Revenue & Customs v Cotter

In tax recovery proceedings, the court may determine whether a taxpayer was legally entitled to include a relief claim in a return. The statutory tribunal procedure has exclusive jurisdiction over whether the claim is substantively valid, but not over the prior question whether the claim could be included in that return.

A claim for employment loss relief relating to a later year, although relief may be given against income for an earlier year, relates to the later year under paragraph 2 of Schedule 1B to the Taxes Management Act 1970. It therefore cannot be included in the earlier year's return and cannot reduce the tax payable for that year.

HMRC claimed income tax and capital gains tax from the defendant for 2007/08. The proceedings were issued in the St Helens County Court and transferred to the High Court to determine an issue of principle. The defendant had amended his 2007/08 return to include a claim for employment loss relief arising from an alleged loss in 2008/09.

The substantive validity of the loss claim was subject to HMRC's enquiry and the statutory appeal procedure. The central questions were whether the court had jurisdiction to decide whether the claim could be included in the 2007/08 return and, if so, whether the claim was legally capable of being included there.

1. Jurisdiction. The statutory enquiry and appeal procedure has exclusive jurisdiction to determine whether a loss-relief claim is well-founded. That principle, reflected in Autologic Holdings plc v IRC [2006] 1 AC 118, did not prevent the High Court from deciding whether the claim could lawfully be included in the relevant return.
2. Sections 8 and 9 of the Taxes Management Act 1970 operate on claims which the statutory scheme permits to be included in a return. If a claim must be made by another method, including it in a return cannot bring it within the enquiry procedure applicable to that return. Otherwise, a taxpayer could circumvent the statutory requirements simply by inserting the claim in the return.
3. Construction of Schedule 1B. Paragraph 2 applies where relief is claimed for a loss incurred in a later year but given in an earlier year. Paragraph 2(3) provides without qualification that the claim relates to the later year. Paragraphs 2(4) and 2(5) use the earlier year's tax position only to calculate the amount, while paragraph 2(6) provides that effect is given to the claim in relation to the later year.
4. Paragraph 2(2), which disapplies section 42(2), removes the requirement to include the claim in a return. It does not create a choice allowing the taxpayer to include the claim in the earlier year's return. The references in section 128 of the Income Tax Act 2007 to deducting the loss in calculating net income were subject to paragraph 2 of Schedule 1B by section 128(7).
5. The analysis of Schedule 1B in Blackburn v Keeling [2003] STC 1162 supported HMRC's construction, although it required caution because it concerned different legislation and issues concerning PAYE which did not arise here.
6. The defendant could not rely on the loss-relief claim as a defence to the tax-recovery claim. HMRC was in principle entitled to judgment, with the precise amount to be determined by reference to the tax certificate and any agreement between counsel.

The proceedings were issued in the St Helens County Court and transferred to the High Court to determine the issue of principle. This was a first-instance determination, not an appeal from an earlier judgment.