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KEY POINTS
- Taxpayers can apply for a closure notice under TMA 1970, s 28A(4).
- Investigation had been under way since 2001.
- Was it reasonable for HMRC to refuse to issue a closure notice?
- Taxpayer’s case must be looked at individually.
- Tribunal decided against HMRC.
One of the keenest areas of contention between HMRC and taxpayers and their advisers is the length of time that enquiries can and often do take before they are concluded.
As taxpayers who have faced the full scrutiny of HMRC will be only too well aware, a long-running enquiry can be commercially disruptive, time-consuming and expensive, particularly if HMRC issue a number of information requests during the course of the enquiry.
Traditionally, taxpayers have not been active in bringing such enquiries to an end.
Increasingly, however, in the author’s experience, taxpayers are seeking appropriate directions from the First-tier Tribunal requiring HMRC to issue closure notices and thereby bring long-running enquiries to an end.
A recent decision of the tribunal provides further comfort for taxpayers faced with such enquiries.
Background
Harold Collinson made an application to the First-tier Tribunal pursuant to TMA 1970, s 28A(4) for a direction that a closure notice be issued in respect of an HMRC enquiry which had been opened in January 2001 into his tax return for the year of assessment 1998/99.
As the tribunal observed, the enquiry had therefore been continuing for more than nine years into a return in respect of a period that ended more than a decade ago.
The enquiry concerned a loss for 1998/99 claimed by Mr Collinson in respect of certain transactions involving relevant discounted securities which he considered gave rise to a loss for tax purposes.
Under s 28A(1), an enquiry into a personal return is completed when a closure notice is given to the taxpayer by HMRC. The notice must state that the relevant HMRC officer has completed his enquiries and state his conclusions.
Under s 28A(4), a taxpayer can apply to the First-tier Tribunal for a direction requiring an HMRC officer to issue a closure notice within a specified period. The issue of such a closure notice will end the enquiry.
The tribunal had to decide whether to give a direction requiring HMRC to issue a closure notice within a specified period pursuant to s 28A.
As s 28A(6) states:
'The tribunal shall give the direction applied for unless satisfied that there are reasonable grounds for not issuing a closure notice within a specified period’ (emphasis added).
The onus was therefore on HMRC to show, objectively, reasonable grounds for not issuing a closure notice.
The facts
Mr Collinson submitted his tax return for 1998/99 on time and made a claim in respect of the relevant discounted securities for loss relief of some £436,000. HMRC opened an enquiry into the return by letter dated 5 January 2001 and requested information about the relevant transactions from Mr Collinson’s accountants. This was duly provided.
However, the accountants refused to supply tax advice given in relation to the transactions which was essentially counsel’s opinions and legal advice which was privileged and not relevant.
HMRC, by letter dated 30 March 2001, queried why this material had been withheld. Mr Collinson’s accountants replied, questioning the relevance of the material withheld.
They also confirmed that Mr Collinson had entered into the transactions for the purpose of obtaining a tax advantage. It was therefore acknowledged by Mr Collinson that he had a ‘tax avoidance’ motive when entering into the transactions under consideration.
The accountants were dealing with a number of similar cases for other clients and, in November 2001, it was agreed that Mr Collinson’s case should be included in the group of cases under discussion between the accountants and HMRC.
There was then a very long period of inactivity and no further correspondence between the accountants and HMRC until 16 April 2007, when the accountants wrote to HMRC reminding them of the Special Commissioners’ decision in Campbell SpC 421 (which had concerned an relevant discounted securities base avoidance scheme) and requested that a closure notice be issued.
HMRC responded that they were looking at all relevant discounted security schemes collectively to ensure a consistent approach.
Thereafter, subsequent attempts at reaching a settlement failed. On 19 November 2008, the accountants wrote to HMRC referring to the closure request of April 2007.
A month later, HMRC wrote to the accountants stating that they proposed to review the discounted security claims on a case-by-case basis and ignored the earlier closure request.
By a letter dated 7 April 2009, HMRC stated that the case could not be closed because the tax advice materials had not been provided. The reasons given by HMRC in their letter were not particularly convincing.
HMRC stated that if the enquiry was closed the information powers contained in TMA 1970, s 19A would cease to apply (that section had been repealed as from 6 April 2009).
HMRC also stated that the withheld materials were needed in relation to a point on which they were seeking advice, namely, whether the sums nominally paid for the relevant discounted securities could be attributed to something else. The letter did not state, however, what that something else might be.
After more fruitless correspondence, on 4 September 2009, Mr Collinson made an application to the First-tier Tribunal for a direction that a closure notice be issued.
HMRC did not seek to use their information powers to obtain the withheld materials or make any form of application to the tribunal to order the production of documents.
HMRC’s submissions
The grounds on which HMRC relied for not issuing a closure notice included the following:
- Not all information requested had been provided.
- Mr Collinson had not been as co-operative as he could have been.
- The schemes were being looked at generically.
- Care had to be exercised in the phrasing of a closure notice in the light of the High Court decision inTower MCashback LLP v CRC [2008] STC 3366.
- The importance of evidence of motive.
The tribunal was not persuaded by any of HMRC's arguments and directed that HMRC issue a closure notice within 30 days from the date of the announcement of its decision.
The tribunal’s reasoning
In reaching its decision, the First-tier Tribunal said that under rule 2 of the Tribunal Rules, its overriding objective must be to deal with cases fairly and justly.
In particular, rule 2(2)(e) states that this includes ‘avoiding delay, so far as compatible with proper consideration of the issues’.
The tribunal reminded itself of the often-quoted saying ‘Justice delayed, is justice denied’.
It considered that nine years was a considerable time to wait to know whether a government department would allow the applicant’s claim. If the claim was denied, it was not until a closure notice was issued that the taxpayer could appeal.
The tribunal commented that the longer the period from the time the actual transactions took place, the harder it is to find documents and reliable evidence; witnesses cease to be available and memories fade. This makes it harder for there to be a fair trial.
The tribunal said it was implicit that a closure notice could be required, notwithstanding that HMRC had not pursued to the end every possible line of enquiry.
What was required was that HMRC should have conducted their enquiry to a point where it was reasonable to make an informed judgment as to the matter in question.
The tribunal referred to Eclipse Film Partnerships No 35 LLP (SpC 736), where it was said:
‘...a closure notice can be required notwithstanding that the officer has not pursued to the end every line of enquiry or investigation. What is required is that he should have conducted his enquiry to a point where it is reasonable for him to make an informed judgment as to the matter in question, so that, exercising such judgment, he can state his conclusions and make any related amendments to the taxpayer’s return.’
It is also useful to note the tribunal’s views on the specific grounds relied upon by HMRC.
HMRC argued that as they had not been provided with all the information that had been requested from Mr Collinson they could not reasonably complete their enquiry.
This was because the ‘information reasonably requested and which remains outstanding may be necessary to bring the enquiry to an analytical conclusion’.
The tribunal considered that HMRC have ample powers to require the production of relevant documents and yet they had not exercised them.
Further, after a closure notice has been issued, an application can be made to the tribunal under rule 16 of the Tribunal Rules for an order for ‘…any person to answer any questions or produce any documents in that person’s possession or control which relate to any issue in the proceedings’.
It had not been shown that HMRC would be prejudiced by such a route.
It was accepted by HMRC that there had been no impropriety or misconduct. Mr Collinson had simply refused to produce certain documentation which he believed HMRC were not entitled to.
Mr Collinson had been as co-operative as possible and, in the view of the tribunal, this was not a reasonable ground for not issuing a closure notice.
HMRC stated that the schemes involving the type of securities under consideration were being looked at generically and discussions had taken place which might have led to settlements in respect of those generic schemes.
The tribunal said that this was not a good reason for failing to issue a closure notice in a particular case if the taxpayer applied for a direction to issue a closure notice.
While it might be administratively inconvenient for HMRC, a taxpayer had the right to have his rights determined in his own case on its own facts and not on a generic basis if he chose to.
HMRC argued that they had to be careful in how they phrased closure notices in the light of the High Court decision in Tower MCashback. The decision of the Court of Appeal in that case was awaited at the time of Mr Collinson’s application.
The tribunal gave short shrift to this argument and, not surprisingly, said that until the Court of Appeal delivered its decision ([2010] STC 809) it was bound by the existing decision of the High Court.
HMRC contended that evidence of motive was important in this case as demonstrated in Astall and another [2008] STC 2920. While accepting this contention, the tribunal did not consider this to be a reason for not issuing a closure notice in the case before them.
It had already been acknowledged by Mr Collinson that he had a tax avoidance motive.
Conclusion
This decision is welcome news for taxpayers who face long running HMRC enquiries, particularly where the underlying transactions involve arrangements which HMRC perceive to involve unacceptable tax avoidance/mitigation.
Such cases frequently disappear into the Anti-Avoidance Group with little or no progress being made until the taxpayer adopts a more proactive approach.
The First-tier Tribunal has once again demonstrated in this latest case that it will direct HMRC to issue a closure notice within a specified period of time, where HMRC have failed to satisfy it that there are reasonable grounds for not issuing a closure notice.
The ability to apply to the tribunal for such a direction should not be overlooked by frustrated taxpayers who find themselves in a similar position to Mr Collinson.
Adam Craggs is a partner in the tax disputes resolution team at Reynolds Porter Chamberlain LLP. He can be contacted by email or telephone: 020 3060 6421.
