hmrc_1816065c1Towards the end of last year, the Supreme Court released its judgment in the case of Cotter v Revenue and Customs Commissioners. The case concerns procedural elements of tax relief; specifically, it relates to the manner in which a taxpayer should carry back trading losses in a previous year’s tax return, which, in turn, affects which enquiry procedure HM Revenue and Customs can use.

The case is important for HMRC as it determines when they are able to enforce a full tax payment from the taxpayer. Equally, it is important to taxpayers attempting to carry back trading losses, as it will affect their cash flow for a particular tax year.


Mr Cotter incurred a considerable tax liability in 2007/08. In order to reduce this liability, he entered into a tax avoidance scheme in 2008/09 that generated losses.

Mr Cotter’s accountants amended his 2007/08 tax return to set these losses off against his large taxable gain in 2007/08. HMRC, however, asserted that his loss relief claim was a stand-alone claim and not validly included in the earlier tax return. Therefore, HMRC used the procedure for stand-alone claims to investigate the legitimacy of the avoidance scheme. Using this procedure allowed HMRC to demand full payment of the tax liability upfront. Had it used the procedure for tax returns, HMRC would only have been able to demand upfront payment of the reduced tax liability, if any.

Mr Cotter contended that he was entitled to claim the loss in his amended 2007/08 tax return and that therefore HMRC should have used the procedure for tax returns. He maintained that only the reduced tax liability, which was in fact nil, would be due upfront.

The Court of Appeal’s decision

Arden LJ, giving the leading judgment in the Court of Appeal, found in favour of Mr Cotter. She declared that the taxpayer had a choice; he is entitled to make the claim to set off losses either in the previous year’s tax return, or in a stand-alone claim.

She focused on interpreting the enquiry procedure legislation for tax returns, ruling that as such enquiries apply to “anything contained in a return”, they should apply to anything which was reasonably included in response to the tax return form, and not just to anything which is “required to be contained in” the form.

HMRC’s tax return form has a number of boxes for loss relief, one of which is headed “tax year for which you are claiming relief”; Arden LJ therefore affirmed that it was reasonable for the claim to be contained in the previous year’s tax return. Further, she took a purposive approach to the legislation, holding that, as the purpose of the tax returns legislation was simplification, the taxpayer should not need to go back to the legislation and investigate where he can claim losses; this would put too great a burden on the taxpayer which could not have been Parliament’s intention.

The Court of Appeal therefore found that HMRC should have used the procedure for enquiring into tax returns, not stand-alone claims. This would mean that a taxpayer only needs to pay the reduced liability upfront, later reimbursing HMRC for any illegitimately claimed losses at the end of the enquiry. The taxpayer will not be required to pay the full amount upfront (and later reclaim any liability for legitimately claimed losses).

The Supreme Court’s decision

The Supreme Court, allowing HMRC’s appeal, ruled that a tax return is not a “return”, for the purposes of the relevant procedure, if the taxpayer leaves the tax calculation to HMRC; the stand-alone procedure will apply to claims for carried back loss relief where the taxpayer has not calculated his tax liability. The tax calculation made by HMRC is therefore final, and, in the words of Lord Hodge “disputes about matters which are not relevant to a taxpayer’s liability in a particular year should not postpone the finality of that year’s assessment”. Mr Cotter had left the calculation to HMRC in his initial return and claim for carried-back loss relief; HMRC was therefore entitled to disregard the claim for relief in calculating the tax due. Thus HMRC was correct in applying the stand-alone procedure and initiating proceedings to recover the full tax due.

On the other hand, where a taxpayer has calculated his tax liability in his return, this is a “return” for the purposes of the relevant procedure. Therefore, if a taxpayer includes any carried-back loss relief in their tax calculation, the claim would be part of the “return” and the procedure for tax returns would apply. The Supreme Court noted that in such cases, the taxpayer could still use a tax avoidance scheme to benefit from the cash flow advantages of the procedure; he would be able to delay full payment until the end of HMRC’s enquiry.


There will be a significant cash flow disadvantage for taxpayers who have not calculated their tax liability where they are using similar avoidance schemes or genuinely claiming carried-back loss relief on an earlier tax return. Such taxpayers will now be required to pay the full tax liability to HMRC pending investigation of the legitimacy of the scheme; their returns are not in fact “returns”.

However, where such a taxpayer calculates his liability to tax in the previous year’s return, he will still benefit from the cash flow advantages of the tax return procedure; his return will be a “return”. Even so, to benefit from this cash flow advantage, Lord Hodge states that the taxpayer must formally calculate his tax liability on the return itself; it is not enough simply to include the final figure as part of a covering letter.

Such seemingly arbitrary distinctions between “returns”, together with the Supreme Court’s relatively brief treatment of this case, highlight the incongruity of such a case going as far as the Supreme Court.  This is a simple procedural case, which arose only due to ambiguous boxes in a form. The Court neither took HMRC’s aggressive stance towards tax avoidance schemes, nor Arden LJ’s purposive approach which focused on the need to avoid complexity in tax returns. Lord Hodge, accepting that the Supreme Court’s decision may add such complexity, instead, and rather tersely, suggests that HMRC could label the boxes more clearly where they apply to stand-alone claims, perhaps implying that the case would not have arisen, and certainly would not have reached the Supreme Court, had this been made clear by HMRC from the start.

The Government is already taking steps to allow HMRC, in avoidance cases, to require taxpayers to pay before the end of the enquiry, and are coupling this with a strengthened penalty regime. Therefore, it is likely that the cash flow advantages sought by Mr Cotter will only be available in rare cases.