Supreme Court case clarifies the correct procedures that clients seeking to claim relief on losses should follow.
Mr Rouse and Mr Cotter sought relief for losses and elected to relieve the losses by offsetting them against the income tax for the previous year. They made the election by including the relief in the tax return (pre-printed form) for the earlier year. These claims were not from identical relieving provisions, but both included their claims in the ‘white space’ on their forms and included the value of the loss. Mr Rouse, not Mr Cotter, entered the amount of the relief on page TCS2 headed ‘adjustments to tax due’ in the box provided for the purpose.
The difference was that Mr Cotter left it to HMRC to calculate the tax he owed, while Mr Rouse instructed his accountants to do the calculation and send it to HMRC with the return.
Mr Cotter submitted his 2007-08 return in October 2008, without any claim for relief, and HMRC calculated the tax payable on the basis of the return as submitted. He later made an amendment to the return, amending the boxes in order to include a claim for relief for a loss suffered in 2008-09 to be set off against his 2007-08 liability.
HMRC recalculated the tax payable for 2007-08, took no notice of the claim relief and arrived at the same figure as before. Mr Cotter’s accountants asserted in correspondence that as a result of the claim, no further tax was payable in January 2009 and asked HMRC to amend the calculation they had made in order that effect could be made to the relief and the January payment reduced to nil. The request was refused.
HMRC opened an enquiry into the claim under para 5(1) of Schedule 1A Taxes Management Act 1970, which deals with claims not included in returns. This paragraph enables an officer of the board to enquire into a claim made by any person, or an amendment made by any person of a claim made by him if, before the end of [the first anniversary of the first 31January next following that year], at the same time refusing to give effect to the claim until their enquiry was closed.
Mr Rouse’s claim was submitted with this self-assessment return on page TCS1, headed ‘tax calculation summary’. Mr Rouse entered in Box 1 as the ‘total tax, student loan repayment and Class 4 NICs due before any payments on account’, the figure shown on the self-assessment, as the aggregate of tax and NICs due after taking credit for tax deducted at source.
The self-assessment consisted of a separate sheet, headed ‘tax computation’, prepared by Mr Rouse’s accountants. It contained the computation of the tax liability for the first year and in addition, a calculation of the amount Mr Rouse was required to pay. The claimed relief was not brought into the year 1 computation, but reduced the payment on account for January.
Again, HMRC opened an enquiry under Para 5, Sch 1A, but it was argued that it could only be opened under section 9A. the difference between the two is that relief for the claim can only be withheld until it is shown to be valid under Sch 1A, whereas a claim cannot be disturbed until the end of an enquiry under section 9A.
The judgement of the Supreme Court was that income tax was an annual tax and therefore relief for the second year cannot be part of the assessment for the first year. In Mr Cotter’s case, HMRC was entitled to bring the case under Sch 5. Mr Cotter lost his case at the Supreme Court.
However, based on the distinction that Lord Hodge made in the Cotter case, there appeared to be a case for Mr Rouse to succeed in his claim, as his case was heard prior to the Supreme Court decision in Cotter. In the end, this did not happen as HMRC appealed, but it does demonstrate the importance of submitting the claim correctly.
It also demonstrated that conclusions can be altered following a later Supreme Court decision.
Article contributed by ACCA