HMRC have the power to enquire into tax returns. They also have the power to enquire into claims. In each case the power is essentially unfettered, though there are time limits within which any enquiry must be started.
There are some very important differences between the methodologies and procedures for the two kinds of enquiry. This is not mere pedantry: if HMRC use the wrong provisions, the enquiry is of no effect, as a number of cases have shown.
It’s therefore important to be able to know whether any enquiry relates to a tax return or to a claim. This is not made any easier by the law’s requirement that, wherever possible, any claim must be made as part of a tax return (including by amending a tax return that has previously been made, where the time limit to do so has not expired). Where a claim is made in that way, it can be challenged only by enquiry into the tax return. On the other hand, if no notice to file a tax return has been issued, or if it is too late to amend a tax return, any claim is a ‘free-standing’ one and any enquiry is made into the claim itself.
Further complication arises from the fact that not every claim whose intimation is physically included on the tax return form for a year (or the online equivalent) is regarded for this purpose as being part of the tax return for the year. Rather, the question is (as the Supreme Court put it in Cotter v HMRC [2013] UKSC 69) whether the claim does or does not ‘as a matter of law affect the tax chargeable and payable in [meaning, in this context, ‘for’] the relevant year of assessment’.
Hitherto, the cases coming to court on the point have been about ‘carry-back’ claims whereby a loss for one tax year generates relief or repayment calculated by reference to income of a previous year. Step by tortuous step, these cases have lit a path through the legislative gloom that surrounds such claims.
Now, in Cumming-Bruce v HMRC [2022] UKUT 00233 (TCC) the Upper Tribunal has addressed the matter of Capital Gains Tax (‘CGT’) losses. And we commend it for its clear, helpful and comprehensive analysis of the case law in this troubled area, which makes the case well worth reading.
CGT losses can be carried forward to be used against future gains only if a claim to that effect is made. Mr Cumming-Bruce made such claims for 2001/2 and 2002/3, at a time when the ‘amendment window’ for each year’s tax return was open. HMRC had purported to enquire into the tax returns, on the basis that the claims formed part of the tax returns: Mr Cumming-Bruce resisted, on the basis that these were ‘free-standing’ claims.
The losses in question, being carried forward in their entirety did not, by definition, affect the tax payable for the years in which they were sustained. Did they nonetheless ‘as a matter of law affect the tax chargeable and payable’ for those years?
The Upper Tribunal said yes, agreeing with HMRC that:
‘The framework of the legislation provides that all the gains and losses for the year are relevant to “establishing the amounts by which a person is chargeable to…capital gains tax”, and it is the net position, having taken all gains and losses into account, which determines the CGT payable.’
Thus where, as here, the losses had been claimed when the amendment window was open, the effect had been to amend the tax return and HMRC had been right to use the ‘tax return’ enquiry powers.
That does not mean that a claim to carry forward CGT losses will always amount to the amendment of a return. The time limit for a claim (four years from the end of the tax year) will often mean that a ‘free-standing’ claim will still be possible even after the period for amending the tax return has expired. In those circumstances, any enquiry would have to be made under the rules governing enquiries into claims.
Gosh: why does such a commonplace matter have to be so complicated?
For more information on how BKL can help you in the event of an HMRC enquiry, please get in touch with your usual BKL contact or use our enquiry form.
We also offer a tax fee protection service which can help to cover the costs of an HMRC enquiry.
