Two limited partners used losses on film investments to claim income tax relief for earlier years. When the partnerships later agreed much smaller losses with HMRC, the partners said it was too late to alter their individual claims. The answer depended on which year’s tax return contained the claim and what HMRC had already taken steps to investigate.
The loss claims and their reduction
Mr De Silva and Mr Dokelman were limited partners in partnerships whose general partner was Investing in Enterprise Ltd. They joined as part of marketed schemes designed to create trading losses from investment in films and to set a partner’s share of those losses against his general income. The schemes used the film incentives in section 42 of the Finance (No 2) Act 1992. Under sections 380 and 381 of the Income and Corporation Taxes Act 1988, a limited partner could, in the early years of trading, set his share of a year’s partnership losses against his general income for that year or any of the previous three years. The partners invested partly with their own money, but principally through non-recourse or limited recourse loans.
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The partnerships’ returns for 1998/99, 1999/2000, 2000/01 and 2001/02 claimed substantial trading losses and film expenditure relief. HMRC did not accept the claims and opened enquiries into the partnership returns. Closure notices issued in about July 2003 disallowed, in substance, expenditure funded by the non-recourse or limited recourse loans and fees paid to the promoters. The partnerships appealed. On 22 August 2011 the appeals and claims were compromised under section 54 of the Taxes Management Act 1970, with the partnerships’ losses stated at much reduced levels.
Mr De Silva initially claimed on estimated losses and later included amended claims in his return for the year the losses arose. Mr Dokelman likewise used his return for the loss year to claim against income in earlier years.
The distinction had practical consequences. Mr De Silva had already received credits and was required to pay additional tax. Mr Dokelman had received no credit, but the losses available to him were reduced.
Why the taxpayers said the claims were final
The taxpayers sought judicial review. They argued that a carry-back claim was not a claim included in a self-assessment return under section 8. It was a stand-alone claim, which HMRC could challenge only by an enquiry under Schedule 1A. No such enquiry had been opened, and they said the time for opening one had expired, so HMRC had to allow the claims in full. They relied on Revenue and Customs Comrs v Cotter and said that HMRC’s power to amend the partnership or personal returns to reflect the settlement did not affect their relief.
The Upper Tribunal rejected the judicial review claim, and the Court of Appeal dismissed the partners’ appeal.
The claim belongs to the later year
Lord Hodge held that the result followed from the provisions on claims and from what a return must contain. Where a return has been required, section 42 generally says that a claim must be included in a return if it can be. Schedule 1A covers claims made outside a return. It requires HMRC to give effect to a claim promptly unless they enquire into it, but that enquiry has a time limit.
Schedule 1B deals with a claim to give relief in an earlier year for a loss incurred in a later year. Its paragraph 2 says that the claim relates to the later year and that effect is given to it in relation to that later year. The amount claimed is the difference between tax actually chargeable for the earlier year and the tax that would have been chargeable if the claim had taken effect then. That is only a method of calculation. It does not make the claim a claim for the earlier year.
Paragraph 2(2) disapplies the usual requirement to include the claim in a return. Lord Hodge agreed with Sales J and the Court of Appeal that this permits an early claim outside a return, including a Schedule 1A claim in the earlier year. It does not excuse the taxpayer from making the claim in the return for the later year. Section 8 requires the information needed to establish the net amounts chargeable and payable for that year, including relief for which a claim is included in the return. A partner’s return must also include his share of partnership losses stated in the relevant partnership statement.
Even relief already credited against an earlier year had to be accounted for in the loss-year return. A section 9A enquiry could therefore reach the carry-back claim there. The absence of a separate Schedule 1A enquiry did not close that route.
Recovering relief and amending the returns
The legislation also allowed HMRC to correct excessive relief. It could give effect to the claim by adjusting the tax chargeable for the loss year, including through an amendment following an enquiry.
Here HMRC had opened enquiries into the partnership returns. Such a notice is deemed to include a section 9A enquiry notice for each relevant partner’s personal return, whether already made or made later. After closure, the partnerships’ section 54 agreement had the same effect as a determination by the Special Commissioners in its terms. Section 50(9) then required an officer to amend each relevant partner’s return to reflect the reduced partnership amounts. The challenged letters made those amendments, and section 59B(5)(b) provided for payment of the resulting tax. The amendments and the decisions in the letters were therefore lawful.
Cotter distinguished
Cotter concerned an amendment to a return for the earlier year which merely intimated a loss expected in the later year. That claim had no bearing on the tax chargeable or payable for the earlier year, so at that stage it was a stand-alone Schedule 1A claim. HMRC had also opened a Schedule 1A enquiry before the later year ended, which prevented a later section 9A enquiry into the same claim. Cotter did not address an enquiry into the later year’s return. Lord Hodge held that it did not help these taxpayers, whose claims were made in their returns for the later year: Mr De Silva’s amended claims in his 1999/2000 return and Mr Dokelman’s claims in his 2000/01 return.
Verdict: The Court unanimously dismissed the partners’ appeal. HMRC’s partnership enquiries extended to the individual returns. The amendments to reflect the agreed losses, and the decisions implementing them, were lawful.
Source: R (De Silva and another) v Commissioners for Her Majesty’s Revenue and Customs [2017] UKSC 74
