by enquiring into the Claimants' tax returns for the year of assessment in which the losses were incurred under section 9A.
The directions of Chief Master Marsh
- In response to the Claimants' contention that HMRC are precluded by the directions made by Chief Master Marsh from making their strike-out applications, HMRC contend that neither party nor Chief Master Marsh himself treated the Order dated 13 July 2015 made on the papers relating to the Defendant's proposed strike out application as continuing in force, as the transcript of the CMCs on 18 September 2015 and 3 May 2016 clearly demonstrate.
- I do not propose to lengthen this judgment by going into the detail of what can be seen from the transcripts. Having read them, and having heard submissions relating to them, I am entirely satisfied that the parties and the Chief Master were indeed proceeding on the basis that the order was not to be treated as continuing in force. I have no doubt that he was entitled to proceed on that basis.
- Nor do I think that there is anything in the point that the order that the parties should agree the identity of test claimants in the Consolidated Claims precludes the making of the strike out application in those proceedings. It is clear that the direction to do so was not intended to prejudice any strike-out application which HMRC might make.
- As to the point that the different facts of each case do not give rise to material distinctions for the purpose of the legal points in issue, the Claimants have now executed a complete volte face and seek to raise a number of distinctions which, in their submissions, have the consequence that the results may not be the same in each case. This, they say, is because the reasoning in De Silva (SC) was not to be anticipated and is surprising. It is that reasoning which has given rise to differences in the facts unexpectedly becoming material when previously they were not thought to be.
- At this stage of a judgment of this sort, I would normally turn to the facts of the case. However, because of the way in which the argument has developed, particularly in the light of De Silva (SC), I postpone consideration of facts until after considering (i) the statutory provisions relating to the reliefs claimed, how they are to be given effect and how claims can be challenged by HMRC and (ii) the judgment in De Silva (CA).
The statutory provisions - TMA
- Section 8– Personal Return:
i) Section 8(1): Taxpayers are required to file self-assessment tax returns if required to do so by an officer of HMRC. The return must contain such information as may reasonably be required for the purpose identified, namely to provide information to establish the amounts in which the taxpayer is chargeable to income tax and capital gains tax for a year of assessment and the amount of tax payable by him for that year. And for the same purpose, he must deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required.
ii) Section 8(1AA): The amounts in which a person is chargeable are net amounts, that is to say taking 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 amount of any income tax deducted at source.
iii) Section 8(1B): The return of a partner must include each amount which, in any relevant statement, is stated to be equal to his share of income, gains and losses for the period in respect of which the statement is made.
iv) Section 8(1C): The "relevant statement" referred to means a statement which, as respects the partnership, falls to be made under section 12AB for the period described in the subsection.
- Section 9 – Returns to include self-assessment:
i) Section 9(1): Subject to subsections (1A) (which I do not need to refer to at this stage) and (2), every return under section 8 shall include a self-assessment. A self-assessment is
a) an assessment of the amounts in which, on the basis of the information contained in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment (ie for the year in respect of which the return is made). The assessment is to take account of "any relief or allowance a claim for which is included in the return".
b) an assessment of the amount payable by way of income tax that is to say the difference between the amount in which he is assessed to income tax under the provision just mentioned and the aggregate amount of income tax deducted at source.
ii) Section 9(2): A person does not have to include a self-assessment in his return if he makes and delivers the return on or before 31 October next following the year of assessment.
- Section 9A – Notice of enquiry:
i) Section 9A(1): an officer of HMRC may open an enquiry into a taxpayer's return under section 8 (and thus into his self-assessment under section 9, since that forms part of the return) if he gives notice to the taxpayer within the time allowed. The time allowed is specified in section 9A(2): I do not need to refer to it at this stage.
ii) Section 9A(3): a return which has been subject to one notice of enquiry may not be the subject of another (with certain exceptions).
iii) Section 9A(4): an enquiry extends to anything contained in the return. It also extends, it is to be noted, to anything required to be contained in the return, including any claim or election included in the return.
iv) Section 12AA – Partnership returns. Partnerships are, in effect, transparent for income tax and capital gains tax purposes. This section makes provision for establishing the amount of the partnership profits, gains and losses, the relevant share of which each partner must include in their own self-assessment return.
v) Section 12AA(1): An officer of HMRC may act under subsection (2) or (3) or both for the purpose of facilitating, in the case of a partner chargeable to income tax, the establishment of the amount in which each partner is chargeable to income tax for any year of assessment and the amount payable by way of income tax by each such partner.
vi) Section 12AA(1A): for that purpose, the amount in which a partner is chargeable to income tax is a net amount that is to say an amount taking into account any relief or allowance "for which a claim is made".
vii) Section 12AA(2) and (3): By subsection (2), an officer of HMRC may, by notice given to the partners, require a person (identified by rules given with the notice) to make a return in respect of such period as is specified in the notice, the return to include such information as may reasonably be required, and to deliver such accounts etc as may be reasonably so required. By subsection (3), an officer of HMRC may make a similar requirement of an individual partner.
- Section 12AB – Partnership return to include partnership statement.
Section 12AB(1): Every partnership return is to contain a partnership statement of the amounts specified in the subsection. For present purposes, it is enough to describe these as the income or loss for the period in respect of which the return is made, taking into account certain reliefs which are not material for present purposes.
- Section 12AC – Notice of enquiry. As with individual self-assessment returns, an officer of HMRC may open an enquiry into a partnership tax return.
i) Section 12AC(1): This provides for the opening of an enquiry by notice to the partner who made the return.
ii) Section 12AC(6): The giving of a notice under subsection (1) "shall be deemed to include" the giving of notice of enquiry under section 9A(1) to each partner who at that time has made a return under section 8 or at any subsequent time makes such a return. Thus, HMRC do not have to go through the process of challenging each individual partner's return when the underlying challenge is made to the partnership return which is relevant to entries in the individual partners' returns.
- Section 28A – Completion of enquiry into personal return
i) Section 28A(1): An enquiry under section 9A(1) is closed when the taxpayer is informed by a closure notice that the officer has completed his enquiries and states his conclusions.
ii) Section 28A(2): The closure notice must either state that in the officer's opinion no amendment to the return is required; or it must make the amendments of the return required to give effect to the officer's conclusions.
- Section 28B – Completion of enquiry into partnership return
i) Sections 28B(1) and (2): These reflect section 28A(1) and (2): an enquiry under section 12AC(1) is closed when the taxpayer is informed by a closure notice that the officer has completed his enquiries and states his conclusions; and the closure notice must either state that in the officer's opinion no amendment to the return is required; or it must made the amendments of the return required to give effect to his conclusions.
ii) Section 28B(4): Where a partnership return is amended, the officer shall by notice to each of the partners amend the partner's return under section 8 so as to give effect to the amendments of the partnership return.
- Section 31 – Right of appeal
Section 31(1) provides for a right of appeal to the First-tier Tribunal in a number of cases, in particular against any conclusion stated or amendment made by a closure notice under section 28A or 28B and to any assessment to tax which is not a self-assessment. There is, it would seem, no right of appeal by an individual partner against the amendment to his own return under section 28B(4) as the result of an amendment to the partnership return.
- Section 42 – Procedure for making claims
i) Section 42(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, section 42 shall, unless otherwise provided, have effect in relation to the claim.
ii) Section 42(2): Subject to certain exceptions, where a person has been required to make a return under section 8, 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.
iii) Section 42(11) and (11A): These subsections introduce Schedule 1A (which relates to claims not included in returns) and Schedule 1B (which relates to claims for relief involving 2 or more years).
- Schedule 1A – Claims etc not included in returns
i) Paragraph 4(1): Subject to sub-paragraphs (1A) and (3) to (5), an officer of HMRC "shall, as soon as practicable after a claim … is made …. give effect to the claim … by discharge or repayment tax".
ii) Paragraph 4(5) provides that paragraph 4 has effect subject to any provision in the Taxes Acts requiring or allowing effect to be given to the claim by other means or which provides that an amount is not to be discharged or repaid.
iii) Paragraph 5(1): An officer of HMRC may open an enquiry into a claim made by any person if he gives notice to the taxpayer within the time allowed. The time allowed is specified in sub-paragraph (2).
iv) Paragraph 5(2): the relevant period is that which ends with the latest of three specified periods. The material provision for present purposes is paragraph (b) which provides "where the claim … relates to a year of assessment, the period ending with the first anniversary of the 31st January next following that year". Paragraph 5(3)(b) provides that where an enquiry has been made into a claim under paragraph 5(1), the claim shall not be subject to a further notice (opening an enquiry) under section 9A(1) if it is subsequently included in a return.
v) Paragraph 7 provides for completion of the enquiry and the service of a closure notice, in similar terms and with similar consequences to those already explained in relation to the closure notices already mentioned in relation to a Section 9A enquiry.
- Schedule 1B – Claims for relief involving two or more years
i) Paragraph 2(1): Paragraph 2 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 ("the earlier year").
ii) Paragraph 2(2): Section 42(2) (see paragraph 25.ii) above) "shall not apply in relation to the claim".
iii) Paragraph 2(3): The claim "shall relate to the later year".
iv) Paragraph 2(4): the claim is for an amount equal to the difference between the amount in which the claimant is chargeable for the earlier year and the amount in which the claimant would be chargeable for the earlier year on the assumption that effect could be, and were, given to the claim in the earlier year.
v) Paragraph 2(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". The words "or otherwise" are to be particularly noted. Section 59B(1)(b) relates to payments on account: nothing turns on its provisions for present purposes.
- The provisions which I have identified above are of general application, applying to a number of different types of claim. The particular claims with which I am concerned are (i) claims to carry back losses made in one tax year ("Year 2") to the previous year ("Year 1") or in some cases years before Year 1 and (ii) claims for relief under the Gift Aid provisions.
- The relevant loss provisions were at one stage to be found in sections 380 and 381 Income and Corporation Taxes Act 1988 ("ICTA") and are now found in sections 64 and 72 Income Tax Act 2007 ("ITA"). These permit individuals to claim to set losses sustained in one year of assessment ("Year 2") against income of one or more previous years ("Year 1"). There is no material difference between the old provisions and the rewrite in ITA, although other provisions of ITA are relied on by Mr Ewart in support of the proposition that the reasoning in De Silva (SC) (for the case name and citation, see paragraph [5] above) does not apply to the Claimants in the present case. I refer only to the current provisions although De Silva itself was concerned with the old provisions:
- Section 64 provides for deduction of losses from general income:
i) Section 64(1): A person may make a claim for trade loss relief against general income if the person (a) carries on a trade in a tax year and (b) makes a loss in the trade in the tax year ("the loss-making year").
ii) Section 64(2): The claim is for the loss to be deducted in calculating the person's net income (a) for the loss-making year, (b) for the previous tax year, or (c) for both tax years.
iii) Section 64(3): if the claim is made in relation to both tax years, the claim must specify the tax year for which a deduction is to be made first.
- Section 72 ITA (like the old section 381 ICTA) concerns further relief for individuals in the early years of trade. I do not need to go into the detail of such relief since the points of principle relevant in the present cases are sufficiently apparent from consideration of the principal relief.
- The relevant Gift Aid provisions are found in sections 413, 416 and 426 ITA. Relief is given where an individual makes a qualifying donation (within the meaning of section 416) to a charity. The present case is concerned with section 426 headed "Election by donor: gift treated as made in previous tax year":
i) Section 426(1): If an individual makes a qualifying donation to a charity and the condition in sub-section (2) is met, the individual may elect to be treated as if the gift had been made in the previous tax year ("year P").
ii) Section 426(2): The condition is, in effect, that the individual has sufficient income and gains in year P to absorb the amount of the donation (grossed up).
iii) Section 426(6): An election must be made on or before the date on which the individual delivers a return for year P under section 8 TMA and not later than the normal self-assessment filing date for year P.
The hearing before me
- As I have said, at the hearing before me, the Claimants' position was that the factual differences between their cases made no difference to the outcomes in each case. All the cases turned on a simple proposition, namely that the Claimants had all made claims which could only be challenged under the procedure laid down in Schedule 1A. HMRC were out of time for doing so; therefore effect must be given to the claims. HMRC's position was that the decision in De Silva (CA) was conclusive of the case against the Claimants. The Claimants did not accept that but, even if it was correct, there should, they said, be no strike out at least until the decision of the Supreme Court had been delivered. In reality, I think that, had the Supreme Court upheld the Court of Appeal for the reasons which it had given, the Claimants would have been likely to recognise that they had no case. According to Mr Ewart, however, the reasons given by the Supreme Court for dismissing the taxpayers' appeals in De Silva (SC) were significantly different from those given by the Court of Appeal. In the present proceedings, therefore, the facts of some, or perhaps all, of the Claimants can be distinguished from the facts in De Silva in a way which leaves open the argument that, by failing to open an enquiry into the carry-back claims under Schedule 1A, HMRC cannot refuse those claims, notwithstanding that the losses on which those claims were founded have been effectively challenged by an enquiry opened into the returns in which those losses were returned.
- On that basis, it is said on behalf of the Claimants that, whatever De Silva (SC) did or did not decide, the position of the Claimants remains open to argument so that a strike out application should be dismissed. To deal with that submission, it is necessary to see what De Silva (SC) actually did decide in terms and also to consider what is necessarily implicit, if not expressed, in the judgment.
- The facts in De Silva are set out by Lord Hodge in De Silva (SC) at [2] to [8] of his judgment. Since the facts are important in the context of Mr Ewart's submission that the decision is not conclusive against the Claimants (or at least some of them), I think that the simplest thing to do (and certainly the easiest for me) is to set them out in full:
"Factual background
2. The taxpayers were limited partners in various limited partnerships established under the Limited Partnerships Act 1907. The general partner of the partnerships was Investing in Enterprise Ltd ("IEL"). The taxpayers became partners in these partnerships in implementation of marketed tax avoidance schemes which were aimed at accruing trading losses through investment in films in order to set off those losses against income of the same or earlier years. The taxpayers invested in the partnerships in part by using their own money but principally by taking out non-recourse or limited recourse loans. The schemes aimed to take advantage of tax incentives under section 42 of the Finance (No 2) Act 1992 (as amended) ("the 1992 Act") to encourage investment in the production and acquisition of qualifying films. It is not necessary to give details of the tax incentives. In the early years of trading a limited partner could use the provisions of sections 380 and 381 of the Income and Corporation Taxes Act 1988 ("ICTA") to set off his allocated share of trading losses of a partnership in a particular year against his general income for that year of assessment or any of the previous three years of assessment. The ability to carry back the losses in this way allowed the partner to choose to set off the losses against his taxable income in one or more of those years in a way which gave him the greatest advantage.
3. The relevant film partnerships lodged tax returns, which IEL completed, for the tax years 1998/99, 1999/2000, 2000/01 and 2001/02, in which the partnerships claimed that they had suffered substantial trading losses, in relation to which they claimed relief for film expenditure under section 42 of the 1992 Act. HMRC did not accept those claims, but initiated inquiries into the partnerships' tax returns under section 12AC(1) of the TMA. After extensive investigations, HMRC determined that the claims for losses should not be accepted and issued closure notices on the inquiries in about July 2003. In substance, HMRC disallowed the partnerships' claims for expenditure funded by the non-recourse or limited recourse loans to individual partners and also the expenditure paid as fees to the promoters of the schemes. The partnerships appealed to the Special Commissioners of Income Tax (the predecessors of the First-tier Tribunal (Tax Chamber)) in August 2003. Those appeals and the partnerships' claims for losses and relief were compromised by an agreement dated 22 August 2011 under section 54 of the TMA ("the partnership settlement agreement") under which the partnerships' losses were stated at much reduced levels.
4. Mr De Silva in his self-assessment return form for 1998/99 included a claim to set off his share of trading losses of certain partnerships in other years, including 1999/2000, against his general income in several tax years, including 1998/99, with the intention of reducing his payment in respect of tax due for 1998/99 by £16,800. He included that figure in box 18.9 on the return form against an entry, "1999-2000 tax you are reclaiming now". Under the heading "additional information" in his return he explained the detail of the carry-back claims which he was making to give rise to that figure. The losses which supported his claim to reduce his tax payment by £16,800 were his share of partnership trading losses in the year 1999/2000, which it had already been estimated that the relevant partnership would incur in that tax year.
5. In his self-assessment return form for 1999/2000, Mr De Silva made amended carry-back claims to set off his share of partnership losses in 1999/2000 against his general income in previous years so as to claim a repayment of tax for those years.
6. Mr Dokelman also claimed tax relief in a similar manner. In his self-assessment return form for 2000/01 he made a claim for the losses which he had incurred as a partner in some of the partnerships in the tax year 2000/01 against his general income in 1999/2000 and 1997/98.
7. In each case the taxpayer claimed relief for his share of the partnership losses as those losses had been stated in the partnership tax returns before they were substantially reduced when HMRC amended the partnership tax returns after entering into the partner settlement agreement.
8. HMRC had initially accepted Mr De Silva's claims for relief and credited him with £22,400 and £42,000. After the partnership claims were determined in the partnership settlement agreement, HMRC wrote to the taxpayers to intimate that their carry-back claims in their personal tax returns would be amended in line with the lower figures for the partnership losses which had been agreed in the partnership settlement agreement. HMRC informed Mr De Silva that he had to pay additional tax of £17,176.80 and £32,400. HMRC informed Mr Dokelman, who had not been given credit for the partnership losses, that those losses available for a claim for 2000/01 were reduced to the levels agreed in the partnership settlement agreement. HMRC's letters to Mr De Silva were dated 16 September 2011 and 17 November 2011. Their letter to Mr Dokelman was dated 28 October 2011."
- It should be noted that De Silva was concerned with carry-back claims and not with relief for charitable donations. My discussion in the following paragraphs of De Silva (SC) and my conclusions following that discussion relate only to carry-back claims. I will consider charitable relief subsequently when addressing the Barrett Claim.
- Lord Hodge explains in [9] that Mr De Silva and Mr Dokelman challenged HMRC's decisions which were set out in the letters to which he had referred in [8], by a claim for judicial review, asserting that HMRC were obliged to give effect in full to their claims to carry back the partnership losses because HMRC did not open, in time, an enquiry into the claims under Schedule 1A.
- Sales J rejected the claim for judicial review in his decision in De Silva (UT). The Court of Appeal rejected the appeal, broadly agreeing with Sales J (other than on the effect of the settlement agreement) although giving some slightly different reasons. The arguments (so far as relevant to the present case) in the Court of Appeal presented on behalf of Mr De Silva and Mr Dokelman, by Mr Southern, were, in summary, as follows:
i) The judge was wrong to conclude that the taxpayers' "Year 01" (ie earlier years) claims for tax relief, in respect of partnership losses arising in "Year 02" (ie subsequent years) were claims included in a return as opposed to stand-alone claims, not included in a return. A forward claim for relief made in Year 01, based on anticipated losses in respect of Year 02, was a stand-alone claim. The judge had wrongly characterised a stand-alone claim as a claim included in a return.
ii) The judge was wrong to conclude that the enquiry conducted by HMRC into the loss claims made by the partnership for the Year 02 also encompassed the related prior year claims made by the individual partners. Because the forward claim was a stand-alone claim, if HMRC wished to challenge it, they had to start an enquiry under Schedule 1A.
iii) Carry back claims were claims which related to two or more years of assessment within Schedule 1B. They therefore could not be included in self-assessment tax returns and could only be made by stand-alone claims.
- Those arguments left Gloster LJ with "a sense of total unreality": see at [47]. To her mind they were commercially at odds with the clear intention of the statutory scheme in relation to the taxation of partnerships and the consequent taxation of individual partners.
- First, she rejected (see [48]) the argument that a claim under Schedule 1B TMA could only be made by way of a "stand-alone claim" under Schedule 1A, or could only be investigated by means of an enquiry under Schedule 1B. As she saw it, all that paragraph 2(2) of Schedule 1B does is to disapply the rule in section 42(2) that, if a claim can be made in a return, it must be so made. The effect of disapplying the section 42(2) restriction is that a Schedule 1B claim may be made in a return, or may be made as a stand-alone claim outside a return, whether by way of a separate letter, or otherwise.
- Secondly, she considered (see [49]) that the taxpayers' approach failed to recognise that, no matter how a claim for relief has initially been "made", the claim for relief is nonetheless required to be included in the return of the individual taxpayer for the year in which the losses were actually made by the partnership, that is to say the later year—Year 2. Her judgment was that that obligation is imposed by sections 8(1B) and 9 TMA and section 380 ICTA (now section 64 ITA). That is because, in her view, the claim, if valid, will affect the tax chargeable and payable in the later year, reference being made to paragraph 2(3) of Schedule 1B. Losses, which may be carried back from a later year to an earlier year, cannot be given effect to in law in that earlier year; in other words they may not be relieved against the tax liability of that earlier year, despite the fact that the quantum of the claim will be calculated by reference to the earlier year. Thus, the correct procedure for making a claim within Schedule 1B is either to make it in the return for the loss-making year in question (the Year 2 return), or to make an earlier (or indeed later) Schedule 1A standalone claim, which is then, subsequently, nonetheless required to be included in the return for the later year.
- Thirdly, even if, contrary to her view, the taxpayers' intimations in their Year 1 tax returns to claim relief in respect of earlier years are to be characterised as stand-alone claims for relief, nonetheless she saw (see [52]) no reason why HMRC were obliged in that event to conduct an enquiry into those stand-alone claims pursuant to paragraph 5(1) Schedule 1A or, if they did not do so within the prescribed time, were precluded from bringing any further enquiry under section 9A.
- In the Supreme Court, Mr De Silva and Mr Dokelman repeated their submissions that, as Lord Hodge puts it at [10] of his judgment, "their claims for relief by carrying back losses were not claims made in their self-assessment returns under section 8 TMA but are to be regarded as "stand-alone" claims for relief which are not made in tax returns and which HMRC could challenge only under Schedule 1A to the TMA", a challenge which HMRC were out of time to make. Although expressing himself in different language, I do not see Lord Hodge's reasons as differing in substance from those of Gloster LJ and do not agree with Mr Ewart's suggestion that his reasoning was radically different from hers.
- Lord Hodge considered that the answer to the appeal was to be found in the provisions of TMA (i) which deal with the making and processing of claims for relief and (ii) which specify what a taxpayer must include in his tax return.
- After noting that the decision in HMRC v Cotter [2013] UKSC 69, [2013] 1 WLR 3514, [2013] STC 2480 ("Cotter") establishes that a "return" in the context of section 8(1), 9, 9A and 42(11)(a) TMA refers to the information in the 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", Lord Hodge goes on in [14] to [22] to deal with the making and processing of claims. He refers to (and in some cases sets out) a number of provisions including parts of section 42, Schedule 1A and Schedule 1B. At [19] he underlines that fact that paragraph 2(3) Schedule 1B makes it clear that the carry-back of the Year 2 loss to Year 1 "relates" to Year 2. He describes the quantification exercise directed by paragraph 2(4) as counterfactual because paragraph 2(3) and paragraph 2(6) relate the claim and giving effect to the claim to Year 2.
- In [20], Lord Hodge addresses paragraph 2(2) Schedule 1B, noting that it disapplies section 42(2) in relation to a carry-back claim. Thus a claim may be made under Schedule 1A outside a tax return notwithstanding that a return has been required (under section 8), for instance in Year 1. But he agrees with the decision of both Sales J and the Court of Appeal that the disapplication of section 42(2) by paragraph 2(2) Schedule 1B does not mean that a taxpayer is released from making the claim in his tax return in Year 2, the obligation to do so being imposed by section 8.
- In [22], Lord Hodge repeats the taxpayers' assertion that their claims were stand-alone claims which were governed only by Schedule 1A and that HMRC, by failing to open an enquiry under paragraph 5, have allowed the claims to become unchallengeable. He rejects that assertion "because of the provisions of the TMA which specify what a taxpayer must include in his return", a matter which he proceeds to address in [23] to [25] under the heading "The content of a tax return". I note that Lord Hodge does not draw any distinction between Mr De Silva's claim in respect of his 1999/2000 losses made in his 1998/1999 return or the claim made in his 1999/2000 return.
- In [23] Lord Hodge sets out material parts of section 8 TMA, namely subsection (1), (1AA), (1B) and (1C). He considers it noteworthy that under subsection (1)(a) the information which is required is not simply the amounts in which the person is chargeable to income tax and the amounts payable by him for the year of assessment but information "for the purpose of establishing" those amounts. This includes the information required by subsection (1B) (as to which see paragraph 17 above) in relation to partnerships with the result that a person must include in the return for Year 2 his share of the losses of a partnership, of which he was a partner, which have been stated in a relevant statement relating to Year 2.
- The next section of Lord Hodge's judgment is headed "Claims, reliefs and tax returns" and runs from [26] to [31]. Importantly, he states at [26] that whether a taxpayer submits his tax return for Year 2 within the time limits of section 9(2), so that HMRC assess the sums in which he is chargeable to income tax and the amount payable, or includes in the return the self-assessment in terms of section 9(1)(a), he must provide information in his return for Year 2 to establish what proportion, if any, of his share of the partnership loss incurred in Year 2 is to be offset against his other income in Year 2.
- At [27] he explains that, in the case where a taxpayer seeks to offset all of his share of partnership losses in Year 2 against other income of Year 2 by invoking section 380(1)(a) ICTA (now section 64(2)(a) ITA), he would have to include that claim in his return for Year 2. Schedule 1B would not apply as the claim for relief would involve only one year of assessment. Section 8(1AA)(a) would allow him relief, for which he had included a claim in the return, giving rise to the net sum in which he would be chargeable to income tax for that year.
- At [28], addressing the case where 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 (now section 64(2)(b) ITA), he says this:
"… [the taxpayer] 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. If HMRC had already given effect to part of the claim under Schedule 1A in Year 1 by giving relief, for example by repayment, the return for Year 2 would still have to state the loss, the claim and the relief already given in order to establish the amounts in which the taxpayer is chargeable to income tax in Year 2. Similarly, if the taxpayer had already received full relief under Schedule 1A in Year 1, he would have to state the same information as to the loss, the claim and the relief already given. By so doing he enables the return to "take into account", as section 8(1AA)(a) requires, both the relief which is claimed in the return and that which he has already received. In each case that information is a necessary part of his return for Year 2 as it is information required "for the purpose of establishing the amounts" in which the taxpayer is chargeable to income tax for that year of assessment: section 8(1)."
- Lord Hodge summarises his conclusions at [29] of his judgment:
"In summary, section 8(1AA)(a) defines the amounts in which a person is chargeable to income tax in a year of assessment as net amounts taking account of any relief, a claim for which has been included in the return. The claims to carry back losses relate to Year 2 and effect is given to them in relation to that year: Schedule 1B paragraph 2(3) and (6). It follows, therefore, that 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 in order to establish the amounts in which he is chargeable to income tax for that year of assessment. If too much has already been given as relief, the self-assessment can take that into account by adjusting the amount in which the taxpayer is chargeable to income tax for Year 2: section 9(1)(a). "
The use of the word "must" (ie the taxpayer must make a claim in his tax return) is to be noted. Lord Hodge is saying that the information must be put in the Year 2 return even if the claim is made somewhere else and that even where the claim is made elsewhere the claim must nonetheless also be included in the Year 2 return.
- After noting at the start of [30] that HMRC may inquire into a return under section 8 or 8A and that such an enquiry may extend to anything contained in the return, or required to be contained in the return, including any claim (see section 9(4)), Lord Hodge concludes that HMRC were therefore empowered under section 9A to inquire into the taxpayers' carry-back claims contained in their Year 2 tax returns; HMRC were not required to institute an enquiry under Schedule 1A in order to challenge the taxpayers' claims.
- Having reached that conclusion, Lord Hodge dealt in [31] with a written intervention made by Cotter Solutions Ltd. It argued that the interpretation of the relevant provisions of the TMA which Sales J and the Court of Appeal favoured, by contrast with the straightforward provisions of Schedule 1A, would not allow HMRC either to postpone giving effect to the claim or to recover any tax relief which was subsequently found, following enquiry, not to have been due. He did not agree for three reasons, which I set out:
"First, in relation to a Schedule 1B claim, the obligation in paragraph 4 of Schedule 1A to give effect to the claim as soon as practicable after the claim is made applies to a claim to which effect is given in relation to Year 2 and in relation to which HMRC can institute an enquiry under section 9A. Schedules 1A and 1B operate in tandem in this context. A claim to carry back loss relief made early under Schedule 1A may need the Year 2 losses to be established before effect is given to the claim. The relevant time limit for enquiring into the claim in paragraph 5 of Schedule 1A operates from Year 2, to which the claim relates, and what is practicable in giving prompt effect to a claim must be assessed in that context. Secondly, the mechanisms in paragraph 2(6) of Schedule 1B for giving effect to a claim in Year 2 are not confined to repayment, set off and the increase in the aggregate of payments on account, none of which would alter the tax chargeable for Year 2. Paragraph 2(6) includes the words "or otherwise", which open the door to an adjustment of the amount chargeable to income tax by virtue of both section 8(1AA)(a), which provides that the amounts in which a person is chargeable "take into account any relief … a claim for which is included in the return" and section 9(1)(a) which makes similar provision for the self-assessment. Where relief has already been given in error, it would in my view be open to HMRC, in completing an enquiry, to amend the return (for example, under section 28A(2) TMA) by altering the amount chargeable to income tax for Year 2 in order to recover the sums which were wrongly paid as relief. Thirdly, section 59B(5) provides for payment of income tax which is payable as a result of an amendment of a self-assessment under section 28A on completion of an enquiry into a personal tax return."
The passage following "Secondly" may say something new not found in Gloster LJ's judgment in De Silva (CA), but there is no inconsistency between the two.
- In the remaining section of his judgement under the heading "What HMRC did", Lord Hodge explains the history leading to amendments of the taxpayers' returns. He explains that the amendment to the taxpayers' returns followed on from the amendment to the partnership return. He refers to section 50(9) TMA requiring HMRC to amend each partner's personal return to give effect to the reductions or increases in the relevant partnership statement following an enquiry into the partnership return.
- He concludes, at [36], that HMRC's "amendment of the taxpayers' individual tax returns and the decisions in the letters were therefore lawful and the judicial review challenge fails".
- In De Silva, Lord Hodge's focus was on the carry-back claims which were made in the Year 2 return form that is to say for the year in which the relevant losses were incurred. His decision was that the claims, as well as being made in the Year 2 return form, actually formed part of the return. On that basis, it was clearly open to HMRC to open an enquiry under section 9A which considered the validity of the carry-back claims.
- His judgment demonstrates not only that the carry-back claims actually made in the Year 2 return form part of the return but also that carry-back claims must be made in the Year 2 return, even if they have already been made elsewhere, for instance in the return for Year 1 or in a letter to HMRC. He rejected, in [37], the suggestion that the decision in Cotter gave any support to the taxpayers' argument that the only route of challenge available to HMRC was through the mechanism of a Schedule 1A enquiry.
- One consequence of an amendment to a taxpayer's individual return which reduces or eliminates an alleged trading loss is that a carry-back claim based on that loss ought not, in principle to be available, wherever that claim is made. I say "in principle" because there may be procedural hurdles facing HMRC in rejecting a claim which has in fact been made; indeed, whether one such hurdle exists (namely the requirement to open a Schedule 1A enquiry) is one of the issues in the present case. Where a claim is in fact made in the Year 2 return, the amendment to the return required by section 50(9) TMA will include an amendment to such a carry-back claim; the claim clearly forms part of the return so that effect can, indeed must, be given to the reduction or elimination of the loss on which the claim was based.
- In De Silva, Lord Hodge concluded that HMRC were entitled to make the amendments to the taxpayers' returns which they did and to make the decisions communicated in the letters under challenge. It appears that Lord Hodge was focusing on claims which were made in the tax return for Year 2. He says nothing expressly about the claims made in Year 1 (on the return form for Year 1 but not as part of the tax return itself) that is to say Mr De Silva's 1998/99 return form.
- It is obviously implicit, however, that Mr De Silva would not be able to rely on the original claim made in his Year 1 return form. Mr De Silva's claim in his Year 1 return form falls with the refusal of the same claim made in his Year 2 tax return. This is not because Mr De Silva is to be taken as having abandoned his original claim when he made essentially the same claim in his Year 2 return form (and as part of the tax return itself) but because to allow him to rely on the original claim would be inconsistent with the result of the (deemed) enquiry into his Year 2 tax return, namely the disallowance of the asserted trading loss with the consequential rejection of the claim contained in that return. I understand, of course, the argument that such inconsistency is inherent in the statutory scheme under which HMRC can only open an enquiry under Schedule 1A. But that argument is one which cannot survive, in the light of the decision in De Silva (SC), in a case where a claim is made in the Year 2 return and is refused following an enquiry into that return.
- In that context, it should be noted that there is a conceptual difference between the right to carry back a loss and the mechanism for exercising that right. The word "claim" is apt to refer to both the right and the mechanism. If the right is exercised in two documents (for instance in the Year 1 return form and in the Year 2 return form as part of the tax return itself) then there are clearly two separate assertions of the right and, in that sense, two claims. But equally clearly there is only one right to carry back the losses and in that sense there is only a single claim.
- Whether an enquiry is made into the claim contained in the Year 1 return form under Schedule 1A or is made into the Year 2 tax return (including the claim contained in that return) under section 9A, the enquiry in each case is into the same claim. This is clear from the provisions of paragraph 5(3)(b) Schedule 1A which provides (as stated in paragraph 26 iv) above) that where an enquiry has been made into a claim under paragraph 5(1), the claim shall not be subject to a further notice (opening an enquiry) under section 9A(1) if it is subsequently included in a return: it is clearly envisaged that the substantive claim can appear in two places, both outside the Year 2 return form (and potentially subject to a Schedule 1A enquiry) and in the Year 2 return form (and, following De Silva (SC) as part of the return and subject potentially to a section 9A enquiry).
- In these circumstances, the rejection of the claim by a closure notice following a section 9A enquiry into the Year 2 tax return necessarily entails the rejection of that same claim contained in the Year 1 return form (or anywhere else).
- Accordingly, there is no difficulty in giving effect to the rejection of the claim as made in the Year 1 return form. There is no further amendment required to the Year 2 tax return over and above that which is required as a result of the rejection of the claim as made in the Year 2 tax return. There is no question of any effect being given to the claim in the way required by paragraph 2(6) of Schedule 1B since there is no valid claim to which effect can be given. This conclusion sits comfortably with what Lord Hodge says in [31] about postponing the requirement to give effect to the earlier claim during the course of a section 9A enquiry into the Year 2 tax return. It is obviously implicit in what he said that, if the enquiry results in the claim in that return being rejected, reliance cannot be placed on the earlier claim.
- For completeness, I add that, in my view, it is strictly unnecessary expressly to amend the claim itself in the Year 2 tax return although this is obviously the sensible course. The return contains (or should contain) the figures which give rise to the loss on which the carry-back claim is made. The disallowance of that loss (or part of it) will result in an amendment to the figures in the return so as to eliminate that loss; such an amendment will necessarily show that the amount claimed in the carry-back claim is erroneous. The disallowance of the loss in whole or in part by that amendment will implicitly amend the carry-back claim by reducing its amount accordingly: reading the unamended return and the closure notice (amending the return to disallow the loss) together will demonstrate that the continued validity of an unamended claim would be wholly inconsistent with the closure notice. Construing the two documents together, the only conclusion can be that the carry-back claim is amended.
- There is, however, a difficulty where effect has already been given to the earlier claim for instance by repayment of tax. It can be seen that, at [31], Lord Hodge dealt with the written intervention made by Cotter Solutions Ltd. One of the arguments was that HMRC's approach would not allow them to recover any tax relief which was subsequently found, following enquiry, not to have been due. He rejected this argument for the reasons appearing in the passages commencing "Secondly" and "Thirdly" which appear in the passage quoted at paragraph 54 above.
- As to "Secondly", Lord Hodge noted that the mechanisms for giving effect to a carry back claim (effect having to be given in Year 2 pursuant to paragraph 2(6) Schedule 1B) included methods covered by the words "or otherwise", which he saw as opening the door to an adjustment of the amount chargeable to income tax under sections 8(1AA)(a) and 9(1)(a). Thus, where a taxpayer makes a valid claim for carry back relief, one way in which that relief can be given, at least where the claim is made in the Year 2 tax return, is for the amount in which the taxpayer is chargeable to income tax to be reduced.
- Further, Lord Hodge expressed the view that, where relief had been given in error, it would be open to HMRC to amend the return (for example under section 28A(2)) by altering the amount chargeable to income tax for Year 2 in order to recover the sums wrongly paid as relief. This reflects his first conclusion concerning the effect of the words "or otherwise": if the carry-back relief can be given effect to in Year 2 by an adjustment to the amount of income tax chargeable, then an erroneous granting of relief should be capable of correction by the same method of adjustment. In referring to "error" I have no doubt at all that Lord Hodge would have regarded the giving of relief pursuant to a claim made in the Year 1 return form as having been given in error if a subsequent section 9A enquiry into the Year 2 tax return (where the claim was repeated) established that there were no relevant losses to carry back.
- It is this aspect of the decision concerning the effect of the words "or otherwise" which Mr Ewart describes as surprising; but, surprising or not, it formed part of Lord Hodge's reasoning in arriving at his main conclusion, rejecting the argument raised against it by Cotter Solutions Ltd.
- In my judgment, the reasoning of Lord Hodge in De Silva is not restricted to cases where a claim is made in the Year 2 tax return, notwithstanding that, on the facts of De Silva, Lord Hodge may have been concerned only with such a case. It extends to the case where a claim has been made (for instance in the Year 1 return form) but has not been repeated in the Year 2 tax return. My reasons for that conclusion appear in the following paragraphs.
- The first, and simple, reason is that section 9A(4) provides that an enquiry extends to anything required to be contained in the return, as Lord Hodge notes in [30]. Since, following De Silva (SC), it is clear that the carry-back claim in fact made in the Year 1 return form or elsewhere must also be included in the Year 2 tax return, an enquiry under section 9A extends to the claim which should have been, but was not, included in the Year 2 tax return.
- A closure notice which amends the Year 2 tax return by reducing the claimed carry-back losses to nil (or to some smaller amount than that claimed) necessarily entails that the claim which should have been included in the Year 2 tax return is to be rejected in whole if the loss is reduced to nil or in part if some of the loss is allowed. The claim made in the Year 1 return form is the same claim as that which should have been included in the Year 2 tax return. That claim, having been rejected in whole or in part as a result of the valid section 9A enquiry cannot stand in this case to any greater extent than in the case where the claim is repeated in the Year 2 return.
- As a matter of form, just as I do not consider that an express amendment to the claim even if it is contained in the Year 2 tax return is necessary (see paragraph 66 above), there is no need to amend the Year 2 tax return by expressly referring to the claim and rejecting it. However, if I am wrong in the view I have expressed in paragraph 66, it may be correct that the Year 2 tax return should also be amended expressly in respect of the claim. Thus, if a carry-back claim is, in principle, to be reduced from £X to a smaller figure of £Y, it may be that the Year 2 tax return should be amended (by HMRC) to include a claim for carry-back relief of £Y: the taxpayer could not complain about this given that the claim for £X should have been included in the first place. Similarly, if the carry-back is reduced from £X to nil, it may be that the Year 2 tax return should expressly state that no carry-back claim is available.
- The position is, in my view, as follows:
i) where effect has not yet been given to the earlier claim, a closure notice disallowing all or some of the losses on which the claim in the Year 1 return form was based, necessarily entails rejection of that claim to the extent that the losses are disallowed. No amendment is required to the Year 2 tax return to reflect this conclusion since no claim is made in it and there is nothing to amend. But the requirement in paragraph 2(6) Schedule 1B then has no content if the claim is reduced to nil and a reduced content if the claim is not wholly disallowed: effect does not need to be given to the earlier claim since there is nothing (or a reduced amount) to be given effect to; and
ii) where effect has been given to the earlier claim by repayment of tax, that tax can be recovered by HMRC by an amendment to the Year 2 tax return increasing the amount chargeable to income tax, just as this can be done where the claim is made in the Year 2 tax return as well as in the Year 1 return form.
- Following on from paragraph 71 above, the second reason is more complex. In De Silva, there were in fact no losses available for carry-back because the trading losses asserted by the partnerships concerned were effectively challenged by HMRC in the partnership enquiry, resulting in amendments to the partnership statements. Under section 50(9), effect then had to be given to those amendments in the individual partners' tax returns. The amendments had then to be reflected in two ways. In the first place, the trading loss for Year 2 (on which the carry-back claim was founded) was eliminated. In the second place, the amount of any carry-back claim in the Year 2 tax return was also to be eliminated to reflect the fact that there were no losses available to carry back. The amendment to the claim was, however, purely consequential on the elimination of the loss.
- What Lord Hodge's judgment shows is that a carry-back claim made outside the Year 2 tax return is not free-standing in the sense that it, and any enquiry into it under Schedule 1A, stand by themselves, unconnected with the tax returns which a taxpayer has to make. His judgment demonstrates that a claim made outside the Year 2 tax return is nonetheless one which is closely connected with the Year 2 tax return.
- It is not, in my judgment, the fact that a claim is actually made in the Year 2 tax return which provides the close connection between the claim made outside the Year 2 tax return and the Year 2 tax return itself: rather it is the requirement to make a claim in the return which is critical. My reasons for reaching this conclusion are as follows:
i) The elimination of the loss for Year 2 following the enquiry under section 9A has these consequences:
a) There is no loss on which a carry-back claim can be based: it is for that reason that the claim made in the Year 2 tax return fails, not because there is anything inherently wrong with the claim.
b) Where the carry-back claim is made in the Year 2 tax return, the taxpayer cannot rely on a claim made outside the Year 2 tax return, for instance in the Year 1 return form: that is what De Silva (SC) necessarily and implicitly decides.
ii) There is no reason why the second consequence should not also apply where no claim is in fact made in the Year 2 return in circumstances where it was required to be made in that return, as De Silva (SC) decides it has to be. Indeed, there is every reason why that consequence should apply since, in each case, the reason for the rejection of the carry-back claim is the same, namely the elimination of the loss on which it is based.
- Paragraphs 72 and 73 above in relation to the first reason apply also to this second reason.
- The position would be different in relation to both of the reasons which I have discussed in the preceding few paragraphs if there were no obligation to include the claim in the Year 2 tax return. If that were the position, contrary to the decision in De Silva, the first reason would not apply and the connection which I have described between the claim in the Year 1 return form and the Year 2 tax return would not exist; and, indeed, the decision in De Silva (SC) might well have been different.
- As the summary in [29] of Lord Hodge's judgment makes clear, (i) the taxpayer must make the carry-back claim in his Year 2 tax return and (ii) the carry-back claim does affect the self-assessment for Year 2. His analysis applies, in my view, whether or not the claim is in fact included in the Year 2 tax return as I now explain.
- Further, paragraph [31] of the judgment shows that adjustments can be made to the amount chargeable to income tax to take account of any relief a claim for which is included in the return. I agree with HMRC's submission that the "self assessment" is not just the figure stating the amount due but is every element of the calculation that goes to the tax chargeable in the year: this is implicit in paragraph [31] where Lord Hodge considered that the words "or otherwise" opened the door to an adjustment of the amount chargeable to income tax and that making an amendment to the return by altering the amount chargeable to income tax for Year 2 by, for example, a closure notice is possible.
- It is now necessary to consider the case where effect has not been given to a carry-back claim. Where the claim is included in the Year 2 tax return and where the loss on which the claim is based has been disallowed following a section 9A enquiry into the Year 2 tax return, it is, as I have explained, not possible for the taxpayer to rely on the claim.
- If a claim is not included in the return, then the amount chargeable to income tax in the taxpayer's self-assessment will not be reduced by the claim. The amount chargeable will not take account of the claim and the taxpayer can, in my view, no more rely on a claim made outside the Year 2 tax return to reduce the amount of tax which he actually has to pay than he can where the claim has in fact been made in the Year 2 tax return.
- Where relief has already been given, in error, Lord Hodge's view (which I should take as an accurate statement of the law for present purposes) is that it would be open to HMRC to amend the return by altering the amount chargeable to income tax for Year 2 in order to recover the sums which were wrongly paid as relief. I see no reason to restrict that statement to cases where a claim has been made in the Year 2 tax return. In cases such as the present, it will often be the case that the claim for relief will have been made and met before the time for filing the Year 2 tax return. I have already given some consideration to what Lord Hodge said in paragraph [31]: see paragraphs 67 to 69 above. Although the passage following "Secondly" was considering in terms the case where the carry back claim was made in the Year 2 tax return, his conclusion in relation to the words "or otherwise" was that they opened the door to the adjustment which he described. Since section 8(1AA)(a) and section 9(1)(a) each referred to account being taken of claims for relief included in the Year 2 return, that door was opened so as to give effect to the claim where it was in fact made in the Year 2 return.
- The significance of that conclusion is that where relief had been given in error, HMRC would be able to amend the Year 2 tax return by altering the amount chargeable to income tax: if the carry-back relief can be given effect to in Year 2 by an adjustment to the amount of income tax chargeable, then an erroneous granting of relief should be capable of correction by the same method of adjustment. Lord Hodge's reasoning is equally applicable to the case where the claim is, wrongly, not repeated in the Year 2 tax return. To put it in slightly different words, the power for HMRC to amend the return (for example under section 28A(2)) arises as much where the carry-back claim is not repeated in the Year 2 tax return as when it is. It is not critical to Lord Hodge's reasoning that there is an actual claim which falls within the words "a claim for which is included in the return" in section 8(1AA)(a) or section 9(1)(a); it is enough that there is a claim which ought to have been included in the return. I can see no reason in logic or principle why the error should not be corrected when it arises as a result of giving effect to a claim which has been in the Year 1 return form rather than in the Year 2 tax return since, in my view, there is an error (as contemplated by Lord Hodge) whenever it is established that there was no loss available for carry-back.
- This provides a principled result in that it precludes reliance on a claim based on a loss which has been established, pursuant to a properly commenced enquiry under sections 9A and 12AC, not to exist. The contrary conclusion would result in a taxpayer who fails to include the claim in his Year 2 tax return, which he is obliged to do in accordance with De Silva (SC), being in a different, and as I see it better, position than a person who does make such a claim. The conclusion which I reach avoids that unsatisfactory result.
- My conclusion, in the light of the above discussion, is that an enquiry by HMRC under section 9A or a deemed enquiry in the context of a section 12AC partnership enquiry, into a partner's individual tax return for Year 2 which results in the elimination of a loss asserted by the partner, has the result that the partner cannot rely on a carry-back claim in relation to the loss asserted which is made in his Year 1 return form or any other document whether or not the claim is also made in the Year 2 tax return.
- I should note that there is some disagreement between the parties about the scope of Lord Hodge's decision at least vis a vis Mr De Silva. Mr Ewart contends that the judicial review application related only to the losses claimed for 1999/2000, maintaining that HMRC's letters of 16 September 2011 and 17 November 2011 dealt only with those losses. HMRC do not accept that that is so. I have to confess that that factual position does not appear clearly to me from Lord Hodge's judgment (or indeed from those of the Court of Appeal and Sales J), although I note that the relevant tax returns were before the Supreme Court. However, as I understand it, all of the carry-back claims which were made by both Mr De Silva and Mr Dokelman were either originally made in the tax return for the year in which the relevant losses were incurred (Year 2) or were repeated in the tax return for that year. If that is wrong, so that there were claims which were made only other than in the returns for Year 2, then it might be of some relevance to focus on the precise extent of the two letters just referred to. However, it is not necessary for me to do so in the light of my decision that, even if the carry back claim is made only in the Year 1 return form, an enquiry into the Year 2 tax return will determine the validity of the claim to the extent at least that its validity depends on the establishment of the relevant losses.
The present claims – the Claimants (not including Mr Barrett)
- Before me, Mr Ewart contended on behalf of all of the Claimants that the precise facts of the individual cases were immaterial and that the pleadings in each case contained the necessary material facts for a decision to be reached in each case. The argument was that there was an overarching principle based on the construction of Schedule 1A, Schedule 1B and section 9A to the effect that the only power to enquire into the Claimants' claims, whether or not included in their Year 2 tax returns, was under Schedule 1A. HMRC are now out of time to make such enquiries. It was on that basis that the Claimants' pleadings were drafted.
- Consistently with that contention, the application by the Claimants for an adjournment pending the decision in De Silva (SC) was put on the basis that the central question was whether the carry-back claims were made in the Claimants' Year 2 tax returns. The Court of Appeal held that, no matter how a claim for relief has initially been made, the claim for relief is nonetheless required to be made in the individual partner's Year 2 tax return. The Supreme Court has reached the same conclusion.
- Having lost that central point, the Claimants now execute a complete volte face. They say that the decision in De Silva (SC) radically departs from what everyone, including HMRC, had taken to be fundamental principles of the self-assessment system. In consequence, the Claimants now say that the outcome of each of the present Claimants' claims depends on a number of factual distinctions between each of the cases, most of which could not have been supposed by anyone to be relevant prior to the Supreme Court's decision, a proposition with which HMRC disagree.
- Mr Ewart accepts that, save for claims (such as in the case of Mr Knibbs himself) which were made by letter or in the Year 1 return form but not in the Year 2 tax return itself, the claims are not currently pleaded according to the different categories which he identifies and to which I will come in a moment. I think that this is really acceptance of the proposition that the claims are not properly pleaded (other than in the excepted cases just described).
- It is said, in any case, by Mr Ewart that the reasoning in De Silva (SC) does not apply to Claimants whose year of loss was 2007/2008 or later because of the effect of section 23 ITA; indeed, it is said that the result of the rewrite under ITA is that De Silva (SC) does not apply to any of the Claimants.
- The position of the Claimants is therefore rather different from their position when the case was argued before me. The question arises whether I should, in the light of the changed circumstances, deal with the impact of De Silva (SC) in this strike-out application or whether that should be left to the trial judge if HMRC do not succeed on the other aspects of their application. I have decided that I should deal with the impact of De Silva (SC) on the Claimants' claims, and now proceed to do so. A significant part of the hearing before me was spent on addressing the meaning of the legislation and the impact of De Silva (CA). Although the landscape has changed to some extent as a result of De Silva (SC), the time spent on consideration of the legislation would be wasted if I now declined to reach a conclusion on the impact of De Silva (SC). There is no hard-and-fast practice about when a court should decline to deal with a strike-out application which turns on a point of law. As with summary judgment applications (whether made by a claimant or a defendant), the Court is able to deal with points of law even if they are not straightforward. Having spent a considerable time in this judgment in addressing the impact of De Silva (SC) (as I had to do in order to understand the points at issue) and having reached clear conclusions about the impact of the decision on the facts of the present cases (as will be seen), it is appropriate to rule on the points in this strike-out application.
- The categories which Mr Ewart now identifies as giving rise to distinct factual scenarios are as follows:
i) Category 1: this comprises claims by what Mr Ewart describes as Knibbs-type claimants. These are Claimants who made their claims either by way of letter or on the face of their Year 1 return forms but not in their Year 2 tax returns.
ii) Category 2: this comprises Claimants who have received repayments and also closure notices.
iii) Category 3: this comprises Claimants who have not received repayments but have received closure notices.
iv) Category 4: this comprises Claimants whose year of loss was incurred in 2007/08 or later.
The categories are not all mutually exclusive: for instance, a Claimant within Category 1 may fall within Category 2 or 3 as well.
- That categorisation needs supplementing as follows:
i) I believe that there are Claimants whose Year 2 tax returns are subject to a section 9A enquiry but where the enquires have not been completed so that they have not therefore received closure notices: I add this as Category 5 (although it is possible that I have misunderstood the factual position and that this class is in fact empty).
ii) I also believe that there are Claimants all or some of whose carry-back claims have in fact been subject to a Schedule 1A enquiry. Those enquiries, and any closure notices issued, are not the subject-matter of the present proceedings. However, if and to the extent that there are any claims which are or have been subject to a Schedule 1A enquiry and which are also subject to a section 9A enquiry with which the current proceedings are concerned, the whole basis of Mr Ewart's arguments falls away since it is not suggested, even following De Silva (SC), that a Schedule 1A enquiry was ineffective.
iii) It may be that some Claimants were granted carry-back relief not by repayment but by some other method for instance by set-off or by credit in the Claimant's statement of account. I do not deal with those cases separately since, in my view, the position of such a Claimant is the same as one who received and actual payment. I include, without further express reference to them, such Claimants in my consideration of the position of Claimants who have received payment, and are thus excluded from Category 3 but included in Category 2.
- Category 1 (Knibbs-type Claimants): Mr Ewart submits that it is hard to see how HMRC could amend the claims of these Claimants pursuant to a closure notice under section 28A(2) or by virtue of section 28B(4). Those provisions allow HMRC to make amendments to the return. A return includes a self-assessment and a self-assessment takes into account "any relief or allowance a claim for which is included in the return" as provided for in section 9(1)(a). But for these Claimants, there was no claim in the return so there was nothing to amend.
- For reasons which are apparent from my discussion of De Silva (SC), I do not agree with Mr Ewart's submission. As I have explained, it is possible, even for Category 1 Claimants, for the Year 2 tax return to be amended by altering the amount chargeable to income tax in cases where a payment has been made to the Claimant pursuant to the claim outside the Year 2 tax return. And in cases where payment has not yet been made (or other relief granted), the claim cannot be pursued once it has been rejected by any necessary amendment to the Year 2 tax return to reflect HMRC's decision on the enquiry to disallow the underlying loss asserted. Accordingly, the mere fact that a claim is not made in the Year 2 tax return is not a reason for upholding these Claimants' claims. The position of such Claimants depends, I consider, on the treatment applicable to them as Claimants within Categories 2, 3, or 5.
- Category 2 (Claimants who have received repayments and also closure notices): Lord Hodge held that the way for HMRC to recover repayments made pursuant to erroneous carry-back claims, where they had not opened a Schedule 1A enquiry, was to close the enquiry and amend the Year 2 tax return by altering the amount chargeable to income tax. The issue for Category 2 Claimants is therefore whether the closure notices which they have received amend their Year 2 tax returns so as to show an increased amount chargeable to income tax.
- The Claimants' stated position is that they believe that in none of these cases have the closure notices amended the self-assessments (more relevantly, I consider, the Year 2 tax returns) in the manner identified by Lord Hodge. The forensic point is made that no closure notice issued before the decision in De Silva (SC) could be construed as having done so since before Lord Hodge's judgment, HMRC did not think it was possible and cannot therefore be taken to have intended it.
- Dealing first with the forensic point, HMRC certainly thought they had power to recover the repayments made under carry-back claims which had been based on alleged losses which were disallowed in the (deemed) section 9A enquiries with consequential amendments, it is to be assumed, to the Year 2 tax returns so as to reduce those losses either to nil or to some figure less than that claimed. If a closure notice purported to disallow the carry-back claim (that is to say, the substantive claim, which would be the same claim whether made outside the Year 2 tax return or as part of it), then that would be the disallowance of a claim which ought to have been included in the Year 2 tax return. The closure notice must be construed objectively; the intention of HMRC in giving it is not relevant to its construction. If, as is in fact the case, HMRC have power to amend the Year 2 return by amending the amount of chargeable income for Year 2 in order to recover the sums wrongly paid as relief, the closure notices should, if possible, be construed as making the necessary amendments. I attach no weight to the forensic point.
- As to the substantive point, whether a closure notice does effect the necessary amendment to the Year 2 tax return is a matter of interpretation of the notice, construed objectively and purposively in the light of the powers which HMRC actually had. Let me take this in stages:
i) I start with the case of a taxpayer who has repeated his carry-back claim in the Year 2 tax return. By "repeated" I mean that the claim is made in such a way that it is expressly or necessarily impliedly acknowledged to be the same claim as previously made. The Claimants content that this is not in fact the case for any of them. If the closure notice not only disallows the loss but also (i) expressly rejects the carry-back claim (on the basis that there is no loss to support the claim) and (ii) states that the taxpayer owes by way of tax a sum equal to the amount of the disallowed loss, I do not consider that it could seriously be contended that this did not amount to an amendment of the Year 2 tax return which effected an alteration of the amount chargeable to income tax for the purposes of section 9(1)(a). The purpose of the closure notice is precisely to make amendments to the Year 2 tax return in order to reflect the conclusions of the enquiry. By stating that the amount of the payment made when originally giving effect to the claim is now owed by way of tax, that can only mean payable by way of adjustment of the tax which is chargeable since no other way of recovering the payment has been suggested. This, in substance, is an amendment to the self-assessment even if the words used are not equivalent to "I hereby amend the figure in your self-assessment for the amount chargeable to income tax from £X to £Y".
ii) Consider next a carry-back claim which is not repeated in the Year 2 tax return. The Claimants contend that this is the case for all of them. However, there are Claimants ("referred to as the Steele claimants) who made two claims to carry back the same losses (i) either by way of letter or on the facts of the Year 1 return form and (ii) on the face of the Year 2 return from. Those Claimants contend that the later claims were not amendments of the earlier claims but were unique claims in their own right and were not a repeat or reflection of the earlier claims. I doubt very much that that is a sustainable position. Without deciding the point, it seems to me that the two claims are in substance the same claim, namely the assertion of entitlement to the relevant loss relief. I will proceed, however on the basis that the later claims are not simply repeats of the earlier claims in which case their position is the same, in relation to the earlier claims, as Claimants who did not make any claim in their Year 2 tax returns.
iii) For completeness, I add that there are some Claimants who assert that they made the claims only on the face of the Year 2 return form. It follows from my reasoning above that the claim of such a Claimant forms part of the his tax return and can therefore be subject to a section 9A enquiry. But if, contrary to that conclusion, it were the case that, construing the return form correctly, the claim did form part of the tax return itself, then the position of these Claimants is precisely the same as that of other Claimants within paragraph ii).
iv) Suppose, as in paragraph i), that the closure notice for a Claimant within paragraph ii) not only disallows the loss but also (i) expressly rejects the carry-back claim (on the basis that there was no loss to support the claim) and (ii) states that the Claimant owes by way of tax the amount of the disallowed loss. In my judgment, the result would be precisely the same. The substantive claim to carry back the losses (that is to say the claim actually asserted in a letter or the Year 1 return form and which should have been included in the Year 2 tax return) was a claim which HMRC were able to enquire into in a section 9A enquiry into the Year 2 tax return. As before, the purpose of the closure notice is precisely to make amendments to the Year 2 tax return in order to reflect the conclusions of the enquiry. And as before, by stating that the amount of the payment made when originally giving effect to the claim is now owed by way of tax, the closure notice can only mean that the amount owed is payable by way of adjustment of the tax which is chargeable since no other way of recovering the payment is available (at least, none has been suggested).
v) Can the actual closure notices for all of the Claimants in Category 2 be construed as having the same effect as the hypothetical letters I have just considered? The meaning of each notice must, of course, turn on the words used so that, without seeing a particular notice, it cannot be said with absolute certainty that it does effect the necessary amendment. However, some things can be said with a high degree of confidence. It must surely be the case that each closure notice expressly disallows the loss for Year 2 and is to be taken as amending the Year 2 tax return accordingly: that is what was directed to take place as the result of the conclusions in the partnership enquiries. I would be extremely surprised if the closure notices do not also state, expressly or by necessary implication, that the claim to carry back the loss is rejected; and I would be equally extremely surprised if a claim is not made for repayment of the erroneously granted relief. However, surprised as I might be, I cannot rule out the possibility that a closure notice in the case of any particular Claimant was ineffective to amend the Year 2 tax return in such a way as to entitle HMRC to receive payment of the erroneously paid relief.
- Category 3 (Claimants who have not received repayments but have received closure notices): In cases where a Category 3 Claimant has included the carry-back claim in his Year 2 tax return, it is clear that the claim can be amended on the closure of a section 9A enquiry into that return; and for reasons already given, if that is done the Claimant clearly cannot continue to rely on the claim made in some other place since that claim is the same substantive claim. Further, again for reasons already given, I do not consider that it is necessary for the closure notice expressly to purport to amend the claim.
- In cases where a Category 3 Claimant has not included the carry-back claim in his Year 2 tax return, there is, as explained in paragraph 66 above, no need to make any amendment to the Year 2 tax return to reflect the refusal of the carry-back claim although, of course, the closure notice must amend the Year 2 tax return to reflect the disallowance of the Year 2 losses in whole or in part. It is not suggested, so far as I am aware, that there is any case where this has not been done.
- Category 4 (Claimants whose year of loss was 2007/08 or later): Mr Ewart emphasises that Lord Hodge's reasoning in De Silva (SC) depends on the proposition that carry-back claims could affect the amount in which a taxpayer is chargeable to income tax for Year 2 and that HMRC have a discretion to alter the amounts in which a taxpayer is chargeable to income tax in Year 2, in order to give effect to, or reverse the effect previously given to, the claim. He submits that this cannot be right where Year 2 is a year to which ITA applies. That, he submits, is because section 23 and the following sections of ITA (in conjunction with section 3) lay down a highly prescriptive method for calculating a taxpayer's income for a given tax year. Among other matters, they set out an exhaustive list of every other statutory provision that may feed into the calculation by resulting in a deduction from, or addition to, taxable income for the year in question. The list does not include paragraph 2(6) Schedule 1B. He submits that these provisions must therefore negative, at least for years in which ITA was in force, the interpretation of the relevant provisions of TMA adopted by Lord Hodge in De Silva (SC) (which concerned losses made in pre-2007 years of assessment).
- I reject that submission. De Silva (SC) establishes the law as it stood prior to ITA. The provisions of ITA are part of the rewrite of pre-existing legislation. Whilst the new legislation is not necessarily to be taken as having an identical effect to the old, the adoption of an interpretation of the new provisions which departs from the interpretation of the old as established in case law (whether before or after the rewrite) is to be avoided if possible, especially where the departure is radical. The effect of ITA for which Mr Ewart argues would give rise to a radical departure from the law as established by De Silva (SC). It would mean that a carry back claim could not ever be made in a Year 2 tax return (although it could of course be included in the Year 2 return form) in contrast with the position established in De Silva (SC) that it must be included in the Year 2 tax return even if it has already been made elsewhere. In my view, it is only if ITA compels such an interpretation that such a departure should be countenanced.
- In my judgment, the provisions of ITA relied on by Mr Ewart do not compel the adoption of such an interpretation. There is no doubt that paragraph 2 Schedule 1B applies in the case of loss claims involving two or more years: section 60(2) ITA makes that clear in stating that the relevant Chapter is "subject to paragraph 2 of Schedule 1B to TMA 1970". Accordingly, there is no doubt that it remains the case both that the claim has no impact on the Year 1 liability to tax and that the claim must be given effect to in Year 2. The claim, if valid, is given effect by one of the methods specified in paragraph 2(6) "or otherwise". The usual methods will be repayment or set-off, that is to say repayment of tax or set-off against a liability to tax. In other words, the claim feeds into the amount of money which a taxpayer is actually liable to pay to or entitled to receive back from HMRC in respect of Year 2.
- Lord Hodge states in [28] and [29] that a carry-back claim must be included in the Year 2 tax return: this is "the combined effect of section 8(1AA) and Schedule 1B paragraphs 2(3) and (6)" and is "in order to establish the amounts in which [the taxpayer] is chargeable to income tax for that year of assessment". However, he also recognises in [31] that the methods of adjustment stated in paragraph 2(6) Schedule 1B would not alter the tax chargeable for Year 2. Accordingly, the starting point is always to establish the amount chargeable to income tax ignoring the carry-back claim: that is, prima facie, the amount chargeable to income tax under both the pre- and post-ITA regimes.
- Consider, then, the case of a carry-back claim which is made on a taxpayer's Year 2 return form, as was the position of Mr De Silva and of Mr Dokelman. One question then is whether, for a year of assessment to which ITA applies, that claim is made in and forms part of the return or whether it is simply that the form provides the taxpayer with a convenient opportunity to make the claim. In my view, such a claim is made in, and forms part of, the return. Just as the words "or otherwise" open the door for adjustments to the amount chargeable to income tax where Year 2 falls before a year in which ITA applies, so too it opens the door to the same adjustment where Year 2 is a year in which ITA does apply. Sections 23ff are prescriptive, as Mr Ewart submits, in laying down how the amount chargeable to income tax is to be ascertained but they do not preclude the amount arrived at by applying those provisions being adjusted by HMRC as one way of giving effect to the carry-back claim.
- If paragraph 2(6) Schedule 1B had stated expressly that one of the methods of giving effect to carry-back relief was to adjust the amount of the chargeable income shown in a taxpayer's self-assessment return, there could, in my view, be no doubt about this conclusion. The reasoning of Lord Hodge would be equally applicable in this case as to the cases of Mr De Silva and Mr Dokelman. In particular, what Lord Hodge says in [28] would be precisely in point. Thus if a taxpayer wished to carry back part of the losses incurred in Year 2 (to which ITA applies) to set off against his income of Year 1 by invoking section 64, "he would" as Lord Hodge puts it "have also to make the claim in his return for Year 2 [that is to say in and as part of the return, not simply on the return form]". The reason which Lord Hodge goes on to give, that is to say that this is the combined effect of section 8(1AA)(a) and paragraphs 2(3) and (6) Schedule 1B, applies equally to the case where Year 2 is a year to which ITA applies as where it does not. This analysis demonstrates that there is no inconsistency between the prescriptive provisions of sections 23ff and an adjustment to the amount chargeable to income tax by an amendment to the Year 2 tax return.
- Mr Ewart's argument could succeed only if the words "or otherwise" are now to be given a more restricted meaning than that given to them in the context of a case where Year 2 is a year to which ITA does not apply. I do not consider that those words have that result. The words "or otherwise" in paragraph 2(6) are, on their face, perfectly general and Lord Hodge has interpreted them as including an adjustment to the amount of income tax chargeable. I do not consider that sections 23ff require that wide prima facie meaning to be restricted.
- I find support for that conclusion in the Court of Appeal decision in R (oao Derry) v HMRC [2017] STC 1723 ("Derry") although I do not go so far as Mr Sachdeva who submits that the decision is an authority, binding on me, determinative against Mr Ewart's argument. In that case, Mr Derry claimed share loss relief under section 132 ITA. This allows for the carry back of losses incurred in Year 2 to Year 1, as in the case of carry-back of trading losses. Mr Derry included a claim to carry back the relief from Year 2 to Year 1 on his Year 1 return form.
- There is a material difference, however, between the provisions relating to trading losses (and the same point arises in relation to the relief in issue in Cotter) and share losses. Trading losses are dealt with in section 64 which appears in Chapter 2 Part 4 ITA: Chapter 2 is expressly subject, as provided in section 60(2), to paragraph 2 Schedule 1B TMA. In contrast, there is no similar provision in the case of share losses.
- Mr Derry argued that paragraph 2 Schedule 1B did not apply to his carry-back claim; that claim was to be given effect to by a reduction in the tax payable in Year 1. HMRC had not opened a section 9A enquiry into the Year 1 tax return and were out of time to do so. Mr Derry was therefore entitled to the relief which he had claimed. The issue, therefore, was whether the absence of a provision similar to that found in section 60(2) ITA meant that paragraph 2 Schedule 1B did not apply. It had been held by the Upper Tribunal that Mr Derry's claim on his Year 1 return form was subject to section 42 and paragraph 2 of Schedule 1B. That decision was upheld. HMRC were not required, therefore, to enquire into the claim under section 9A but were able to enquire into it under paragraph 5 Schedule 1A TMA.
- The facts in Derry were very different from those in the present cases. More importantly, the issues are different. In Derry, the issue was whether paragraph 2 Schedule 1B applied to Mr Derry's claim in his Year 1 tax return. If paragraph 2 did not apply, Mr Derry was able to make his claim in, and so as to form part of, his Year 1 tax return in relation to which HMRC had not opened a section 9A enquiry. If paragraph 2 did apply, then the claim could not have been made in, so as to form part of, the Year 1 tax return but instead would fall within Schedule 1A in relation to which HMRC had opened an enquiry into the claim in due time. In the present cases, there is no doubt that paragraph 2 Schedule 1B applies so that the main issue decided in Derry is not in point: the issue in the present cases is whether a claim can be made, and if so whether it has to be made, in, so as to form part of, the Year 2 tax return.
- However, both Derry and the present cases raise questions concerning the interaction of the relief provisions in ITA and the way in which relief is given for such claims under TMA. It is in that context that the judgment of Henderson LJ in Derry is of assistance. At [50] he says this:
"50. 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. …. 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."
- By parity of reasoning, I do not find it helpful to approach the present question as though it involved a conflict between the regime in paragraph 2 Schedule 1B and the more specific enactments of sections 23 and 24 in particular. In the present cases (just as in Derry), it is unrealistic to suppose that in enacting section 23 and 24, Parliament intended to override or detract from the specific provisions of paragraph 2(6) directing that effect is to be given to the carry-back claim in Year 2 by the specified methods "or otherwise", including an adjustment to the amount of income tax chargeable.
- I therefore conclude that where a carry-back claim is made on the Year 2 return form, it is thereby included in, and forms part of, the tax return itself. It follows from the reasoning of Lord Hodge that the carry-back claim has to be included in the Year 2 tax return. The position if it is not included is precisely the same where the relevant loss is incurred in a year for which ITA applies as in a year for which it does not apply.
- Category 5 (Claimants whose Year 2 tax returns are subject to an open enquiry where no closure notice has been given): clearly, whichever of Categories 1, 2 and 3 the relevant Claimant would fall into if a closure notice had been given, the claims of the Category 5 Claimants in the present proceedings cannot succeed. Given the decision in De Silva (SC) together with the views which I express in this judgment, HMRC will be able to draft a closure notice rejecting a carry-back claim in whole or in part in such a way that it is clearly effective to achieve a rejection of the claim and to impose a payment liability on the Claimant in order to recover the sums erroneously paid as relief.
- In summary:
i) Category 1 Claimants cannot succeed in their carry-back claims simply on the basis that their claims were not included in their Year 2 tax returns.
ii) Category 2 Claimants can succeed in their carry-back claims only if the relevant closure notices failed, on their true construction, to effect amendments to the Year 2 tax returns so as to increase the amount chargeable to income tax. Although I would be extremely surprised if, properly construed, the notices did not have that effect, it cannot be said with certainty that that is so.
iii) Category 3 Claimants cannot succeed in their carry-back claims assuming, as I do, that all relevant closure notices amended the Year 2 tax returns to disallow (in whole or in part) the losses for Year 2 on which the carry-back claims were based. On that basis, their claims should be struck out. However, if I am wrong in thinking that it is unnecessary expressly to amend the carry-back claims in Category 3 cases, it is then a question of construction of the relevant notices whether they do so, either expressly or by necessary implication. I would be extremely surprised if they did not.
iv) Category 4 Claimants fall to be treated in the same way as Claimants whose losses arose in a year to which ITA did not apply.
v) Category 5 Claimants cannot succeed in their carry-back claims at the present time. It is inconceivable that, if and when closure notices are given, HMRC will not draft them in such a way that they are effective to disallow the carry-back claims and to enable HMRC to recover the sums wrongly paid as relief. Their claims should be struck out.
- I will return to the consequences, in terms of strike-out, of my conclusions in relation to Category 2 later in this judgment.
The present claims – Mr Barrett
- At the time of the hearing before me, Mr Ewart's argument in relation to claimants (as I understand, now only Mr Barrett) whose claims relied on the Gift Aid provisions was really no different from those of the other Claimants. It was that, just as a loss carry-back claim could be challenged by HMRC only in the context of an enquiry under Schedule 1A, so too Mr Barrett's claim for relief depended on an election which could only be enquired into under that Schedule. However, now that Mr Ewart's overarching argument has no traction following the decision in De Silva (SC), the precise terms of the Gift Aid provisions need to be considered. I have to say that the submissions of both sides on this aspect of the case have been somewhat skeletal. I have therefore carried out my own analysis of the provisions. Not having heard full argument, however, my conclusions should be regarded as only provisional.
- Mr Ewart's categorisation of claims includes Claimants (ie Mr Barrett) who could not have made elections in their Year 2 tax return. Section 426(6) ITA provides that an election to carry-back relief for charitable donations must be made on or before the date the taxpayer submits his Year 1 return and no later than the normal self-assessment filing date for the Year 1 return. Those Claimants who participated in Gift Aid schemes, therefore, could not, under the statute, have made their elections in their Year 2 return forms let alone in their Year 2 tax returns. Mr Ewart submits that it is hard to see how the reasoning in De Silva could apply to these Claimants.
- This submission must be put in the context of Chapter 2 (Gift Aid) as a whole. The principal relief is given in section 414 in relation to qualifying donations. It operates by increasing the limits for the basic and higher rate which the taxpayer is to adopt when completing a self-assessment. For there to be a qualifying donation, the taxpayer must make a Gift Aid declaration. A taxpayer who makes a qualifying donation (and who by making the Gift Aid declaration indicates an intention to obtain the benefit of the relief) obtains the benefit of the relief when he makes his self-assessment for the year in which the donation is made (subject to the effect of section 426 to which I will come). If the taxpayer completes his tax return in a way which does not reflect the relief, that is his error. There is no doubt, however, that the self-assessment reflecting the relief under section 414 is part of the return. It is therefore possible for a section 9A enquiry into the return to enquire into whether the donation was a donation to which the Gift Aid scheme is properly applicable and, if it is not, for the self-assessment to be amended accordingly.
- There are limits on the amount of relief which an individual can obtain in relation to qualifying donations. One of the restrictions is found in section 424. Where the tax treated as deducted from the donations under section 414 (amount A) is greater than the amount of income tax to which the individual is charged for the tax year (together with capital gains tax subject to certain exclusions) (amount C), then the individual is to be charged to an amount equal to the difference between amount A and amount C: section 424(4). Tax is charged for the year in which the gift is made: section 424(5). The income tax chargeable for the year is calculated in accordance with sections 423 and 425: section 424(3).
- Section 426 provides for an individual who makes a gift (in Year 2 to continue with the references which I have been using so far) which is a qualifying donation to elect to be treated as if the gift had been made in the previous tax year (referred to as year P, ie Year 1). The election is not itself a claim to relief: rather it has the effect that the gift made in one year (Year 2) is to be treated as having been made in another year (Year 1). The taxpayer has already indicated his intention to claim the relief by making a Gift Aid declaration (otherwise the gift would not be a qualifying donation in the first place).
- Section 426(3) then describes what the effect of the election is, namely that sections 414 and 423 to 425 are to have effect as if the gift were a qualifying donation made in Year 1. Looking at the Gift Aid provisions in isolation (that is to say, ignoring Schedule 1B TMA) it is clear that the result of this is that the basic rate and higher rate limits are increased for Year 1 and that there is no impact on the self-assessment for Year 2 (or indeed the Year 2 tax return at all).
- The provisions of section 426 demonstrate, to my mind, that Schedule 1B does not apply to the carry-back of charitable gifts. That is the conclusion for which Mr Sachdeva argues (although he bases his argument on section 426(6) whereas I reach that provisional conclusion relying on other provisions as well). Section 426(1) provides for the individual to elect to be treated as though the gift had been made in the previous year. As just explained, an election under section 426(1) results in the gift being treated as made in Year 1 with the consequences set out in section 426(3). The election, as I have said, is not itself a claim to a relief but is simply an election that the individual should be treated as though a gift made in Year 2 should be treated as made in Year 1. The relief itself results from the provision of a Gift Aid declaration (thus rendering the gift a qualifying donation) as a result of which the taxpayer can obtain the benefit of the relief by completing his self-assessment utilising the increases in the basic and higher rate limits specified in section 414.
- There is another strong pointer to this conclusion. Where an election is made, one effect of section 426(3) is that section 424 is to take effect as if the gift were a qualifying donation made in Year 1 and so that any tax charged under that section is charged for "the tax year in which the gift or gifts are made" which, under the statutory treatment provided for by section 414, is Year 1. If it is right that paragraph 2 Schedule 1B applies, then the result would be that effect has to be given to the election in Year 2 (notwithstanding that the gift is treated as made in Year 1) and yet any assessment made to reflect an over-recovery of relief (ie the amount referred to in section 424(4)) would be assessable for Year 1. That would, to my mind, be a very odd result.
- A yet further pointer to the same conclusion is to be found in section 426(6) requiring the election to be made before the date on which the return for Year 1 is filed and not later than the normal self-assessment filing date for that return. Thus the election will necessarily have been made before the Year 1 return is filed which suggests that the obvious place for obtaining the relief is in the Year 1 return itself.
- Mr Ewart may be right to say that the reasoning in De Silva (SC) does not apply to a taxpayer making an election under section 426. This, however, is because the two cases of relief under Gift Aid and relief for trading losses are like chalk and cheese. Gift Aid relief is given by treating the taxpayer as though the gift made in Year 2 had been made in Year 1. In contrast, loss relief under section 64 is expressly subject (as a result of section 60) to the regime under paragraph 2 Schedule 1B and so the loss is not treated as having been made in the earlier year. Instead, a calculation is made of the difference in tax which was in fact chargeable for the earlier year and the tax which would have been chargeable on the assumption that effect could be, and were, given to the claim in the earlier year. As in Derry in relation to share loss relief, the Gift Aid provisions are not expressed to be subject to paragraph 2 Schedule 1B. But in contrast with Derry, I consider that Parliament has laid down a clear regime for Gift Aid which is inconsistent with the provisions of Schedule 1B. My provisional view is that this regime cannot be displaced by the general provisions of paragraph 2 Schedule 1B relating to other reliefs of varying types.
- If that analysis is wrong, so that the election gives rise to a claim within paragraph 2 Schedule 1B (for which purpose a "claim" includes an election: see paragraph 1(1)(a) Schedule 1B), the taxpayer's claim to obtain the benefit of the relief (in contrast with the election qua election) is one which would have to be made in the Year 2 tax return in accordance with the decision in De Silva (SC). Just as in the case of carry-back of losses, the claim referred to in paragraph 2(4) Schedule 1B must be included in the Year 2 tax return in order that the amount chargeable to income tax can be ascertained. In the absence of an election, relief would be given in Year 2 as a result of the increase in the basic and higher rate limits. If an election is made, those limits will not be increased. HMRC are entitled to be provided with information in the Year 2 tax return to show why a claim for Gift Aid relief following the giving by the taxpayer of a Gift Aid declaration is not included in the Year 2 tax return. By parity of reasoning with the case of carry-back of losses, the claim must be included in the Year 2 return. It is nothing to the point that the election relating to the claim must be made outside that return.
- The result of these conclusions is that Mr Barrett's claim must fail. His case is that HMRC must challenge the election (or as I prefer to put it, the claim to Gift Aid relief) pursuant to a Schedule 1A enquiry. Even if it is correct that paragraph 2 Schedule 1B does apply to, or as a result of, the election, the claim to which the election gives rise (whether it is viewed as a claim for relief pursuant to Gift Aid or as a claim defined by paragraph 2(4) Schedule 1B as the result of the election) it is a claim which must be included in the Year 2 tax return. Accordingly, Mr Barrett's position in relation to the case which is made on his behalf is no different from the relevant category of Claimants in the Consolidated Claims. For reasons which appear in a moment, the claims of all of those Claimants are to be struck out. So too must Mr Barrett's claim be struck out.
- If that is wrong, I would nonetheless strike out Mr Barrett's claim on the basis of my analysis of the Gift Aid provisions. If that analysis is correct, Mr Ewart's argument, that it is only in the context of a Schedule 1A enquiry that HMRC would be able to reject the claim for relief, cannot succeed. I do not decide the case on that basis however. The true interpretation and effect of the Gift Aid provisions are matters on which I intend that both parties should be able to take whatever position they wish if and when it comes to any appeal, although I hope that my provisional conclusions will be of assistance to any further analysis.
The appropriate Court or Tribunal for dealing with the Claimants' claims
- The Consolidated Claims: The question concerning where the Claimants in the Consolidated Claims should be entitled to ventilate their arguments cannot be answered in abstract. The answer will depend on what the Claimants are challenging and why. More importantly, whether it is appropriate to continue their claims, to the extent that they are not struck out, depends on the precise scope of the challenge which is now open to them raise irrespective of where it might be raised.
- My conclusions earlier in this judgment in relation to the impact of De Silva (SC) is that HMRC were entitled to open enquiries under section 9A into the Claimants' Year 2 tax returns in which the validity of the carry-back claims could be established. HMRC were entitled to give closure notices and could have drafted them in such a way that they were effective to reject those claims to the extent that the losses on which they were based had been disallowed in the partnership enquiries, and to recover the repayments made in error. HMRC issued notices some of which, at least, purport to disallow the losses and recover repayments made. None has been appealed and the time limit for doing so has expired with the result that they are binding on the Claimants.
- In cases where closure notices have not yet been given, HMRC will in practice be able, as I have said, to formulate them in such a way that they are effective to reject the relevant carry-back claims. The only issue, therefore, is in relation to the true construction of the closure notices which have been given. For reasons which I have already explained, in relation to Category 2 Claimants, I cannot be sure, not having seen any of the closure notices, that any of them was effective to reject the carry-back claims. In the cases of Categories 3 and 5 (including those who also fall within Category 4), I can be confident that the closure notices were effective.
- The issue then is whether those notices were effective to amend the Claimants' Year 2 returns in such a way that HMRC were entitled to refuse to meet the claims and entitled to require repayment of relief given in error. There is no issue, in the light of my analysis, that the Year 2 tax returns could have been amended to achieve this result: they could have been. The question is whether they were. If the answer in any particular case is Yes, that is an end of the matter: the relevant Claimant would have no claim in any Court or Tribunal. If the answer is No, then HMRC's decisions to reject the claim and to seek repayment were unlawful, although I confess to great difficulty in seeing how a notice which required repayment could be seen as other than a rejection of the carry-back claim and an adjustment to the amount chargeable to income tax.
- In cases where the answer is No, the question then is whether the Claimant concerned could (in which case whether he should) have made a statutory appeal or sought judicial review had he acted within the applicable time-limits. In my view, such a Claimant could and should have appealed. Sample letters which I have seen communicating relevant decisions to Claimants are expressed to be closure notices and if there are cases where that is not expressed, it will surely be obvious that the letter is communicating the conclusions of the enquiry and purporting to give effect to them. If a Claimant wished to challenge any specific ruling or amendment contained in the notice on the basis that to make it went beyond the relevant powers under section 28A even though HMRC were entitled to enquire into the carry-back claim as part of the enquiry under section 9A, then the statutory right of appeal to the Tax Chamber against the contents of the notice would have been available to him. It would, prima facie, be an abuse of process for the Claimant to seek a remedy in any other forum. Accordingly, the claims of Category 2 Claimants should also be struck out as an abuse of process. This is not a case, in my judgment, where the Court should allow a claim to proceed even if there is, strictly, jurisdiction for the Court to deal with it in accordance with the principles established in the authorities, in particular Autologic Holdings PLC v Inland Revenue Commissioners [2005] UKHL 54 [2006] 1 AC 118.
- The Claimants' position in all cases was that there was no power to include the carry-back claims within the scope of the enquiries which had been opened into the Year 2 tax returns under section 9A. That was the position of Mr De Silva and Mr Dokelman when they started their proceedings in the De Silva litigation. Their challenges to HMRC's decisions were brought by judicial review, which both sides appear to have considered was the correct way to proceed. It might therefore be thought that the appropriate way for the Claimants in the present cases to bring their challenge was similarly by way of judicial review. However, in my view, my analysis in the preceding paragraph is the correct one now that the law has been explained in De Silva (SC). But if I am wrong in that, the appropriate challenge in the present case would have been by way of judicial review and not by seeking declarations in proceedings in the Chancery Division. Since I have already decided the strike-out application in favour of HMRC, I will take this point quite shortly.
- The decision to disallow a Claimant's carry-back claim is one which is made by HMRC in the exercise of their public law functions. If the Claimants are correct in saying that HMRC had no power at all to make such a decision because the only challenge open to them was pursuant to a Schedule 1A enquiry, then, assuming that it was not open to the Claimant to appeal in accordance with the statutory procedure, judicial review is, in my judgment, the appropriate, and exclusive, way to bring such a challenge. The fact that, if a judicial review claim succeeds, HMRC would have to allow the claim does not mean that a Claimant has the right to challenge the decision by an action seeking declaratory relief. Still less is it appropriate for a Claimant to seek declaratory relief or judicial review in advance of a decision disallowing the carry-back claim. In reaching that conclusion, I have examined the several authorities referred to by the parties. I do not think that there is any advantage to be found in referring to the cases in support of the well-established principle that in the case of a pure public law claim, it is an abuse of process to bring a claim in private law where it could, as in the present cases, have been made within a claim for judicial review.
- If that is right, as I consider it would be, were the Claimants clearly correct in their submissions concerning the need for a Schedule 1A enquiry, the position is a fortiori were the submissions only arguably correct. Accordingly, even if I had doubts about the impact of De Silva (SC), it would follow that, in cases where closure notices have been served, the Claimants should have either appealed their closure notices or sought judicial review of the decision disallowing their carry-back claims; and it would follow that in cases where closure notices have not yet been given, they should either await the giving of the notice or, conceivably, bring judicial review to prevent a threatened unlawful decision. On no basis is it appropriate, in my judgement, for the Claimants to seek declaratory relief of the nature sought.
- The Barrett Claim: As I understand the position at present, Mr Barrett has received the benefit of Gift Aid relief on his gift of £600,000. HMRC have not, as yet, sought to claw back any part of that relief. If and when they do so, Mr Barrett will be able to raise such objections as he can. In particular, if HMRC seek to disallow the relief in the context of their section 9A enquiry into Mr Barrett's 2010/11 tax return by a suitably drafted closure notice, Mr Barrett's appropriate remedy will be to appeal as in the case of Category 5 Claimants. If I am wrong in my understanding that he has not received a closure notice, his position will be the same as Category 2 Claimants. It is not open to him in the proceedings as currently constituted to contend that the only challenge open to HMRC would have been to open a section 9A enquiry into his 2009/10 tax return on the basis of my analysis earlier in this judgment of the Gift Aid provisions.
The pleadings
- I do not propose to address HMRC's final ground of strike-out, namely the inadequacy of the Claimants' pleadings. In the light of my conclusions concerning the impact of De Silva (SC), the pleadings are now, on any view, inadequate. Each Claimant would need to plead facts which brought them into one or more of Mr Ewart's Categories 2 or 3 or my Category 5: it is clearly inadequate simply to plead that no enquiry has been opened under Schedule 1A (which I understand not to be the case for some Claimants where such enquiries have been opened). In order for the claims to proceed, amendments would be necessary. No application to amend has, of course, been made since the need for amendment only became apparent, on the Claimants' case, once the decision in De Silva (SC) had been handed down. And clearly no application to amend could sensibly be made until this judgment had been handed down.
- In the light of this judgment, however, the Claimants' claims cannot be improved by amendment. The claims are to be struck out not because of some pleading point but because, in my judgment, the Claimants have no claims and, even if they did have, they are to be brought either by way of appeal in the Tax Chamber or by judicial review.
Disposition
- The Consolidated Claims and Mr Barrett's Claim are struck out.
- For completeness, I should add that nothing has been said to me in these strike-out applications about the possibility of a restitutionary claim by HMRC in cases where they have already made payment. I say nothing about the admissibility of such claims.
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