HMRC has won what it describes as 'an important ruling' as a result of an appeal to the Supreme Court over its refusal to allow a claim to tax relief for losses while an enquiry into a tax avoidance scheme was ongoing.
The Supreme Court ruled unanimously that HMRC was entitled to enforce payment of a tax debt and withhold tax relief while it investigated the scheme, which HMRC says was used by around 200 people. As a result, HMRC says they will not be able to take advantage of what it calls the 'cashflow' advantages of the scheme, which it calculates will save the UK government around £60m, rising to £500m for similar cases.
The original case concerned Maurice Cotter, who made no claim for loss relief when he originally filed his 2007-08 tax return. Cotter also let HMRC calculate his tax for that tax year, which resulted in income and capital gains tax of £211,927.
In January 2009, Cotter's accountants sent a 'provisional 2007-08 loss relief claim' and amendments to his 2007-08 return to HMRC. These indicated Cotter had sustained an employment-related loss of £710,000 in the tax year 2008-09 for which he claimed relief in tax year 2007-08. Cotter acknowledged that his interpretation of the applicable tax law might not accord with HMRC's and stated that he expected an enquiry to be opened.
Cotter's accountants informed HMRC that 'As a result of this claim no further 2007-08 taxes will be payable by Mr Cotter'. HMRC's response indicated it would not give any credit for the loss until the enquiry was complete. This decision was contested by Cotter's accountants, and in June 2009 HMRC went to court for the recovery of £203,243, namely the income and capital gains tax for 2007-08 and the first payment of account for 2008-09.
Cotter argued that he was entitled to use his loss claim to reduce to nil the tax otherwise payable for 2007-08. An element of his argument was that HMRC's legal proceedings against him would be unlawful because his self assessment showed that no tax was payable as at 31 January 2009, and HMRC had not amended his self assessment return and was not following the procedures laid out in the Taxes Management Act 1970 correctly.
While an initial High Court hearing found in HMRC's favour, this ruling was overturned by the Court of Appeal, on the grounds that HMRC should have followed TMA procedures and allowed Cotter leave to appeal to the First Tier Tribunal.
The Supreme Court has now found in HMRC's favour, which means that no claim for tax relief on losses will be paid out until any enquiry into a tax avoidance scheme has been concluded.
To read the Supreme Court judgment, click HERE
