Cotter v HMRC [2013] UKSC 69

A technical question about where a claim sits, with an entirely untechnical consequence. If the claim is part of the return, HMRC waits. If it is a stand-alone claim, the client pays first and argues afterwards, and Cotter decides which.

Why This Case Matters

The question looks technical and is anything but. Whether a claim forms part of a return determines which enquiry power HMRC must use, and, far more importantly to the client, whether HMRC can collect the tax while the argument runs.

• If the claim is in the return, HMRC must enquire under s9A TMA 1970, the self-assessment stands as filed while the enquiry proceeds, and the disputed tax is not collectable in the meantime.
• If the claim is a stand-alone claim under Schedule 1A TMA 1970, HMRC enquires under that Schedule and can demand payment of the tax that would be due without the claim.

The Facts

Mr Cotter incurred a substantial tax liability for 2007–08. In 2008–09 he entered into arrangements which generated losses.

His accountants amended the 2007–08 return to claim relief for those 2008–09 losses against the 2007–08 liability. The entries were made in the return, with an explanation, and the claim would, if effective, have substantially reduced the tax payable for the earlier year.

The critical feature is that the losses arose in a later year and were being carried back. They did not feed into the self-assessment calculation for 2007–08 in the ordinary way.

HMRC treated the claim as a stand-alone claim under Schedule 1A, opened an enquiry into it under that Schedule, and demanded payment of the 2007–08 tax without regard to the claim. Mr Cotter contended that HMRC was obliged to proceed under s9A, because s9A permits an enquiry into “anything contained in the return, or required to be contained in the return, including any claim or election included in the return”.

The Ratio Decidendi

The reasoning

Lord Hodge approached the question functionally. A “return” in the self-assessment system is the document by which the taxpayer establishes the amounts in which they are chargeable for the year of assessment. Information which is entered on the form but which does not go to that calculation is not, for these purposes, part of the return, even though it physically appears on the same document.

A carried-back loss from a later year does not alter the taxpayer’s chargeable amounts for the earlier year in the ordinary sense. It gives rise to a freestanding right to relief, and the machinery for such claims is Schedule 1A.

Lord Hodge’s criticism of the form

Lord Hodge did not pretend the distinction was easy for taxpayers to apply. He observed that the uncertainty could be removed if HMRC’s prescribed return form made clear which boxes requesting information were not relevant to the calculation of tax due for the particular year of assessment. That is a criticism of the design of the system, and it remains a fair one.

Obiter and the Limits

• The observations on the return form. Lord Hodge’s remarks about how the form should be designed are commentary. They are nonetheless useful in argument, because they acknowledge that a taxpayer may reasonably be confused about which entries are part of the return.
• Not every entry outside the calculation is a stand-alone claim. The case does not lay down a general rule that anything not feeding the arithmetic falls outside the return. The analysis is provision-specific and depends on what the particular claim does.
• The relationship with Derry. The Supreme Court returned to this territory in R (De Silva) v HMRC and subsequently in HMRC v Derry, which addressed a claim to share loss relief and where the boundary falls when a claim is made in the return. The two decisions have to be read together, and the outcome turns closely on the statutory route by which the particular relief is claimed.
• The case says nothing about the merits of the underlying arrangements. It is entirely about procedure and collection.

Practitioner Application

When making a claim

• Identify the statutory route for the relief before deciding where to make the claim. Whether a relief is claimed in a return or as a stand-alone claim is not a matter of presentational choice; it follows from the provision under which it arises.
• Understand the collection consequence before filing. Where the claim will be treated as stand-alone, advise the client that the tax computed without it will be payable, and plan for it.
• Use the white space. Explaining what has been claimed and on what basis protects against later allegations of inaccuracy, see HMRC v Tooth, even where it does not change the procedural analysis.

When HMRC opens an enquiry

• Check which power HMRC has used and whether it was the right one. An enquiry opened under the wrong provision may be ineffective. That was precisely the defect in Tooth, where a Schedule 1A notice was used for a claim made in a return.
• Check the closure position. Schedule 1A enquiries and s9A enquiries have different closure machinery, and an application to force closure is available in each: see our resource on closure notice applications.
• Deal with collection separately from the substantive dispute. Where tax has become payable, consider postponement under s55 TMA 1970 where available, and Time to Pay where it is not.
• Watch the scope of any closure notice when it comes, the subject matter it fixes governs the appeal, as Tower MCashback establishes.

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