Tax analysis: we welcome the new rules on partial closures of tax enquiries and point out that the inflexibility in the current enquiry framework can lead to complex or multi-issue tax disputes taking an excessive amount of time to be resolved.
This article was first published on Lexis®PSL Tax on 19 December 2016.
Government publishes draft Finance Bill 2017 legislation, LNB News 05/12/2016 73
The government published draft tax legislation on 5 December 2016 for inclusion in Finance Bill 2017. Consultation on the draft legislation will run until 1 February 2017.
Can you remind us of the history of the previous consultation on partial closures of tax enquiries?
Under the current rules, HMRC may only close an enquiry when it has reached a conclusion on all areas of the return under enquiry. While HMRC and the taxpayer may jointly agree to refer certain issues to the Tribunal for resolution before the enquiry is completed, the Tribunal's determination (though binding) is not effective until reflected in the closure notice. Accordingly, any tax payable is not due until after the closure notice has been issued.
At Autumn Statement 2014, the government announced that there would be a consultation on a new power to enable HMRC to close one or more aspects of a tax enquiry while leaving other aspects open.
On 18 December 2014, HMRC published a consultation paper setting out proposals to amend the tax return enquiry closure rules to enable HMRC to close one or more aspects of a tax enquiry while leaving others open. HMRC noted that it would target the power at cases or issues involving significant tax under consideration or involving issues which are novel, complex or had a wider impact, which could include tax avoidance arrangements. Responses were invited by 12 March 2015.
On 28 September 2015, HMRC published responses to the consultation. In summary, there was overwhelming disagreement by respondents with the suggestion that HMRC should be able to use the proposed changes unilaterally. It was felt that the taxpayer should also have the same opportunity. There was also concern there were not sufficient safeguards in place to ensure the power was used appropriately by HMRC.
How do the draft Finance Bill 2017 provisions work
The measure allows conclusion of discrete issues in an enquiry into a self-assessment, or corporation tax self-assessment where one or more issues are open. Under the proposed legislation, HMRC will be able to issue a Partial Closure Notice (PCN) at its own discretion or with the agreement of a taxpayer, once any discreet issue can be resolved although other issues may remain under enquiry. Taxpayers can also apply to the Tribunal for a PCN.
A PCN will almost always be followed by HMRC making an amendment to a tax return which will generally mean more tax is claimed. Where HMRC issues a PCN and amends a tax return, as a safeguard, taxpayers will have a right to appeal a PCN and ask for payment of the tax to be postponed.
The draft legislation makes provision for PCN's via consequential amendments to the Taxes Management Act 1970 and the Finance Act 1998.
HMRC has advised the issue of PCN's will remain focused on enquiries where the taxpayer's affairs are complex or where there is avoidance or large amounts of tax at risk.
The government has advised in their Tax Information and Impact Note (TINN), published with the draft legislation on 5 December 2016, that the issue of PCNs by HMRC will be overseen by existing governance procedures, for example, the Dispute Resolution Board. HMRC are yet to publish guidance on the use of PCNs so the extent of the safeguards is not yet known.
How do the provisions differ from the earlier proposals?
The mechanism to achieve a partial closure differs markedly from the earlier proposals. In the initial consultation, HMRC proposed that the enquiry would progress as it currently does up until the joint referral to the Tribunal stage. If the taxpayer did not want a mutual referral, HMRC could make a sole referral to the Tribunal which would result in a 'Tribunal Referral Notice' being issued. The taxpayer would then have 30 days to appeal against the Notice. The Tribunal would then hear HMRC's application. If HMRC were successful, a 'Tribunal Referral Closure Notice' would then be issued. Following the consultation, HMRC have not pursued the 'Tribunal Referral Notice' route and the new legislation adopts the PCN process set out above.
In the initial consultation, HMRC proposed they would unilaterally decide whether to partially close an aspect of an enquiry while leaving others open. In response to comments made during the consultation process, the government has changed this so a taxpayer can also apply for a PCN. HMRC will be able to issue a PCN either at its own discretion, in agreement with a taxpayer, or when directed to so by the First-tier Tribunal following an application by a taxpayer.
In the consultation, HMRC also sought to extend its limited "jeopardy" powers to amend self-assessment returns during the enquiry, but little detail was given about this proposal and it has not been included in the draft Finance Bill 2017.
Are the new rules welcome, and do you foresee any practical difficulties?
The new rules are welcome. The inflexibility in the current enquiry framework can lead to complex or multi-issue tax disputes taking an excessive amount of time to be resolved.
Under the current rules, there is no time limit within which HMRC must conclude an open enquiry. If issues cannot be settled with HMRC and matters need to be litigated, the longer the period from the time the relevant transactions took place, the harder it is to locate documents, witnesses cease to be available and memories fade, which can make it more difficult for there to be a fair hearing of the issues in dispute.
HMRC has not yet published detailed guidance in relation to the new rules, therefore, we are not yet aware of the extent of the safeguards in place to protect taxpayers which was a major concern of many respondents to the earlier consultation.
If a taxpayer has to apply to the First-tier Tribunal for a PCN because HMRC have refused to issue a PCN, this will take time and is likely to lead to the incurring of costs by the taxpayer. We have in recent months seen an increase in applications to the First-tier Tribunal for a closure notice direction and under the new proposals we anticipate a large number of applications for PCNs.This is likely to lead to an overall surge in appeals to the First-tier Tribunal with a consequential delay before the substantive hearing is heard.
In what circumstances might HMRC seek partial closure of an enquiry?
HMRC indicated during the consultation process they intend to seek partial closure in complex cases where there is significant tax at stake and long running issues are preventing final resolution of simpler issues, thwarting their ability to collect the tax in relation to settled issues. HMRC referred to international issues involving transfer pricing, double taxation or enquiries regarding tax avoidance with multiple issues spanning several years, as examples of long running issues. HMRC also noted during the consultation that the new rules would act a deterrent to serial tax avoiders who they consider use the current inflexible enquiry framework to achieve a cash flow advantage by creating complex interactions to delay HMRC's determination of the issues.
It is anticipated HMRC will mainly use the power where it would expect earlier payment of tax in respect of particular aspects of an enquiry they have dealt with where the Accelerated Payment regime does not apply.
In what circumstances might a taxpayer, rather than HMRC, seek partial closure?
As noted above, the current legislation does not provide a time limit by which HMRC is required to conclude an enquiry, and it is not uncommon for enquiries to become protracted, resource intensive and costly for taxpayers. There will be occasions when a taxpayer decides that an enquiry has gone on for long enough and wishes to bring it to an end. The new rules will provide a mechanism for the taxpayer to achieve closure in relation to specific discrete issues.
In enquiries involving a large number of taxpayers who have one particular common issue of the enquiry, some of whom have other issues within HMRC's open enquiries, under the current rules, if a joint referral cannot be agreed with HMRC, those taxpayers with other open issues are not able to have their dispute in relation to the common issue determined by the First-tier Tribunal. If the other taxpayers who have received closure notices proceed to the First-tier Tribunal, those that still have open enquiries are not able to benefit from the lead case provisions within Rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, that those taxpayers may secure. Obtaining a PCN will enable such taxpayers to benefit from the Rule 18 lead case procedure.
When do the changes take effect?
The measures will have effect from Royal Assent of the Finance Bill 2017 and will apply to all enquiries open at the time, and any future enquiries.