Civic Environmental Systems Ltd v The Commissioners for HMRC

A statutory right to carry back a trading loss does not itself determine how relief affects an earlier corporation-tax return. Under Finance Act 1998, Sch 18, para 58, a claim made while the earlier return remains amendable is treated as an amendment and may be considered in later enquiry and appeal proceedings. A claim made after that period is dealt with separately under Sch 1A to the Taxes Management Act 1970. It leads to discharge or repayment of tax then assessed or paid, but does not alter the earlier return or assessment. The legislation provides no mechanism for reopening such a claim when the earlier profits are later increased. The appeal was dismissed.

Civic Environmental Systems Ltd filed a return showing profits of £142,039 for the period ended 30 April 2007. It later claimed to carry back its 2008 trading loss, and HMRC repaid the tax originally paid. Following an enquiry, HMRC issued a closure notice increasing the 2007 profits by £540,000 without giving effect to the carry-back claim. The First-tier Tribunal held that no additional losses could be carried back. The Upper Tribunal dismissed CES’s appeal in [2022] UKUT 84 (TCC). The issue before the Court of Appeal was whether the FTT had been required to give effect to the carry-back claim when determining the appeal against the closure notice.

The Court of Appeal unanimously dismissed the appeal. Lord Justice Nugee gave the judgment, with Lady Justice Simler and Lady Justice Asplin agreeing.

1. Nature of the claim. Section 393A of the Income and Corporation Taxes Act 1988 conferred a right to claim carry-back of the whole trading loss, subject to the profits available for set-off. It did not itself prescribe the procedural mechanism by which the claim was to be given effect.
2. Timing under Schedule 18. Paragraph 58 of Schedule 18 to the Finance Act 1998 distinguished between claims made before and after the deadline for amending the earlier return. If the earlier return remained amendable, the claim was treated as an amendment. The amended self-assessment, any closure notice and any appeal could then take account of the loss and the correctly determined profits.
3. Late claims. CES’s claim was made after 30 April 2009, when its 2007 return could no longer be amended. Paragraph 58 therefore directed that the claim be dealt with under Schedule 1A to the Taxes Management Act 1970, outside the Schedule 18 procedure. It was a freestanding claim and did not alter the profits or assessment shown in the 2007 return.
4. Role of HMRC and the FTT. HMRC correctly omitted the claim from the closure notice. The FTT’s function under section 50 was to determine whether CES was overcharged or undercharged by that assessment, on the material which HMRC had taken, or ought to have taken, into account. The FTT was neither required nor entitled to introduce the freestanding claim into that appeal.
5. Effect of repayment and finality. Under Schedule 1A, paragraph 4(1), HMRC correctly repaid the tax that had been assessed and paid. Neither paragraph 3(1)(b) nor any other provision supplied a power to reopen the claim after the 2007 profits were increased. Section 393A and Schedule 1A were not inconsistent; the different result followed from the statutory procedures. Reliance on R (Derry) v HMRC did not require a different construction. The additional corporation tax arising from the increased profits could therefore be calculated without reopening the original repayment.

• Court of Appeal (Civil Division) — In [2023] EWCA Civ 722, the appeal was dismissed.
• Upper Tribunal (Tax and Chancery Chamber) — In [2022] UKUT 84 (TCC), the appeal was dismissed on the carry-back issue.
• First-tier Tribunal — The tribunal increased the profits for the 2007 period by £540,000 and held that no additional part of the 2008 loss could be carried back against that increase.