Dundas: out of time capital allowance claims become valid due to HMRC opening enquiries

In Dundas Heritable Ltd v HMRC [2018] UKFTT 0244 (TC), the First-tier Tribunal (FTT) has held that a taxpayer was entitled to make, what would otherwise have been out of time capital allowance claims, as a result of HMRC opening enquiries.

Background

Dundas Heritable Ltd (the taxpayer) operates various pubs and bars. It submitted its corporation tax returns for the periods ending 31 March 2012 (the 2012 return) and 31 March 2013 (the 2013 return). The 2012 return was received by HMRC in February 2015 and included a claim for capital allowances which should have been lodged by 31 March 2014. The 2013 return was received by HMRC in November 2015 and included a claim for capital allowances which should have been lodged by 31 March 2015. Both returns were submitted late (paragraph 82(1)(a), Schedule 18, Finance Act 1998). 

HMRC opened enquiries into both returns, within the statutory time limits. HMRC accepted that the capital allowance claims, had they been lodge in time, would have been accepted, however, since the claims had been made out of time, HMRC disallowed them and issued closure notices. The taxpayer appealed.

FTT decision

The appeal was allowed.

In determining the appeal, the FTT was required to interpret paragraph 82, Schedule 18, Finance Act 1998, which provides: 

“82.—
(1) A claim for capital allowances may be made, amended or withdrawn at any time up to whichever is the last of the following dates—

(a) the first anniversary of the filing date for the company tax return of the claimant company for the accounting period for which the claim is made;

(b) if notice of enquiry is given into that return, 30 days after the enquiry is completed;

(c) if after such an enquiry the Inland Revenue amend the return under paragraph 34(2), 30 days after notice of the amendment is issued;

(d) if an appeal is brought against such an amendment, 30 days after the date on which the appeal is finally determined.

(2) A claim for capital allowances may be made, amended or withdrawn at a later time if the Inland Revenue allow it.

(3) The time limits otherwise applicable to amendment of a company tax return do not apply to an amendment to the extent that it makes, amends or withdraws a claim for capital allowances within the time allowed by or under this paragraph.

(4) The references in sub-paragraph (1) to an enquiry into a company tax return do not include an enquiry restricted to a previous amendment making, amending or withdrawing a claim for capital allowances.

An enquiry is so restricted if— 

(a) the scope of the enquiry is limited as mentioned in paragraph 25(2), and

(b) the amendment giving rise to the enquiry consisted of the making, amending or withdrawing of a claim for capital allowances.”

The critical sub-paragraphs were 82(1)(a) and (b).  It was accepted by the taxpayer that it had failed to make a claim in accordance with paragraph 82(1)(a), due to the late filing of its claims. However, the taxpayer argued that paragraph 82(1)(b) operated separately such that the opening of the enquiry by HMRC afforded the taxpayer an opportunity to make its claim timeously, under paragraph 82(1)(b). 

HMRC argued that at the time the claim was made, some 10 months after the deadline provided for under paragraph 82(1)(a) had expired, there was no valid claim and the opening of an enquiry could not validate a claim which was invalid at the time it was made. 

The taxpayer argued that the scope of paragraph 82(1) was permissive rather than restrictive. The use of the words "may" and "at any time" in the opening sentence indicated that a claim could be made before the last of the dates referred to in the paragraph. 

The FTT observed that the purpose of HMRC opening an enquiry is so that it can fulfil its duty to collect the correct amount of tax. In such circumstances, a taxpayer is entitled to make any relevant claims which may then have been available to it. In the view of the FTT, this is a sensible approach as it ensures that a taxpayer is not 'cornered' by an assessment by being time barred from utilising a relief it may have otherwise used had it known of the assessed tax. 

The FTT applied this approach in interpreting paragraph 82(1). With regard to paragraph 82(1)(b), the FTT considered that Parliament was attempting to ensure that a taxpayer had a similar opportunity to seek relief when it became subject to an enquiry. In the view of the FTT, nothing in the wording of paragraph 82(1) appeared to limit its scope only to claims which had been made in accordance with paragraph 82(1)(a). On the contrary, the paragraph clearly refers to four distinct situations in which a taxpayer may submit a claim for capital allowances. 

The FTT considered that the claims would also be valid under subparagraphs (c), after the notice of amendment was issued and (d), following the release of the FTT's decision. 

Comment

Some commentators have remarked that this decision has produced an unexpected result, however, the wording of paragraph 82(1) is  clear and the FTT's reasoning is persuasive. 

Interestingly, several of the reasons given in the original HMRC decision letter were abandoned by HMRC during the course of the hearing. In particular, there had been reference to the absence of a "reasonable excuse" on the part of the taxpayer for the late submission of the claims. HMRC accepted that the notion of an excuse was irrelevant for the purpose of construing the statutory provisions under consideration and acknowledged that some of the drafting in its letters had been "unfortunate".

HMRC tends to adopt a restrictive approach when construing  statutory provisions in circumstances where to do so will deprive the taxpayer of the benefit of the provisions under consideration. If in doubt, taxpayers and their advisers should return to the legislation itself and consider the words actually used by Parliament.

A copy of the decision may be viewed here.