Derry Supreme Court case – a technical overview
Background – Derry Supreme Court case
Earlier this week, the Supreme Court handed down its judgement in the Derry case. The decision was a unanimous one in favour of the taxpayer.
However, even in the heady world of tax, this was not a sexy case at all. It involved a lot of highly technical and procedural points which we will try and round up here. However, if you would like a lighter commentary then please see our blog post.
In short, the taxpayer had claimed a capital loss (which arose in the 2010/11 tax year) and opted to carry this back against his 2009/10 income. As he had not submitted the 2009/10 tax return at that time he did so and included the details of the loss along with the appropriate disclosure.
Furthermore, when time came to submit his 2010/11 tax return, he played a straight bat and once again disclosed the losses.
In Janury 2012, HMRC raised an enquiry in to the claim. This was ‘out of time’ in relation to the first tax return but in time as regards to the second one.
This presented two very basic issues:
- Did HMRC follow the correct process in enquiring in to the claim for share loss relief (“Issue one”)
- Did the fact that the claim was made in the 2009/10 tax return ( including ‘white space disclosures’) mean that HMRC had every opportunity to open an enquiry within the 12 months of that tax return under basic principles? (“Issue two”)
We will explore these issues in turn.
TMA 1970, s9A(1) – general power of enquiry
Most tax advisers will be aware that this broadly gives HMRC the power to enquire into a return if notice is given within the correct time frame. That time limit is 12 months from the date of delivery, for returns delivered on or before the filing date and slightly longer if the tax return is filed late.
HMRC may in to anything contained or should be contained in the tax return. Of course, this includes any claim contained in the return.
TMA 1970, s42 – making a claim (basic rule)
Our next stopping off point around on our tour of TMA is s42. Here we find provisions that relate to the making of a claim.
Section 42 does not beat around the bush and barks the order that if a claim can be made in a return it must be made there.
The combination of s9A and s42 works quite clearly. If a loss relief claim can be made in the body of the tax return then the taxpayer must make his claim for loss relief there. This would then allow (or depending on which way you look at it) restrict HMRC’s power of enquiry to s9A.
But things are not quite so simple.
Schedule 1B of TMA 1970– claims involving two or more years
This provides an override to the general position under s42. It deals with ‘Claims for relief involving two or more years‘.
For certain losses, it states that where a claim is made for losses that relate to a later year (ie a loss in 2010/11 is carried back to 2009/10) then is made in an earlier year, the claim is deemed to relate to the later year.
Schedule 1A, TMA 1970– enquiry where claim made outside the tax return
This provides HMRC with a power to enquire into claims (as opposed to the tax return) which are made outside of a return. In such a scenario, it gives HMRC the power to enquire into that claim.
An HMRC officer may enquire into such a claim by giving notice to the claimant by the later of:
- the quarter day following the first anniversary of the date the claim was made
- if the claim relates to a year of assessment, 31 January following the end of that year
- if the claim relates to some other period, 12 months after the end of that period
Of course, this could act to delay the time from which the enquiry window began to run and extend the time limit for HMRC.
As such, was the claim in Derry made outside of the tax return?
In Cotter  we see a similar case. Mr Cotter was seeking to carry back employment loss relief to an earlier year. The provisions enabling the loss to be carried back were largely the same as those relating to share loss relief.
However, there are two important differences.
Firstly, in relation to employment loss relief, ITA 2007, s128(7), provides:
‘This Chapter is subject to paragraph 2 of Schedule 1B to TMA 1970 (claims for loss relief involving two or more years).‘
However, and relevant for Derry, there is no equivalent provision relating to share loss relief. With no ‘signpost’ to Sch 1B can it be said that s42 is overridden?
Secondly, in Cotter, the taxpayer did not complete his own tax return. He left it to HMRC to calculate the liability.
The question before the Court in Derry was whether the claim for share loss relief could be said to be one made in a return (and therefore enquiry only under s9A).
The two arguments:
The two issues set out at the beginning of this article can be further elaborated upon to become the arguments of the taxpayer. These can be set out as:
- The correct process was followed in respect of share loss relief. As there was no signpost to Schedule 1B then it was not relevant. As such, s42 and S9A were relevant instead
- Even if the wrong process, the fact that the claim was made in the 2009/10 tax return, including in the ‘white space disclosures’ explaining what had done meant that HMRC have every opportunity to open an enquiry within the 12 months under s9A
Early stages of litigation
Of course, the Supreme Court is generally the end of the litigation process.
|Court||Argument one||Argument two|
|Tribunal||Taxpayer lost||Taxpayer lost|
|Court of Appeal||Taxpayer lost||Taxpayer won|
As per the above, at the Tribunal, the Courts rejected both of the taxpayer’s arguments.
However, when Mr Derry brought the dispute to the Court of Appeal (“COA”) the Taxpayer started to gain some success.
In respect of Argument one, the COA was not persuaded that the absence of signpost to Schedule 1B meant that it did not apply. On the contrary, it found that Schedule 1B did apply.
However, in respect of Argument two, the Court found that although errors may be made in such self-assessments, HMRC’s could deal with any such errors by either amending the return or opening an enquiry under TMA, s9A.
As HMRC had not availed itself of that right it was now out of time to do so.
This meant that Mr Derry had won overall.
Derry Supreme Court case
So, the Derry case rolled on to the Supreme Court with HMRC now having to turn the tide.
Clearly, one of the main issues around the Argument one is the clear difference in treatment of share loss relief and other loss reliefs (such as employment loss relief as in Cotter).
However, it appears that this difference in treatment became apparent following the rewrite of the income taxes act.
However, noting this apparent difference, the Judge could not identify the reasons behind this point of difference.
Perhaps grasping at straws, Counsel for HMRC tried to explain the reasoning by reference to the Explanatory Notes to the relevant statute.
However, Lord Carnwarth not inclined to take part, what he described as, Legal archaeology. He found it:
“neither necessary nor appropriate for the Court to speculate as to Parliament’s intentions to justify a departure from the natural interpretation of the statutory language.” [Para 38]
As such, on Argument One, the Supreme Court agreed with the taxpayer.
It should be noted that as Argument One was determined in the taxpayers favour no requirement to make a judgement on Issue 2.
Conclusion – Derry Supreme Court case
This is a highly technical case and one could perhaps be forgiven for expecting it to be consigned to the annals of procedural obscurity.
However, it does show that, even in a case such as this where the taxpayer was involved in tax avoidance, the higher courts will not always attempt to twist and bend the legislation such that the avoidance scheme is frustrated where the statute is clear.
It also shows that HMRC’s enquiry powers are limited. It also shows that a taxpayer may have to be prepared to challenge HMRC when he or she believes HMRC to be acting outside of those powers. In this case, be prepared to challenge HMRC right up to the highest court in the land.
A copy of the full judgement can be found here.
If you have any queries on the Derry Supreme Court case or any other HMRC matters then please do not hesitate to get in touch