HMRC wins Supreme Court ruling on provisional loss claims

The Supreme Court has ruled earlier this month, that HM Revenue and Customs (HMRC) can request possession of funds under dispute if the taxpayer has not calculated the amount of tax due themselves and it has been left to HMRC to calculate.

HMRC welcomed this significant ruling, which could potentially save the UK £500 million based on amounts owed in around 200 similar cases, if they are settled.

The case in question was Maurice Cotter vs. HMRC.  He filed his tax return for 2007/08 on 31st October 2008, with no claim for loss relief and leaving HMRC to calculate his tax liability. On 24th December, HMRC issued Cotter a tax calculation with liability of over £210,000 in income and capital gains (CGT) taxes.  In January 2009, a ‘provisional’ loss relief claim showing employment-related losses of £710,000 for 2008/09 was submitted by his accountants and they stressed that no further tax was due as a result.

HMRC opened an enquiry into the loss claim under the Taxes Management Act (TMA) and made a claim through the county court, for the unpaid tax for 2007/08.  They ignored the actual loss claim that they were enquiring into. Cotter appealed on two grounds: firstly, that his loss for 2008/09 covered the amount owed for the previous year; and secondly, that the county court did not have the jurisdiction to hear the dispute.

In their judgment, the Supreme Court overturned an earlier decision by the Court of Appeal and found in favour of HMRC. The loss claim for 2008/09 had not been made ‘in a tax return’ and therefore, HMRC had the right to recover amounts due through the courts. Their argument had been that by not allowing them to recover amounts would expose them to the risk of ” inappropriate claims” being made in tax return forms , other than for the purposes of postponing tax payments  that would otherwise be payable.

In his judgment, Lord Hodge stated that although the taxpayer has included information in his tax return, he left HMRC to calculate the tax that was payable.  Consequently, HMRC was entitled to treat this information as irrelevant for the calculation, which under law, does not affect the tax chargeable and payable in the year of assessment.   If the taxpayer had calculated his tax on the relevant pages of the tax return, HMRC would not have been able to recover these amounts.   Under self-assessment, this would fall within a ‘return’ under [the TMA] as the taxpayer had self-assessed his liability.

If you have any questions and would like to know how this ruling affects you contact our Tax team on 0161 249 5040