When a HMRC enquiry notice into a tax return arrives, it is perhaps natural to anticipate a long, drawn out process to completion. This is particularly the case with full (as opposed to aspect) enquiries. However, an enquiry does not need to be unduly protracted. The taxpayer (or his agent) can apply to the tribunal for a closure notice in appropriate circumstances. This facility can be particularly helpful in curtailing ‘fishing expeditions’ by HMRC officers, and preventing the enquiry from straying outside the boundaries of the tax return itself.
The taxpayer company used the closure notice facility to good effect in Estate 4 Ltd v Revenue and Customs  UKFTT 269 (TC). In that case, HMRC issued an enquiry notice into the company’s return for the year ended 31 December 2007. HMRC found information on the internet suggesting that the company and one of its directors held an interest in a site in London, and were heavily involved in its development. HMRC did not consider that the company’s return reflected a project of this scale. The London site had actually been acquired by an offshore group company. The Estate 4 director was a shareholder in the parent company. The director explained to HMRC that Estate 4 had not carried out any project work, but had assisted the offshore company in return for a monthly fee plus a commission for each property unit sold or rented.
Closure notice request
HMRC subsequently requested further information about the offshore companies, as well as the Estate 4 directors’ bank statements. The Company’s accountant replied that the offshore structure has no bearing on Estate 4’s return, and requested a closure notice. HMRC claimed that the request for further information was justified, but the accountants considered that HMRC’s lines of enquiry were irrelevant and outside the scope of the enquiry notice, and wrote to the tribunal asking for a closure notice.
HMRC told the tribunal that they were taking a "holistic approach to a complicated set of circumstances", and that it would be premature to issue a closure notice as HMRC were still at a fact finding stage. The tribunal stated that the burden was on HMRC to satisfy the tribunal that a closure direction should not be given, and added: "Whereas an officer of HMRC may feel able to follow a suspicion (or a number of suspicions) in pursuing an enquiry, the tribunal can only consider objective justification. If on balance the tribunal is not satisfied that such justification has been provided, it must direct the issue of a closure notice." In the context of an enquiry into a company tax return, 'tax' means corporation tax.
The tribunal could understand why HMRC asked questions about directors' remuneration, which may have indicated that the profits as stated in the company's accounts did not truly reflect actual profits. However, there was no specific information to indicate that this might be the case. There was also not enough evidence to suggest that the profits stated in the company's return were not correct. The tribunal directed HMRC to issue a closure notice in respect of the enquiry into the company's tax return within 30 days.
Burden of proof
During the case, HMRC had referred to the case of Mr G R Gould and Mrs H A Gould t/a Garry's Private Hire  STC (SCD) 502 (SpC 0604), although the tribunal did not refer to the case in its judgment. In that case, HMRC enquired into the partnership return of a married couple's taxi business. HMRC discovered that the accounts included estimated figures, and that petrol expenditure had been overstated as it included some personal expenditure. There were no prime records of takings. HMRC raised a number of questions, but the taxpayers declined to answer those relating to personal expenditure. An application was made for a closure notice. The taxpayers argued (among other things) that the enquiry had been ongoing for 16 months, and that the enquiries about personal expenditure were unnecessary.
HMRC contended that they should be allowed to continue the enquiries until they were in a position to estimate the tax due, which might be expected to take another six months.
The Special Commissioner noted that the burden of proof was on HMRC to show that there were reasonable grounds for not issuing a closure notice (TMA 1970, S 28A(6)). The Commissioner considered that HMRC was not yet in a position to make a judgment of the tax due, and that it was reasonable for the enquiries to continue until HMRC could put a figure on its view of any under-declaration. It was therefore held that HMRC should be allowed to continue its enquiries, and so there were reasonable grounds for not issuing a closure notice at that point. The taxpayers’ application for a closure notice was therefore dismissed. As far as HMRC’s enquiries into personal expenditure were concerned, the Commissioner said: “If the Applicants had kept better records such investigation would not have been necessary, but I can see no other way of verifying the accounts.”
Sting in the tail
It is worth noting a few points about closure notices generally. Firstly, a tribunal may refuse an application for an enquiry to be closed immediately, but may specify a time period in which HMRC must conclude its enquiries, as in the Estate 4 case. Secondly, the refusal of an application does not prevent the taxpayer from making another closure application later on, if it is felt that HMRC are prolonging the enquiry unnecessarily. Thirdly, even if the tribunal does direct that an enquiry is closed immediately, that is unlikely to be the end of the story. HMRC will assess any additional income or gains based on its conclusions at the point where the enquiry is closed. HMRC’s conclusions may be incomplete and/or incorrect, and a subsequent appeal may involve (another) hearing before the tribunal.
Finally, remember that HMRC’s recently enhanced range of powers includes powers to inspect business records and premises (FA 2008, Sch 36). This is a tactic which HMRC could employ in some cases where a closure notice application is being considered.
This article is accredited to Mark McLaughlin for the ICPA
Mark McLaughlin CTA (Fellow) ATT TEP