Supreme Court backs HMRC in dispute over film partnership tax losses

The taxpayers, Mr De Silva and Mr Dokelman, had claimed tax relief on the losses they had made from investments in various partnerships set up to invest in films. These partnerships were "marketed tax avoidance schemes which were aimed at accruing trading losses through investment in films in order to set off those losses against income of the same or earlier years", HMRC told the Supreme Court.

In a separate action, HMRC had questioned the loss amounts incurred by the partnerships, which ultimately entered into a settlement agreement with HMRC on the amount of the losses. Following that settlement, HMRC wrote to the taxpayers to inform them that their share of the partnership losses that they had claimed in previous years had been reduced.

De Silva and Dokelman claimed that HMRC was entitled to inquire into their claims under schedule 1A of the 1970 Tax Management Act (TMA), but that the statutory time limit for doing so had passed. HMRC instead made its inquiry under section 12AC(1) of the TMA, and ultimately disallowed the partnerships' claims for loss relief. The legislation treats the opening of an enquiry into the partnership return as the opening of an enquiry into the individual partners' self assessment returns for the year in question.

The decision turned on whether the taxpayers' claims should be classed as stand-alone claims for relief, as argued by the taxpayers, or as claims made in their self-assessment tax returns under section 8 of the TMA. The Supreme Court ruled that they should be classed as the latter, siding with HMRC and upholding the decisions of the lower courts.

"This decision will be a disappointment to the many other taxpayers who have claims relying on similar arguments to those made by the taxpayers in this case and who have been waiting for the Supreme Court's ruling," said  Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

Lord Hodge, giving the unanimous judgment of the court, said that the taxpayers' case was incorrect "because of the provisions of the TMA which specify what a taxpayer must include in his return". Section 8 of the TMA states that a tax return must include information about an individual's share of partnership income or losses for the period which falls within the year of assessment. He said that if a taxpayer wished to carry back a loss incurred in Year 2 to set against his income in Year 1, he had to make a claim in his return for Year 2 as well as in his return for Year 1. Even if HMRC had already given a repayment for Year 1, the judge said the return for Year 2 would still have to state the loss, the claim and the relief already given in order to establish the tax liability for Year 2.

"By so doing [the taxpayer] enables the return to 'take into account', as section 8(1AA)(a) requires, both the relief which is claimed in the return and that which he has already received," the judge said. "In each case that information is a necessary part of his return for Year 2 as it is information required 'for the purpose of establishing the amounts' in which the taxpayer is chargeable to income tax for that year of assessment."

"HMRC may inquire into a return under section 8 or 8A if an officer gives notice of his intention to do so … and that enquiry may extend to anything contained in the return, or required to be contained in the return, including any claim … HMRC [was] therefore empowered under section 9A to inquire into the taxpayers' carry back claims contained in their Year 2 tax returns. HMRC [was] not required to institute an enquiry under schedule 1A in order to challenge the taxpayers' claims," he said.