In Cotter v HMRC [2013] UKSC 69 the Supreme Court has found that HMRC was correct to withhold repayment of tax pending an enquiry following a claim made for a carry back of loss relief.

The taxpayer filed his return in 2007/08 and he allowed HMRC to calculate his £211,000 CGT liablity. The next tax year he entered into a tax avoidance scheme which created an employment income loss. His advisers wrote to HMRC to amend the 2007/08 return to carry back the loss and reduce the 2007/08 tax bill.

HMRC opened an enquiry under Schedule 1A to TMA (allowing postponement of relief until completion of the enquiry) and then issued court proceedings to recover the 2007/08 tax due.  Mr Cotter's advisers claimed that HMRC's enquiry ought to have been made under section 9A (also allowing effect given to the loss claim) as section 9A allows an officer to enquire into “anything contained in the return, or required to be contained in the return, including any claim or election included in the return”.  Part of the appeal therefore involved a consideration of the meaning of a “return” in the relevant legislation.

The Supreme Court decided that the claim for relief against the loss incurred in 2008/09 and carried back to 2007/08 was covered by s9A, therefore HMRC was right to use Sch 1A and so it did not have any obligation to repay the loss until its enquiry was complete.

Lord Hodge noted that whilst treating everything on the tax return form as the “tax return” is attractive in its simplicity, it would expose the Revenue to irrelevant claims made in the form which have no merit and which serve only to postpone the payment of tax due. Having concluded, correctly, that the claim in respect of losses incurred in 2008/09 did not alter the tax chargeable or payable in relation to 2007/08, the Revenue was entitled – indeed obliged – to use Schedule 1A as the vehicle for its enquiry (section 42(11)(a) TMA).


A pleasing victory for HMRC who without doubt did not wish to make a repayment until it had fully investigated a tax avoidance scheme. Not such good news for all taxpayers who wish to make loss claims going forward. Lord Hodge did thoughtfully provide guidance as to how avoid this outcome. The best course of action is to calculate your own tax and HMRC may correct the tax return if it disagrees with the claim for relief. If the taxpayer rejects the amendment, the Revenue may institute a section 9A enquiry. Upon the closure of that enquiry, the taxpayer will have a right of appeal to the tribunal. In the meantime, effect is given to the loss relief claim.

A note of warning (as noted by BKL Tax - thanks for the tip) is that if you make a supurious loss claim in calculating your own tax you will be subject to penalties if you understate your tax liability. So, whilst Lord Hodge's advice is good, you need to tread very carefully especially if your loss claim falls in the category that HMRC considers abusive.

Links: Supreme Court Judment