BKL looks at the recent Dundas case on Capital Allowances that were claimed out of time - until HMRC opened tax enquiries.
When is a time limit not a time limit? On the evidence of the Tribunal case of Revenue and Customs v Dundas Heritable Ltd (Tax)  UKUT 208 (TCC) (2 July 2019), it’s when the time limit relates to a company’s claim to capital allowances.
The rules that apply to claims to capital allowances are different from those that govern other claims. Except in a few special cases which we’ll ignore for the purposes of this note, capital allowances must be claimed as part of a tax return – there can be no “free-standing” claims as there can with some other reliefs.
For Income Tax purposes, there is no express statutory guidance as to the time limits for making or amending a claim: but HMRC draw the conclusion – to us, a slightly questionable one – that if any claim must be made as part of the tax return, it inevitably follows that “the time limit for making a claim or amending a claim is the normal time limit for making or amending a tax return”.
The time limits for filing and amending a tax return for a tax year are, respectively, 31 January after the end of the tax year and the following 31 January. So you might conclude that for Income Tax purposes, capital allowances for the year 2017/18, for example, must normally be claimed in a tax return made by 31 January 2019 but that, once made, the claim can be amended at any time up to 31 January 2020. In fact, HMRC seem to take the view – presumably to be consistent with the Corporation Tax position described below – that the initial claim can be made at any time up to 31 January 2020. But, in HMRC’s view, if you file your 2017/18 tax return later than 31 January 2020, you cannot claim capital allowances for the year.
For Corporation Tax purposes the law is more specific. It provides (at FA 1998 Sch18 para 82) that “a claim for capital allowances may be made, amended or withdrawn at any time up to whichever is the last of the following dates” and lists four dates of which the first two are “the first anniversary of the filing date for the company tax return” (so normally two years after the end of the accounting period) and “if notice of enquiry is given into that return, 30 days after the enquiry is completed”.
Dundas Heritable Ltd filed its tax return for the year to 31 March 2012 on 3 February 2015, and the return for the year to 31 March 2013 on 26 November 2015. Both were therefore filed late (that is, later than the statutory “filing date” for the accounting period) and both contained claims to capital allowances that were (other than their timing) uncontroversial.
For each year, HMRC opened an enquiry into the tax return in respect of the capital allowance claim and subsequently issued a closure notice denying relief on the grounds that the claim was out of time.
The company argued that the plain wording of paragraph 82 provided that, in a case where an enquiry was made, a claim to capital allowances was within time if made at a time that was earlier than “30 days after the enquiry is completed”. That was so in this case, so the claims were in time and should be allowed.
Before the First-tier Tribunal, HMRC asserted that the key point was that the validity of a claim had to be determined at the time it was made and by reference to the time limits applicable at that time: nothing that subsequently happened could operate to “post-validate” a claim that was invalid when made. They also observed that “in order to remove a late claim HMRC must open an enquiry”.
Having lost at the First-tier Tribunal, they developed that point further at the Upper Tribunal: “An analysis which permitted an out of time claim to be validated by the very process required for corrective action was entirely circular and rendered the initial time limit in subparagraph (a) otiose.” Very fair point, well made, we’d have said.
Both the First-tier and now the Upper Tribunal sided with the company, reasoning that the legislation is unequivocal in listing four dates and in providing that a claim would be timeous if made “at any time” before the last of them. The company’s claim had been made before the last date had passed: it was therefore in time.
The decision is surprising. The effect seems to be to allow a company to make a claim for capital allowances in any tax return, regardless of how late the tax return is made. For in such a case the claim can be challenged only by the making of an enquiry into the return; and the very fact of the making (or, at least, completing) of the enquiry retrospectively extends the time limit for making the claim: a sort of Catch-22 against HMRC.
This can hardly have been the result that Parliament envisaged when enacting the provision. But unless and until the law is changed or the case is reversed on appeal, that is how things stand: a decision of the Upper Tribunal (unlike the First-tier Tribunal) has the force of precedent.