In Towers Watson Limited v HMRC [2017] TC06241, the First-tier Tribunal (FTT) has held that HMRC cannot raise a new matter which was not covered in the closure notice which it had issued to the appellant company.

Background

Towers Watson Ltd (the appellant) is part of the Willis Towers Watson group (the Group). The principal activities of the appellant are the provision of actuarial services, advice on employee benefits, human capital strategies, benefits administration, investment consulting, insurance and financial services consulting.

On 1 February 2011, the appellant acquired the trade and assets of EMB Consultancy LLP and EMB Software Managements LLP (the EMB LLPs) for £57,094,000, as part of the Group’s acquisition of the EMB Group. This transaction was recorded in the financial statements of the appellant for the year ended 30 June 2011. The goodwill attributable to the acquisition of the EMB LLPs was £51,157,000. The notes to the accounts provided that an amortisation rate of 20% would be applied to the goodwill arising from the acquisition of the EMB LLPs. The accounts were prepared on the basis of a 20% amortisation charge in relation to £51,157,000 ie £10,232,000. Goodwill amortisation was permitted as a deduction for corporation tax purposes; initially under Schedule 29, Finance Act 2002 and then under Part 8, the Corporation Tax Act 2009.

Following the filing of the appellant’s corporation tax self-assessment return for the period ending 30 June 2011, HMRC wrote to the appellant on 13 June 2013, informing the appellant that it intended to enquire into its tax return. In particular, HMRC took issue with the appellant seeking to charge a full year’s amortisation in the year of acquisition. In HMRC's view, only 5 months’ amortisation should have been included in the year of acquisition. Following protracted correspondence between the parties, on 16 February 2016, HMRC issued a closure notice to the appellant reflecting HMRC's position as set out above.

The amendment made to the appellant's corporation tax self-assessment return resulted in an additional tax liability of £1,641,464.

The appellant appealed the closure notice and amendment to the FTT.

The appellant argued that HMRC's closure notice and the scope of the appeal related to the method of amortisation only, whereas HMRC's view was that the closure notice encompassed the value of the goodwill.

FTT decision

The issue before the FTT concerned the scope of the appeal. The substantive appeal itself will be determined at a later hearing.

The appellant's application was allowed.

The appellant argued that HMRC's conclusion, as set out in the closure notice, limited the scope of the appeal. The conclusion only dealt with the method of amortisation, and in particular whether it was correct to charge a full year’s amortisation in the year of acquisition as opposed to 5 months amortisation (“the 5/12ths issue).

The parties produced expert opinion. HMRC’s expert did not limit his deliberations to whether a full year’s amortisation could be claimed, he also sought to provide an opinion on the valuation of goodwill.

The leading authority in this area is the Supreme Court decision in Tower MCashback LLP1 v HMRC [2011] UKSC 19, and the position was conveniently summarised by the Court of Appeal in Fidex Ltd v HMRC [2016] EWCA Civ 385, as follows:

a) The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions.

b) What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions.

c) The closure notice must be read in context in order properly to understand its meaning.

d) Subject to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice.

The FTT said that although the construction of a closure notice should not be narrow, it should not be stretched in the manner HMRC sought. In the view of the FTT, a reasonable recipient of the closure notice would not have understood it to encompass a challenge to the valuation of the goodwill. The FTT therefore held that the scope of the appeal was limited to the conclusion stated in the closure notice, namely, that charging a full year’s amortisation in the year of acquisition did not comply with generally accepted accounting principles (GAAP). The conclusion in the closure notice, and therefore the scope of the appeal, did not extend to the question of whether the valuation of the goodwill, upon which the amortisation was carried out, was in accordance with GAAP.

Comment

This case provides helpful confirmation that the scope and subject matter of an appeal to the FTT are defined by the conclusions stated by HMRC in its closure notice and by the amendments required to give effect to those conclusions. HMRC cannot raise new issues for determination. Only those issues encompassed in the closure notice can be determined by the FTT.

A copy of the decision can be viewed here.