HMRC victory in Supreme Court Cotter battle

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Robert Lovell
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HMRC has won an important ruling in the Supreme Court which could see it recover £500m in avoided tax.

The Supreme Court found that a taxpayer must perform a calculation of the amount of tax due itself, rather than leave that calculation to HMRC, in order to retain possession of funds under dispute.

The unanimous ruling in Cotter v Commissioners for HMRC [2013] UKSC 69 means HMRC is entitled to enforce payment of a tax debt and withhold tax relief arising from a tax avoidance scheme while it is investigating.

Jason Collins, a tax expert at law firm Pinsent Masons, said...

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12th Nov 2013 13:12

Two points

I think there are two key points in the Supreme Court judgment.

To quote from the judgment:

"Income tax is an annual tax, and liability to such tax is calculated in relation to a particular tax year" and the particular relief claimed had an effect equivalent to setting a loss in year 2 against income / gains in year 1 - but did not actually affect the tax due in year 1.

So the taxpayer's liability for 2007/08, which initially had been calculated without giving effect to any relief for a loss in 2008/09, was correct and HMRC could sue for the tax shown as due by that (correct) calculation.  HMRC were not obliged to wait for the outcome of the loss relief claim to be determined (which might generate a repayment which could settle some or all of the outstanding tax).

Had the taxpayer initially submitted a tax calculation for 2007/08 which included the relief claimed for the loss incurred in 2008/09 then HMRC would have to have accepted THAT tax calculation as correct until it had been determined to be incorrect.  But in this case the taxpayer had not submitted a tax calculation for 2007/08 and so HMRC performed their own calculation (which did not reflect any relief for the loss incurred in 2008/09).


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12th Nov 2013 18:21

The way judgments are going

I wouldn't want to have to take on HMRC in the Courts, no matter how good I thought my case was.

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13th Nov 2013 10:53

Wide of the mark

Some of the above commentary is wide of the mark. Firstly this only applies to a limited number of avoidance schemes in which there are losses to which sch 1B TMA applies. Secondly the Supreme Court has confirmed that when the loss is (wrongly) claimed in the earlier year's return HMRC has to go down the section 9A route before collecting any tax. That seems to me especially unhelpful to HMRC!

HMRC needs to do two things:

1. open sch1A enquiries as well as 9A.

2. amend the design of the tax return to prevent this.

Alternatively the Government could give some consideration to proper simplification. Anyone unfamiliar with UK tax reading the Cotter case as it has travelled through the court system would conclude that it is simply bonkers.  

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