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

The first alleged error is that HMRC went wrong in law in that they failed to appreciate that a deficit claim cannot be made until HMRC have served a closure notice bringing the Dividends into the charge to tax. The position was that the company could only self-assess chargeable profit through its return up until 24 months after. After that the power to bring the profits into charge rested in HMRC’s hands by issuing a closure notice to that effect. Until that has been done, there are no profits against which a deficit claim can be made. There was accordingly no relevant delay in making a claim to set off NTLRD by not making it a time when HMRC would (due to its own inaction) be unable to process it even if were to be accepted.

In support for the proposition that a claim could not be made until the profits were brought into charge, Mr Firth’s relied on the Court of Appeal’s reasoning in Civic Environmental Systems v HMRC [2023] EWCA Civ 722.

That concerned a company’s claim made in its 2007/2008 to carry back a loss of £444k loss made in that year to set against profits of £142k for the tax year 2006/2007 (shown at the time of claim in the return for that year). HMRC processed the claim and repaid corporation tax for that earlier year. HMRC later opened an enquiry into 2006/2007. The closure notice, which was appealed but upheld by the FTT, increased the profit for that year to £682k. The company argued that the £444k loss could bite on the increased profit whereas the FTT (whose decision was upheld by the Upper Tribunal on appeal) held only the £142k could be set off against the 2006/2007 profits.

The Court of Appeal noted that under the relevant statutory provision (s393A ICTA 1988) for carry back the taxpayer was not permitted to elect how much of a loss to carry back ([15]). The claim was made too late for the return for 2006/2007 to be amended by the taxpayer which, as the Court of Appeal explained (at [29] – [34]) meant that the claim was not to be given effect by a closure notice increasing not only the profits but the effect of the offset. Instead the claim was to be given effect by paragraph 4 of Schedule 1A TMA 1970 which provides:

“Subject to sub-paragraphs 1A), (3), to (5) below an officer of the Board or the Board shall, as soon as practicable after a claim other than a partnership claim is made, or such a claim is amended under paragraph 3 above, give effect to the claim or amendment by discharge or repayment of tax.”

In a passage relied on by Mr Firth the Court of Appeal explained (at [37]):

“The effect of a successful claim under schedule 1A is (by paragraph 4(1)) a discharge or repayment of tax. This is to be given effect as soon as practicable, and Mr Firth accepted that this had been done in the present case. As he also accepted, it is obvious that one cannot have a repayment of tax that has not been paid (or, I would add, a discharge of tax that has not yet been assessed to be due). When CES made its s. 393A claim, the only tax that had then been assessed as due for the 2007 period was the self-assessment in its 2007 return that £41,371.95 was payable; and the only tax paid for that period was the £41,371.95 that it had paid. So HMRC acted correctly in repaying that sum as it is agreed that it did. I do not see how it could properly have repaid any other sum, nor was there anything else to discharge.”

Mr Firth submits that the above reasoning means that a claim can only bite on tax that is charged or paid at the time the claim is made. It did not matter that as a matter of fact the parties know that the tax ought to have been and is likely to be charged. In other words the ratio of the case, he says, is that a claim can only be given effect to and can only discharge tax actually charged at the date the claim was made. That explained why the taxpayer in that case could not rely on that claim to discharge tax due as a result of HMRC subsequently amending its return.

Ms Ruxandu by contrast depicts this case as turning on the fact that there was no statutory mechanism to reopen the claim; in the circumstances of that case the claim had already been given effect to and there was nothing more that could be done. While she accepted the proposition that actual discharge or repayment cannot happen until tax is brought into charge or repaid she emphasised that there was a distinction between making the claim and giving effect to it. The point being made at [37], she explains, was that the claim could not be given effect to until tax was brought into charge. In her submission the case has nothing to say about whether a claim could be made before profits are brought into account.

We consider Ms Ruxandu’s description of the ratio to be the better one and to be one which reflects the Court’s summary of the position at [39] where it said:

“In summary in my judgement the position is this. CES’s section 393A claim was not given expect to as an amendment to its 2007 return. It was therefore correctly not taken into account either by HMRC in the closure notice or by the FTT in their decision on appeal. Instead it was given effect to as a free-standing claim under Schedule 1A. That correctly resulted in repayment of the tax that had been paid. There is no mechanism to enable that claim to be re-opened on the basis that the profits for the period have subsequently been increased by HMRC or the FTT.”

The central theme running through the Court’s analysis (and indeed by way of response to Mr Firth’s further arguments on behalf of the taxpayer in that case – see for instance [45] and [54]) is that the legislature had drawn a distinction in the way in which claims that were to be treated as within the return were treated and those where the claim was treated as being outside of the return (the question of whether the claim was “in return” or freestanding turning on whether the claim was within the time limit for the taxpayer’s time limit to amend the return). If the claim had been treated as within the return, the closure notice and therefore the FTT could have adjusted it when the profits were increased. There was by contrast no such similar mechanism provided for when the claim was a free-standing claim.

We also agree with HMRC that there is nothing inconsistent with saying, as the Court did at [37], that tax cannot be discharged until charged when that is understood in terms of the provision which is about the giving effect to the claim. That, as Ms Ruxandu submitted, does not mean however that a claim cannot be made; just that it could not be given effect to. So, even if the ratio was that as advanced by Mr Firth, that did not rule out the legal possibility of making a claim.

In his oral reply to that reconciliation, Mr Firth queried how, if such a claim was valid, it would be resolved if for some reason it turned out that tax was not charged and HMRC had not opened an enquiry in relation to it. We do not see how the point would help on the question of whether a valid claim could be made in the first place. If tax was not charged, then as set out in Civic Environmental the absence of chargeable tax would mean that such claim, could not be given effect to. It is difficult to see what real consequences would arise from the question of how such a claim would be procedurally disposed of, once it was agreed it was a claim that could not be given effect to.