De Silva & Anor, R (on the application of) v HM Revenue and Customs

For loss-relief claims involving more than one year of assessment, the claim relates to the later, loss-making year and relief is given in relation to that year. A claim may initially be made in a return or outside it, but it must ultimately be reflected in the taxpayer’s return for the later year. An earlier indication of a carry-back claim does not prevent HM Revenue and Customs from enquiring into the later partnership and individual returns within the applicable time limit. An enquiry into a partnership return is deemed to include an enquiry into the relevant partners’ returns. A settlement under the Taxes Management Act 1970 may consequently require corresponding amendments to those returns. An agreement made by an authorised partner under the Partnership Act 1891 binds the firm and all partners.

Limited partners in film partnerships claimed to carry back losses against income for earlier years. The partnerships’ returns were enquired into in time under the Taxes Management Act 1970. The enquiries led to closure notices disallowing the claimed expenditure, followed by appeals which were compromised under section 54 agreements. The Revenue then amended the individual partners’ returns to reflect the reduced losses.

The Upper Tribunal, Sales J, dismissed the judicial-review claim: [2014] UKUT 0170 (TCC). The partners appealed, relying principally on Revenue and Customs Commissioners v Cotter and contending that their earlier carry-back claims were stand-alone claims which had become final. The Revenue served a respondent’s notice concerning the binding effect of the partnership settlement agreements. The central issues were whether the Revenue had used a lawful enquiry route and whether the agreements bound the individual partners.

1. Appeal dismissed. Arden LJ and Simon LJ agreed with the judgment of Gloster LJ.
2. Schedule 1B claims for relief involving two or more years are not confined to the stand-alone procedure in Schedule 1A. Paragraph 2(2) of Schedule 1B disapplies the rule in section 42(2) of the Taxes Management Act 1970; it therefore permits a claim to be made in a return or outside a return. In either event, the claim must ultimately be included in the individual taxpayer’s return for the later year, because it affects the tax chargeable and payable for that year.
3. The partners’ entries in their earlier-year returns were made before the relevant partnership losses had arisen and were based on estimated losses. They were therefore not complete stand-alone claims in the substantive sense. The claims could only be made good when the partners included their shares of the losses in their later-year returns.
4. The Revenue lawfully challenged the later-year loss entries through enquiries into the partnership returns. By sections 12AC(3) and 12AC(6) of the TMA, the partnership enquiries were deemed to include enquiries into the partners’ corresponding returns. The Revenue was not required to use Schedule 1A merely because an earlier carry-back claim had been intimated. If it had chosen to enquire into an earlier stand-alone claim under Schedule 1A, however, paragraph 5(3)(b) would have prevented a later enquiry into the same claim.
5. Revenue and Customs Commissioners v Cotter concerned a materially different situation: a clearly stand-alone claim made outside the relevant returns, with no corresponding carry-back claim in the later-year return. It did not preclude the present analysis.
6. The partnership settlement agreements were contractually binding on the appellants. Under section 6 of the Partnership Act 1891, the agreements were instruments relating to the firm’s business, executed in the firm name by an authorised person and intended to bind the firm. They therefore bound the firm and all partners, including the limited partners, and restricted the losses which could be claimed.
7. Even if the procedural argument had succeeded, the appellants were contractually precluded from asserting losses greater than those agreed. The Revenue was entitled to amend the relevant returns under sections 50(9) and 54 of the TMA. Judicial review was dismissed.

• Court of Appeal (Civil Division) — The appeal against the Upper Tribunal’s decision was dismissed. The court upheld the lawfulness of the Revenue’s enquiries and amendments and rejected the partners’ reliance on Revenue and Customs Commissioners v Cotter.
• Upper Tribunal (Tax and Chancery Chamber) — Sales J dismissed the judicial-review claim on 15 April 2014: [2014] UKUT 0170 (TCC).