Derry v Revenue and Customs: Establishing Clear Precedents on Share Loss Relief under ITA 2007

Introduction

The case of Derry v Revenue and Customs ([2019] 1 WLR 2754) was adjudicated by the United Kingdom Supreme Court on April 10, 2019. This pivotal case centers on the correct treatment of share loss relief claims for income tax purposes under section 132 of the Income Tax Act 2007 (ITA). The appellant, Mr. Derry, sought to claim a significant capital loss arising from the disposal of shares, aiming to reduce his taxable income for the tax year 2009/10. Revenue and Customs (HMRC) contested this claim, questioning its validity as a potential tax avoidance scheme.

The judgment explores two critical legal questions:

The legal effect of claiming loss relief against the income of a previous tax year.
The implications of including such a claim within a tax return, especially when HMRC fails to timely inquire into the return under the Taxes Management Act 1970 (TMA) section 9A.

The Supreme Court's decision not only resolves the immediate dispute but also sets significant precedents affecting future tax relief claims and the interpretation of tax statutes.

Summary of the Judgment

The Supreme Court, led by Lord Carnwath, dismissed HMRC's appeal and upheld the Court of Appeal's decision in favor of Mr. Derry. The core issue revolved around whether the claim for share loss relief made by Mr. Derry under ITA section 132 should be applied against his income for the tax year 2009/10 or treated as relating to the subsequent year. HMRC contended that the claim fell under TMA Schedule 1B, thus negating Mr. Derry's entitlement for the earlier year. However, the Supreme Court held that the explicit provisions within the ITA provided a clear and unambiguous framework for Mr. Derry to claim the relief against the specified tax year, irrespective of Schedule 1B's general provisions.

Additionally, the Court addressed procedural concerns regarding the inclusion of such claims in tax returns and the obligations of HMRC to timely inquire into potential discrepancies. While the primary decision settled Issue 1, the Court also provisionally addressed Issue 2, highlighting the complexities of interpreting online tax returns and the implications for tax relief claims.

Analysis

Precedents Cited

The Judgment extensively referenced several key precedents to substantiate its interpretation of the ITA 2007 and TMA 1970:

Revenue and Customs Comrs v Cotter [2013] UKSC 69; This case provided critical insights into the treatment of loss relief claims within tax returns, distinguishing between claims that affect the current year's liability and those that relate to previous or subsequent years.
Farrell v Alexander [1977] AC 59; This seminal case elaborated on the principles of statutory interpretation, particularly emphasizing the approach to consolidating statutes and the reliance on clear legislative intent.
Eclipse Film Partners (No 35) LLP v Comrs of Her Majesty's Revenue and Customs [2013] UKUT 639 (TCC); [2014] STC 1114; This case likened the interpretation of consolidation statutes to that of the ITA, reinforcing the need for a coherent and integrated understanding of the statute without frequent recourse to previous versions.

These precedents collectively underscored the importance of statutory clarity, legislative intent, and the structured approach to interpreting consolidated tax statutes.

Legal Reasoning

The Supreme Court's reasoning hinged on a meticulous interpretation of the ITA 2007 in conjunction with the TMA 1970. The Court emphasized the following points:

Statutory Interpretation of ITA 2007: The ITA was treated as a consolidated statute aimed at clarity and coherence. The Court noted that while the ITA did not intend to alter existing laws significantly, it provided comprehensive guidance on income tax calculations, including loss relief.
Section 132 of ITA 2007: This section explicitly allowed taxpayers to claim loss relief for the year of the loss, the previous year, or both. The Court underscored that this provision was self-contained and clear in its intent, directing taxpayers through a step-by-step process for calculating tax liability.
Interaction with TMA 1970 Schedule 1B: HMRC argued that Schedule 1B of the TMA should override the ITA provisions. However, the Court found that without explicit legislative language indicating such precedence, the clear instructions within the ITA took precedence. The absence of specific signposts in ITA Chapter 6 (relating to share loss relief) suggested no intended modification by Schedule 1B.
Focus on Tax Liability Calculation: The Court reiterated that the primary objective was to determine the taxpayer's liability based on the ITA's provisions. The claim for loss relief directly impacted this calculation under section 23, reinforcing Mr. Derry's entitlement.
Supremacy of ITA Provisions: The ITA's detailed provisions on loss relief were deemed the governing statute over the TMA's administrative procedures unless explicitly stated otherwise.

Overall, the Court adopted a purposive approach, ensuring that the statutory framework's integrity and clarity were maintained, prioritizing the ITA's explicit provisions over procedural statutes like the TMA unless contradicted by clear legislative intent.

Impact

This landmark decision has profound implications for both taxpayers and HMRC:

Taxpayer Confidence: The judgment reinforces the importance of clear statutory provisions, providing taxpayers with greater confidence in claiming legitimate tax reliefs.
HMRC Procedures: HMRC may need to reassess its approach to interpreting loss relief claims, especially those that span multiple tax years, ensuring they align with the statutory intent of the ITA 2007.
Future Judicial Interpretations: The decision sets a precedent emphasizing the supremacy of consolidated statutes like the ITA over procedural acts unless explicitly overridden, guiding future courts in similar interpretations.
Tax Law Rewrite Project: The judgment underscores the success of the Tax Law Rewrite Project in achieving legislative clarity and coherence, influencing future legislative drafting and rewriting initiatives.

Overall, the decision bridges gaps between statutory provisions and administrative interpretations, promoting fair tax practices and reducing ambiguities in tax relief claims.

Complex Concepts Simplified

Share Loss Relief under ITA 2007

Definition: Share loss relief allows taxpayers to offset capital losses incurred from the disposal of qualifying shares against their taxable income, thereby reducing the tax liability.

Eligibility: Individuals must incur allowable losses on qualifying shares within a tax year to be eligible for this relief.

Tax Law Rewrite Project

Purpose: An initiative to rewrite existing tax legislation to enhance clarity, consistency, and accessibility without altering the substantive law.

Impact: By consolidating and simplifying statutes, the project aims to reduce ambiguities and make tax laws more user-friendly for both professionals and taxpayers.

Self-Assessment Regime

Definition: A system where taxpayers calculate their own tax liabilities, file tax returns, and make payments based on their assessments.

Key Features:

Taxpayers are responsible for accurately reporting income and claiming allowable deductions.
HMRC reviews returns and may conduct inquiries or adjustments if discrepancies arise.

Stages of Tax Imposition

Declaration of Liability: Establishes who owes tax and on what income or assets.

Assessment: Calculates the exact tax liability based on declared information.

Recovery: Collects the tax owed through payments or other means.

Conclusion

The Supreme Court's decision in Derry v Revenue and Customs serves as a cornerstone in the interpretation of tax relief provisions under the ITA 2007. By affirming the clear entitlement of Mr. Derry to claim share loss relief against his specified tax year, the Court underscored the paramount importance of statutory clarity and legislative intent. This judgment not only resolves the immediate dispute but also establishes a robust precedent ensuring that taxpayers can confidently navigate the self-assessment regime, leveraging available reliefs without undue fear of administrative overreach.

Furthermore, the ruling signals to HMRC the necessity of aligning its interpretative approaches with the explicit directions of consolidated statutes, thereby fostering a more transparent and equitable tax system. As such, this decision contributes significantly to the broader legal context, reinforcing the principles of statutory interpretation and the effective implementation of tax laws designed with taxpayer accessibility in mind.