Case No: CH/2003/APP/0067
Neutral Citation No: [2003] EWHC 754 (Ch) 
 
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 9 April 2003

Before :

THE HONOURABLE MR JUSTICE PETER SMITH
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Between :

	Stephen Blackburn
(H M Inspector of Taxes)	
Appellant	
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	Christopher Keeling	Respondent	

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Mr David Ewart (instructed by The Solicitor for the Inland Revenue) for the Appellant
Mr Giles Goodfellow (instructed by Gregory Rowcliffe Milners) for the Respondent

Hearing date: 27 March 2003
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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

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Mr Justice Peter Smith

Mr Justice Peter Smith:

INTRODUCTION

1.	This is an appeal by way of case stated based on a point of law under TMA 1970 Section 56.  The appeal is against a decision of the General Commissioners (“GC”) given in August 2002 that the Respondents PAYE coding reflect a loss of £425,390.00 which is expected to arise in the year of assessment 2003/4.  The GC also dismissed the Respondent’s appeal against the Revenue’s refusal of a claim for loss relief under section 380 TA 1988.  There is no appeal against that decision.  The Appellant sought at the hearing to raise further grounds in support of its appeal as set out in Mr Ewart’s skeleton argument (he appearing for the Appellant) dated 25 March 2003.
2.	I allowed the Appellant to raise the new arguments on the basis of the Respondent suffering no prejudice and on the Appellant’s undertaking that if the case proceeded further beyond my decision on this ground the Appellant would not seek any costs from the Respondent.  The reasoning behind that was that the point raised was a test point of some importance to the Appellant, but had marginal significance to the Respondent.  The Appellant accepted that condition and through Mr Ewart gave that undertaking, so I permitted him to raise the new point.
BACKGROUND
3.	The Respondent is a Name in various Lloyd’s Syndicates.  The Syndicates trade from 1 January to 31 December in each year (“the underwriting year”) and each such year is regarded as a single venture for each year.  In common with other Lloyd’s Syndicates however, the Syndicates do not close their accounts at the end of the underwriting year, but normally keep them open for a further two years.  The result is then declared sometime in the following year.  The losses in issue in this appeal are those which are anticipated will be declared in May 2003 (“the losses”).  They will be declared in the underwriting year 2003 and they will be losses for the year of assessment which corresponds to that underwriting year:- FA 1993 Section 172 (1) (a).  The 2003 underwriting year ends in the year of assessment 2003/4 and therefore corresponds to that year of assessment FA 1993 Section 184 (2) (a).  The Appellant contends that the losses will be losses for the year of assessment 2003/4.
4.	By a letter dated 14 February 2002 the Respondent asked the Revenue to amend his PAYE coding for the year 2002/3 to take account of the losses.  In addition to his underwriting business the Respondent is entitled to pension income and the PAYE code is applicable to that.  The amount of the losses potentially far exceeds the income in question.  Thus the GC in allowing the Respondents appeal amended his tax coding to 11153T i.e £111,530.00 as against the projected losses of £425,390.00.
5.	The Revenue do not dispute that the Respondent will in all probability be entitled to loss relief in approximately the sum claimed (subject to final lodgement of the claim).  The dispute is as to the year when the Losses can be claimed.  It is the Revenue’s case that the entitlement to claim for loss relief is not presently established and will not be established until the end of the underwriting year when the loss has been sustained.  Although the claim for setoff under Section 380 ICTA 98 is stated to be claimable “by notice given within twelve months from the 31 January next following that year …” neither the Respondent nor the Appellant contends that the time does not begin until that 31 January.  The Appellant accepts as a matter of practice notwithstanding the apparent clear wording to the contrary that once the loss has been sustained the claim can be made at any time from then until twelve months after the 31 January following.  The wording is curious and is to be contrasted with a different wording under Section 381.  This is not a point for consideration in this Appeal accordingly.
THE REGIME FOR CLAIMING LOSS RELIEF
6.	The primary basis for claiming loss relief is set out in Section 380 ICTA 88.  Section 380 (1) provides:-
“(1)	Where in any year of assessment any person sustains a loss in any trade, profession, vocation or employment carried on by him either solely or in partnership, he may, by notice given within twelve months from the 31 January next following that year make a claim for relief from income tax on -
(a)	so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or
(b)	so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income;
but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above.”
Relief under section 380(1)(b) is given effect by TMA 1970 Schedule 1B paragraph 2, which provides:-
“2(1)	This paragraph applies where a person makes a claim requiring relief for a loss incurred or treated as incurred, or a payment made, in one year of assessment (“the later year”) to be given in an earlier year of assessment (“the earlier year”).
 (2)	Section 42(2) of this Act shall not apply in relation to the claim.
 (3)	The claim shall relate to the later year.
 (4)	[Procedure for calculation]
 (5)	 Where effect has been given to one or more associated claims, amounts [as calculated under subparagraph 4] shall each be determined on the assumption that effect could have been, and had been, given to the associated claim or claims in relation to the earlier year.
 (6)	Effect shall be given to the claim in relation to the later year, whether by repayment or set-off, or by an increase in the aggregate amount given by Section 59 B (1) (b) of this Act or otherwise.
(7)	[omitted]”
It is to be observed that there are similar claims for differing reliefs elsewhere in that schedule, see paragraph 3 fluctuation and farm profits, paragraph 4 and paragraph 5.
7.	Section 42 (2) is part of a section dealing with a procedure for making claims.  Section 42(1A) provides that subject to subsection (3) a claim for relief an allowance or repayment of tax shall be for an amount which is quantified at the time when the claim is made.
8.	 As I have said that procedure does not apply in relation to any claim that falls to be taken into account in the making of the deductions or repayments of tax under section 203.  This is a significant point from the Respondents point of view as section 203 provides the mechanism for the setting up of the PAYE system.  In particular the Respondents rely upon subsection (1) which provides:-
“On the making of any payment of or on account of any income assessable to income tax under Schedule E income tax shall subject to and accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for same year of assessment other than the year during which the payment is made”.
Under subsection (2) it is provided that the Board has the power to make regulations with respect to assessment charge collection and recovery of income tax in respect of all income and those regulations may in particular include provision for various items.  There are then set out seven categories in respect of which the Board may make provision.  It will be seen however, that those categories are not exhaustive because of the words “may in particular include provision”.
9.	Pursuant to that the relevant regulation are the the Income Tax (Employment) Regulations 1993 (SI 1993/744) and in particular paragraph 7.
10.	Also under section 203 (2) it is provided that the regulations shall have effect not withstanding anything in the Income Tax Acts.
11.	It is important to appreciate the effect of the PAYE scheme in conceptual terms.  It is well established that liability to pay tax, stands or falls on an assessment.  A taxpayer cannot generally be required to be a tax in advance of an assessment see: Jones (HMIT) -v- O’Brien 60 TC 706 at pages 714/715 per Hoffman J as he then was.  Thus as was said in that Judgment there is no ability to charge income tax on a daily basis.
12.	The PAYE system is a departure from that in that the tax is estimated and recovered on a weekly or monthly basis according to the manner in which the relevant employees are paid.  A similar provisional assessment regime operates in relation to the on account payments that are made under the self assessment regime under section 59 A TMA 1970 which itself is subject to (for example) a claim to reduction by a taxpayer under subsection (3) if he has “(a) [a] belief that he will not be assessed to income tax that year or that the amount that he will be so assessed will not exceed the amount of income tax deducted at source”.
13.	The final relevant provision from the Respondent’s point of view in section 203 ICTA 88 is subsection 7, which provides as follows:-
“(7)	In subsection (6) above reference to the total income tax payable for the year shall be construed as references to the total income tax estimated to be payable for the year in respect of the income in question, subject to a provisional deduction for allowances and reliefs and subject also, if necessary, to an adjustment for amounts overpaid or remaining unpaid on account of income tax in respect of income assessable under Schedule E for any previous year ”.
THE REGULATION
14.	The scheme of recovery under the PAYE system is to make the employer responsible for collection and payment of the tax although the employer’s liability is measured by the individual employee’s position.
15.	Under regulation 6 every employer upon making any payment of emoluments to any employee is obliged to deduct or repay tax in accordance with the regulations.
16.	The key provision is regulation 7, which provides:-
“7(1)	The appropriate code shall be determined by the Inspector who for that purpose may have regard to any of the matters specified in paragraph (2).
  (2)	The matters specified in this paragraph are;
(a)	subject to paragraph (3) the reliefs from income tax to which the employee is entitled to for the year in which the code is determined, so far as his title to those reliefs has been established at the time of the determination.
(aa)	where the code is determined before the beginning of the year for which it is to have effect any propose alteration or alterations in the rates for that year of any of the reliefs referred to in sub-paragraph (a)
(b)	any income of the employee (other than emoluments in relation to which the appropriate code is being determined)… 
(c)	any tax overpaid for any for any previous year which has not been repaid
(d)	any tax remaining unpaid for any previous year which is not otherwise recovered
(e)	any amount to be recovered as if it were unpaid tax under the provisions of section 30(1) of the Management Act …
(f)	such other adjustments as may be necessary to secure that so far as possible the tax in respect of the employee’s emoluments for the year for which the code is to have effect shall be deducted from the emoluments paid during that year”.
17.	Paragraph 9 also enables the Inspector to determine that tax shall be deducted at a higher rate under the PAYE system or that no tax shall be deducted from the emoluments.
18.	On an appeal the General Commissioners determine the code (as they did) having regard to the same matter as the Inspector may have regard to.
19.	The lines between the two parties is relatively straight forward.  Mr Ewart contends that the reference to the reliefs under 7(2)(a) shows that the Inspector can only give effect to reliefs when they properly arise in the relevant tax year.  That he says effectively referred back to the procedure in this case for the loss relief claim.  A loss relief claim he submits can only be made in accordance with section 380 and will fall to be considered in the second year as specified by schedule 1 B paragraph 2 (3) TMA 1970 as set out above.  As this cannot arise until after the accounts for the underwriting year have been declared i.e. May next, no claim can be submitted and the Inspector cannot take into account any claim of a future lose which is not yet presently claimable.  He relies in particular on the words “the reliefs from income tax to which the employee is entitled for the year in which the code is determined so far as he is entitled to those reliefs has been established”.  He says that the title cannot be established until the claim has been submitted and assessed.
20.	He submits that that shows that the only time in which an Inspector can give effect to a claim for relief is when a claim is properly established in the relevant year and that the provision of sub-paragraph (2) are exhaustive.
21.	This is in line with the Jones case.  Mr Ewart submits with some force that as the profits are assessed only on an annual assessment basis, losses are similarly assessed so there can be no claim otherwise than when the procedure for claiming losses is in voked.
22.	For the Respondent the submissions are somewhat different.  Mr Goodfellow submits that the PAYE regime is a provisional assessment procedure.  It would be quite wrong for the Inspector to ignore the obvious facts in this case.  The obvious facts are that ultimately the Respondent will not have any tax liability when all reliefs are ultimately taken into account.  This is not disputed by the Appellant.  The case essentially turns on a cash flow exercise namely should the Appellant obtain the tax now and repay it in a years time, or should the Inspector on working out the provisional regime under the PAYE regime take into account the realities of the situation and grant relief now for the losses which he knows will arrive next year.
23.	I see no objection in principle to the Code being determined on a provisional basis in the light of the information available to the Inspector when he determines the code.  Although subparagraph (a) refers to a relief to which the employee is entitled for the year, I do not see that as meaning that the Inspector does not have the ability to take into account a future entitlement which will ultimately affect the relevant tax year and to my mind he can do that under subparagraph (f).  That is a sweeper clause entitling the Inspector to take into account all matters known to him at the time he prepares the code to arrive at the fairest and most realistic code that is likely to be the nearest to the true tax position of the taxpayer when the taxpayer’s affairs for that tax year are finally worked out.  It seems to me that the PAYE code should operate both ways.  Primarily of course it operates in favour of the Government in that the Government is enabled to collect in advance tax which otherwise it could not claim until the year end.  I do not see why the Government should not also submit to the counter position namely that if the reality in any given case is that there is likely to be no tax paid the Code should be amended accordingly.
24.	This will not open any floodgates; it is a matter for the Inspector to arrive fairly at a decision in the light of the information.  If he does not accept the information provided to him as being acceptable he will refuse to alter the code.  If that is not accepted by the taxpayer, the taxpayer can appeal.  It does seem to me that the regime under the regulations is self-contained.  That is why in section 203 it is stated that is applies not withstanding any provision in the Taxes Act.
25.	Therefore although I accept that the method of recovery of loss relief is as set out in the provisions helpfully referred to above by Mr Ewart that does not have any impact on an ability to treat the loss differently under the PAYE regime if it is appropriate so to do.  Accordingly, the GC came to the right decisions and I will dismiss this appeal.