R (on the application of Derry) (Respondent) v Commissioners for Her Majesty’s Revenue and Customs (Appellant)

Cite as:[2019] UKSC 19
Hand-down Date:April 10, 2019

Hilary Term [2019] UKSC 19 On appeal from: [2017] EWCA Civ 435


R (on the application of Derry) (Respondent) v Commissioners for Her Majesty's Revenue and Customs (Appellant) before

Lord Reed, Deputy President Lord Carnwath

Lady Black Lady Arden Lord Kitchin JUDGMENT GIVEN ON 10 April 2019 Heard on 12 December 2018 Appellant Respondent Akash Nawbatt QC

Hui Ling McCarthy QC Michael Ripley (Instructed by Greenwoods GRM LLP) Aparna Nathan

(Instructed by HMRC Solicitor's Office


LORD CARNWATH: (with whom Lord Reed, Lady Black and Lord Kitchin agree)


  1. This appeal concerns the correct treatment for income tax purposes of the respondent's (Mr Derry's) claim for share loss relief under section 132 of the Income Tax Act 2007 ("ITA").

  2. The claimed loss arose in this way. On 22 March 2010 (tax year 2009/10) Mr Derry bought 500,000 shares, at a cost of £500,000, in a company called Media Pro Four Ltd. On 4 November 2010 (tax year 2010/11) he sold them to the "Island House Private Charitable Trust" for £85,500, thereby realising a capital loss of £414,500. In his return for 2009/10, submitted by his accountants on 24 January 2011, he claimed share loss relief for that amount against his income for that year under ITA section 132, with the aim of reducing to that extent his taxable income for that year. The appellant ("the Revenue") has identified the claim as a case of possible tax avoidance, but whether that is so is not an issue presently before us.

  3. The appeal raises two questions. The first relates to the effect in law of such a claim to set the relief against the income for the previous year ("the loss relief issue"). The second relates to the effect of the inclusion of such a claim (even if erroneous) within Mr Derry's return for the previous year, in circumstances where the Revenue have failed to institute a timeous enquiry into the return under Taxes Management Act 1970 as amended ("TMA") section 9A ("the tax return issue"). The first is an issue of pure statutory interpretation, depending on the interaction of the certain provisions of the ITA and of the TMA. The second raises issues as to the correct understanding and effect of Mr Derry's return, in the light of the law and practice relating to the self-assessment regime, having regard in particular to the guidance given by this court in Revenue and Customs Comrs v Cotter [2013] UKSC 69; [2013] 1 WLR 3514 ("Cotter").

  4. The procedural background is as follows. In December 2011, Mr Derry's accountants submitted his tax return for 2010/11 online, which (consistently with the position as stated in his 2009/10 return) said of the loss of £414,500:

    "This loss relief has already been claimed and relief obtained in 2009/10."

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    Nothing turns on the detail of this return.

  5. The Revenue responded by three steps:

    i) On 4 January 2012, the Revenue gave notice of their intention to open an enquiry into the claim for share loss relief for 2009/10. This notice was issued under TMA Schedule lA, on the footing that the claim had been made "outside of a return" by virtue of paragraph 2(3) of Schedule 1B. That enquiry remains open. However, if, as Mr Derry submits, Schedule 1B had no application and the claim was properly made within the return for 2009/10, then (as is common ground) the enquiry under Schedule 1A had no statutory basis.

    ii) On 16 February 2012, the Revenue gave notice of their intention to open an enquiry under TMA section 9A into the return for 2010/11. The accompanying letter indicated that it would be necessary to look at all the arrangements surrounding the claim, an area of concern being that the claimed losses might have arisen from "a marketed scheme of arrangements with the purpose of avoiding tax". That enquiry also remains open.

    iii) On 21 February 2014, the Revenue issued a demand under TMA section 60 for tax allegedly due for the tax year 2009/10 in the sum of £166,044.26 with interest. On 6 June 2014, this was replaced by a demand for £95,546.36 with interest.

  6. On 21 May 2014, Mr Derry began the present judicial review proceedings, which were treated by agreement as relating to the replacement demand of 6 June 2014. He failed on both issues before the Upper Tribunal but succeeded on the second issue before the Court of Appeal (and therefore succeeded overall). The Revenue appeal on that issue with the permission of this court; Mr Derry resists the appeal on that issue but seeks to uphold the decision in any event on Issue 1.

    The statutory framework

    The Tax Law Rewrite project

  7. As noted above, the relevant provisions are contained in the ITA and the TMA. In considering the interpretation of the ITA it is necessary in my view to have in mind its genesis as part of the Tax Law Rewrite project. The main purpose of that project, as stated in the ITA Explanatory Notes (paras 5 and 7) was -

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    "... to rewrite the income tax legislation that has not so far been rewritten so as to make it clearer and easier to use ...

    The Act does not generally change the meaning of the law when rewriting it. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Act. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with established practice."

    For a useful description and evaluation of the project, see David Salter "The tax law rewrite in the United Kingdom: plus ç change plus c'est la meme chose?" [2010] BTR 671.

  8. I would also refer to the explanation of the drafting approach for the project, given by Stephen Timms MP, then Financial Secretary to the Treasury, in 2009 in the course of opening the Second Reading Committee debate on the second Corporation Tax Bill:

    "The project now has a well-established approach to rewriting legislation, developed with the help of people whom it has consulted over a number of years. It restructures legislation to bring related provisions together and to provide more logical ordering. It also helps users by providing navigational aids, such as signposts, to make relevant parts of the legislation easier to find, and it has introductory provisions to set the scene. It unpacks dense source legislation by using shorter sentences and, where possible, it harmonises definitions. It uses modern language and helps the reader with aids such as formulae, tables and method statements, when appropriate." (Hansard, HC, col 3, Second Reading Committee, Corporation Tax Bill, 2008-2009 (January 15, 2009) (HC General Committee Debates, Session 2008-09) cited by David Salter op cit p 680.)

  9. In Eclipse Film Partners (No 35) LLP v Comrs of Her Majesty's Revenue and Customs [2013] UKUT 639 (TCC); [2014] STC 1114 Sales J, likened the correct approach to statutory interpretation to that appropriate to a consolidation statute (as explained by the House of Lords in Farrell v Alexander [1977] AC 59):

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    "When construing a consolidating statute, which is intended to operate as a coherent code or scheme governing some subject matter, the principal inference as to the intention of Parliament is that it should be construed as a single integrated body of law, without any need for reference back to the same provisions as they appeared in earlier legislative versions. ... An important part of the objective of a consolidating statute or a project like the Tax Law Rewrite Project is to gather disparate provisions into a single, easily accessible code. That objective would be undermined if, in order to interpret the consolidating legislation, there was a constant need to refer back to the previous disparate provisions and construe them ..." (para 97)

  10. I would respectfully endorse this guidance, which should be read with Lady Arden's comments (paras 84-90) on the relevance of prior case law. At the same time I would emphasise that the task should be approached from the standpoint that the resulting statutes are intended to be relatively easy to use, not just by professionals but also by the reasonably informed taxpayer, and that the signposts are there for a purpose, in particular to give clear pointers to each stage of the taxpayer's journey to fiscal enlightenment.

    Income Tax Act 2007

  11. The ITA clearly reflects these principles (as will be readily apparent from a comparison with its immediate predecessor, the Income and Corporation Taxes Act 1988 - "ICTA 1988"). It starts in section 2 with an "Overview of the Act", designed to give specific guidance as to what follows. Thus, the reader is told that the Act has 17 Parts, the effect of each of which is then summarised with references to the corresponding chapters. Relevant in the present context are Part 2, which "contains basic provisions about income tax", including "(a) provision about the annual nature of income tax (Chapter 1)" and "(c) the calculation of income tax liability (Chapter

    3)"; and Part 4 which "is about loss relief including relief for ... (d) losses on disposal of shares (Chapter 6) ...".

  12. In Part 2, section 4 establishes income tax as an annual tax, charged for a tax year running from 6 April to 5 April in the following year. Chapter 3, headed "Calculation of Income Tax Liability" provides in section 23 a step-by-step guide to the process:

    "23. The calculation of income tax liability

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    To find the liability of a person ('the taxpayer') to income tax for a tax year, take the following steps.

    Step 1

    Identify the amounts of income on which the taxpayer is charged to income tax for the tax year. The sum of those amounts is 'total income'. Each of those amounts is a 'component' of total income.

    Step 2

    Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year. See sections 24A and 25 for further provision...

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