Menu Close

De Silva fails to strike gold: spot the difference in carry-back claims

/ 8 January 2018

David Whiscombe

The way in which “carry-back” claims are treated for Income Tax purposes is surprisingly complicated.  The Supreme Court considered it in Cotter [2013] UKSC 69: it’s now had to consider it again in De Silva [2017] UKSC 74.  The facts in the two cases are very similar but the decisions are different.

When a loss is “carried back” from Year 2 to Year 1 it does not affect the tax payable for Year 1.  Instead, it is the tax payable for Year 2 that is reduced (albeit that the reduction is computed as the amount by which Year 1 tax would have been reduced if the loss had in fact been taken into account in Year 1).

In Cotter, the taxpayer had, on filing his tax return for 2007/8, claimed to reduce the tax that he owed for 2007/8 by reference to losses carried back from 2008/9.  HMRC had enquired into the claim as a “free-standing” claim.  The taxpayer asserted that any enquiry should be framed not as an enquiry into the claim as a “free-standing” claim but as an enquiry into the tax return itself, to which different rules would apply.  The Supreme Court held that HMRC were correct.  For more on that case and why the distinction between the two kinds of enquiry mattered, see Cotter pinned: carry-back claims.

In De Silva, the taxpayer had, on filing his tax return for 1998/99, claimed relief for losses carried back from 1999/2000.  HMRC had made an enquiry into the taxpayer’s return for 1999/2000.  The taxpayer – relying on the decision in Cotter – said that that would not do: any enquiry had to be into the claim as a free-standing claim and since no such enquiry had been made within the time limit, the claim must stand good.

The Supreme Court again found in favour of HMRC, explaining that the case was not governed by their decision in Cotter because the facts were different.  In Cotter, the taxpayer had argued that the enquiry should be framed as an enquiry into the tax return for 2007/8 (that is, “Year 1”).  That was plainly wrong – the claim did not affect the tax payable for that year so was not part of the tax return for “Year 1”.  In De Silva, HMRC had enquired into the tax return for 1999/2000 (that is, “Year 2”).  The claim did affect the tax payable for that year so did form part of the tax return for the year, and therefore could be challenged by way of an enquiry into the tax return for that year.  This did not contradict Cotter – it was just that in Cotter, neither side had canvassed the possibility of an enquiry into Year 2.

It is of course possible that a claim to carry back a loss from Year 2 might be made before the tax return for Year 2 is filed: that was what happened in Cotter.  Such a claim was described by the Court of Appeal in De Silva [2016] EWCA Civ 40 as an “inchoate” claim which could not be perfected until it was included in the tax return for Year 2.

The combined effect of Cotter and De Silva is that HMRC are able either to enquire into such a claim as a “free-standing” claim or to wait until the tax return for Year 2 is filed and then enquire into the tax return.  The Court of Appeal intimated that “normally, the appropriate point of challenge… has to be at the time when such losses are included in the … return” because “commercially, there would be little or no sense in the Revenue initiating its enquiry before the full facts were known”.  But HMRC must choose one enquiry route or the other – they cannot do both.

What remains less than crystal clear is the position as regards collection of tax.  The difference between an enquiry into a “free-standing” claim and an enquiry into a return is that the former allows HMRC to postpone giving effect to the claim pending completion of the enquiry and the latter normally defers payment of any additional tax until the enquiry is completed.  That distinction was the whole point of the Cotter case.   The issue of an Accelerated or Partner Payment Notice where available will remove the distinction; but APNs and PPNs are not relevant in every case so the point remains a live one.

There is a suggestion in the Supreme Court judgement in De Silva that, even where HMRC choose to investigate a carry-back claim by enquiring into the tax return for Year 2, they would be able to postpone giving effect to the claim.  But since postponement in this way applies only to “free-standing” claims, it is difficult to see how this can be right. On the contrary: where APNs and PPNs are not relevant, it seems still to be the case that if HMRC choose to enquire into a “carry-back” claim by way of enquiry into the tax return for Year 2, the tax attributable to the disputed claim will not be payable until the enquiry is concluded; if HMRC wish to deny the taxpayer that cash-flow benefit, it seems that they must proceed under the rules governing enquiries into free-standing claims.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

David Whiscombe

Consultant

View Profile