Replies to Queries - 2

A supplementary problem

Prior to self assessment, a claim under section 381, Taxes Act 1988, for losses sustained in the first year of trading to be carried back three years, attracted repayment supplement from the relevant date calculated by reference to the year against which the losses were set.

Post self assessment, we have been told by the Revenue that the relevant time is by reference to the year in which the losses arose.

The Inland Revenue argues that the 'later year' referred to in section 824(3), Taxes Act 1988 is, in fact, a reference to the claim year, i.e. the fiscal year in which the losses actually arose, not the year to which the losses are to be carried back.

We feel that the reference to 'later year' in the legislation could be interpreted as meaning the later year where more than one year is involved in a claim. In the case of the carry back of losses, where there is only one year involved, the relevant time should be by reference to the year against which the losses are set.

Has the basis for calculating repayment supplement been changed without publicity?

(Query T16,173) - At a loss.

As 'At a loss' has found, the basis of repayment supplement has changed under self assessment, as it applies to the carry back of losses, pension contributions, etc. Supplement now only runs from the relevant date that applies to the year in which the event that generates the supplement occurs. To describe it in simple terms (as explained to me by someone intimately involved with the new rules), a 2001-02 loss carried back under section 380 or 381, Taxes Act 1988 will generate a refund that will attract supplement as if it were a 2001-02 repayment. This is because the event that generated the refund is a 2001-02 event, being a trading loss. Contrast this to a claim made for, say, the married couple's allowance (now only available to the over 65s). If I married in 1999-2000, I could make an error or mistake claim for that year, which would generate a refund. This refund would receive an interest supplement as if it were a 1999-2000 refund. This is because the event that generated the refund was the marriage, and the marriage was in 1999-2000.

The Revenue's Self Assessment Manual at paragraph 9.108 says that 'Claims to carry back losses or pension contributions are established in the later year, that is the year in which the loss is incurred or contribution is made, but the relief due is calculated by reference to the tax liability of the earlier year, that is the year to which the loss or contribution is "carried back". It is as if the amount claimed could be carried back and included in the self assessment for that year, but the actual self assessment for the earlier year is not revised at all.'

The Self Assessment Manual at paragraph 9.109.2 says that: 'The amount of relief is calculated as the difference between the actual tax liability for the earlier year and the liability which would have arisen for the earlier year if the loss or pension contribution had been included in the return for that year. Where no return was issued for the earlier year, the claim is quantified in terms of the tax that would not have been due if a self assessment containing the claim had been made for the earlier year.

'Although the relief is calculated by reference to tax of the earlier year, it is a claim of the later year. This means that any interest or repayment supplement arising will be calculated by reference to the fixed filing date of the later year or the date the valid claim is made, if later.' - Quiet Achiever.

The wording in section 824(3)(ab), Taxes Act 1988 was inserted by section 90, Finance Act 2001 and it applies to all repayments made after 11 May 2001, covering cases such as carry back of loss relief or pension contributions or farmers averaging. The introduction at the front of my annotated copy of the Finance Act 2001 states that section 90 gives statutory effect to a concession under which repayment supplement would be paid on a tax repayment arising from a carry back of loss relief.

This practice applied from when self assessment was introduced and it applies because of paragraph 2 of Schedule 1B to the Taxes Management Act 1970, which deals with claims that affect more than one year of assessment.

Quoting from subparagraph 1, it reads as follows. 'This paragraph applies where a person makes a claim requiring relief for a loss incurred … in one year of assessment ("the later year") to be given in an earlier year of assessment ("the earlier year").'

Subparagraph 3 of Schedule 1B goes on to state that in such cases, the claim shall relate to the later year.

Sadly there is no ambiguity and the later year is clearly the year of assessment in which the loss arises, even though the claim is calculated by reference to the reduction in the tax payable in the earlier year.

Therefore the Inland Revenue position is correct and should be accepted. - Hodgy.

Issue: 3899 / Categories: