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

The complaint in Ground Two is that HMRC failed to apply, or failed to apply correctly what is referred to, at various points in the Claimant’s skeleton argument, as “the alternative condition” and “Limb 2”. This is a reference to the second of the illustrative examples in Paragraph 10. This second illustrative example is contained in the second bullet point in Paragraph 10, in the following terms:

“the amount of a profit or loss depended upon discussions with an inspector which were not complete when the time limit expired, and the delay in agreeing figures is not substantially the fault of the company or its agents.”

As with the first illustrative example, this second illustrative example is not accurately referred to either as an alternative condition or as Limb 2. The second illustrative example is better referred to, as we have already identified, as “Example Two”.

The Claimant argues Example Two is directed at situations where, whether the taxpayer can claim relief, and if so in what amount, depends on discussions. The Example, it says, envisaged the situation here where both HMRC and the Claimant were awaiting the outcome of the FII litigation to understand what the correct taxation position for foreign dividends was. The issue of whether a claim could be made and if so in what figure depended on issues not resolved until 2021 when the FNR was agreed with HMRC. The Decision, which made no mention of the alternative condition, simply failed to apply this.

The Decision (set out at [34] above) does not make reference, at least in express terms, to Example Two. It was however accepted by Mr Birdling, in his submissions on behalf of HMRC, that if the current case came within Example Two, that would constitute an error of law in the Decision. In these circumstances Ground Two becomes the equivalent of Ground One, in the sense that we have to decide whether the case falls within the terms of Example Two.

HMRC submits that the Claimant misconstrues the alternative condition. The legal challenge to the tax treatment of dividends could not be described as “discussions with an inspector”. The Claimant knew the amount of dividends/profits it had, because it is accepted it knew the amount of the Irish subsidiary’s dividends. In line with Example One, Example Two was concerned with situations where the amount of profits was the subject of discussion, not the further stage of whether the profits were taxable. The Claimant in any case knew that HMRC considered them taxable and the amount of taxable profits was settled by the FII litigation at the latest by 2018 when the Supreme Court handed down its decision in 2018 Prudential SC. HMRC’s stated position, (as set out in their skeleton argument) was that the discussions had “long finished”.

We consider it clear that Example Two was not applicable here. Example Two can only apply where the amount of the profit or loss depends upon “discussions” which were not complete at the Expiry Date, and the delay in agreeing figures is not substantially the fault of the company or its agents. In the present case, and as HMRC emphasise, the amount of the relevant profit, namely the Dividends, has never been in dispute. What was subject to legal dispute was their chargeability to tax.

The word used in Example Two is “discussions”. This specific word has been chosen by those responsible for drafting the SP. This word is not apt to refer to a situation where the chargeability of profits to tax is subject to a legal challenge which is working its way through tribunals and/or courts. If it had been intended that Example Two should extend to a situation where the chargeability of profits to tax was subject to an unresolved legal challenge, different wording would have been required.

The reference to discussions with an inspector is obviously intended to apply to a situation such as that offered, by way of example, by Ms Ruxandu. Where the amount of the relevant profits required a valuation of some kind, there could easily be discussions between a taxpayer and an inspector over the amount of that valuation. Those discussions might engage legal questions or valuation questions or both. If however there was a continuing dialogue, geared towards settling the amount of the relevant profit, that would qualify as a situation where the amount of the relevant profit depended on discussions with an inspector.

In his oral submissions Mr Firth underscored the words in the paragraph following Example Two that:

“In such cases the Commissioners for HMRC’s approach will be to admit late claims up to the amount of the profit or loss in question. Where the claim involves the withdrawal of an existing claim and the making of a fresh claim, the Commissioners for HMRC’s approach will be to admit these to the extent of the profit or loss in question. Claims which go beyond this and affect profits which were not in dispute at the time of expiry of the statutory time limits will not be within this approach.”

He argued that the inverse of that was that profits which were in dispute would be within the scope of Example Two and that this was talking about discussions with an inspector on interpretation of the law. We disagree. We consider there is no reason one must read the scope of discussions in that way. The point being made by the underlined words above is the need to show a link between the late claim and the dispute. That these words concern the need to show such causative link is reinforced by the reference tothe time at which the dispute is being considered as “at the time of the expiry of the statutory time limit”. In other words, if the amount was not the subject of a dispute at the time of expiry there would be no reason why it ought not to have been captured with an in-time claim. The passage is equally consistent when read as referring to disputes over the amount of profits which are not concerned with legal chargeability.

Our view above, on the proper scope of Example Two, is sufficient to dismiss this Ground. But for the sake of completeness we should record that, an issue occurred to us, after the hearing regarding the date “the time limit expired” and it not being clear what discussions were said to have been not completed by 31 December 2004. On the evidence the next event that had happened following filing of the Amended Return on 22 December 2004 was that HMRC opened its enquiry, but that was not until 22 December 2005; that is to say after the Expiry Date. As this point had not been aired in the hearing we invited written submissions from the parties.

From those submissions it did not appear to us there was any dispute that the relevant words “the time limit expired” in this case referred to the Expiry Date (i.e. 31 December 2004). The Claimant’s written submissions identified the discussions as being the “discussion regarding the tax treatment of the overseas dividends in the light of EU law which were not complete by the date that the time limit expired”.

The Claimant also argued that it was procedurally unfair to address this point as HMRC’s position as set out in its grounds of resistance and skeleton was the “discussions had long finished” (see [92] above). That implied that HMRC had accepted that there might have been discussions which had commenced prior to the Expiry Date. In turn that opened the way for the Claimant to argue that it was prejudiced because, even on HMRC's case, there were previous discussions which require factual investigation and that could not now be investigated because it was only now, after the hearing is over and the evidence has been prepared, that this new point has been raised on Example Two. 

The Claimant went on to submit however that even if that procedural objection were not accepted, the Claimant’s position was that it was not, as a matter of interpretation, necessary for the discussions referred to in Example Two to have begun prior to the expiry of the time limit. This was on the basis there would be no rational purpose to draw such a distinction and accordingly it would not be read that way from the perspective of the ordinarily sophisticated taxpayer. The Claimant highlights the importance of the date of completion of discussions as being that it is at that point that the taxpayer will be in a position to make any claims that arise as a result of the discussions. That taxpayer is exactly the same position vis-à-vis the time limits for making claims and the purpose of those time limits whether those discussions began before or after the expiry of the ordinary time limit.

In addition, the Claimant argues that even if the example could be read that way, so as to require discussions to have started, that the Claimant’s amended return (which set out the Claimant’s position that the dividends were not taxable) represented the start of the discussions.

We were not persuaded by these arguments. As to procedural unfairness we acknowledge the question of whether discussions needed to have commenced before the Expiry Date, and if so what discussions there were at that point was a new one. It was raised by the tribunal and was not argued by HMRC. However, in the circumstances, and if it had been necessary for us to do so we would not have considered that it was procedurally unfair to address the point.

The first aspect of the new point (whether discussions needed to have begun before in order to have been completed by the time limit expiry) is a point of interpretation. It is one in relation to which both parties have had the fair opportunity to make submissions. As to the question of the application of the correct interpretation, the Claimant’s position in the alternative (that it is the amended return which constituted discussions) does not suggest to us that this is a situation where the shape of evidence before the Tribunal would have been different if the new point had been raised earlier. Rather, it discloses that the Claimant (who after all is the party in control of the relevant evidence, if it exists) is unable to point to anything other than the Amended Return as constituting discussion commencing prior to the Expiry Date. In other words, if prior discussions had in fact occurred, we would have expected the Claimant to be able to identify them, as opposed to alleging that HMRC had conceded that there might have been such discussions.

Moving on to the points of substantive interpretation, we consider the Claimant’s reading entirely at odds with the clear wording of Example Two. That specifically refers to discussions not being “complete” by the time limit expiry date, which envisages that discussions must have started before the expiry date. Contrary to the Claimant’s submissions there is an obvious rational purpose to this. The Example captures the sense that, where there is something flowing from the position HMRC have represented to the taxpayer in discussions which means that the amount of profits remains to be quantified, then it would be reasonable to allow the taxpayer more time. It therefore makes good sense for the example to imply that such discussions must have begun before the time limit expiry. That is because HMRC’s discussions after the Expiry Date would be of no relevance to explaining why the time limit could not have been complied with before it expired.

Although the Claimant’s submissions reiterate the points made previously that a NTLRD claim against profits, given the way it had filed its Amended Return (showing no profits), was not legally possible, we reject that view for the reasons we discuss more below at [160] onwards. In any case, even if that analysis were wrong the point would remain that the situation whereby the Claimant was not able to make a claim arose because of the taxpayer’s choice as to how it filled out its return and as already discussed that cannot sensibly be described as something that is beyond the taxpayer’s control.

As for the Claimant’s fallback argument that “discussions” are somehow initiated by the act of filing a return that also, in our view, seems entirely at odds with the language used. A tax return is a recognisable formal statutory element in the machinery of tax assessment which unless further statutorily based steps are taken will stand good as a determination of tax liability. It would not on any normal understanding constitute the beginning of a “discussion”. Given the special status of tax returns and the fact a reference to them would be so readily understood (including the situation where what was sought to be captured was a return which took a different view to that generally prevailing) it would be expected that if the term “discussions” was intended to encompass the filing of such tax returns it would specifically say so.

Accordingly the point that no discussions had commenced by the time of the expiry date would be a further reason, if one were required, as to why the Claimant’s situation did not fall within Example Two. It is also a point that would apply with similar force to explain why Example Two did not apply in the event we were wrong in our primary reasoning (that the Example’s reference to discussions on the amount of profit did not capture disputes on legal chargeability). In other words even if the situation here amounted to one where HMRC and a taxpayer had agreed to put on hold their discussions on chargeability pending the resolution of litigation, on the facts here, Example Two would not apply because those discussions did not commence until after the Expiry Date.

In conclusion, although the Decision did not consider Example Two, our judgment is that if it had it would inevitably have found Example Two was not satisfied. The decision that the time extension should be refused would thus be the same.

For all of the above reasons, our conclusion is that Ground Two fails.