Derry, R (on the application of) v HM Revenue and Customs

Paragraph 2 of Schedule 1B to the Taxes Management Act 1970 applies to share-loss relief under Chapter 6 of Part 4 of the Income Tax Act 2007, even though that chapter contains no express signpost to Schedule 1B. The relief is given effect in the later year and does not alter the earlier year’s tax charge. A legally irrelevant claim entered on a tax-return form is not necessarily included in the return for enquiry purposes. However, where the taxpayer performs the self-assessment, entries for adjustments to tax due form part of the return. HMRC must amend the return or open a timely enquiry under section 9A to challenge that assessment.

Mr Derry appealed from the Upper Tribunal (Tax and Chancery Chamber), which had dismissed his judicial-review challenge to HMRC’s demand for tax and interest. The Upper Tribunal held that his claim to carry back share-loss relief was governed by paragraph 2 of Schedule 1B to the Taxes Management Act 1970 and that his 2009/10 return assessed liability at £95,546.36.

The Court of Appeal considered whether Schedule 1B applied despite the absence of an express cross-reference in Chapter 6 of Part 4 of the Income Tax Act 2007, and whether the taxpayer’s entries reducing tax due formed part of his self-assessment when HMRC had not opened an enquiry into that return.

1. Ground 1. The court dismissed the challenge to the application of paragraph 2 of Schedule 1B to share-loss relief. Its language was apt to cover a claim for a loss incurred in a later year and carried back to an earlier year. Section 42(11A) of the Taxes Management Act 1970 gave effect to Schedule 1B but did not confine it to claims expressly identified elsewhere. The absence of an express signpost in Chapter 6 was therefore not conclusive.
2. Paragraph 2 of Schedule 1B created a specific regime for loss-relief carry-back claims. The claim related to the later year, and effect was given to it in that year by repayment, set-off or otherwise. It did not alter the tax chargeable or payable for the earlier year. The provisions of sections 132 and 133 of the Income Tax Act 2007 were not inconsistent with that regime.
3. The court applied the analysis in Revenue and Customs Commissioners v Cotter [2013] UKSC 69. A claim which could not affect the tax liability for the year covered by a return was not included in that return for the purposes of an HMRC enquiry and could instead be investigated under Schedule 1A. The claim itself was therefore properly treated as a claim outside the return.
4. Ground 2. The reasoning in Cotter [2013] UKSC 69 concerning a taxpayer who completed the tax-calculation pages was expressly described as obiter, but Henderson LJ agreed with it. A taxpayer’s self-assessment, including entries for adjustments to tax due, formed part of the return because those entries were integral to the calculation under sections 23 and 24 of the Income Tax Act 2007. HMRC could not go behind that assessment without amending the return or opening an enquiry under section 9A of the Taxes Management Act 1970.
5. No enquiry had been opened into the 2009/10 return within the statutory period. HMRC had therefore permitted Mr Derry at least the cash-flow advantage of the repayment claimed on the basis of his self-assessment. Permission to appeal on ground 2 was granted and the appeal was allowed on that ground. Lord Justice McFarlane and Lord Justice Longmore agreed.

1. Court of Appeal (Civil Division): [2017] EWCA Civ 435 — permission granted on ground 2; ground 1 dismissed and ground 2 allowed.
2. Upper Tribunal (Tax and Chancery Chamber): [2015] UKUT 0416 (TCC) — dismissed the judicial-review claim concerning HMRC’s tax demand.