If you are a rugby fan, you will know that the wording of the referee's question to the TMO is crucial: if he asks 'is there any reason why I can't award the try?’ and the TMO pictures are inconclusive, the try will be awarded. If he asks 'should I award the try?’ and the TMO pictures are inconclusive, the try will not be awarded.
In the case of Easinghall Ltd v Revenue and Customs Commissioners ( UKUT 0105 (TCC)), the exact question that was being asked was equally crucial. The Upper Tribunal ruled that HMRC must close their enquiry into a company’s tax return. The decision was made on the basis that, in its discovery assessment, HMRC had addressed the question of whether the company's business profits had been understated and it couldn't subsequently open an enquiry into the same point.
The decision overturns that of the First Tier Tribunal which had concluded that, in conducting its discovery assessment, HMRC had asked a more narrow question and the subsequent enquiry could therefore continue.
HMRC opened an enquiry into Easinghall Ltd’s tax return for the year 2010/2011. The enquiry was conducted by HMRC officer, Mr Laurie, who concluded that the company had understated its profits for the period, basing his decision on information he had obtained from the company’s supplier. He amended the calculation of the company’s profits and the corporation tax due.
By the time the decision was made, Easinghall had submitted its tax return for the next year, 2011/12. Mr Laurie considered it was likely that the company had understated its profits and its tax liability for 2011/2012 in the same way, although he did not have any direct evidence to show this. He relied on the “presumption of continuity” which presumes that a situation continues unless there has been a change.
Mr Laurie could have opened an enquiry into the 2011/2012 tax return as he was within the time limit to do so. Instead, he issued a discovery assessment on the basis that the company had carelessly or deliberately brought about an underassessment of tax. Mr Laurie also imposed penalties for both years 2010/2011 and 2011/2012.
Easinghall appealed against the amendment to its 2010/2011 tax return, against the discovery assessment and against the imposition of penalties. Another HMRC officer, Mr Musgrove, conducted a review of the decisions and concluded that the tax liability for 2010/2011 had been incorrectly calculated and should be reduced and the penalty reduced accordingly. With regards the 2011/2012 tax year, he wrote in his letter to Easinghall that there was insufficient evidence to support the amount assessed and the assessment and penalty should therefore be cancelled, reducing the liability to nil.
Unsurprisingly, Easinghall did not appeal against the decision in relation to the 2011/2012 tax year and, according to the Taxes Management Act 1970, the matter was therefore treated as having been settled by agreement with the same consequences as if the tribunal had determined the matter. However, a week later, Mr Laurie opened a new enquiry into Easinghall’s 2011/2012 tax return and, in particular, into whether Easinghall’s business takings had been under-reported. Easinghall made an application to the First-tier Tribunal for a direction that HMRC close the enquiry.
The Decision of the First Tier Tribunal
The First Tier Tribunal ruled that it was open to HMRC to continue the enquiry. It determined that, although there had been an agreement and the subject matter of that agreement could not be re-opened, the agreement was limited to the question of whether there had been sufficient evidence to show that there was an understatement of business takings.
According to the First Tier Tribunal, the agreement did not cover the wider question of whether there had been an understatement of business takings.
The Decision of the Upper Tribunal
The Upper Tribunal re-examined whether HMRC should be ordered to close the enquiry and decided that the First Tier Tribunal had erred in its decision to allow HMRC to continue.
Mrs Justice Rose considered the relevant legislation and the wording of the letter that Mr Musgrove had sent to Easinghall. She decided that the conclusion of the review by Mr Musgovre must be treated as an agreement between HMRC and Easinghall, and the subject matter of that agreement was whether Easinghall had understated its profits in the 2011/2012 tax year.
As HMRC had already made an agreement on this point, it was not open to them to assert again that Easinghall had understated its business profits and the enquiry should therefore be closed.
Although the taxpayer was successful in this case, it shows that (unlike rugby referees) HMRC are willing to re-open matters that have seemingly already been concluded. The wording of any agreement or deemed agreement with HMRC should be carefully considered as its scope may be narrower that one might at first assume.
Mrs Justice Rose pointed out that if any other element of Easinghall’s return (other than whether business takings had been understated) had been questioned by HMRC, Easinghall would not have been able to rely on the agreement.