The case of Cotter v HMRC  UKSC 69, heard at the Supreme Court on 6 November 2013, considers the fundamental issue of when HMRC are obliged to treat a tax relief claim as within a tax return and therefore subject to normal self-assessment time limits and procedures.
When Mr Cotter filed his 2007/08 tax return he did not include a self-assessment of the tax due for that year, rather he allowed HMRC to calculate the income tax and capital gains tax arising. A figure in excess of £200,000 of tax due was subsequently returned to him. Shortly afterwards, by an amendment to his return, Mr Cotter submitted a loss relief claim based on a substantial loss for income tax purposes in 2008/09, a result of his participation in a tax avoidance scheme.
HMRC did not accept the validity of this loss relief claim and this case concerned the correct approach to be adopted by HMRC in disputing it.
Both HMRC and the taxpayer were in agreement that the loss relief claim would not affect the tax payable for 2007/08 – i.e the year for which the return was prepared – instead, effect would be given effect in 2008/09.
The taxpayer argued that because the loss claim was included in the 2007/08 return – in the box named ‘relief now for 2008/09 trading losses’ – an enquiry should have been made into the return under the normal ‘Section 9A’ procedure and, in the meantime, the repayment should have been processed.
HMRC contended that this was a standalone claim; that the relevant enquiry provision was therefore TMA 1970 Sch 1A; and they therefore did not have to give effect to the claim until the enquiry was closed.
The Supreme Court held that because the loss relief claim was not relevant to the taxpayer’s 2007/08 tax liability, it did not form part of his ‘return’ for that year. HMRC did not therefore have to follow normal self-assessment procedures when disputing it – and, particularly, they did not have to process repayment in the meantime.
The overall context to this decision is HMRC’s frustration at having to give effect to a taxpayer’s self-assessment of low or no tax in circumstances where the taxpayer is relying on a tax avoidance strategy, the validity of which they dispute. In this particular case, it was found that they did not have to do this. The reasoning is, however, quite specific. In other cases, where the claim does affect that year’s tax liability, the same reasoning would presumably not apply.
The fact that the Supreme Court has also now created a category of items which, while included in the actual tax return, are not now to be considered as properly within it for self-assessment purposes does not help the cause of tax simplification!