Weekly Tax Update - Monday 28 May, 2012

  1. General news

    1.1. GAAR

    A Parliamentary report has been produced into a general anti-abuse rule (GAAR). It presents a background and summary of the issues discussed and leading to the Government's comment at the 21 March 2012 Budget that it would introduce a GAAR on the lines suggested by the Aaronson study group (see Tax Update 28 November 2011) from 2013.

    http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel= pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_032074

    1.2. Higher penalties for income tax and capital gains tax involving offshore matters

    HMRC has issued a factsheet giving information on the higher penalties applicable to income tax and capital gains tax involving offshore matters. The penalties can be as high as 200% of the tax involved.

    www.hmrc.gov.uk/compliance/cc-fs17.pdf

    1.3. Working Together Bulletin

    Working Together issue 48 has been published.

    www.hmrc.gov.uk/agents/working-together-48.pdf

  2. Private Clients

    2.1. Free-standing credits: Revenue & Customs Commissioners v Cotter [2012] EWCA Civ 81

    This case is of importance because HMRC is known to be removing 'free-standing credits' that arise as a result of claims made in returns involving two or more years from Self-assessment Statements of Account, then seeking to enforce the collection of tax that appears to become due as a result of the removal of the 'freestanding credit'.

    The 'Cotter' case concerns the correct enquiry procedure that must be applied to claims made in a tax return, where the claim for relief involves two or more years. The correct enquiry procedure has a direct consequence on what amount of tax is collectable, where a 'free-standing credit' is involved.

    Schedule 1A or s 9A enquiry?

    Where a claim has been made outside of a tax return, and that claim is enquired into, the enquiry falls to be carried out under TMA 1970, Schedule 1A. In those circumstances, HMRC does not have to give any effect to the claim until the enquiry is concluded (Sch 1A, para 4). As such, during an enquiry being carried on under Sch 1A, HMRC is fully entitled to enforce collection of assessed taxes, without having to take account of the tax credit arising from the claim that has been made outside of the tax return.

    If, on the other hand, the claim is made in a tax return, any enquiry into the claim contained in the return must be made under s9A. In affecting two or more years, the claim made in the return falls within TMA 1970, Sch 1B. Crucially, paragraph 2(6) of Sch 1B states that 'Effect shall be given to the claim....whether by repayment or set-off, or increase in (payments on account), or otherwise'.

    Whilst a return is under enquiry under s9A, HMRC can decide not to make a 'repayment' of tax for that year (relying on TMA 1970, s59B(4)), but it must still 'give effect' to the claim by some other means, in accordance with the mandatory requirements of paragraph 2(6). Consequently, where the claim has been made in a return, HMRC has no legally enforceable power that would enable it to collect tax that arises as a result of ignoring the effect of the 'free-standing credit', whilst a s9A enquiry is ongoing.

    If HMRC wishes to collect tax on the basis of removing the effect of a claim made in a return that is subject to s9A enquiry, it can only do so by the exercise of a power to amend the assessment, against which formal rights of appeal and postponement apply.

    The 'Cotter' decision

    In Cotter, HMRC commenced proceedings in the High Court to recover tax of over £200k. The tax arose as a result of HMRC having ignored the effect of the tax credit in his return that arose from his loss claim, relying on the enquiry being carried out under Sch 1A for its power to leave the credit out of account whilst the enquiry continued.

    Mr Cotter's 2008/2009 loss had been claimed in the 2007/2008 return. HMRC contended that for the 2008/2009 loss to be claimed 'in a return', the claim must be made in the return for the year of the loss, i.e the 2008/2009 return.

    In HMRC's view, the entries in the 2007/2008 return amounted to a claim made 'outside' of a return, so that the enquiry was properly carried out under Sch 1A, and as a result HMRC was entitled to give no effect to the claim while the enquiry continued, and hence was able to continue collection proceedings in the High Court.

    The Court of Appeal decided that the entries on the 2007/2008 return were 'contained in a return', so that the only way HMRC could enquire into the claim was by the s9A procedure of enquiry into a return, not the Sch 1A procedure. It followed that as the power contained within Sch 1A to leave the credit out of account was not available to HMRC, the collection proceedings in the High Court, which arose as a result of removal of the 'free-standing credit', could not be continued.

    Relevance for taxpayers

    It remains to be seen whether HMRC appeal the decision. In the meantime if a taxpayer has made claims affecting two or more years of assessment in their tax returns, and HMRC has removed the resulting 'freestanding credit' from their Statement of Account and sought to collect tax that then becomes due, HMRC should be challenged on the basis that as the enquiry is...

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