Derry Case: a failed attempt in ‘legal archaeology?’
Derry case: Introduction
There is no shortage of small businesses and personal taxpayers who confess to being more than a little confused by tax.
When you consider the length (more than 21,000 pages) of the handbook relied on by so many to navigate their way through the fast-moving waters of UK taxation, it might come as no surprise.
Equally, it’s perhaps not startling to learn that, just over two decades ago, the Government launched an initiative designed to make things a little easier to comprehend.
The Tax Law Rewrite Project (TLRP) was intended to make the language of tax simpler and more straightforward without, though, changing the law.
Although its initial focus was on personal tax and resulted in the introduction of revised legislation relating to income tax and pensions, it was subsequently asked to vet Corporation Tax law in the years before it was finally wound up in April 2010.
The Project’s work has been praised since for going some way to demystifying the vocabulary of taxation.
Even so, its impact is still being felt, ironically in a case hingeing on events which occurred in the weeks before it was brought to a close.
Derry case – the facts
In March 2010, one taxpayer, James Derry, bought £500,000 worth of shares in an unlisted company (as part of a tax avoidance scheme) which were sold for only £85,500 to a charitable trust just over seven months later in the 2010/11 tax year.
He was, he believed, entitled to claim ‘ share loss relief’ on this disposal, offsetting that £414,500 loss against his tax bill.
Mr Derry sought to ‘carry back’ that relief, applying the loss to his tax return for 2009/10, which was submitted in January 2011. As a result, HMRC ended up making a repayment to him of more than £70,000.
However, early in 2012, HMRC opened an inquiry into Mr Derry’s affairs. It had clearly caught a whiff of the avoidance scheme in which he had participated.
Essentially, whether HMRC had the power to open this enquiry was at the heart of this dispute.
Derry case – the arguments
On one hand, Derry argued that he had done everything correct in submitting his tax return in 2009/10 and making the loss relief claim there. Under basic principles, he argued he had made the claim in his tax return and, as such, HMRC had 12 months from the filing date in which to open its enquiry. It had not done so and therefore was out of time. (“Argument one”)
HMRC said ‘au contraire’. As this was a special type of claim relating to two years it actually had 12 months from the time the claim was made. In this case, the 2010/11 tax return due to the interaction of Sch 1A and Sch 1B.
In response, the taxpayer said that, even if HMRC were correct, then the fact that they had mistakenly claimed the relief in the 2009/10 return with full disculsure meant HMRC were still limited by the 12 months time limit (“Argument two”)
Derry case – the early rounds
At the Tribunal, Mr Derry failed to persuade them on either of these arguments.
His luck began to turn when the Court of Appeal decided that even though HMRC had strictly been correct under the rules (Argument one) it agreed with Mr Derry around Argument two and therefore HMRC were out of time and Mr Derry had won the day.
Derry case – Supreme Court
Like a dog with a potentially lucrative bone, HMRC appealed to the Supreme Court, in the hope of ultimately prevailing.
That move was also in vain as HMRC saw even its application of the rules called into question. Furthermore, its lawyers were criticised for trying save the day by making assumptions about what might have been in the minds of those who had drawn up the rewritten tax code.
In this regard, one of the key differences between Derry and a similar case found against the taxpayer, Cotter, was that the former involved share loss relief and the latter employment loss relief.
In Cotter it was clear that the special rules in HMRC’s argument one (ie the enquiry window remained open based on the claim and not the initial return) applied to employment loss relief as there were explicit legislative ‘signposts’ to these special rules.
However, it was also clear that in Derry, share loss relief did not have the same signposts and, in their absence, the basic position was that the time limit was 12 months from 2009/10 filing date.
However, the Judge could see not reason why the statute should draw such a distinction.
Perhaps somewhat clutching at statutory straws, counsel for HMRC had looked to the explanatory notes to find a reason why share loss relief was ‘detached’ from the special code that applied to employment loss relief and others.
In a memorable turn of phrase, the judgement decided that the Revenue had resorted to the sort of “legal archaeology..[which]..would negate the whole purpose of the tax law rewrite”
Derry case – conclusions
It was an outcome which was significant in itself, not least because it marked how a Tax Tribunal’s decision had been incrementally rolled back by the highest courts in the land.
The ruling also illustrates how the attempt to simplify tax law may have resulted in some critical and highly technical issues slipping between the cracks, meaning that they can only be resolved by lengthy, expensive and very complex court proceedings.
If that’s not enough, I reckon that the Derry case is important because it may well lead to HMRC having to change the humble tax return.
According to the Supreme Court judgement:
“there is an urgent need for clarification, not only of the precise legal status of the different parts of the return, but also of any relevant differences between the paper and electronic versions of the return, and their practical consequences”.
A point which Lord Hodge had already made in his summing up in Cotter.
Trying to undertake that exercise at a time when the UK’s tax code continues to lengthen apace will not be easy.
Will it, I wonder, hasten the setting up of yet another effort to simplify not just the language but the methods of how tax in this country is calculated, paid and pursued?
Watch this space…
For our separate note on the technicalities of this case please see here.
For the full judgement please click here.
If you have any queries about the Derry case then please do not hesitate to get in touch.