UT/2024/000060 - [2025] UKUT 00143 (TCC)

As to the first issue it is convenient to note the overlap here with an error of law alleged under Ground Four (that HMRC were wrong to consider a claim could actually be made/processed prior to HMRC bringing the overseas dividends into charge). For the reasons, which we explain more fully when we deal with that point (at [164] onwards under Ground Four), we reject that proposition as an error of law. It is possible, as a matter of law, to make a Deficit Claim prior to the relevant profits being brought into the charge to tax (even if the Deficit Claim could only be given effect to once those profits were brought into charge). In the present case therefore it was possible, as a matter of law, for the Claimant to make the Deficit Claim in time, or to have made the Deficit Claim at any time after the Expiry Date.

In the context of a judicial review against a decision in relation to the Deficit Claim, there is, it must also be recognised, and as we broached with the parties at the hearing, an inherent difficulty in running the argument that the Deficit Claim was effectively premature. If the argument is correct, and a Deficit Claim cannot be made until the Dividends have been brought into charge by the closure notice the Deficit Claim could not be made, and still cannot be made. Both the Deficit Claim and the Decision were misconceived. Equally, and on the same hypothesis, the Decision could not be made to refuse the Deficit Claim, in circumstances where, as a matter of law, a Deficit Claim could not be made. Equally, and pursuing the hypothesis further, the JR Claim is misconceived, or at least serves no purpose because there is nothing to review. HMRC had no power to admit or refuse the Deficit Claim because it was not a valid claim.

Similar difficulties were exposed in the Claimant’s oral discussion of its policy arguments concerning the consequential claims provisions in Schedule 18 (paragraphs 61 and 62) which, as mentioned, provide for time to run from the end of the accounting period in which the closure notice is issued. Those revealed that the Claimant would potentially want to argue that its apparent exclusion from the benefit of such provisions (because they did not extend to a claim affecting a current year as opposed to a previous year) was incorrect as a matter of statutory interpretation. If correct that would mean, in the Claimant’s situation, that the Deficit Claim was still in time. Under those consequential claims provisions the Claimant would have one year after the accounting period in which HMRC adjusted the return to make its claim.

Mr Firth was not able to state a firm position of the Claimant on this point and we were instead told we do not need to decide it. At first sight that did not seem satisfactory as if the argument were correct it would render the current JR Claim unnecessary. In response Mr Firth mentioned that the Claimant had sought in its correspondence with HMRC prior to the Decision to raise the point with HMRC. Before us he suggested the right time to raise the applicability of the provisions was when HMRC eventually issued their closure notice after which the Claimant would put in a claim whose validity if not accepted could then be litigated.

Taking Mr Firth’s use of the provisions of Schedule 18 on his own terms however, and so far as the current JR Claim is concerned, the argument of the Claimant that is put before us is that there is a rational policy in Schedule 18, so that there is no reason why a rational policy of a similar kind should not apply in the case of the Statement of Practice. In considering this argument as a relevant, or at least a potentially relevant consideration, the question is whether the relevant provisions of Schedule 18 do or do not apply to a Deficit Claim. It would normally be unsatisfactory to leave a point of this kind open, even in considering the argument based upon policy.

The position is however saved from being unsatisfactory because the issue of whether a claim is possible is something we address as part of Ground Four (given it is raised as a specific error of law). If, as we have concluded under Ground Four, a Deficit Claim could have been made, and (subject to the consequences of being out of time) was made by the Deficit Claim, it is difficult to see, as explained further below, how the above policy argument can succeed.

So far as Ground Three is concerned, the conclusion that a valid Deficit Claim can be made, before the relevant profits have been brought into the charge to tax, disposes of the argument that the Decision was irrational because no valid Deficit Claim could or can be made, as a matter of law, until HMRC serves a closure notice, bringing the Dividends into the charge to tax. The basis on which this argument proceeds is mistaken. The conclusion that a claim could have been made before also undermines the argument that there is a rational policy behind the SP to the effect that claims should not be refused where the relevant profits have not yet been brought into the charge to tax or, putting the matter the other way round, that claims should be permitted provided that they are made in good time following the relevant profits being brought into the charge to tax. If as a matter of law, the Claim could be made prior to the Dividends being brought into the charge to tax, it seems perverse to say that there is a policy behind the SP that late claims should be admitted, in all cases where the relevant profits have not yet been brought into the charge to tax.

And in any case there remains the point that even if that were wrong, and it was not legally possible to make a claim, it would not be irrational for HMRC to refuse a purported claim such as the one here that was made on the basis that that situation (i.e. of the Claimant not being able to bring the claim within the time limit) came about because of the taxpayer’s choice in filling out the return in the way it did. In other words the Deficit Claim could have been made if the taxpayer had filled out its return in what is now known to be (and falls to be treated as always having been) the correct way.

In addition to this, the existence of such a policy is, in any event, difficult, if not impossible to discern in the text of the SP. The SP is concerned with claims for relief which are made out of time, and with the circumstances where HMRC will admit those claims, notwithstanding that they are out of time. We have already mentioned the SP does not formally apply to Deficit Claims, although the parties have effectively agreed, by their conduct of this case, to treat the SP as applicable to the Deficit Claim. Nevertheless it would be very strange if the SP was required to be interpreted in such a way as to mean that HMRC could not reject any claim made prior to the issue of a closure notice by HMRC. In any such case the provisions of the SP would effectively only become relevant (in the case of the time limits which ran from one or two years from the end of the accounting period) in assessing a period of delay in making the relevant claim which occurred after issue of a closure notice. This is completely inconsistent with the scheme and language of the SP. For instance it would be unclear how to make sense of Example Two’s reference to discussions with the inspector that were not complete when the time limit expired. By contrast those references make perfect sense in the context of discussions taking place in the course of an open enquiry.

Two conclusions follow from the above analysis, so far as Ground Three is concerned. First, the arguments regarding no valid claim being possible because of quantification, lack of FNR agreement and lack of enquiry closure which concern the ability of the Claimant to make the Deficit Claim, have only limited scope. They cannot function as arguments that the Claimant could not, as a matter of law, have made the Deficit Claim at any earlier date. They can only function as arguments that it was sufficiently unreasonable, in practical terms, to have expected the Claimant to make the Deficit Claim at any earlier date, so as to render the Decision irrational. Second, the policy argument fails, for both of the reasons identified above (i.e. that it was legally possible to make the Deficit Claim earlier and it is difficult if not impossible to discern the suggested policy in the SP).

Whatever one thinks of the merits of the Decision, it cannot possibly be said that the Decision was one which no reasonable tax inspector could have made. We will nevertheless address the individual points which the Claimant raises in relation to Ground Three.

They essentially raise the question of when it would have been reasonable to expect the Claimant to have made the Deficit Claim (as opposed to the question, which we have decided against the Claimant, of whether it was possible, as a matter of law, to make the Deficit Claim). That question is raised in more detail in relation to Ground Four, but we address below our response to the Claimant’s specific points made under this Ground (remembering the question is whether it was irrational to decide this question against the Claimant on the basis of all or any of those arguments).

It is argued that as at the expiry date (31 December 2004) the Claimant’s tax return did not show profits against which the NTLRD could be relieved. This in essence is the legal point which, as mentioned, we reject for the reasons explained under Ground Four. The point is effectively irrelevant, if it was legally possible to make the Deficit Claim, as from the Expiry Date. The point simply begs the question of whether it was irrational for HMRC to refuse the Deficit Claim when it was made in 2021, a significant number of years after the Expiry Date, when it was legally possible to have done so despite the return not showing profits.

Similarly, the argument that the Decision was irrational because HMRC had not issued the closure noticefails for the same reason. Unless the Claimant can establish that it was and remains a practical impossibility to make a Deficit Claim until a closure notice has been issued, this point cannot possibly justify the conclusion that the Decision was irrational. This particular point also suffers from the additional difficulty that if it was possible, as a matter of law, to make the Deficit Claim prior to the issue of a closure notice, the argument that it was not practicable or reasonable to do so is essentially contradicted by the fact that the Claimant clearly felt able to, and did make the Deficit Claim.

Moreover, and as already mentioned, if, contrary to our conclusion, it was not legally possible to make the Deficit Claim until the Dividends had been brought into the Charge, the fact that HMRC have not yet issued the closure notice undermines the basis of the Deficit Claim. The Decision and the JR Claim, become irrelevant.

The Claimant also relies on the fact that the questions of whether the dividends were liable to UK tax, and, if so, how much tax, were litigated by HMRC and other taxpayers exhaustively over a lengthy period. It is difficult to see however why the fact that chargeability of the Dividends to tax was the subject of lengthy litigation rendered it reasonable to delay the Deficit Claim for so many years, independent of the point that this cannot, on any view of the matter, render the Decision irrational. It should be recalled that this ground proceeds on assumption that Grounds One and Two failed and therefore that questions of the Claimant’s awareness of legal chargeability were not relevant. Nor per that assumption could the litigation constitute relevant discussions with the inspector so as to justify an exercise of discretion to extend the time limit.