Mr Derry claimed share loss relief of £414,500 against his 2009/10 income after selling shares at a loss. The Supreme Court held that sections 23 and 131 to 133 of the Income Tax Act 2007 gave him a clear entitlement to deduct that loss in the year he specified, and that Schedule 1B to the Taxes Management Act 1970 did not override it. The Revenue’s appeal was dismissed.
On 22 March 2010 Mr Derry bought 500,000 shares in Media Pro Four Ltd for £500,000. On 4 November 2010 he sold them for £85,500, realising a capital loss of £414,500. In his 2009/10 return, submitted on 24 January 2011, he claimed share loss relief for that amount against his income for 2009/10 under section 132 of the Income Tax Act 2007. The Revenue treated the claim as made outside a return and opened an enquiry under Schedule 1A to the Taxes Management Act 1970. They also opened a section 9A enquiry into his 2010/11 return and later issued a demand for tax said to be due for 2009/10. Mr Derry sought judicial review of the demand.
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He failed on both issues in the Upper Tribunal. The Court of Appeal decided the tax-return issue in his favour, so he succeeded overall. The Revenue appealed on that issue; Mr Derry sought to uphold the result on the loss-relief issue.
Share loss relief and the Taxes Management Act
The Income Tax Act 2007 formed part of the Tax Law Rewrite project. Its purpose was to restate the legislation more clearly, generally without changing its meaning, and to guide the reader through the calculation of liability. Section 23 sets out the steps for calculating income tax. At Step 2 the taxpayer deducts listed reliefs, including share loss relief, to arrive at net income. Sections 131 to 133 deal specifically with share loss relief. Section 132 entitles an eligible individual to claim a deduction in calculating net income for the year of the loss, the previous year, or both, and it expressly directs the reader to Step 2 of section 23. Section 133 explains that the loss is deducted in calculating net income for the specified year.
The chapters dealing with trade losses and employment loss relief contain an express statement that they are subject to paragraph 2 of Schedule 1B to the Taxes Management Act 1970. Chapter 6, which contains the share-loss provisions, has no equivalent wording. Schedule 1B applies to certain claims for relief involving two or more years and provides that such a claim relates to the later year. Section 42 of the Taxes Management Act deals with the procedure for claims and gives effect to Schedules 1A and 1B.
Whether the claim could be made for 2009/10
The first issue was whether Mr Derry could deduct the loss when calculating his liability for 2009/10, or whether Schedule 1B overrode that claim and required it to be treated as relating to 2010/11.
Both the Upper Tribunal and the Court of Appeal decided this issue for the Revenue. Henderson LJ considered that paragraph 2 of Schedule 1B, read in isolation, was apt to cover a share-loss claim. He treated the absence of an express cross-reference in Chapter 6 as insufficient to show that Parliament intended Schedule 1B not to apply. He also considered that there was no inconsistency between sections 132 and 133, read with section 23, and Schedule 1B.
Lord Carnwath, with whom Lord Reed, Lady Black and Lord Kitchin agreed, disagreed. He held that sections 23 and 131 to 133 form a clear and self-contained code governing liability. They give the taxpayer an entitlement to specify the year and to deduct the loss in calculating net income, and therefore tax liability, for that year. Having guided the taxpayer through that process, it would be extraordinary for the entitlement to be removed without any direct reference by a provision in a schedule to another statute concerned principally with management of the tax. The words “subject to” in the trade and employment chapters are substantive qualifications; their absence from section 132 indicates that the share-loss right is not subject to the same qualification. The Income Tax Act is the governing statute on liability and takes precedence in the absence of a contrary indication. There is also a real inconsistency: one set of provisions gives an unqualified right to deduct in the previous year, while the other treats the claim as relating to the later year. Indications in the previous legislation and explanatory notes that the authors may have assumed uniform treatment were not enough to depart from the ordinary meaning of the rewritten statute. Lord Carnwath therefore held that Mr Derry was entitled to make the claim for 2009/10.
The effect of the entries in the return
The second issue asked what followed if a claim that was erroneous in law had nevertheless been included in the 2009/10 return and the Revenue had not opened a timely enquiry under section 9A. Success on the first issue made a decision unnecessary: the claim properly formed part of the return and could be challenged only by a notice served in time under section 9A.
Lord Carnwath nevertheless discussed the issue on the assumption that the claim had been wrongly included. The return contained entries identifying the loss, the year for which relief was claimed, and an adjustment said to reduce the tax due. The Court of Appeal had held that those entries formed part of Mr Derry’s self-assessment, so the Revenue’s remedy was to amend the return or open a section 9A enquiry within time. Lord Carnwath considered that important questions remained insufficiently explored, including the correct reading of the online form, the relationship between section 9A and Schedule 1A, and whether the Revenue could later enquire on a different basis if a claim proved to have been wrongly included. He left those questions open.
Lady Arden agreed that the appeal should be dismissed. Provisionally, and on the basis of evidence about the online form which she considered had not been fully tested, she took a different view of the second issue. She considered that an erroneous year-2-related entry in Box 15 would not form part of the statutory return for enquiry purposes, so the appropriate enquiry would be into the claim rather than the return.
Verdict: The Court unanimously dismissed HMRC’s appeal. Mr Derry had correctly deducted the share loss when calculating his net income for 2009/10. The Court had no need to decide what would follow if an invalid claim had been included in a return.
Source: R (on the application of Derry) v Commissioners for Her Majesty’s Revenue and Customs [2019] UKSC 19
