The verdict of HMRC’s appeal to the Supreme Court in Cotter v HMRC has now been released.  The case concerned procedural matters as to whether a claim for loss relief was included on a return and therefore under which regime HMRC could raise an enquiry.  Whilst this sounds dull, HMRC publicity is announcing at as a victory over “tax avoidance” enabling it to collect an extra £500m.

The Supreme Court found in favour of HMRC in the case of Cotter. However, it was on a very narrow point and  hope remains, following the verdict, for taxpayers who calculated their own tax liabilities.


The taxpayer, Mr Cotter, filed his tax return for the 2007/08 tax year on 31 October 2008.  He did not make a claim for loss relief and left HMRC to calculate the tax.

In January 2009, Mr Cotter’s accountants wrote to HMRC enclosing a “provisional 2007/08 loss relief claim” with amendments to his 2007/08 tax return.  They stated that no further tax would be due for 2007/08 but did not provide a tax calculation.

HMRC amended the return and opened an enquiry into the return but refused to give effect to any credit arising from the loss relief claim.  They held that the claim had not been made in a return and as such were not required to give effect to the claim until the enquiry was closed.

HMRC eventually issued legal proceedings for collection of the tax at the County Court, and a series of cases ensued.  In February 2012, the Court of Appeal found in favour of Mr Cotter, finding that HMRC would have to raise an enquiry under Section 9A of TMA 1970, thus giving Mr Cotter the right to appeal and postpone the tax until resolution.

Supreme Court Decision

The Supreme Court found that where the taxpayer had included information in his tax return that did not feed into the year’s calculation, it did not mean that HMRC were obliged to give effect to it. The tax return form includes other requests for information which do not impact on the income tax chargeable for the year, and as such the word “return” should refer to “information in the tax return which is submitted ‘for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax’ for the relevant year”.

As Mr Cotter had not calculated the tax due, HMRC were not required to include a claim for 2008/09 loss relief in the 2007/08 assessment.

However, Lord Hodge noted that “matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by…completing the tax calculation summary pages of the tax return”.  By including a calculation with the tax return, the calculation then becomes part of the self-assessment and must be enquired into under section 9A.  “The Revenue could not go behind the taxpayer’s self-assessment without either amending the return or instituting an enquiry under Section 9A of TMA”; with either option providing the taxpayer with an opportunity to appeal.

It is also worth noting that Lord Hodge suggests that HMRC could remove uncertainty in the tax return by highlighting which boxes are not deemed relevant to that tax year’s calculation.


We now have an interesting situation whereby HMRC have won their appeal on Cotter, but the verdict may not have the level of impact that HMRC were hoping for, as taxpayers who calculated their own tax liabilities ought, from reading the case, to be able to use the decision to their advantage.

It remains to be seen how HMRC will seek to apply the decision to such cases, and whether they will update their tax return forms as suggested by Lord Hodge.

Taxpayers who may be affected by the decision should take further advice before surrendering to a new HMRC demand which may not be valid.

County cricket clubs were first to be targeted by HMRC enquiry. They have broadly been given a clean bill of health, although questions are still being asked about tax associated with image rights for Test players and there have been problems with the tax position of players’ agents.

HMRC though have denied it is targeting local sports clubs after a Hertfordshire cricket club was sent a tax bill of over £14,000.

Sawbridgeworth Cricket Club, a 151-year-old amateur team with an annual income of around £21,000, received the bill after the Revenue carried out an assessment in 2012.

However, after HMRC agreed a schedule of staged payments and waived penalties, the club was able to settle the bill with money raised from fund-raising events and an interest-free loan.

Community amateur sports clubs are exempt from corporation tax on profits of less than £30,00 a year, but employees such as bar staff are subject to PAYE.

An HMRC spokesperson said the department wasn’t targeting amateur clubs, but non-compliance with the PAYE regime.

“This kind of work is normal. HMRC works to ensure employers are correctly operating the payroll system, so that everyone pays the right amount of tax. We have worked with sports clubs to put things right if necessary,” the spokesman said.

The England & Wales Cricket Board (ECB) has issued guidance notes to clubs, outlining what HMRC wants, urging them to seek advice and warning they could face penalties for failing to meet PAYE and NIC payroll deductions. “Do not accept any HMRC calculations without challenge, but use the results of your review to negotiate with HMRC,” says the ECB.

In the recent case of Mr Shakoor v HMRC, the appellant had failed to disclose the sale of two flats in July 2003 which resulted in significant capital gains. HMRC subsequently raised a discovery assessment for CGT of £49,014 plus a penalty of 70%.

The appellant contended the penalty on the basis that he had taken reasonable care by seeking advice from his accountant. He said the failure to disclose the gain was as a result of negligent advice from his accountant.

The accountant did advise that there was no CGT to pay, and that the disposal of the properties was not reportable on the tax return. However the accountant kept no notes of his advice but said he had relied upon two extra-statutory concessions relating to private residence relief. These clearly did not apply as the appellant had never resided in either property but the taxpayer asked for no explanation of this advice.

The Tribunal found that the taxpayer must have been aware that CGT was due on the properties, and it appeared to be “a case of shutting one’s eyes to what either was or ought reasonably have been seen as incorrect advice”.

The Tribunal did in fact cut the penalty to 30% giving the appellant the “benefit of the doubt” as a result of the poor advice given by his adviser. It observed that the appellant was content to “take a chance on the basis that his accountant had given him comfort, albeit in the rather dubious circumstances”

There have been a number of recent cases in the taxpayers favour regarding the meaning of ‘reasonable excuse’ in the context of penalties. 
The case of Candlestick Company (TC1573), involved the late submission of a partnership return. Key point to this case was that the taxpayers had tried to correct the situation and had sought advice regarding their tax affairs from an accountant.
The case of Dudman Group Ltd (TC1608) involved penalties in respect of the late payment of PAYE by the employer company.
The taxpayer argued that they had suffered financially as a result of 9 of the company’s debtors going into administration and cash flow problems due to their bank changing its credit terms.
HM Revenue and Customs argued that inability to pay is not a reasonable excuse. However the Tribunal found in the taxpayers favour and noted the recent economic climate has put a lot of pressure on UK businesses.
These cases show the importance of considering making an appeal against penalties imposed by HM Revenue and Customs where there are mitigating factors in play.

In the recent case of Admirals Locums & Bhadra (TC 1416) the First Tier Tribunal disallowed the taxpayers claim for trade loss relief on the grounds that the taxpayer’s trade had ceased.
The taxpayer had previously carried on an employment agency for locums and doctors.  In 1998 he was suspended by the General Medical Council (GMC) and since that date the business had no turnover.
The taxpayer incurred legal fees challenging the GMC’s decision and consequently claimed trading losses.  The taxpayer argued that he had continued to trade despite receiving no income.  Furthermore, he argued that HM Revenue and Customs had allowed the claims in previous years thus creating a legitimate expectation that the claim would continue to be allowed.
The First Tier Tribunal concluded that the expenses were incurred to re-establish a previous trade rather than maintain an existing one  and that no legitimate expectation existed.
The Tribunal did allow the taxpayers appeal in respect of some of the earlier years under question, on the basis that the taxpayer had made a full disclosure therefore a discovery assessment outside of the normal  enquiry window was not allowed.