Out-Law News 3 min. read
08 Nov 2013, 3:53 pm
The ruling still leaves open the possibility that taxpayers engaged in avoidance can retain possession of the cash, and so benefit from cash flow advantages, if they carry out their own tax calculations, according to tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com.
"HMRC has for many years been taking steps to remove the ability for taxpayers to keep possession of the cash during a dispute about tax avoidance," he said. "As the disputes are lengthy, in some cases lasting a decade or more, even if the taxpayer has to pay the tax at the end of the process with statutory interest, the cash flow advantage of keeping possession of the cash in the meantime can of itself be quite attractive," he said.
"The irony is that HMRC usually strings out its enquiries into avoidance: if it were to progress cases more quickly, it would not have to worry so much about the cash flow advantages. HMRC's latest guidance states that it will not delay in opening enquiries during the 12 month window, but that is only the start of it – the issue is how quickly the enquiry itself is progressed, which is often in the gift of HMRC itself," he said.
The taxpayer in this case, Maurice Cotter, filed his tax return for 2007/08 on 31 October 2008, without making any claim for loss relief and leaving HMRC to calculate his tax liability for that year. On 24 December, HMRC sent Cotter a tax calculation showing that he owed over £210,000 in income and capital gains (CGT) taxes. The following January, Cotter's accountants submitted a 'provisional' loss relief claim showing employment-related losses of £710,000 for 2008/09 and asserting that no further tax was due because of this.
HMRC opened an enquiry into the loss claim under the Taxes Management Act (TMA); however, it claimed the unpaid tax for 2007/08 through the county court, ignoring the 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 its judgment, the Supreme Court overturned an earlier decision by the Court of Appeal and found in favour of HMRC. As the loss claim for 2008/09 was not made 'in a return', the department was right to proceed to recovery through the courts. HMRC had argued that not allowing it to do so could expose it to the risk of "irrelevant claims" with no merit being made in tax return forms in order to postpone the payment of tax that would otherwise be payable.
"Where, as in this case, the taxpayer has included information in his tax return but has left it to the Revenue to calculate the tax which he is due to pay, I think that the Revenue is entitled to treat as irrelevant to that calculation information and claims, which clearly do not as a matter of law affect the tax chargeable and payable in the relevant year of assessment," said Lord Hodge in his leading judgment.
"Matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return. In such circumstances the Revenue would have his assessment that, as a result of the claim, specific sums or no sums were due as the tax chargeable and payable for 2007/08. Such information and self assessment would in my view fall within a 'return' under [the TMA] as it would be the taxpayer's assessment of his liability in respect of the relevant tax year," he said.
HMRC welcomed the "important" ruling, which it said could save the UK £500 million once the amount owed in around 200 similar cases was settled. However, tax expert Jason Collins described the verdict as "a deft bit of judicial engineering".
"Whilst a sizeable victory for HMRC in this case, it does leave open the possibility that taxpayers engaged in avoidance are still able to retain the possession of the cash if they carry out their own tax calculations," he said. "HMRC has in recent years consulted on amending its rules to take the 'cash flow advantage' away - including an aborted attempt to exact heavy penalties for failed planning. Whilst that initiative was put on the back burner, HMRC is now pushing to impose penalties if taxpayers do not give the cash back where related litigation goes against them at any stage of appeal in the courts and the scheme is ultimately found not to work."
"Perhaps HMRC might now be thinking that it would be simpler to build on this decision and overhaul all its collection rules to give it broader powers to collect payment or suspend a repayment wherever tax avoidance is alleged. If they were to do this, clear safeguards would need to be put in place to narrow the remit to cases of proper avoidance," he said.