Knibbs & Ors v Revenue And Customs

A loss carry-back claim must be included in the tax return for the year in which the loss arose, even if it was first made elsewhere. HMRC may enquire into that return under section 9A of the Taxes Management Act 1970. If the underlying loss is disallowed, the carry-back claim cannot be relied upon, and relief already paid may be recovered by amending the later-year return. The same approach applies where the later year falls within the Income Tax Act 2007. A public-law challenge to a closure notice should ordinarily be brought by statutory appeal or judicial review, not by an action for declarations in the Chancery Division. The court provisionally considered the Gift Aid election regime distinct from the Schedule 1B regime, but held that the claim as pleaded could not proceed.

The proceedings comprised consolidated claims by numerous taxpayers and a separate claim by Stephen Barrett against HMRC. The taxpayers sought declarations requiring HMRC to give effect to loss carry-back claims and a Gift Aid election, or preventing HMRC from recovering relief already given. They also claimed damages for breach of statutory duty.

HMRC applied to strike out the claims. The principal issue was whether HMRC could challenge loss carry-back claims through enquiries into the taxpayers’ later-year tax returns under section 9A of the Taxes Management Act 1970, or whether they were confined to enquiries under Schedule 1A. The court also considered the effect of closure notices, the Income Tax Act 2007, the Gift Aid provisions, and the proper procedural route for challenging HMRC’s decisions.

1. Loss carry-back claims. The reasoning of the Supreme Court in R (De Silva) v HMRC [2017] UKSC 74 establishes that a carry-back claim relates to the later, loss-making year and must be included in the taxpayer’s return for that year, even if it was previously made in an earlier-year return form or by letter. The claim therefore falls within the scope of an enquiry under section 9A TMA. It is not confined to a Schedule 1A enquiry.
2. Effect of disallowing the loss. Where an enquiry into the later-year return, including a deemed enquiry arising from a partnership enquiry, eliminates or reduces the loss, the taxpayer cannot rely on the corresponding carry-back claim. This is so whether or not the claim was repeated in the later-year return. Where relief has already been paid, HMRC may amend the later-year return by increasing the amount chargeable to income tax to recover the sums paid in error.
3. Income Tax Act 2007. The statutory rewrite did not displace the specific regime in paragraph 2 of Schedule 1B TMA. The words “or otherwise” in paragraph 2(6) permit effect to be given to a carry-back claim by adjustment of the amount chargeable to income tax. The same reasoning applies to losses arising in years governed by ITA.
4. Gift Aid. The court provisionally considered that section 426 ITA establishes a distinct regime under which an election treats a later-year gift as made in the previous year, and that Schedule 1B does not apply. Alternatively, if Schedule 1B applied, the associated claim for relief would have to be included in the later-year return. In either event, Mr Barrett’s pleaded case could not succeed.
5. Procedure and disposition. A challenge to a closure notice or HMRC’s exercise of public-law functions should ordinarily be brought by statutory appeal to the Tax Chamber or by judicial review. Seeking declaratory relief in the Chancery Division was an abuse of process. The consolidated claims and Mr Barrett’s claim were struck out. The judge made no ruling on any possible restitutionary claim by HMRC.

First-instance decision. No prior appellate history of these proceedings was stated in the judgment.