Inspector of Taxes v Keeling

A PAYE code may take account of a tax relief only where the employee is entitled to the relief for the relevant year and that entitlement has been established when the code is determined. A specific restriction of that kind in the PAYE Regulations cannot be displaced by the general provisions requiring provisional deductions for allowances and reliefs, by the adjustment power, or by a residual discretion.

For a Lloyd’s underwriter, a loss treated as sustained in a later year of assessment cannot support an earlier-year PAYE adjustment before the statutory entitlement to loss relief has arisen. The court did not decide the separate effect of Schedule 1B to the Taxes Management Act 1970.

The taxpayer was a Lloyd’s Name. In February 2002 he sought to reduce deductions from his pension under PAYE for 2002/03. He relied on a substantial underwriting loss expected to be declared in May 2003 and claimed that it would be available as relief against his 2002/03 income.

The General Commissioners allowed his appeal against the Inspector’s PAYE code. Peter Smith J dismissed the Revenue’s appeal from that decision. The Inspector appealed to the Court of Appeal.

The central issue was whether a prospective loss, which would be treated as sustained in 2003/04, could be reflected in the PAYE code for 2002/03 before the taxpayer’s statutory entitlement to loss relief had arisen.

1. Appeal allowed. Carnwath LJ, with whom Waller LJ and Lord Phillips MR agreed, restored the Inspector’s PAYE code determination.
2. Under the Lloyd’s provisions in the Finance Act 1993, the relevant loss was treated as a loss of the 2003/04 year of assessment. The right to relief under section 380 of the Income and Corporation Taxes Act 1988 depended upon the taxpayer having sustained that loss. In February 2002, and when the Commissioners determined the appeal in July 2002, no such right had arisen. It was immaterial whether the loss crystallised on declaration in May 2003 or only at the end of the underwriting year. On either view, it had not been sustained at the material time.
3. Regulation 7(2)(a) of the Income Tax (Employment) Regulations 1993 was decisive. It permits account to be taken only of reliefs for the code year where the employee’s title has been established. That condition was not met.
4. The general PAYE provisions in section 203(6) and (7), regulation 7(2)(f), and any discretion implied by regulation 7(1), could not circumvent the specific restriction in regulation 7(2)(a). To hold otherwise would deprive the restriction of purpose and would require PAYE coding to accommodate uncertain prospective trading losses.
5. The court acknowledged the practical attraction of avoiding deductions where a future loss would exceed the pension income. That consideration could not justify departure from the statutory scheme. It was unnecessary to determine the Revenue’s alternative argument based on Schedule 1B to the Taxes Management Act 1970.

• Court of Appeal (Civil Division): Allowed the Inspector’s appeal and restored the PAYE code determination: [2003] EWCA Civ 1221.
• Chancery Division: Peter Smith J dismissed the Revenue’s appeal from the General Commissioners.
• General Commissioners: In August 2002, allowed the taxpayer’s appeal against the Inspector’s PAYE code determination.