R v Commissioners for Her Majesty’s Revenue and Customs

A claim to carry a trading loss from a later tax year back to an earlier year must be included in the taxpayer’s return for the later year. This remains so where relief has already been sought or obtained under Schedule 1A to the Taxes Management Act 1970.

Schedules 1A and 1B operate together. HMRC may inquire under section 9A into a carry-back claim contained, or required to be contained, in the later-year return. An inquiry into a partnership return also constitutes an inquiry into each partner’s relevant personal return. Following the determination or agreed settlement of the partnership’s losses, HMRC may amend the partners’ returns and recover excessive relief.

The taxpayers were limited partners in partnerships participating in film-investment tax schemes. They claimed to carry their shares of partnership trading losses back to earlier tax years. HMRC opened inquiries into the partnership returns, and the resulting appeals were compromised under section 54 of the Taxes Management Act 1970 at substantially reduced loss figures. HMRC consequently amended the taxpayers’ personal returns and sought additional tax.

The taxpayers sought judicial review, contending that their carry-back claims were stand-alone claims governed exclusively by Schedule 1A. They argued that HMRC’s failure to open timely Schedule 1A inquiries made the claims unchallengeable. The Upper Tribunal rejected the claim in [2014] UKUT 170 (TCC), and the Court of Appeal dismissed the appeal in [2016] EWCA Civ 40.

The central issue was whether HMRC could inquire into the claims through the later-year personal returns and amend those returns following the settlement of the partnership appeals.

1. Appeal dismissed unanimously. Lord Hodge, with whom Lord Neuberger, Lord Kerr, Lord Reed and Lord Hughes agreed, held that HMRC’s amendments to the taxpayers’ personal returns were lawful and that the judicial review challenge failed.

2. Paragraph 2 of Schedule 1B to the Taxes Management Act 1970 makes a carry-back claim relate to the later year and requires effect to be given to it in relation to that year. Although paragraph 2(2) disapplies section 42(2), permitting an early claim outside a return under Schedule 1A, it does not release the taxpayer from including the claim in the later-year return. Sections 8 and 9 require that return to state the loss, the claim and any relief already received so that the net amount chargeable for the later year can be established.

3. Schedules 1A and 1B operate in tandem. HMRC may inquire under section 9A into anything contained, or required to be contained, in the later-year return, including the carry-back claim. Relief previously given in error may be recovered by amending the amount chargeable for the later year on completion of the inquiry. The words “or otherwise” in Schedule 1B paragraph 2(6) permit that adjustment, while sections 28A and 59B provide the amendment and payment mechanisms.

4. Under section 12AC(6)(a), HMRC’s notices opening inquiries into the partnership returns were deemed to include section 9A notices relating to the partners’ personal returns. The settlement agreements under section 54 had the same consequences as tribunal determinations. Sections 50(7) and 50(9) therefore empowered and required HMRC to amend each partner’s return to reflect the reduced partnership losses.

5. Revenue and Customs Comrs v Cotter [2013] UKSC 69 concerned an early claim entered on an earlier-year return which could not affect the tax chargeable or payable for that year. It was then a stand-alone Schedule 1A claim. That decision did not address a section 9A inquiry into a later-year return and gave the taxpayers no support.

1. United Kingdom Supreme Court: The taxpayers’ appeal was dismissed unanimously in [2017] UKSC 74. HMRC’s amendments to their personal returns were held lawful.
2. Court of Appeal: The taxpayers’ appeal was dismissed in [2016] EWCA Civ 40; [2016] STC 1333.
3. Upper Tribunal: Sales J rejected the taxpayers’ judicial review claim in [2014] UKUT 170 (TCC); [2014] STC 2088.