The taxpayer company claimed error or mistake relief under section 33, Taxes Management Act 1970 in order to use terminal losses against earlier trading profits. The Revenue refused on the grounds that a section 54 agreement existed. The Special Commissioner agreed with the Revenue, and in the High Court it was ruled that an appeal from the Special Commissioner was not to be permitted since it was not an appeal on a point of law arising in connection with the computation of profits. The Appeal Court supported this decision, and dismissed the appeal.
The taxpayer company claimed error or mistake relief under section 33, Taxes Management Act 1970 in order to use terminal losses against earlier trading profits. The Revenue refused on the grounds that a section 54 agreement existed. The Special Commissioner agreed with the Revenue, and in the High Court it was ruled that an appeal from the Special Commissioner was not to be permitted since it was not an appeal on a point of law arising in connection with the computation of profits. The Appeal Court supported this decision, and dismissed the appeal.
Background
Eagerpath Ltd, a property development and investment company, made up its first accounts to 30 April 1987. In that period it borrowed foreign currency to finance an acquisition, and in the course of the transaction it made a notional currency exchange profit or gain. The interest on the loan was deducted in the computation of trading profit. Eventually in February 1989, after some correspondence, the Revenue accepted the company's computations, settling the appeal under section 54, Taxes Management Act 1970. The company ceased trading in June 1990, and showed terminal losses in its final accounts. It wished to claim terminal loss relief and, as this could be claimed only against trading profits of earlier years, sought to have the loan interest treated as a charge on income rather than a deduction from profits. The company claimed error or mistake relief under section 33.
The Revenue rejected the claim, so the company appealed to the Special Commissioners under section 33(4).
The Special Commissioner dismissed the appeal, as did the High Court, so the company appealed to the Court of Appeal.
(Christopher Sokol for the company; Timothy Brennan for the Crown.)
Judgment in the Court of Appeal
Lord Justice Robert Walker noted that before the Special Commissioner, Eagerpath has conceded that the established principle as to the interaction between section 54 and a discovery assessment applied equally to the interaction between section 54 and an error or mistake claim, i.e., an error or mistake claim could not be made if the error had formed part of the subject matter of an earlier agreement. Counsel for the company sought to withdraw this concession in the current appeal, however.
Reference was also made to Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms 1950, but counsel for the company conceded that this particular tax appeal did not amount to the determination of civil rights and obligations within the autonomous meaning of Article 6.
Agreeing with Lord Justice Walker's decision to dismiss the appeal, Lord Justice Brooke said that mistakes were made 'from time to time' while the tax laws were being administered. He explained the reasoning behind section 33 which contained a statutory scheme, going back to legislation formed in the 1923 Finance Act, whereby taxpayers had up to six years after the end of the relevant year of assessment to discover a mistake and claim relief from the Revenue. Section 33(2) gave the Revenue discretion to make a repayment, and section 33(3) was there to ensure that the Revenue took into account all relevant circumstances. Finally, section 33(4) gave the taxpayer the right of appeal to the Special Commissioners.
The judge said that the 'continued existence of a statutory scheme of this kind, founded on executive and legislative benevolence, is strangely inconsistent with modern rights-based law and the ability of the High Court to correct all manner of errors of law, whether or not Parliament has created a statutory avenue to that court by appeal or case stated'. He went on to say further that it was odd that a statutory scheme denying the right to recover overpaid tax after six years lingered on, when the House of Lords had recognised that a citizen had right to recover money under a mistake in law (Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349).
Lord Justice Brooke then mentioned the response to Lord Goff's invitation in Woolwich Equitable Building Society v Commissioners of Inland Revenue [1992] STC 657, for the authorities to reconsider the time limits to recovery of tax. He said that the Law Commission has published proposals in a report 'Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments', but that the Government had rejected the proposed changes, and so section 33 remained unchanged.
However, the judge said that the need to reform section 33 was pressing for three reasons. Firstly, there was the Kleinwort Benson decision, and secondly, the judgment of the European Court of Human Rights in National & Provincial Building Society v United Kingdom [1997] STC 1466, where the court ruled that restitution proceedings for taxes paid under regulations later declared invalid involved the determination of the applicant's civil rights within the meaning of Article 6(1) of the Convention for the Protection of Human Rights and Fundamental Freedoms 1950. The third reason was that the Human Rights Act 1998 prevented public authorities from acting in a way which was incompatible with a convention right, viz. Article 6(1).
Lord Justice Brooke continued that in a 'rights based culture', it was 'with something resembling the curiosity of an antiquary' that he had to consider section 33 in court. However, regardless, the court was bound to do so. He too agreed with Mrs Justice Arden's ruling, but said that there were other methods of redress for the taxpayer. For instance, the taxpayer could go to the Administrative Court for judicial review, where judges were adopting a 'benevolent approach to the interpretation of the time limits for judicial review applications' where taxpayers had first gone through all the statutory remedies. The judge noted, however, that counsel for the taxpayer appeared none too enthusiastic about this, and summarised that this could be due to 'reluctance to appear in a division of the High Court whose culture may be unfamiliar to a tax lawyer' but was also due to concern about the limited powers of the High Court in judicial review proceedings to interfere with decisions made by 'inferior tribunals'.
While he did not 'anticipate a very long span of future happy life for section 33' which was 'well past pensionable age', he dismissed the appeal. Lord Justice Ward agreed.
Decision for the Revenue
(Reported at [2001] STC 26.)
Commentary by Allison Plager
What makes this case particularly interesting are Lord Justice Brooke's perceptive comments on section 33 being an anachronism in a 'new rights-based legal culture'. It is undoubtedly a peculiarity that a taxpayer has no right after six years to correct a mistake which he could not reasonably have discovered earlier. Would the judge have made similar comments about the altogether more modern three year cap in the VAT legislation? And if section 33 is unsatisfactory in a modern context, what about the similar (approximately) six-year time limit for raising assessments?
The potential disarray into which the Human Rights Act could send the tax legislation is growing steadily, and one wonders if the revenue authorities are considering their options or if they are simply waiting for the crisis to happen.
