Derry, R (on the application of) v Revenue and Customs [2019] UKSC 19

Mr Derry bought shares for £500,000 and sold them at a loss, claiming share loss relief against his 2009/10 income. HMRC challenged the claim procedurally. The Supreme Court held he was entitled to claim relief in the earlier year under the Income Tax Act 2007.

Facts

On 22 March 2010 (tax year 2009/10), Mr Derry purchased 500,000 shares in Media Pro Four Ltd for £500,000. On 4 November 2010 (tax year 2010/11), he sold them to the Island House Private Charitable Trust for £85,500, generating a capital loss of £414,500. In his 2009/10 tax return submitted in January 2011, he claimed share loss relief under section 132 of the Income Tax Act 2007 (ITA), seeking to deduct the loss against his income for that earlier year.

HMRC identified the claim as possible tax avoidance and responded by: (i) opening an enquiry on 4 January 2012 under Schedule 1A of the Taxes Management Act 1970 (TMA), treating the claim as made ‘outside of a return’ by virtue of paragraph 2(3) of Schedule 1B; (ii) opening an enquiry under TMA section 9A into the 2010/11 return; and (iii) issuing demands for tax allegedly due for 2009/10. HMRC did not open a timely section 9A enquiry into the 2009/10 return.

Mr Derry commenced judicial review proceedings. He lost before the Upper Tribunal on both issues but succeeded on the second issue before the Court of Appeal. HMRC appealed to the Supreme Court.

Issues

The appeal raised two questions:

Issue 1 (the loss relief issue)

Whether, having exercised his right under ITA section 132 to claim loss relief in the previous year (2009/10), Mr Derry was correct to deduct that loss in calculating his net income and tax liability for that year under ITA section 23; or whether this right was overridden by TMA Schedule 1B, with the effect that the claim was to be treated as ‘relating to’ the later year (2010/11).

Issue 2 (the tax return issue)

Whether the inclusion of the claim within Mr Derry’s 2009/10 return meant that HMRC could only challenge it via a timeous section 9A enquiry, which they had failed to institute.

Arguments

For Mr Derry, Ms McCarthy QC submitted that sections 23 and 131-132 of the ITA constitute a clear, self-contained code for share loss relief. She relied on Lord Dunedin’s distinction in Whitney v Inland Revenue Comrs [1926] AC 37 between stages of tax imposition, arguing that liability fixed by Chapter 6 could not be overridden by assessment machinery without clear words (as appear in sections 60(2) and 128(7) for other reliefs, but not section 132).

For HMRC, Mr Nawbatt QC submitted that ITA section 1020(2) directed the reader to the TMA, that Schedule 1B was sufficiently clear to apply by its own terms, and that the analogy with sections 60(2) and 128(7) indicated the appropriate relationship. He contended the claim should be treated as relating to the later year under Schedule 1B, paragraph 2.

Judgment

Issue 1: Loss Relief

Lord Carnwath (with whom Lord Reed, Lady Black, Lady Arden and Lord Kitchin agreed) allowed Mr Derry’s argument. The judgment emphasised the legislative purpose of the Tax Law Rewrite project, endorsing Sales J’s approach in Eclipse Film Partners (No 35) LLP v HMRC that such statutes should be treated like consolidation statutes, operating as a coherent code.

Lord Carnwath held that sections 23 and 131-132 ITA ‘appear to constitute a clear and self-contained code for the treatment of a claim to share-loss relief’. Section 132 gives an ‘entitlement’ to make the claim and specifies the tax year; section 132(1) provides a specific signpost to Step 2 in section 23. Having walked the taxpayer through this process, it would be ‘extraordinary’ for entitlement to be removed ‘without any direct reference or signpost, by a provision in a relatively obscure Schedule of another statute concerned principally, not with liability, but with management of the tax’.

The court held that sections 60(2) and 128(7), which expressly make trade loss relief and employment loss relief ‘subject to’ Schedule 1B, ‘are more than mere signposts’ – the words ‘subject to’ are substantive. Their absence in section 132 indicated that share loss relief is not subject to the same qualification. The ITA, as the governing statute in respect of tax liability, should take precedence absent contrary indication. The reference in section 42(11A) TMA to ‘certain claims’ supported this construction.

The court acknowledged the lack of any obvious explanation for the different treatment but held that ‘for the taxpayer’s liability to be determined by reference to legal archaeology of this kind would negate the whole purpose of the tax law rewrite’.

Issue 2: The Tax Return Issue

Having decided Issue 1 for Mr Derry, the court did not need to decide Issue 2 but offered observations. Lord Carnwath expressed the view that Ms McCarthy’s submissions appeared consistent with the natural reading of the statutory provisions, and that HMRC’s difficulty arose from failing to open a timely section 9A enquiry. However, the court left unresolved questions about the legal status of different parts of the return, the relationship between paper and online forms, and the interplay between Schedule 1A and section 9A enquiries.

Lady Arden, while agreeing on Issue 1, provisionally took a different view on Issue 2, considering that Mr Dean’s evidence about the workings of the online form suggested that an erroneous Box 15 entry might not form part of the statutory ‘return’ for enquiry purposes.

Implications

The decision reinforces the interpretative approach appropriate to statutes produced under the Tax Law Rewrite project. Such statutes should be interpreted as coherent codes with their signposts, overviews, and step-by-step calculations taken seriously. Reference back to prior disparate provisions should generally be avoided, consistent with the project’s aim of producing legislation ‘relatively easy to use, not just by professionals but also by the reasonably informed taxpayer’.

Substantively, the judgment confirms that share loss relief under ITA section 132 may be claimed against the income of the previous tax year without being diverted by TMA Schedule 1B into the later year. This is significant for taxpayers making such claims and for HMRC’s enquiry strategy.

The case also highlights the ‘urgent need for clarification’ of the status of different parts of the self-assessment return, particularly regarding differences between paper and electronic forms – echoing Lord Hodge’s concluding remarks in Cotter. The court expressly left open for future consideration the precise boundaries of what constitutes a ‘return’ for section 9A enquiry purposes, and the consequences of erroneous claims being included within it.

The decision demonstrates judicial reluctance to allow assessment-stage machinery to override liability provisions without clear statutory language, and reaffirms that where Parliament intends one provision to be subject to another, clear words such as ‘subject to’ will be required.

Verdict: The Supreme Court dismissed HMRC’s appeal and confirmed the order of the Court of Appeal. Mr Derry was entitled to make his claim to share loss relief in the tax year 2009/10 under section 132 of the Income Tax Act 2007, and that right was not overridden by Schedule 1B to the Taxes Management Act 1970.

Source: Derry, R (on the application of) v Revenue and Customs [2019] UKSC 19