When might it be appropriate to apply to the First-tier Tribunal for a direction for HMRC to close an enquiry?
The self-assessment tax regime is built around a system known as ‘process now, check later’. In other words, HMRC will generally process a taxpayer’s self-assessment return as submitted, but has the power to subsequently open an enquiry into the return within statutory time limits.
An HMRC enquiry into a self-assessment return can be a long, time-consuming process. This can sometimes cause anger and frustration, with the taxpayer (or adviser) perhaps considering that HMRC is unduly prolonging the enquiry, or possibly that the HMRC officer is on a ‘fishing expedition’ by extending the scope of the enquiry into new areas.
Fortunately, there is an important protection available to taxpayers in such circumstances. The legislation dealing with closure notices by HMRC at the completion of enquiries into personal or trustee returns is in TMA 1970, s 28A. This includes a facility for taxpayers to apply to the tribunal for a direction requiring HMRC to issue a closure notice within a specified period (s 28A(4)). There is a similar statutory protection in respect of HMRC enquiries into the tax returns of partnerships (TMA 1970, s 28B(4)) and companies (FA 1998, Sch 18, para 33).
If the taxpayer requests that the tribunal issues a closure notice, HMRC must convince the tribunal that there are reasonable grounds for the enquiry to be allowed to continue. Otherwise, the legislation requires the tribunal to direct that HMRC issues the closure notice within a specified period (TMA 1970, s 28A(6)).
Not so fast!
A taxpayer (or adviser) can apply to the tribunal for a closure notice at any time following the commencement of the enquiry (EM1976). It may therefore be tempting for taxpayers to seek a closure notice early on in the HMRC enquiry.
However, this temptation should generally be resisted. There have been a number of cases in which tribunals have turned down applications by taxpayers for closure notices (e.g. BJH Building & Plumbing v HMRC  UKFTT 60 (TC); S Price v HMRC  UKFTT 624 (TC)).
There is nothing to stop the taxpayer applying to the tribunal for a closure notice on more than one occasion in respect of the same HMRC enquiry. As mentioned, this puts the onus on HMRC to show the tribunal why the enquiry should be allowed to continue on each occasion. However, if the tribunal considers that the applications are premature they will be dismissed, and there are potential time and cost implications to consider in making an application.
If the tribunal does decide that HMRC should issue a closure notice, it will specify a time period for HMRC to do so. The legislation doesn’t stipulate any particular timeframe. In practice, the time period specified for closing the enquiry will vary, depending on the particular circumstances of the case.
For example, in Bloomfield v Revenue & Customs  UKFTT 593 (TC), HMRC opened an enquiry into the taxpayer’s return for 2007/08 on 25 January 2010. The tribunal hearing took place on 3 October 2013, so the HMRC enquiry had been in progress for well over three years. The tribunal took into account a number of factors, including the length of time the enquiry had been in progress, the degree of cooperation from the taxpayer and the information which remained outstanding for HMRC to complete the enquiry. The tribunal directed that HMRC should issue a closure notice within 30 days, on the basis that this would allow HMRC’s enquiries to be concluded.
On the other hand, in Khazenifar v Revenue & Customs  UKFTT 752 (TC), HMRC opened an enquiry into the taxpayer’s return for 2009/10 on 12 January 2012. The tribunal hearing took place on 13 November 2013. HMRC was seeking certain information from the taxpayer to continue the enquiry. The tribunal decided that HMRC had reasonable grounds for not issuing a closure notice straightaway, but directed that HMRC must do so within the following six months.
Subsequently, in Khan v Revenue & Customs  UKFTT 18 (TC), HMRC opened an enquiry into the taxpayer’s 2009/10 tax return on 15 June 2011. There were certain unusual features in this case. For example, the taxpayer sent the originals of certain documents to HMRC in response to a request for information. HMRC apparently mislaid the taxpayer’s records. In addition, the tribunal criticised HMRC for its “poor administration” of the case. However, the tribunal was also somewhat critical of the taxpayer, indicating that his responses to HMRC's requests for information had “frequently not been adequate or timely.” The tribunal held that the enquiry should be concluded within nine months.
The tribunal in Khan made some interesting comments about HMRC enquiries, and about striking a balance between the rights of the taxpayer and HMRC. The tribunal judge said:
“An enquiry of this nature ought to be capable of being completed within two years, and the tribunal must guard against it becoming a fishing expedition by the Revenue in the hope of justifying the time already spent. That said, it is also the tribunal’s task to safeguard the public interest in the payment of the correct amount of tax, which involves detailed calculations and enquiries being undertaken.” He added:
“On the one hand, the Revenue must not be constrained to close an enquiry when there is genuinely significant information which needs to be provided but, on the other hand, there is unlikely to be any ultimate prejudice to the public interest in placing a reasonable limit on the extent of the enquiry, since in any eventual amendment to his self-assessment return the taxpayer has an unrestricted right of appeal in regard to everything relevant to the year under enquiry, and he bears the burden of displacing the Revenue’s assessment.”
Points to note
There are one or two further points to note in respect of applications to the tribunal for closure notices.
First, if the tribunal upholds the taxpayer’s application and directs HMRC to issue a closure notice, HMRC can appeal against the tribunal's decision. On the other hand, the taxpayer can appeal against the tribunal's decision not to give a direction for a closure notice (EM1990).
Secondly, even if the tribunal directs HMRC to issue a closure notice straightaway, the taxpayer’s problems are unlikely to end there. The closure notice will set out HMRC's conclusions at the point where the enquiry is ended. If HMRC has no information or grounds for amending the taxpayer’s return, the closure notice will state that there are no amendments to the original self-assessment. However, if the return is amended, HMRC's conclusion in the closure notice could be based on incomplete information, in which case any amendment to the taxpayer’s return may be inaccurate. Additional tax (and possibly penalties) could therefore be wrongly charged, which may result in an appeal and potentially another hearing before the tribunal.
Thirdly, HMRC's Enquiry manual states that if a taxpayer applies to the tribunal for a closure notice (or is considering applying for one), HMRC's enquiry officer should consider whether to offer alternative dispute resolution (ADR) to the taxpayer (EM1976). ADR is broadly a voluntary procedure for resolving tax disputes in compliance checks if appropriate, whereby a trained mediator from HMRC who was not previously involved in the case mediates between the taxpayer and the HMRC officer dealing with the case with a view to reaching an agreement between them. The attraction of ADR is that it may help to resolve any disputes between the taxpayer and HMRC in the enquiry without a tribunal hearing; if the dispute cannot be resolved, the taxpayer could still go to the tribunal. ADR is therefore potentially helpful, and should be considered in appropriate cases. Further information on ADR is available on HMRC’s website (www.hmrc.gov.uk/complaints-appeals/how-to-appeal/adr.htm).
Finally, HMRC’s information powers (in FA 2008, Sch 36) include the power to inspect business records and premises during the course of an enquiry (Sch 36, para 21(4)). It should be borne in mind that HMRC could seek to use these powers in cases where the taxpayer is considering an application to the tribunal for a direction that HMRC should issue a closure notice.
Mark McLaughlin CTA (Fellow), ATT (Fellow), TEP