Cotter v Commissioners for Her Majesty's Revenue & Customs

A claim entered on a tax return form is not necessarily part of the statutory return for the relevant assessment year. Where the taxpayer leaves the calculation to the Revenue, it may disregard a claim which clearly cannot affect that year’s tax and treat it as a stand-alone claim governed by Schedule 1A to the Taxes Management Act 1970.

Loss relief carried back under Schedule 1B relates to the later, loss-making year. It does not alter the tax chargeable or payable for the earlier year. The tax tribunal’s exclusive jurisdiction over appeals against assessments does not prevent the ordinary courts from deciding whether such a later-year claim is a defence to collection proceedings. If the taxpayer instead calculates a self-assessment incorporating the claim, the Revenue must use the statutory correction or enquiry machinery before going behind that assessment.

Cotter v Commissioners for Her Majesty's Revenue & Customs arose from collection proceedings for tax assessed for 2007/08. The taxpayer had subsequently entered in his return form a provisional claim under the Income Tax Act 2007 for employment losses incurred in 2008/09. He contended that the claim reduced the earlier liability to nil and that only the First-tier Tribunal could determine its effect.

The proceedings were transferred to the High Court, where David Richards J held that the courts had jurisdiction and that the claim was no defence to immediate payment. The Court of Appeal allowed the taxpayer’s appeal in [2012] EWCA Civ 81, holding that the Revenue had to use the section 9A enquiry procedure.

The central questions were whether the claim formed part of the statutory return for 2007/08, whether Schedule 1A or section 9A of the Taxes Management Act 1970 governed the enquiry, and whether the ordinary courts had jurisdiction over the collection defence.

1. Appeal allowed unanimously. Lord Hodge delivered the judgment, with which Lord Neuberger, Lord Sumption, Lord Reed and Lord Toulson agreed. The employment-loss claim did not provide a defence to the demand for the tax assessed for 2007/08. The relevant parts of David Richards J’s order were restored.

2. Paragraph 2 of Schedule 1B to the Taxes Management Act 1970 made the claim relate to the later, loss-making year. Relief was given in that later year through repayment, set-off or an adjustment to payments on account. It did not alter the tax chargeable or payable for the earlier year. The relief was merely quantified by comparing the earlier-year liability with the hypothetical liability had the claim taken effect there.

3. In sections 8, 9, 9A and 42(11)(a), the statutory “return” comprised information submitted to establish the income tax and capital gains tax chargeable, and the income tax payable, for the relevant year. Where a taxpayer left the calculation to the Revenue, the Revenue could disregard information and claims which clearly could not affect that calculation. The loss claim was therefore treated as made otherwise than in the 2007/08 return. Schedule 1A governed the enquiry, and the Revenue was entitled to withhold effect from the claim while the enquiry continued.

4. The position would have differed if the taxpayer had completed his own calculation and assessed the tax due after allowing for the claim. That calculation would have formed part of the return. The Revenue could then go behind it only by correcting the return under section 9ZB or opening an enquiry under section 9A, with the accompanying rights of appeal to the First-tier Tribunal.

5. Autologic Holdings plc v Inland Revenue Commissioners [2006] 1 AC 118 established the tribunal’s exclusive jurisdiction over appeals against tax assessments. The present collection proceedings involved neither an assessment appeal nor the substantive validity of the loss claim. The county court and High Court could therefore decide whether the claim was a defence to immediate payment without intruding upon the tribunal’s jurisdiction. The Revenue could collect the assessed tax under section 66 while the Schedule 1A enquiry continued. It was unnecessary to decide the late argument based on section 35 of the Crown Proceedings Act 1947 and rule 66.4 of the Civil Procedure Rules 1998.

1. United Kingdom Supreme Court: In Cotter v Commissioners for Her Majesty's Revenue & Customs [2013] UKSC 69, the court unanimously allowed the Revenue’s appeal and restored paragraphs 1 and 2 of David Richards J’s order.
2. Court of Appeal: In [2012] EWCA Civ 81, the court allowed the taxpayer’s appeal. It held that the Revenue had to use the section 9A enquiry procedure and that neither the county court nor the High Court could determine the claim’s effect.
3. High Court: David Richards J held that the court had jurisdiction in the collection proceedings and that the later-year loss-relief claim was not a defence to payment of the tax due for 2007/08.