The Court of Appeal in Revenue and Customs Commissioners v Cotter (published on 14 February 2012) ruled that HMRC was wrong not to open an enquiry under section 9A TMA 1970 and provide the taxpayer with the right of appeal. HMRC had decided to ignore a claim for loss relief generated by a tax avoidance scheme and had instead pursued the tax liability that existed before the claim.
The case concerned a claim for loss relief made through an amendment by Mr Cotter to his 2007/08 tax return following the realisation of losses generated by investing in a tax avoidance scheme. Mr Cotter completed the relevant boxes on the tax return to make the amendment and the source of the loss was explained in the additional information boxes, including a note which explained that the taxpayer’s interpretation on tax law might be different from that of HMRC. Mr Cotter’s advisers concluded that the loss relief claim extinguished the previously calculated 2007/08 liability.
HMRC produced a tax calculation in March 2009 which did not acknowledge the loss claim and left an amount of £211,927.77 in charge. At the same time HMRC opened an enquiry into Mr Cotter’s loss relief claim under schedule 1A(5) of TMA 1970, its view being that the loss relief was a standalone claim and did not form part of the 2007/08 tax return. On the other hand, Mr Cotter and his advisers believed that they had made an effective claim on the 2007/08 tax return, albeit by amendment.
In June 2009 HMRC commenced County Court proceedings against Mr Cotter for an amount of £203,342.77 plus interest (which also incorporated 2008/09). Mr Cotter filed a defence claiming that the loss relief negated the tax liability and challenged the county court’s jurisdiction over proceedings on the basis that the issue was within the jurisdiction in section 9A TMA 1970 and that HMRC had not followed the correct procedure when enquiring into the loss relief claim.
At this point proceedings were transferred to the High Court, where on 14 April 2011 the judge found in favour of HMRC and agreed that the County Court did have jurisdiction to determine a tax debt. Mr Cotter subsequently appealed to the Court of Appeal.
The Court of Appeal judges were unanimous in agreeing that HMRC should have opened an enquiry using section 9A TMA 1970 in this case, as it was clear that the enquiry might extend to ‘anything contained in the return, or required to be contained in the return, including any claim or election included in the return’ (therefore affording the taxpayer a right of appeal to the first tier tribunal) and that neither the County Court or High Court had any jurisdiction. HMRC could not therefore use the County Court to determine their collection proceedings.
Whilst this may not be the end of the matter – as HMRC may decide to appeal – it is heartening to see that the tribunal has not allowed HMRC to pick and choose when it uses its enquiry powers.