HMRC use Eric Morecombe tactics according to judge. “Playing all the notes but not necessarily in the right order”
HMRC use Eric Morecombe tactics according to judge.
“Playing all the notes but not necessarily in the right order”

Readers of our blogs will know we are always interested in cases analysing the extent of HMRC powers and how they should be used. The recent case of Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs demonstrates (again) that HMRC powers are not infinite. It also brings out some highly topical points:

1) In Raymond Tooth the taxpayer filed a tax claim which HMRC later decided to challenge. They had though missed their normal time limit on raising an enquiry, so had to raise a ‘discovery assessment’.

2) The definition of a ‘discovery’ made by HMRC is confirmed to be very wide in scope and may include “a change of opinion or correction of an oversight” by the Inspector of Taxes raising the discovery assessment.

3) The general points in Cotter are good law and emphasise the requirements for good disclosure by taxpayers and a clear explanation of how they have computed their self-assessment.

4) The burden is on HMRC to demonstrate that their extended time limits for assessments under ‘discovery’ may be used only where they are saying that the loss of tax was brought about ‘deliberately’. Deliberately means intentionally or knowingly (Duckitt v Farrand).

5) All praise to John Brookes (Tribunal Judge in this case). He basically eviscerated the HMRC case. He said with regard to the issue of extended time limits,

“In my judgment this [assessment] cannot be right. The deliberate (or indeed careless) conduct necessary to enable the issue of a discovery assessment and extend the time limits for doing so must involve more than the completion of a tax return which, in itself, is a deliberate act. As a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between ‘careless’ and ‘deliberate’…[their] attempt to argue otherwise, saying that if the wrong figures were entered in the right boxes it might be careless but if the right figures were entered in the wrong boxes it would be deliberate, was somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about “playing all the notes, but not necessarily in the right order.”

6) The case can also be linked to current concerns about ‘Making Tax Digital’ (MTD).

Evidence was presented about the problems created by a computer glitch on how the alleged loss claim should be shown. The computer system adopted was a respectable one, approved by HMRC. However, apparently it would not cope with the proposed claim. The advice given to the taxpayer – to fit in with electronic filing, was thus to use a computer ‘work around’. As most people with appreciate, this is quite a common suggested solution, because computer programming is never perfect. The work around meant the loss claim went in the ‘wrong’ data input box, but the taxpayer described this in the ‘white space’ on the Return and the final answer came to what he believed was the correct net tax liability. Despite this, HMRC when they wished to dispute the loss claim, accused him of ‘deliberately’ causing an underpayment of tax. Whilst HMRC lost in this case, it is easy to imagine the dangers of accidental non-compliance caused by seeking to meet tight computer deadlines for making tax digital. Then it appears from cases such as this that such computer errors may be seen as something more sinister by HMRC. I believe this emphasises the risks of making such a system compulsory, before it is thoroughly field tested and people are familiar with it.

I am pleased to see that most commentary from the profession seems to agree with this line.

There is an interesting contrast in the apparent view of HMRC on a balanced system, in that the proposals suggest taxpayers are to be given a compulsory deadline for compliance every three months, whereas if they get it wrong HMRC should be entitled to a time limit of 20 years to challenge it.

Compliance is a delicate flower, worth preserving. If the proposals are brought in, how many businesses will simply drop off the radar if they get behind for a couple of returns and then fear they have neither the time nor resources to catch up again?

Do people believe the MTD and new penalty proposals are fair? If not please lobby to try to get them amended. If computer filing is going to be so popular, as claimed by HMRC, there should be no need for compulsion. Penalties should be levied on people committing deliberate wrongdoing, not mere bystanders.

A recent case on trading losses could have implications going forward as it was found that, in the specific circumstances, losses from an acquired trade could be used against profits from the existing trade.

The case in question, Leekes Ltd v HMRC (TC4298), was heard by the First-Tier Tribunal.

Leekes Ltd previously owned four department stores and purchased Coles, a company with three furniture stores as well as warehousing facilities.  Coles had been loss making for a number of years. The Coles trade was hived up to Leekes Ltd and the stores were all rebranded as Leekes stores; however the former Coles stores continue to sell furniture predominantly.

Leekes claimed the brought forward losses incurred by the Coles business against the profits of the combined business for the year to 31 March 2010, which was the first following the acquisition.

HMRC argued that the losses incurred in the Coles business could be used only against future profits from that business, and could not be used against the previous Leekes business.

It was common ground between the company and HMRC that Leekes Ltd succeeded to the trade of Coles Ltd and that the trade consisted of the running of out of town department stores.

The issue at stake was therefore whether Leekes could relieve trading losses incurred by Coles before the succession against the profits of the combined trade after the succession by virtue of the provisions of ICTA 1988, s. 343(3).  Interestingly, HMRC agreed that ICTA 1988, s. 343(8) did not apply in this case.  Section 343(8) deals with situations in which there has been a succession to something different than the trade of the successor company, but in that case specifically requires that losses are kept separate.

Section 343(3) stated that ‘the successor shall be entitled to relief under s. 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief had it continued to carry on the trade.’

The legislation did not make it clear whether it was necessary to stream the losses as it was not clear whether the “trade” referred to was the post or pre-acquisition trade.

The First-tier tribunal found in favour of the taxpayer company, concluding that the Colesʼ trade losses were relievable against future profits of the combined post-acquisition trade for three main reasons:

1. There was no explicit reference to a requirement to stream losses in s. 343(1) and (3), unlike those of s. 343(8) where there is such a specific.

2. That requiring the company to stream losses would involve extensive practical difficulties in application.

3. That such an approach to the legislation is more closely aligned to commercial reality.

This ruling may help to give greater clarity to taxpayers on the treatment of such losses.  As was admitted in the case, the legislation itself is fairly vague and therefore the decision should be useful. It is possible that HMRC may seek to appeal or look to rewrite the legislation to achieve HMRCʼs preferred interpretation.

It should also be noted that ICTA 1988, s. 343(3) is re-written at CTA 2010, s. 944 but the substance of the rules appears to be unchanged in the process.

A recent case (J. Thorne) found in favour of HMRC, so denying a taxpayer’s claim for loss relief.  This was on the grounds that the taxpayer’s loss making business was uncommercial.  The business was described as horse breeding and farming on the Self-Assessment Return, with integrated accounts.
With a first reading of the case it is hard to be unsympathetic to the technical issues raised by HMRC.  In terms of breeding, at much of the key time there were 3 horses in the business, a gelding, a mare over breeding age and an unproven filly.
I suspect many people may query how each of these fitted into  a business model for a breeding programme (as opposed to an interesting hobby or ‘dilettante venture’ as the case puts it).  Hence, ‘uncommercial’ does not seem too much of a surprise as a conclusion.
A second reading though raises questions of whether things could have been improved by better planning.

  1. The ‘farming’ element incorporated what seemed to be a separate strand of business, that of growing asparagus.  This made a loss, because of the slow growth and development of asparagus plants, but it seems to have been acknowledged this element of the loss was commercial.  By that time, it was too late for the taxpayer though, because the question before the Tribunal was based on the integrated claim, showing a single set of loss making results.


  1. Could more have been made of the point that whilst S9 ITTOIA 2005 refers to all farming in the UK by a person representing a single trade, this does not automatically bring in hobby elements, and horse breeding and equestrian events are obviously radically different in nature to growing asparagus.  The Tribunal actually suggests that they may be treated separately in future returns.


  1. The Tribunal found that the fact that asparagus represents a long term crop does not preclude early losses from qualifying as ‘commercial’, available to be offset against general income.  When added to another loss making business strand though it just detracts further from the prospect of commercial profit.  The case evidence though seems to focus on the equestrian side, rather than the asparagus farm.

Of course, if they had won everything then the client would have been happy.  Accountancy advice though is not just about adding up figures, it is thinking what the numbers are to be used for and then working out the most meaningful way of presenting them.

The question of what constitutes a discovery remains an area of ambiguity, although recent cases tended to have sided with HMRC’s view that virtually anything can be considered a discovery.

A further recent case was heard on the subject in N Pattullo v HMRC (TC03958), although the decision in the case is unlikely to be too controversial or unexpected, especially considering the case involved an avoidance scheme.  In the current climate, the courts are tending to be reluctant to favour taxpayers in cases where they have used an avoidance scheme.

Mr Pattullo participated in a scheme which generated capital losses of around £2.6m which he reported on his 2003/04 tax return.  HMRC concluded that he had participated in an avoidance scheme and issued a notice under TMA 1970, s.20(1) requesting relevant documents.  The taxpayer did not comply with this request and instead sought a judicial review to revoke the notice, but this request was dismissed by the Court of Session in 2009.

In the meantime, the Court of Appeal had found in favour of HMRC in the case of J Drummond v CRC (2009) which involved a similar second-hand insurance policy scheme.  Therefore, HMRC raised a discovery assessment for £835.400 as they were now satisfied that his original return was incorrect.

The taxpayer appealed, arguing that there had been no discovery as no new information had come to light.  The Tribunal found that the decision in Drummond v CRC constituted a discovery as it converted a “suspicion” of an underpayment of tax into a “positive view”.  It was doubtful that a hypothetical officer would have been aware of these avoidance schemes before the Drummond case was heard.

The taxpayer made a final attempt to protect his position by arguing that the grounds of his appeal should be amended to argue that the original avoidance scheme actually worked.  This was again dismissed by the tribunal who felt that, bearing in mind there were a number of appeals on similar schemes to Drummond pending, he was trying to jump on a “bandwagon” allowing other taxpayers to argue his case for him.  They felt the amendment was too vague and dismissed the appeal.

The final decision will likely not be a surprise to many, but does highlight the current attitude of the courts to the use of such avoidance schemes, and the wide definition of “discovery” that HMRC are using.

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.

The recent HMRC repayments brief 28/13 outlines a new policy on withholding repayment claims, particularly in suspected avoidance cases.  In cases where it is HMRC’s opinion that an avoidance scheme was used, it is their intention to withhold repayments.  It is not clear on what legal basis this is to be achieved, especially bearing in mind the outcome of Cotter.

The Cotter decision was enforced in the recent case of Rouse v CRC, in which HMRC sought to enforce the payment of tax debts with immediate effect pending the resolution of enquiries into their claims for loss relief. In the Rouse case a repayment over an undisputed VAT repayment was also withheld from the taxpayer, and set against a disputed income tax liability, while waiting for the resolution of the enquiry with regards to his income tax.

Rouse v CRC

Background and facts: 

Rouse had been a VAT-registered, self-employed contractor of plant and machinery since about 1993. He was also a director of a civil engineering company. For the years 2007/08 and 2008/09 he paid tax and National Insurance amounting to £1,049,061 and £998,892 respectively. In 2008/09 Mr Rouse incurred a loss of £1.5 million. He applied to ‘carry back’ the loss and have it offset against the tax due for 2007/08 under ITA 2007, s.132 as part of his 2007/08 tax return.

Mr Rouse had also submitted a VAT return in 2011 which stated that he was owed a repayment of over £600,000.

The Case:

HMRC rejected the claim for loss relief as they argued that the losses were made through avoidance schemes and opened an enquiry under TMA 1970 s.9A into the 2007/08 and 2008/09 tax returns, and refused to give credit for the loss in the meantime.

However, they also withheld the VAT repayment that they accepted was due to Mr Rouse to set against the income tax debt they claimed was due. The central issue in the case was whether HMRC were entitled to set-off a VAT repayment against the disputed income tax.

The Decision:

Upon Rouse’s appeal, the Upper Tribunal were bound by the Court of Appeal decision in CRC v Cotter from 2012 whereby once HMRC had begun an enquiry into a return under TMA 1970, s.9A they could not also enquire under Sch 1A para 5.

Under TMA 1970, s.9A and Cotter there should be no debt on Mr Rouse’s account against which the VAT credit due to him might be set off.  The taxpayer’s application for judicial review was therefore granted.


HMRC repayments may become increasingly hard to obtain based on their stated intentions. Fortunately, the cases of Rouse and Cotter prove that the courts and tribunals do continue to provide a mechanism to challenge HMRC decisions that exercise powers disproportionately.  However, it is worrying that HMRC persist with such tactics, which they claim prevent the taxpayer from the right to appeal which should rightly be due.

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.