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Supreme Court Rules HMRC Can Withhold Tax Relief During Enquiries

By Amanda Banks, Tax-News.com, London

14 November 2013


In a much-anticipated ruling, the UK Supreme Court has confirmed that HM Revenue and Customs has the right to withhold tax relief and demand payment of a tax debt while investigating what the tax body believes to be a tax avoidance scheme.

The judgment reverses the decision of the Appeal Court in relation to the Cotter test case, in which it was argued that a taxpayer has the right to amend a tax return to carry back employment loss relief, and that HMRC had been wrong to bring collection proceedings without first allowing an appeal to the tax tribunal. In September, HMRC stated in a briefing that it would allow similar cases to go to tribunal pending the Supreme Court's judgment.

According to a summary produced by the court, the case raised a question about the jurisdictional boundary between the specialist tax tribunal and the ordinary courts. In this instance, the claimant had allowed HMRC to calculate his tax owed for 2007-08, and his claim for loss relief took the form of an amendment to his tax return for that year submitted in January 2009 in which he referred to losses incurred in 2008-09.

The judges reasoned that a claim for relief in respect of losses incurred in 2008-09 did not alter the tax chargeable or payable in relation to 2007-08, and that therefore the county court and the High Court had jurisdiction rather than the tax tribunal. This was because the taxpayer was not appealing against a tax assessment in respect to a particular year, but, rather, whether losses incurred in 2008-09 constituted a defence against HMRC's claim for immediate payment in relation to tax it had calculated as owed in relation to 2007-08.

Further, a provision in the Taxes Management Act by which relief can be given while a tax inquiry is underway (Section 9A) did not apply because the claimant had allowed HMRC to calculate the amount of tax owed and his amendment was not relevant to the calculation of tax for that year. This meant that the amendment was not itself part of the "return," as defined in the provision.

HMRC hailed the decision as a "significant deterrent" against the use of cash flow advantages to avoid tax. The tax body says that the decision may affect 200 users of the same scheme, representing GBP60m, and that similar cases will bring in up to GBP500m extra revenue.

TAGS: court | capital gains tax (CGT) | tax | tax avoidance | United Kingdom | legislation | HM Revenue and Customs (HMRC) | HM Revenue and Customs (HMRC)

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