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

We start with some general principles/observations. The organising principle in Paragraph 10 of the SP is identified at the start of Paragraph 10:

“In general, the Commissioners for HMRC’s approach will be to admit claims which could not have been made within the statutory time limits for reasons beyond the company’s control.”

Paragraph 10 then goes on to identify two examples which are used to illustrate the type of circumstances in which this organising principle will apply and in which, as a general rule and subject to the remaining provisions of the SP, a late claim will be admitted. The first of these illustrative examples is in the first bullet point. As such, and as we have already indicated, it is better referred to in our view as “Example One” (rather than limb 1 as the Claimant’s submissions put it).

The question of whether Example One applies has to be considered at the date of the expiry of the relevant time limit. Here the relevant time limit is contained in Section 83(6), so that the expiry date, on the facts of the present case, was 31^st December 2004 (“the Expiry Date”).

In our view the meaning of this example is perfectly clear.

What has to be considered at the Expiry Date is the Claimant’s state of knowledge. At the Expiry Date the Claimant had to be unaware of profits. The reference to profits is not however a reference to any category of profits, but only to those profits against which the Claimant could claim relief.

The Claimant’s case is that the “straightforward and obvious meaning” of Example One is that the company needs to be aware that there is additional profit which ought to have been brought into the charge to tax, but which has not been brought into the charge to tax.

It will be seen immediately that this case is attempting to re-write the wording of Example One. Example One says nothing about awareness of whether profits should or should not be brought into the charge to tax. What is required is awareness of profits against which the company “could” claim relief. Provided that there are profits of which the company is aware, and provided that they are profits against which relief could be claimed, the case falls outside Example One.

The Claimant’s argument means that the return filed by the company for the relevant year becomes decisive. Provided that the company leaves profits out of the charge to tax, so that a claim for relief cannot be made against the exempted profits, Example One is satisfied. The company, so the argument goes, cannot be aware of the relevant profits because they are, following completion of the return, profits against which a claim for relief cannot be made. This remains so, regardless of whether the relevant profits should have been brought into the charge to tax. This seems a remarkable result. On the Claimant’s argument Example One will always apply, provided that that the relevant profits are left out of the company’s return, regardless of whether they should have been left out or not.

The difficulties with this argument do not end there. The argument requires an inquiry into the subjective belief of the relevant company which is then determinative of whether Example Two applies, irrespective of the reasonableness of that belief. The subjective belief of the company thus becomes key. Mr Firth also sidesteps all the usual difficulties of ascertaining such belief by submitting that will effectively be determined by the binary question the taxpayer faces of whether to declare the profits or not.

Thus, on the Claimant’s case, provided that the company believes that the relevant profits should not be brought into the charge to tax, and fills the return out on that basis,it is within Example One. This is because, so the argument goes, the company necessarily also believes that the profits, as profits lying outside the charge to tax, are not profits against which the company could claim relief.

None of this fits however with the language of Example One. It is a strained interpretation of “awareness” as it requires an assumption that the way the return is filled out deems the answer on “awareness”. In other words the normal fact sensitive question of knowledge is simply deemed.

Nor, crucially, does the Claimant’s suggested interpretation fit with the organising principle in Paragraph 10, which is concerned with claims which could not have been made within the statutory time limits for reasons beyond the company’s control. On that point, Mr Firth argued orally that it is not a matter of choice for the taxpayer as to how to fill out its return because the taxpayer has to take a view one way or the other. If it came to the view, having taken advice, that the dividends should not be brought into account it would be beyond the taxpayer’s control to be expected to submit a return that was inaccurate according to the taxpayer’s view of the law.

We do not agree. Where a company is aware of the existence of profits, a decision on whether or not to include those profits in the charge to tax is a decision for the company. It is not a matter outside the company’s control. This is well-illustrated by the facts of the present case, where the Claimant first submitted the Original Return, with the Dividends included in the charge to tax and with an accompanying deficit claim, followed by the submission of the Amended Return, which left the Dividends out of the charge to tax. The deficit claim which had been made was withdrawn, and the Deficit (unused) was surrendered, in its entirety, to Purmo. It seems perverse to describe this chain of events as one where the Deficit Claim could not have been made within the statutory time limits for reasons beyond the Claimant’s control.

The problem in the present case has come about because the chargeability of the Dividends to tax was the subject of dispute between HMRC and taxpayers. The dispute has been determined in favour of HMRC. In consequence, the Claimant needed to reverse its previous position, and made the Deficit Claim. It would be odd if Example One covered every case where a taxpayer made the decision to leave profits out of the charge to tax, there was then a lengthy dispute over the chargeability of the relevant profits to tax, and it subsequently turned out that the taxpayer had made the wrong decision. It also equates to a situation where a taxpayer can defend the lateness of a claim on the basis of ignorance of the law. Ignorance of the law is not normally admitted as a defence and in those situations where it is, there will usually have been further enquiry in relation to the circumstances surrounding that ignorance and the reasonableness of any lack of knowledge. Given Mr Firth’s point about the binary nature of filling out a return, ignorance of the law would however be admitted as a valid reason for making a late claim as a matter of course and without any such wider consideration of the circumstances.

As long as the taxpayer genuinely believed the profit was not chargeable and irrespective of how reasonable or unreasonable that belief was they could benefit from extended time limits. For instance where a taxpayer who has taken no steps to ascertain chargeability and is ignorant of the chargeability one cannot describe that lack of awareness as a situation beyond the taxpayers’ control.

By contrast the position is much simpler and faithful to the language if one is simply asking the question of whether there are profits in the relevant accounting year of which the company was aware at the date of expiry of the relevant time limit, against which a claim for relief could have been made. Paragraph 10 assumes a situation in which a late claim for relief is made. It therefore assumes a situation where an eligible claim for relief existed in relation to the relevant profits in the relevant accounting year. The simple factual inquiry which is required, on HMRC’s case, is whether the company was aware or unaware, at the relevant expiry date, of the relevant profits against which the claim for relief, which is made as a late claim, could have been made. If the company was aware of the relevant profits at the relevant expiry date, and if there was an eligible claim for relief which could have been made within time, Example One does not apply.

In support of this construction of Paragraph 10 it is instructive to consider the closing part of Paragraph 10, which gives an example of circumstances beyond the company’s control. The example is an obvious one, involving a situation where the failure to make the claim resulted, and only resulted from the critical illness or absence of an officer of the company who was the only person who could deal with the making of the claim. This example bears no relation to a situation where a company decides to leave profits out of the charge to tax, and makes no claim for that reason. By reference to this example, it seems extremely unlikely that a decision by a company to leave profits out of the charge to tax was intended to constitute circumstances outside the control of the company, independent of the inherent linguistic conflict between the making of a decision by a company and circumstances outside that company’s control.

While Mr Firth argued that it was surprising that “difference in view of law” situation (on HMRC’s case) was not listed within these paragraph 10 exclusions, we consider the contrary is true. If disputes as to legal chargeability were intended to be caught by Example One then it is surprising that that category is not specifically mentioned given its inherently different character to the kinds of exclusions mentioned.

There is also support for an approach of looking to the consequences of the interpretation and also testing these against the concept of whether such circumstances are truly beyond the company’s control in the Court of Appeal’s reasoning in Bampton. There the Court of Appeal provided general guidance on the interpretation of the Statement of Practice, to which we can and should have regard.

The case concerned a situation where, due to an accountant of one group company overclaiming loss relief for that company (he had wrongly taken account of the relevant time apportionments), other companies in the group were out of time to claim relief they would have otherwise claimed. One of the Claimant’s arguments there was that the mistakes were not made by the company applying to make a late claim to use the stranded losses against its own profits.

Although it was strenuously argued by Mr Firth that Bampton was concerned with a different set of circumstances (attribution of error from one group member to another), what was said by Arden LJ (as she then was) in her judgment at [99] is relevant in the present case.

“The judge held that ‘on a sensible construction of SP 5/01, HMRC was entitled to treat the group as a whole, and to treat a failure to make a claim intime by reason of the accountants’ “oversight” accordingly’ (judgment para [115]). I agree. SP 5/01 has to be interpreted realistically. It would run a coach and horses through paras 9 to 12 of SP 5/01 if the consequences of oversight by a company could be side-stepped in this way. It would mean that, if another company under common management or ownership applied to make a late claim to take advantage of a relief which the first company had lost through that oversight, it could completely dissociate itself from the first company’s error.”

It is also important to note that what was said by Arden LJ constituted the view of the Court of Appeal. The other members of the Court of Appeal (Kitchin and Rix LJJ) both agreed with the judgment of Arden LJ. The passage confirms that in taking a sensible or realistic interpretation it is legitimate to have regard to the consequences of the competing interpretations and to test these against the principle that the circumstances are beyond the company’s control. In Bampton that was that a company under common control could dissociate itself from an oversight error by another group company.

If the Claimant’s construction of Example One results in a situation where any taxpayer who decides to leave profits out of the charge to tax can thereafter make an out of time claim, we are entitled to consider whether those consequences are of the same kind as the consequences which concerned the Court of Appeal in Bampton. In our view they are. In Bampton it was the undermining of an oversight by one company not being sidestepped by a company under common control. Here the concern with the Claimant’s interpretation would protect the belief as to chargeability in circumstances where such belief as to chargeability cannot be described as something which is beyond the company’s control.

In oral submissions, one of the criticisms the Claimant made was that on HMRC’s view it was difficult to conceive of any realistic example that would fall with the bullet (as will be seen a similar criticism is made under Ground Two in the context of Example Two). Mr Firth argued the absence of such a realistic example was relevant as a matter of interpretation because where there were two competing interpretations, the interpretation which was consistent with a realistic example from the point of the view of a reasonably sophisticated taxpayer was to be preferred to an interpretation for which there was no real life example. He argued that on HMRC’s view requiring factual unawareness, it was difficult to see how the SP would ever apply. If a company was not aware of the fact of its profits that would imply an oversight on its part which did not count as a valid reason.

The first point to make is that we should be wary of trying to determine the meaning of Example One by reference to the question of whether one can identify specific circumstances falling within it. The SP is not a statute. It is a statement of practice. The question is how the SP would reasonably have been understood by the ordinarily sophisticated taxpayer. The wording of Example One is very clear in its meaning, particularly when it is read, as it should be, as an illustrative example of the organising principle in Paragraph 10, which is whether the claim could not have been made within the relevant statutory time limit for reasons beyond the company’s control. No ordinarily sophisticated taxpayer would think that a decision by the taxpayer to leave profits out of the charge would fall within it.

Having said that we do have the example provided by Ms Ruxandu on behalf of HMRC. She gave the example of a partnership dispute where, because of a dispute between other partners as to the profit allocation by the designated partner, a corporate partner did not know the profit allocation to state in filing its company return. While the company would know it had a source of income it did not know the amount and although they might take steps to go to court to resolve the allocation number that might be outside of the time limit. That was a situation, she suggested, which would constitute circumstances beyond the company’s control.

We accept that as a valid example of circumstances falling within Example One. We reject Mr Firth’s argument in reply that this was simply another case where there was a dispute on the underlying issues in respect of which the taxpayer had to take a view on in order to submit its return. Where the amount of profits is dependent on resolution of a dispute between other partners that is capable of being understood as being beyond another partner’s control. By contrast one cannot sensibly describe the correct assessment of the law as being beyond one’s control. It is entirely within a taxpayer’s control to make the correct assessment of the relevant legal position. The fact that view may prove to be wrong does not mean it was out of their control to make that assessment, just that they got it wrong.

This is not therefore the kind of situation Mr Firth described where there are two competing interpretations with a ready example on one side but none on the other. It is a situation where there is one interpretation clearly consistent with the language but where the other is inconsistent. Moreover, even if the Claimant’s interpretation is assumed to be equally consistent one cannot overlook that the example that generates itself reveals the conflict with the organising principle of the circumstances being beyond the company’s control.

In reply Mr Firth also argued that his interpretation did not create a routine exception, in the way HMRC suggested, in that one had to be in the situation where HMRC needed, as here, to take a step (issue of a closure notice) to bring tax into charge. Even then, he submitted most relief cases would be covered by the different time limits governing consequential claims. We do not see however how that helps in relation to the two year loss claims which are under consideration here. These would, under the Claimant’s interpretation, always be extended because the taxpayer believed profits were not chargeable, whether right or wrong and whether that view was reasonably held or not.

Mr Firth also argued that the fact Ms Murphy, the HMRC decision maker did not herself proceed on the basis HMRC now advance is itself a strong pointer to that interpretation not being one which a reasonably sophisticated taxpayer would take. We disagree. Even if it were correct that she had in fact adopted the test the Claimant argues for, that would not amount to a strong pointer in favour of the Claimant’s interpretation but simply reflect that Ms Murphy was responding in kind to the arguments the Claimant put to her (which were couched in terms of it not being possible for the Claimant to be aware of the level of taxable profits against which it could claim any relief (see [33] above)).

In summary, in our judgment, HMRC are correct in their construction of Example One. What is required, for Example One to apply, is lack of awareness of profits against which a claim for relief could be made. Example One does not apply where there is awareness of the profits, but lack of awareness that the profits should be brought into the charge to tax.