Mark McLaughlin looks at a case where a taxpayer made a successful application to the First-tier Tribunal for a direction that HMRC must close its enquiries into his tax return.
If you are one of the millions of individual taxpayers within the self-assessment tax return regime, you may be subject to an enquiry into your tax return by HM Revenue and Customs (HMRC).
The chosen ones
HMRC enquiries may be ‘risk-based’ (i.e. HMRC considers that there is a risk of error or underassessment), or HMRC might hold information to suggest that the return is inaccurate. However, a proportion of returns are selected at random, and you may be one of the unlucky ones.
Of course, the vast majority of taxpayers pay the ‘right’ amount of tax. Even so, HMRC’s tax return enquiries can be time consuming and (if professionally represented) costly. For example, the process may become protracted if an HMRC enquiry into part of the return (i.e. an ‘aspect’ enquiry) is extended into the entire return (i.e. a ‘full’ enquiry).
Fortunately, taxpayers have some statutory protection. At any point in an HMRC tax return enquiry, the taxpayer may apply to the First-tier Tribunal (FTT) for a direction requiring HMRC to close the enquiry (i.e. by issuing a ‘closure notice’) within a specified period. Such a direction must be given unless HMRC satisfies the FTT that there are reasonable grounds for not issuing a closure notice.
Of course, the FTT does not direct HMRC to issue a closure notice in all instances. There have been numerous cases where the FTT declined to do so. However, applications to the FTT can sometimes reveal flaws in HMRC’s approach and resolve situations in the taxpayer’s favour.
No amendments, no enquiry!
For example, in Patel v Revenue and Customs  UKFTT 561 (TC), HMRC opened an enquiry into the taxpayer’s tax return for 2014/15, and also requested information concerning licence fees received by the taxpayer. Information in the ‘white space’ in his 2014/15 return had expanded on an entry in the return showing ‘other taxable income’ of £85,000, stating that the licence fees were received from the taxpayer’s personal company (AK). Subsequently, HMRC also opened an enquiry into the taxpayer’s tax return for 2015/16.
The licence agreement stated that the taxpayer practiced as a Chartered Accountant and had built up goodwill and considerable business contacts over many years. The agreement provided for AK to exploit the taxpayer’s practice name and business contacts in return for the payment of an annual fee, being 20% of the gross fees charged to clients of AK in the preceding calendar year.
HMRC was concerned that the licence payments were actually employment income, and as such should be liable to deduction of tax and National Insurance contributions (NICs). HMRC requested information from AK regarding the licence arrangements, and subsequently issued an information notice (under FA 2008, Sch 36). AK appealed against it. Furthermore, the taxpayer applied to the FTT for a direction that HMRC close the enquiries into his tax returns for 2014/15 and 2015/16.
At the hearing, the FTT asked the HMRC officer some questions. In response, the officer agreed with the FTT that if Class 1 NICs were payable, it was AK that would be liable to pay them, not the taxpayer. The HMRC officer also agreed that if the payments were actually salary, it would be AK that was liable to pay PAYE. When asked to explain what amendment to the taxpayer’s tax returns for 2014/15 or 2015/16 the HMRC officer would make to reflect his conclusion that the payments were salary, his answer was ‘none’. In the FTT’s view, that admission settled the issue. The FTT directed that HMRC must issue a closure notice in respect of its enquiries into the taxpayer’s tax returns for 2014/15 and 2015/16 within 14 days.
HMRC’s guidance (in its Enquiry manual, at EM1980) instructs its officers to use a closure notice application as an opportunity to review the enquiry to date.
In Patel, the case was seemingly not reviewed adequately by HMRC, as it became apparent during the FTT hearing that HMRC had opened an enquiry into the taxpayer’s tax return instead of his company based on HMRC’s potential challenge to the licence arrangements.
It should be noted that if the FTT directs HMRC to close an enquiry, that is not necessarily the end of the story. HMRC’s closure notice will state its conclusions and make any amendments to the return based on the information and evidence available (see EM1990). This information and evidence may be incomplete and/or incorrect, possibly resulting in amendments to the taxpayer’s return being inaccurate and additional tax being wrongly charged (subject to an appeal). The decision whether to apply for a closure notice should therefore not be taken lightly.
The closure notice application facility is a potentially useful and formidable safeguard for taxpayers, but it should be used with care at an appropriate time.
This article was first printed in Business Tax Insider in February 2019.