Trading Losses in later year – Effect of s 380 TA relief claim – Whether taxable amount for earlier reduced? No – Appeal dismissed

THE SPECIAL COMMISSIONERS

	C J NORTON	Appellant

	- and -

                  MR A THOMPSON
	     (HM INSPECTOR OF TAXES)    	Respondents

				Special Commissioner:   ADRIAN SHIPWRIGHT

Sitting in London on 24 November 2003

Giles Goodfellow QC of Counsel for the Appellant

David Rees of Counsel for the Respondents

© CROWN COPYRIGHT 2004

DECISION

Introduction  

1.	This is an appeal by Mr CJ Norton (“the Appellant”) against a Closure Notice dated 23 January 2002 after an inquiry relating to the Appellants’ self-assessment return for the year of assessment 1998-99.  This Closure Notice does not take account of trading losses incurred in the year of 1999-2000 as the Appellant contends it should.

Abbreviations

2.	For ease of exposition I use (except where the context otherwise requires) the following abbreviations in this decision:

“Appellant”		Mr CJ Norton
“Greenback”		The Greenback Partnership
“HRA”			Haim Robinson Associates
“HMIT”			The relevant local Inspector 
“Partnership”		The film partnership to which the Appellant subscribed
“Respondent”		Mr A Thompson (HM Inspector of Taxes)
“TA” 			Income and Corporation Taxes Act 1988
“Trust”			Taxes Management Act 1970

The Issues

3.	The essential issue in this case is whether “carrying back” losses under section 380 Income and Corporation Taxes Act 1988 (“TA”) has the effect of: 

(a)	reducing retrospectively the taxable income of the taxpayer for the period to which the loss is carried back so that (in this case) there was no taxable income at the date tax for the first period would otherwise be due; or
(b)	allowing an amount equal to the tax paid if it were the case that it had been paid to be reclaimed when the claim to carry the loss back is made.

4.	I was informed that between the parties it is agreed that determination of the primary statutory construction issue “is also an agreed method of determining:

(i)	what effect (if any) a valid claim for relief under section 380(1)(b) TA and Schedule 1B TMA has on the individual’s liability to interest in respect of missed payment deadlines for income tax otherwise chargeable for 1998-99;
(ii)	 what effect (if any) a valid claim for relief under section 380(1)(b) TA and Schedule 1B Taxes Management Act 1970 (“TMA”) has on the individual’s liability to default surcharge in respect of missed payment deadlines for income tax otherwise chargeable for the “earlier” year of assessment, in a claim covering two or more years”

5.	Not having had the benefit of express argument on these further matters I express no view as to the correctness of this approach as a matter of law but it does seem a very sensible and practical way of dealing with the matter.

Evidence

6.	The parties produced a Statement of Agreed Facts and Issues. Folders of  documents were produced. No objection was taken to the admissibility of these documents. 

7.	No oral evidence was given.

Findings of Fact

8.	From the Statement of Agreed Facts, the documents and the evidence before me I make the following findings of fact.

The Appellant and the potential charge

9.	In the year of assessment 1998-99 the Appellant was an employee of a computer group. The Appellant exercised a number of share options during that year of assessment. This give rise to a gain of approximately £1.9m. This gain was liable to income tax under section 135 TA.  The income tax liability for 1998-99 in respect of these gains was £769,878.

10.	The gain chargeable under section 135 TA was included in the Appellant’s return for the year of assessment 1998-99. This was submitted in September 1999 (21 September 1999).

The Losses

11.	On 6 January 2000 the Appellant applied to become a member of a film partnership (“the Partnership”) which had been set up to acquire and exploit film(s).  The Appellant became a member of the Partnership at that date and was a member at the relevant times.  The Partnership made losses in its first accounting period. The Appellant was entitled to a proportionate share of any profit or loss the partnership made.

12.	The amount of the Appellant’s share of the partnership losses for 1999-00 was agreed following investigation at £1,820,236.

Claims and Correspondence
 
13.	Various matters were the subject of correspondence between the Inland Revenue and the Appellants’ advisors.  These were, initially, Haim Robinson Associates (“HRA”) and, subsequently, the Greenback Partnership (“Greenback”).

14.	HRA wrote to the relevant local inspector (“HMIT”) on 10 January 2000 claiming to reduce the Appellant’s payment on account for 1998-1999 to nil.  The Inland Revenue replied on 12 January 2000 stating that the Appellant’s claim to reduce payments on account for 1999-2000 had been reduced to nil as requested.  The Agreed Statement of Facts says “As Mr Norton’s payments on account for 1989-99 had been made the correct procedure would have been to revert to the agent to clarify the instructions given”.

15.	The Partnership’s first accounts were drawn up for the period ending 5 April 2000.  However, HRA wrote to HMIT on 14 March 2000 (before the end of the Partnership’s accounting period) saying that the Appellant would be carrying back a trading loss for 1999-2000 against his income for 1998-1999, thereby extinguishing his tax liability for 1998-1999.  HRA requested HMIT to instruct the Collector of Taxes not to collect the £755,205 originally claimed as the Appellant’s Self-Assessment Return for 1998-1999.

16.	No response was made to the letter of 14 March 2000 until May 2000.  HMIT issued a 5% Surcharge Notice on 8 May 2000 in respect of the Appellant’s failure to pay the £755,205 shown on his Self-Assessment Return for 1998-1999 on or before 28 February 2000.  A further Surcharge Notice was issued on 23 May 2000.

17.	The Appellant made a further payment of £20,000 in respect of any outstanding liability for income tax for 1998-1999 in September 2000.

18.	Greenback wrote to HMIT on 2 November 2000.  This letter set out details of the Appellant’s share of the trading losses from the Partnership and the Appellant’s intention to “carry-back” the loss to 1998-1999.  The losses had arisen before that date.

19.	The letter of 2 November 2000 was accepted by HMIT to be a stand-alone claim for relief arising from the trading loss in 1999-2000.  The Respondent regarded the claim for relief as being effective from 2 November 2000 and regarded the Appellants liability to interest and default surcharges for missed payment deadlines for 1998-1999 as ceasing to accrue from that date.

20.	The Appellant’s Self-Assessment Return for 1999-2000 was submitted on 23 January 2001.  This contained a formal claim to carry back the trading loss in respect of 1999-2000 to the year of assessment 1998-1999.

21.	HMIT issued a closure notice in respect of the Appellants’ Self-Assessment Return for 1998-1999.  This made some adjustments to the Return but did not reduce the underlying liability to tax to take account of the claim for relief by reference to the trading loss made in 1999-2000.

22.	The Appellant appealed against the Closure Notice by letter dated 15 February 2002.  He elected for the Appeal to be heard before the Special Commissioners.

23.	It is accepted as common ground that the Appellant:

(a)	validly claimed a trading loss which after investigation was agreed at £1,820,236;
(b)	is entitled to relief in respect of this trading loss by reference to his income for the year of assessment 1998-1999 under section 380 TA and Schedule 1B TMA.

24.	The Appellant appealed against both Surcharge Notices to the General Commissioners who decided the Appellant had a reasonable excuse throughout the period.  No appeal was made against this.  Mr Goodfellow QC confirmed that the Appellant was not raising any issue estoppel or similar point in respect of this.

25.	Summary Chronology

(a)	Before 6 April 1999
Share Options exercised triggering gains taxable under section 135 TA.
(b)	21 September 1999 
Return for 1998-99 submitted showing liability of £755,205.45.
(c)	6 January 2000 
Appellant subscribes to, and becomes a member of, the Partnership.
(d)	10 January 2000 
Claim to reduce payments on account for 1998-99.
(e)	31 January 2000
Balancing payment for 1998-99 due.
(f)	28 February 2000
First surcharge trigger date
(g)	5 April 2000
Partnership Accounting Date
(h)	8 May 2000
5% surcharge notice issued
(i)	September 2000
Further payment of £20,000 for 1998-1999
(j)	2 November 2000
Letter claiming loss of £1,854,400.15 in respect of 1998-99
(k)	23 January 2001
Self-Assessment Return for 1999-2000 submitted
(l)	23 January 2001
HMIT issued closure notice

 The Relevant Legislation

26.	 The relevant provisions of the tax legislation are mainly found in Schedule 1B TMA and section 380 TA.  The relevant legislation includes the following provisions. 

27.	Paragraph 2 Schedule 1B TMA deals with claims involving more than one year of assessment.  It provides:

“(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) Subject to sub-paragraph (5) below, the claim shall be for an amount equal to the difference between—
(a) the amount in which the person is chargeable to tax for the earlier year (“amount A”); and
(b) the amount in which he would be so chargeable on the assumption that effect could be, and were, given to the claim in relation to that year (“amount B”).
(5) Where effect has been given to one or more associated claims, amounts A and B above 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 59B(1)(b) of this Act, or otherwise.
(7) For the purposes of this paragraph, any deduction made under section 62(2) of the 1992 Act (death: general provisions) in respect of an allowable loss shall be deemed to be made in pursuance of a claim requiring relief to be given in respect of that loss.

The exclusion of S42(2) TMA allows claims to be made otherwise than in the Return.

28.	The TA makes provision for relief in respect of trading losses for income tax purposes.  These are found in sections 380-382 TA.  These provide:
380 Set-off against general income
(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 31st 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.
(2) Any relief claimed under paragraph (a) of subsection (1) above in respect of any income shall be given in priority to any relief claimed in respect of that income under paragraph (b) of that subsection.

381 Further relief for individuals for losses in early years of trade
(1) Where an individual carrying on a trade sustains a loss in the trade in—
(a) the year of assessment in which it is first carried on by him; or
(b) any of the next three years of assessment;
he may, by notice given on or before the first anniversary of the 31st January next following the year of assessment in which the loss is sustained, make a claim for relief under this section.
(2) Subject to section 492 and this section, relief shall be given under subsection (1) above from income tax on so much of the claimant’s income as is equal to the amount of the loss or, where it is less than that amount, the whole of that income, being income for the three years of assessment last preceding that in which the loss is sustained, taking income for an earlier year before income for a later year.
(3) Relief shall not be given for the same loss or the same portion of a loss both under subsection (1) above and under any other provision of the Income Tax Acts.
(4) Relief shall not be given under subsection (1) above in respect of a loss sustained in any period unless ... the trade was carried on throughout that period on a commercial basis and in such a way that profits in the trade (or, where the carrying on of the trade forms part of a larger undertaking, in the undertaking as a whole) could reasonably be expected to be realised in that period or within a reasonable time thereafter.
(5) Relief shall not be given under subsection (1) above in respect of a loss sustained by an individual in a trade if—
(a) at the time when it is first carried on by him he is married to and living with another individual who has previously carried on the trade; and
(b) the loss is sustained in a year of assessment later than the third year of assessment after that in which the trade was first carried on by the other individual.
(7) This section applies, with the necessary modifications, in relation to a profession or vocation as it applies in relation to a trade.

382 Provisions supplementary to sections 380 and 381
(3) Subject to subsection (4) below, for the purposes of sections 380 and 381, the amount of a loss sustained in a trade, profession or vocation shall be computed in like manner and in respect of the same period as the profits arising or accruing from the trade, profession or vocation are computed under the provisions of the Income Tax Acts applicable to Case I or II of Schedule D.
(4) An amount of a loss which, apart from this subsection, would fall to be included in the computations for two successive years of assessment shall not be included in the computation for the second of those years.

Appellant’s Contention

29.	Mr Goodfellow QC made the following contentions on behalf of the Appellant.
(a)	In essence, the Appellant’s case is that the effect of section380 TA is to reduce the taxable amount for the earlier year so that there is no liability for the interest and default surcharge to bite on.  The effect of section380 TA is that income for the earlier year ceases to be subject to tax.  This effect is fully retrospective and not just from the date of the claim and/or its acceptance.
(b)	The tax under section 135 TA ceased to be payable as the effect of a valid claim for relief under section 380(1)(b) TA was to remove without time limit the burden of income tax under section 135 which had arisen in the earlier year as a result of the exercise of the share options.  The income tax on the income for the earlier year ceased to be payable and cannot be relied upon to sustain a claim for interest or a default surcharge as the “principal” on which such interest or surcharge is said to arise has been extinguished.
(c)	The Respondent’s contention that the income of the earlier year is unaffected is wrong for a number of reasons including the following.
(i)	It is contrary to the clear language and purpose of the provisions.
(ii)	It wrongly elevates paragraph 2 Schedule 1B TMA into a charging provision.
(iii)	It deprives the taxpayer of repayment supplement if the taxpayer pays and later successfully makes a section 380 TA claim.
(iv)	It discriminates against taxpayers with accounting periods ending late in the year of assessment.
(d)	Prior to the enactment of Schedule 1B there was no doubt that the effect of a valid section 380(1)(b) claim was to remove the burden of tax for the earlier year for the purposes of charging tax, interest and tax-generated penalties.
(e)	The language of sections 380 and 381 TA was not changed when Schedule 1B TMA was introduced.  It was not Parliament’s intention to change the reliefs under sections 380 and 381 by enacting Schedule 1B which was an administrative response intended to facilitate the mechanics of self-assessment rather than to effect any change to the reliefs under sections 380 and 381 TA.
(f)	The function of paragraph 2 Schedule 1B TMA is simply to allow the taxpayer to obtain relief from tax for the earlier year without reopening the assessment for that year.  It does so by adopting the fiction that the claim relates to the later and not the earlier year.  However, it is clear that the substance of the relief conferred by section 380 remains a relief from tax on income for the earlier year.
(g)	This is supported by paragraph 2(1) Schedule 1B which applies where a claim is made requiring relief for a loss incurred in a late year “… to be given in an earlier year of assessment”.
(h)	The Respondent’s contention of a “free standing tax credit” is inconsistent with paragraph 2 Schedule 1B TMA.  Paragraph 2(b) provides that effect is to be given to the claim in the later year “… by way of repayment …”.   Repayment is the natural description of the effect of a claim which extinguishes an earlier liability to tax thereby giving rise to repayment of the monies previously paid.
(i)	Sections 380 and 824 TA demonstrate the illogicality of the Respondent’s contention that a taxpayer should pay the tax for the earlier year on the due date (or be liable for interest and penalties if he does not) only to be refunded with interest from the date of that payment when the claim for relief is accepted.
Respondent’s Contentions

30.	Mr Rees argued on behalf of the Respondent that the claim under section380 TA did not reduce the taxable amount for the earlier year or the amount of tax due in respect of it.  The section 380 claim gave rise to a right to repayment or set off etc. of an amount of which the measure was thus the tax due on the amount by which the taxable amount was assumed to be reduced – a free standing tax credit when claimed.  Accordingly, the liability to tax remained till the claim was made with consequent interest and surcharge liabilities for non-payment.
31.	Mr Rees made the following submissions:
(a)	A valid section 380 TA claim gives rise to a free standing tax credit.
(b)	The net income tax liability for the two years is the same whether the Appellant or the Respondent’s view of the effect of a section 380 claim is correct.  The point at issue though has considerable implications for liability to surcharges and interest if the statutory payment date is missed.
(c)	The wording of section 380 TA suggests that a claim can only be made during the period of twelve months from 31 January after the end of the year of assessment in question.  However, in practice the Revenue will accept a claim for loss relief once the taxpayer’s accounting period has ended. (cf. section381).
(d)	Section 380 TA simply provides that a taxpayer is entitled to claim relief.  It is silent as to how the relief is to be given.  Section 42 and Schedule 1B TMA deal with this.
(e)	Where a claim under section 380 TA is made in relation to two or more years of assessment, Schedule 1B TMA sets out how effect is to be given to the claim.
(f)	The Respondent contends that the statutory provisions are clear.  The Schedule operates by giving the taxpayer a free standing tax credit in the later year of assessment which may be used in any of the ways set out in paragraph 2(6) i.e. “repayment or set-off, or by an increase in the aggregate amount given by section 59B(1)(b) [TMA] or otherwise”.
(g)	By paragraph 2(3) the section 380 loss claim is to relate to the later year.  If the Appellant’s contentions are correct these words would seemingly be otiose as would paragraph 2(5) and 2(4)(b).
(h)	Paragraph 2(6) provides that “Effect shall be given to the claim in relation to the later year”.  The Appellant was thus entitled to and given a free standing tax credit on his self‑assessment account in relation to 1999/2000.  The amount on which the Respondent was chargeable to tax in 1998/1999 and the amount of tax payable by him in respect of 1998/1999 remain unchanged.
(i)	Accordingly the interest and surcharge were correctly incurred for missed payment deadlines for 1998/99.
(j)	This accords with the general principles underlying the self-assessment regime that each year stands alone and that what happens in one tax year does not affect another.  This provides for certainly and finality.
(k)	The balancing payment of the tax liability for a year of assessment is due and payable on 31 January following the end of the year of assessment in question.  If it is paid on time no surcharge or interest is incurred.
(l)	The Appellant’s construction would allow him and others who had not paid at the due date to obtain an interest free loan from the Revenue at the expense of other taxpayers who do make payment on time.  A taxpayer cannot choose not to pay the tax that is due because he thinks he may make a loss in a later year.
32.	Mr Rees, in his Skeleton Argument, sought to rely on his Explanatory Notes to the Bill as an aid to interpretation.  Mr Goodfellow objected to this.  I asked for written observations from both parties on this matter.  However, Mr Rees in his observations decided not to press this matter.
Musashi
33.	I raised the question of the VAT case of C&E v Musashi Autoparts Europe Limited [2003] EWCA 1738 and its helpfulness or otherwise as far as this case was concerned with the parties.  I asked for written representations from both sides on this within a certain time.  This was extended when the Court of Appeal decision was given.  I was asked to allow further representation to be made up to 7 January 2004, a request to which I acceded.
I am grateful to Counsel for their helpful representations on this issue.
34.	The Musashi case concerned an assessment raised by Customs & Excise for interest in respect of supplies which were not shown to be zero-rated until after the due date for payment of VAT.  The Court of Appeal held that it was correct that the taxpayer remained liable to interest on the amount of VAT assessed by Customs where the amount of VAT had subsequently ceased to be due and payable when the supply was shown to be zero-rated.  The effect of satisfying the conditions for zero-rating was not retrospective.  This gave an incentive to the taxpayer to get it right from the start.
Respondent’s Representations

35.	Mr Rees made the following submissions in respect of the Musashi case.
(i)	The VAT legislation differs from the income tax legislation so the case is not on all fours.
(ii) Two propositions can be derived from the decisions, which by way of analogy may assist the Commissioner in determining Mr Norton’s appeal.
(iii)	First both courts distinguish between situations where the assessment to VAT is “discharged” or “loses its validity” (ie the later event has full retrospective effect) and those situations where a previous liability is merely offset by a credit as at the date of the later event.  It is only in the former case where the liability for accrued interest will be affected.  In the latter case, the satisfaction  of the assessment for VAT “in no way discharges or undermines the assessment for interest” (per Lightman J at para 22); and “It does not affect the accuracy or validity of the assessment with respect to the period for which it was made or remove the obligation to pay the interest assessed for the earlier period.”  (per Pill LJ at para 27).  The taxable person “remains liable to pay under the assessment, notwithstanding that he can recoup the amount for which he is liable indirectly” (per Chadwick LJ at para 49).
(iv)	These conclusions support the Revenue's contention that a claim to "carry-back" loss relief to an earlier year can be given effect by a free-standing credit on the self-assessment account, as at the date the valid claim is made.
(v)	Mr Norton’s liability to tax under section 59B TMA for 1998/99 was not “discharged”, the claim did not operate retrospectively and the interest imposed by section 86 TMA was therefore unaffected by the claim to "carry-back" his loss.
(vi)	The second point relates to the conclusion reached by both tribunals that a taxpayer who ignores his statutory obligations should not be in a different (and better) position than a taxpayer who fulfils the statutory requirements to pay his liability to tax on time.
(vii)	The effect of Mr Norton’s argument is that he is placed in a more advantageous position than a taxpayer who properly made his payments on time in accordance with the statutory obligations in section 59B TMA.  And in a more advantageous position than a taxpayer who misses the deadline for payment of the earlier year's liability but satisfies the liability to tax and interest at some point before the valid claim is given effect in the later year.

Appellant’s Representations

36.	 The Appellant made the following representations.
(i)	The case has little direct relevance as it turns on different legislation.
(ii)	The Court of Appeal recognised the logic and common sense of the proposition that if tax is no longer due then interest on that tax cannot be due.
(iii)	The VAT legislation led to a debit in the VAT account and not a reversal of the earlier credit for the previous accounting period.  In contrast there is a relief from tax on the income for Year 1 equal to the loss in Year 2.
(iv)	By contrast, in the present case, section 380(1)(b) confers on the taxpayer a relief in respect of tax for a single year of assessment: it grants relief from tax on the income for Year 1 equal to the amount of the trading loss for Year 2. Neither section 380 nor Schedule 1B para 2 provides that such income is to be relieved only if and to the extent the loss has accrued and been quantified prior to the date of the balancing payment for Year 1 (which in practice would be the net effect of the Revenue’s construction) and that where such conditions are not satisfied the taxpayer can reduce his payments or become entitled to a repayment for Year 2.
(v)	On its face, section 380(1) confers the same relief from tax for Year 1 on all taxpayers who suffer a loss in Year 2 irrespective of when their basis period falls. Paragraph 2 of Schedule 1B does not indicate any decision by Parliament to treat taxpayers with late basis periods more harshly than those with early basis periods. The dictum of Lightman J in the High Court (at para 27) about treating taxpayers in like positions alike of Musashi in fact favours the Appellant.
(vi)	In the present case, the charge to interest is on “income tax which becomes due and payable in accordance with section 55 or 59B”. It is a requirement that there should be a continuing liability to tax for there to be a liability to interest. The reference to section 55 or 59B merely incorporates provisions which determine when such income tax becomes due and payable and not whether it remains payable. 
(vii)	The common sense conclusion is that where the substantive charging provision expressly states that relief from income tax on the income for Year 1 may be claimed, the such income ceases to be taxable and the income tax in respect of such income ceases to be payable. 
(viii)	Properly analysed, the decision of both the High Court and Court of Appeal in Musashi was that the assessment for PAC 2 remained correct because the substantive relieving provisions contemplated that there would be and remain an increase in VAT payable for PAC 2 if conditions were not satisfied. Significantly, Chadwick LJ (at para 48) relied upon the fact that the zero-rating provisions did not state that when the conditions were satisfied in PAC 3 that the amount payable for PAC 2 would be “repayable”. In the present case, “repayment” is precisely one of the ways that it is contemplated by para 2 of Schedule 1B that effect will be given to relief from income tax on the income for Year 1. The common sense interpretation is it is the tax for the Year 1 that is the subject of the repayment. 
(ix)	The Appellant accepts that the time value of money is important to both the Revenue and to taxpayers. But the Revenue’s construction makes the method of giving effect to the claim for relief of crucial importance (e.g. repayment, set-off, credit or some other method) because that will determine the date when interest and default surcharges cease to accrue and thus the value of the relief. However, Paragraph 2(6) seems to give the Revenue a choice which one is to be used and there is no apparent obligation to give relief in accordance with the choice of the taxpayer or the most advantageous way to the taxpayer.
Authorities

37.	An agreed bundle of authorities was produced.  The authorities in the bundle were the following:

St Lucia Usines and Estates Co Lt v Saint Lucia (Colonial Treasurer) [1924] AC 508 (PC)
Whitney v IRC [1926] AC 37
Pepper v Hart [1993] AC 593
R v Secretary of State for the Environment ex parte Spath Holme Ltd [2001] 2 AC 349
R (Westminster City Council) v National Asylum Support Service [2002] 1 WLR 2956
Robinson v Secretary of State for Northern Ireland [2002] UKHL 32
Blackburn (Inspector of Taxes) v Keeling [2003] EW HC 754 (Ch), [2003] EW CA Civ 1221 and Revenue Note to Court of Appeal on TB 48
Melham Ltd v Burton [2003) STC 441
NAP Holdings (UK) Ltd v Whittles (Inspector of  Taxes) [1994] STC 979
Kirkness (Inspector of taxes) v John Hudson & Co. Ltd [1955] PC 696

Discussion

Introductory

38.	The essential question in this case is the effect of the claim under section 380 TA.

There are however certain other matters that also need to be considered.  These are:

(a)	when were the self-assessment returns due?
(b)	when was payment of the tax due?
(c)	what was the effect of the letters of 10 January and 14 March 2000?
(d)	when was loss relief claimed?
(e)	what is the effect of the claim for relief?

I consider each of these in turn.

When were the self-assessment returns due?

39.	The Self-Assessment Return for 1998-99 was due on or before 31 January 2000.  The Self-Assessment Return for 1999-2000 was due on or before 31 January 2001 (see section 8 TMA).  The returns were duly made.

When was payment of the tax due?

40.	The general rule is that the balance of income tax for a year of assessment (net of payments on account) is payable “… on or before 31 January next following the year of assessment”. In this case this would be 31 January 2000 (see section 59B TMA).  This is before the end of the Partnership’s first accounting period.

41.	No payment of income tax was made on that date in respect of 1998-1999 (see above and the agreed Statement of Facts and Issues).  Accordingly, income tax that was prima facie payable on 31 January 2000 was not paid on or before that date.  I find this as a fact.

42.	Where a person anticipates that a loss may arise in a later year but it has not arisen at the relevant time the liability to income tax is not reduced because of such anticipation.  The tax is still due. If someone, for example, anticipated that a loss would arise in the individual’s fourth year of trade sufficient to wipe out the profits of the first three years of trade if a claim were made under section 381 TA (Further relief for individuals for losses in early years of trade) this would not justify the taxpayer withholding payment of tax during the earlier years because such was his anticipation. Section 381 TA provides for relief to be given on a claim being made on a similar basis to that under section 380TA (see section 381(2) TA). The tax should be paid by the taxpayer. It could later be reclaimed and repayment sought.  The position is the same for section 380 TA.  A taxpayer cannot decide not to pay income tax when it is due and payable simply because he believes he may make a loss in the future.

What was the effect of the letters of 10 January and 14 March 2000?

43.	The letter of 10 January 2000 purported to reduce his payments on account for 1998-99.  It was not a valid claim for loss relief under section 380 TA nor was the letter of 14 March 2000.  It could not be as the losses for the accounting period had not arisen as the accounting period had not ended.  I find as a fact that it was not a valid claim for relief under section 380 TA.

When was loss relief claimed?

44.	Loss relief was claimed in the letter of 2 November 2000.  This is accepted as a valid stand-alone claim for loss relief by the Respondent.  I find as a fact that this is so and that such loss relief was not validly claimed at any earlier date.

What is the effect of the claim for relief?

45.	Section 380(1)(b) TA provides that where an individual has a trading loss for a year of assessment that individual may:
“… by notice given within twelve months from the 31st January next following that year [of assessment], make a claim for relief from income tax on—…
(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”.

[emphasis supplied]

The section provides that there is to be a relief the measure of which is tax on so much of the income of the previous year as the loss could reduce. 

46.	Section 380 TA does not say that the taxable income is reduced, it merely says that relief from income tax is given on so much of the income of the preceding year as is equal to the loss.  This does not alter when income tax is payable in respect of the earlier year.

47.	This is in contrast to the position for corporation tax. Section 393A(1) TA provides:
“(1) Subject to section 492(3), where in any accounting period ending on or after 1st April 1991 a company carrying on a trade incurs a loss in the trade, then, subject to subsection (3) below, the company may make a claim requiring that the loss be set off for the purposes of corporation tax against profits (of whatever description)—
(a) of that accounting period, and
(b) if the company was then carrying on the trade and the claim so requires, of preceding accounting periods falling wholly or partly within the period specified in subsection (2) below;
and, subject to that subsection and to any relief for an earlier loss, the profits of any of those accounting periods shall then be treated as reduced by the amount of the loss, or by so much of that amount as cannot be relieved under this subsection against profits of a later accounting period”. [Emphasis supplied].

48.	Paragraph 2 Schedule 1B TMA 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”). Subparagraph (3) provides that “The claim shall relate to the later year”.  This is consistent with finality for each year of assessment for self-assessment purposes.

49.	The paragraph then provides that the claim is to be given effect to on the assumption that effect could have been given to the claim in relation to the earlier year not that the earlier year is reopened and the taxable amount is reduced (See paragraph 2(4) and (5) TMA Schedule 1B).  It does not say that effect is to be given to it in the earlier year.
50.	The way is which effect is to be given to the claim is deal with by subparagraph(6). This provides:
“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 59B(1)(b) of this Act, or otherwise”.

51.	I consider that repayment is an appropriate word to cover the situation where the tax has been paid and is paid back on a claim being made for loss relief.  I do not consider it if apt to cover a situation where tax due has not been paid and a relief is later claimed.

52.	I gratefully adopt Carnwath LJ’s summary of the effect of Schedule 1B TMA in Keeling at paragraph 16. He said “This elaborate deeming provision has the effect (so far as it applies) that, where under section 380(1)(b) loss relief is claimed on income in the preceding year, the claim nonetheless "relates" to the later year (para 2(3)). The amount of the claim is computed using the formula in paragraph 2(4), based on the income in the previous year; but it does not affect the tax position in the earlier year (para 2(3)). It gives rise to a "free-standing credit" (in the Revenue’s language) which can be used in any of the ways set out in paragraph 2(6)”.

Conclusion 

53.	I conclude that as at the date when the payment of tax for 1998-99 was due there was an outstanding liability to pay that tax which was not discharged and I find this as a fact. That liability to pay tax on the due date (31 January 2000) was not expunged by the claim for loss relief. 

54.	The taxpayer made a valid claim for relief on 2 November 2000. The effect of this was that he became entitled to relief from income tax from a date after the due date for payment of tax. In practice, I was told, the Inland Revenue accept the date of claim as the relevant date and the Respondent accepted that this was the relevant date in this case. The measure of relief was by reference to the taxable profits of the earlier year but the claim to the later year.  

55.	The effect of the claim which is a claim of the later year is neither to reopen the earlier year nor to reduce the taxable amount for that year.  I am fortified in this view by the decisions in Keeling and Musashi and the apparent policy of the legislation.  

56.	I consider that the effect of “carrying back” losses under section 380 TA is to allow an amount equal to the tax paid if it were the case that it had been paid to be reclaimed when the claim to carry back the loss is made (see paragraph 2(b) above).  It does not retrospectively reduce the taxable income for the earlier period in the circumstances of this case.

57.	The appeal is therefore dismissed.

ADRIAN SHIPWRIGHT
SPECIAL COMMISSIONER

SC 3018/03