R (on the application of De Silva & Anor) v Revenue and Customs [2017] UKSC 74

Taxpayers in film partnership tax avoidance schemes claimed loss relief by carrying back partnership losses in their self-assessment returns. The Supreme Court held HMRC could challenge these claims through section 9A enquiries into the returns, not solely under Schedule 1A.

Facts

The appellants, Mr De Silva and Mr Dokelman, were limited partners in various limited partnerships established under the Limited Partnerships Act 1907, the general partner being Investing in Enterprise Ltd (IEL). They participated in marketed tax avoidance schemes intended to generate trading losses through film investments, financed partly by their own funds but principally through non-recourse or limited recourse loans. The schemes sought to exploit tax incentives under section 42 of the Finance (No 2) Act 1992 to encourage qualifying film investment, and the carry-back provisions in sections 380 and 381 of ICTA 1988.

The partnerships submitted tax returns for 1998/99 to 2001/02 claiming substantial trading losses. HMRC opened enquiries under section 12AC(1) TMA, ultimately disallowing significant portions of the claimed losses. Following appeals to the Special Commissioners, the matters were compromised by a partnership settlement agreement dated 22 August 2011 under section 54 TMA, which substantially reduced the partnership losses.

The taxpayers had included carry-back loss claims in their personal self-assessment returns (Mr De Silva for 1998/99 and 1999/2000; Mr Dokelman for 2000/01). After the partnership settlement, HMRC wrote to the taxpayers in late 2011 amending their personal returns to reflect the reduced partnership losses and demanding additional tax.

Issues

The principal issue was whether HMRC were entitled to challenge the taxpayers’ carry-back loss relief claims through the enquiry process applicable to self-assessment returns, or whether such claims were ‘stand-alone’ claims that could only be challenged under Schedule 1A TMA (in which case the statutory time limit had expired, rendering the claims unchallengeable).

Arguments

Appellants

The taxpayers contended that their carry-back claims were not claims made in their self-assessment returns under section 8 TMA but were ‘stand-alone’ claims governed exclusively by Schedule 1A. Since HMRC had failed to open Schedule 1A enquiries within the statutory time limits, HMRC were now barred from challenging the claims. They relied on Revenue and Customs Comrs v Cotter [2013] UKSC 69.

Respondent

HMRC argued that section 8(1) required the taxpayers to include the loss claim information in their Year 2 returns, that Schedule 1B paragraph 2(3) and (6) related such claims to Year 2, and that HMRC could therefore enquire into the claims under section 9A as part of the Year 2 return.

Intervener

Cotter Solutions Ltd submitted that HMRC’s interpretation would prevent HMRC postponing relief or recovering relief subsequently found not to be due.

Judgment

Lord Hodge (with whom Lord Neuberger, Lord Kerr, Lord Reed and Lord Hughes agreed) dismissed the appeal.

The Court analysed the statutory architecture of the TMA. Schedule 1B paragraph 2 governs claims for relief involving two or more years of assessment. Critically, paragraph 2(3) provides that such a claim ‘shall relate to the later year’ (Year 2), and paragraph 2(6) requires effect to be given to the claim in relation to Year 2. While paragraph 2(2) disapplies section 42(2) (thus permitting a Schedule 1A claim to be made outside a Year 1 return), this does not release the taxpayer from making the claim in the Year 2 return.

Section 8(1AA)(a) defines the amounts in which a person is chargeable to income tax as net amounts taking account of any relief claimed in the return. Section 8(1B) requires inclusion of partnership share information. Consequently, the taxpayer must make the carry-back claim in the Year 2 return and state the extent to which relief has already been given, in order to establish the amounts in which he is chargeable to income tax for Year 2.

Since the claims were properly to be included in the Year 2 returns, HMRC were empowered under section 9A to enquire into them, and section 9A(4) extends such enquiries to ‘anything contained in the return, or required to be contained in the return, including any claim’. Furthermore, by section 12AC(6)(a), the notice opening enquiries into the partnership returns was deemed to include notices under section 9A(1) to each partner.

Following the compromise of the partnership appeals under section 54 (which had the same effect as a determination under section 50(7)), section 50(9) empowered HMRC to amend the partners’ personal returns to give effect to the reduced partnership amounts. HMRC’s letters in 2011 lawfully amended the taxpayers’ returns under this provision.

The Court rejected the intervener’s concerns, holding that Schedules 1A and 1B operate in tandem; that paragraph 2(6)’s words ‘or otherwise’ enable adjustment of the chargeable amount; and that section 59B(5) provides for payment of tax resulting from such amendments.

The Court distinguished Cotter, which concerned a claim made by amendment of a Year 1 return that had no bearing on Year 1 tax chargeable and was therefore a stand-alone Schedule 1A claim. By contrast, the present taxpayers had made their claims in their Year 2 returns.

Implications

The decision clarifies that where a taxpayer carries back partnership losses from Year 2 to Year 1, the carry-back claim must be included in the Year 2 self-assessment return and effect is given to the claim in relation to Year 2. HMRC may therefore enquire into such claims under section 9A as part of an enquiry into the Year 2 return, and need not rely solely on Schedule 1A enquiry procedures.

The decision draws a clear boundary between Cotter (stand-alone Schedule 1A claims made by amendment of a Year 1 return relating to anticipated Year 2 losses) and the present situation (claims properly included in Year 2 returns). It also confirms that where a partnership settlement under section 54 reduces partnership losses, HMRC can amend partners’ personal returns under section 50(9) to give effect to the reduction.

The case is particularly significant for participants in marketed tax avoidance schemes involving carry-back of partnership losses, confirming that the section 9A enquiry route remains available to HMRC and that taxpayers cannot insulate such claims from challenge by relying on lapsed Schedule 1A time limits. More broadly, it illustrates how the self-assessment regime requires taxpayers to provide comprehensive information enabling HMRC to establish the correct net chargeable amounts, integrating claims for relief into the return process.

Verdict: Appeal dismissed. HMRC lawfully amended the taxpayers’ self-assessment returns to give effect to the reduced partnership losses agreed in the partnership settlement agreement; HMRC were entitled to challenge the carry-back claims through the section 9A enquiry mechanism applicable to the Year 2 returns and were not confined to Schedule 1A procedures.

Source: R (on the application of De Silva & Anor) v Revenue and Customs [2017] UKSC 74