Amrolia, R (on the application of) v HM Revenue & Customs

Where an enquiry into a partnership return reduces losses allocated to a partner, HMRC may amend the partner’s self-assessment by reducing the allowable-loss figure. Under Taxes Management Act 1970, section 59B(5), tax previously repaid on the basis of the larger loss becomes repayable as a result of that amendment.

The statutory machinery is not confined to changing the figure of tax chargeable for the year in which the return was made. It may also reduce relief claimed against earlier years and, where necessary, recalculate tax chargeable for the year of assessment in which losses were incurred. This applies even where part of the losses was set against income in that same year.

Two taxpayers challenged HMRC decisions following the completion of an enquiry into the partnership return of Tower MCashback 3 LLP. The enquiry established that the partnership losses allocated to each taxpayer were excessive because the loan element of the investments was not allowable.

HMRC therefore reduced the losses stated in each taxpayer’s 2004/2005 return. In the first case, the reduction affected relief claimed against earlier years and required repayment of tax already repaid. In the second, part of the loss had also been set against income for 2004/2005, so HMRC recalculated the tax chargeable for that year and reduced the repayment relating to earlier years.

The central issues were whether HMRC’s notices validly amended the self-assessments and whether section 59B(5) permitted recovery where losses had been used partly against income in the year of assessment.

1. The claims for judicial review were dismissed. HMRC was entitled to recover or require repayment of tax following amendments made under section 28B(4) of the Taxes Management Act 1970.

2. Section 59B(5) recognises that tax may become payable or repayable as a result of an amendment or correction of a self-assessment. It does not require every amendment to alter the specific part of the self-assessment stating the tax chargeable for the relevant year.

3. Where allowable losses claimed in a return are reduced, the self-assessment may be amended by reducing the loss figure that can be set against income in earlier years. If HMRC has already made a repayment on the basis of the larger loss, the reduced amount is repayable under section 59B(5).

4. In the first claimant’s case, HMRC validly reduced the claimed partnership losses and correspondingly reduced the repayment previously made.

5. In the second claimant’s case, section 59B(5) also permitted HMRC to recalculate the tax chargeable for 2004/2005 after reducing the losses set against income in that year, while reducing the repayment attributable to losses set against earlier years. The fact that the losses were used partly in the current year and partly in earlier years did not prevent the amendments.

6. The notices therefore amended the self-assessments and stated the resulting liabilities sufficiently. It was unnecessary to consider HMRC’s alternative reliance on section 114 of the Taxes Management Act 1970 or section 31(2A) of the Senior Courts Act 1981.