In R (on the application of Andrew Michael Higgs) v HMRC6, the Upper Tribunal (UT), exercising its jurisdiction to consider judicial review proceedings, has granted relief in favour of a taxpayer in a dispute in which HMRC refused to make repayment of a sum which the taxpayer had overpaid to HMRC.

Background

Mr Higgs (the Claimant), made payments on account to HMRC in 2007 of £43,317, in respect of tax year 2006/07, which sum was an amount equal to his previous year’s tax liability.

A tax return for 2006/07 had been prepared on behalf of the Claimant by his accountants  on 26 March 2008. The return showed that the Claimant’s actual tax liability for 2006/07 was £18,830. The Claimant had therefore made an overpayment to HMRC in the sum of £27,487.

The box used for claiming a refund of sums overpaid on account was ticked. Unfortunately for the Claimant, he failed to sign, date and return to his accountants the return for onward transmission to HMRC.

On 14 October 2011, HMRC wrote to the Claimant in relation to outstanding tax returns for 2007/08, 2008/09 and 2009/10. The Claimant’s accountants telephoned HMRC on 25 October 2011 and were informed that the return for 2006/07 remained outstanding. On being informed of this, the Claimant sent a duplicate of his return for 2006/07 to HMRC on 2 November 2011.

Thereafter, HMRC made it clear in correspondence that it was not going to process the Claimant’s tax return for 2006/07, on the basis that it was out of time. It was also of the view that it was entitled to retain the Claimant’s overpayment on account. This culminated in a final “decision” by HMRC on 7 March 2013, in which it confirmed its original position not to process the 2006/07 return and to retain the overpayment on account (the Decision). The Decision stated:

“When the Return was received on 7 November 2011 it was, as per Section 34 TMA … outside   the time limit of 5 April 2011 to be processed. The effect of this means the Payments on Account are final and conclusive and cannot be displaced by the actual liability declared in the 2006/07 Income Tax Return.”

The Claimant sought a judicial review of the Decision.

The Legislation

Section 34(1) Taxes Management Act 1970 (TMA) provides as follows:

“34 Ordinary time limit of 4 years

(1) Subject to the following provisions of this Act, and to any other provisions of the Taxes Acts allowing a larger period in any particular class of case, an assessment to income tax or capital gains tax may be made at any time not more than 4 years after the end of the year of assessment to which it relates.

Section 59B(1) TMA provides, so far as relevant, as follows:

“59B Payment of income tax and capital gains tax

 (1) Subject to subsection (2) below, the difference between –

  1. The amount of income tax and capital gains tax contained in a person’s self-assessment under section 9 of this Act for any year of assessment, and
  2. the aggregate of any payments on account made by him in respect of that year … and any income tax which in respect of that year has been deducted at source,

shall be payable by him or (as the case may be) repayable to him as mentioned in subsection (3) or (4) below … “

UT’s decision

HMRC argued that the Claimant’s tax return for 2006/07, and more particularly the self-assessment contained therein, was received too late to be valid on the basis that the deadline for making a self-assessment in respect of the 2006/07 tax year was 5 April 2011, which was when the four year period referred to in section 34(1) TMA expired. The essential dispute between the parties was whether section 34(1) applied to the facts of the case. HMRC submitted that the section was relevant and prevented any adjustment to the sum paid on account in 2007.

The Claimant argued that section 34(1) applied only to assessments made by HMRC and therefore did not apply to a self-assessment such as the one contained in his return for 2006/07. The Claimant also argued, in the alternative, that if section 34 did apply to a self-assessment, HMRC has a discretion to extend the deadline which it was obliged to exercise in his favour as,   in the absence of an extension, he would suffer disproportionate damage resulting from an infringement of his rights under Article 1 of Protocol 1 of the European Convention on Human Rights (Article 1).

HMRC submitted that there was a public interest in achieving finality in fiscal transactions and there was ample evidence of a general policy of imposing time limits on repayments of excess payments on account, for example, in section 28C(5) TMA.

The UT accepted that there was a public interest in obtaining finality in fiscal matters, but in its view that interest could not justify a construction of section 34(1) which was not otherwise justified and it was not convinced that the Claimant’s interpretation would result in the administrative chaos predicted by HMRC.

In preferring the Claimant’s arguments, the UT said that there would be inconsistency with   time limits contained in other provisions relating to self-assessment, for example in section 28C TMA (which provides for a determination by HMRC where no return was delivered), if HMRC’s view was correct. In any event, the UT noted that where, as in this case, no tax return had been submitted in a timely manner pursuant to a section 8 TMA notice, HMRC could achieve finality by making a section 28C determination, which would bring into play the time limit contained in section 28C(5) for the making of a self-assessment. That interpretation was consistent with the natural reading of the section as a whole, and was also consistent with the placing of the section alongside other sections such as section 36 TMA, which related exclusively to assessments made by HMRC.

The UT also took comfort from the case of Morris and another v HMRC7, in which the court had concluded that an earlier version of section 34 had no application to self-assessment.

In the view of the UT, the interpretation advanced by HMRC would result in inconsistency with other provisions of the TMA, including those which contain different time limits, and concluded that the time limit referred to in section 34(1) was not applicable to a self-assessment such as that which the Claimant made in this case. The UT ordered HMRC to process the Claimant’s tax return including the self-assessment in respect of the year 2006/07.

Given its conclusions in relation to section 34, the UT did not have to consider the Article 1 argument, and it said that it was reluctant to pronounce on the lawfulness of a decision to refuse to extend time which had not in fact been made and which was therefore hypothetical.

However, it did express the view that in the circumstances of the present case, such a decision would be unlikely to fall outside a tax authority’s wide margin of appreciation so as to infringe Article 1. In the view of the UT, it was not clear that if HMRC was to give full and proper consideration to its discretion, the outcome would necessarily be a refusal to extend time.

The UT considered that in the event of a successful appeal by HMRC on the construction of section 34, the matter should be remitted to HMRC for it to give full and proper consideration to whether it would be appropriate to exercise its discretion to extend the time limit so as to permit the Claimant’s self- assessment and repayment claim to be processed.

Comment

It is regrettable that in resisting the claim for repayment of overpaid monies, HMRC chose to rely on an interpretation of section 34 TMA which had been doubted for some considerable time following Morris. It remains to be seen whether HMRC will accept the outcome in this case or seek to appeal the decision to the Court of Appeal.