In Eastern Power Networks Plc and others v HMRC [2017] UKFTT 494 (TC), the First-tier Tribunal (FTT) ordered HMRC to issue closure notices even though there were a number of outstanding information notices.

Background

The four applicants, Eastern Power Networks Plc, London Power Networks Plc, Southern Eastern Power Networks Plc and UK Power Networks (Transport) Ltd (the Applicants), were trading subsidiaries of a shell company, UK Power Networks Holdings Limited (UK Power). HMRC opened enquiries into the Applicants' Corporation Tax returns for the periods ended 31 December 2011 to 2013, inclusive. In those returns the Applicants had claimed consortium relief under section 133(2), Corporation Tax Act 2010 (CTA 2010). The tax at stake was £220,000,000.

When first incorporated, UK Power had three shareholders, Devin International Ltd (Devin), Eagle Insight International Ltd and CKI Number 1 Ltd (CKI1), who owned the company in equal shares. The three shareholders had some connection with the Hutchison Whampoa group (HWG), and were part of a consortium.

Hutchinson 3G UK Holdings Ltd owned Hutchinson 3G UK Ltd (Hutchison 3G), and both companies were also members of the HWG. Hutchinson 3G, provides mobile phone services under the 3 brand.

The surrendering company was Hutchinson 3G, who had sustained substantial losses when developing the 3G network in the UK. The 'link company', for the purposes of section 133(2) was CKI1. CKI1 was owned by CKI2, which was itself owned by CKI3. Devin was owned by an energy company, Hong Kong Electric Holdings (HEH), in which CKI1 also had an interest.

The consortium subsequently acquired the power transmission business of EDF, and underwent a restructure. The articles of UK Power were amended to the effect that: the CKI companies held 74.6% of the voting rights; the voting threshold to pass shareholder resolutions was increased to 75%; and CKI3 entered into an agreement with HEH under which it contracted not to exercise its votes in UK Power without the prior written consent of HEH (the Voting Agreement). At this point the consortium comprised CKI1, CKI2 and CKI3, each of which was now also a link company.

As part of its enquiries, HMRC issued information notices to UK Power and CKI3 in November 2015 and August 2016, under Schedule 36, Finance Act 2008.

HMRC was of the view that it needed the information requested in the information notices in order to establish whether the purpose of the restructuring was to obtain a tax advantage by exploiting the consortium relief rules and to verify the quantum of the relief claimed.

The Applicants argued that the information requested was not necessary in order to determine the issues between themselves and HMRC and applied to the FTT for a direction, pursuant to paragraph 33, Schedule 18, Finance Act 1998 (FA 1998), that HMRC issue closure notices in relation to the enquiries.

FTT decision

The FTT granted the application and directed that HMRC issue a closure notice within 30 days of the date of the FTT's decision.

The FTT rejected HMRC's submission that the mere existence of outstanding information notices prevented the issue of a closure notice. The closure notice procedure provides protection for a taxpayer seeking finality in his tax affairs and Parliament could not have intended that this could be automatically negated by HMRC issuing an information notice.

In the FTT's view, consent given by the Applicants in relation to the third party information notices did not amount to an admission that the information sought was reasonably required. The consent was given under sufferance, and had been designed to allow the Applicants to challenge the notices at a hearing before the FTT. If they had not given their consent, HMRC would have sought approval from the FTT to issue the third party information notices, in which case the Applicants would be limited to making representations as there is no right of appeal against such notices.

The FTT concluded that questions in the third party notices relating to the Voting Agreement did not constitute reasonable grounds for not closing the enquiries. Whether the Voting Agreement deprived CKI3 of its voting power was a question of law (section 144(3)(d), CTA 2010) and the proper place to determine that issue was at a substantive appeal hearing.

Finally, the FTT held that the request for information in relation to the purpose of the restructuring in relation to section 146B did not constitute reasonable grounds for not issuing a closure notice. This was because the purpose test in section 146B was only relevant if certain criteria were met. The CKI companies could not be prevented from exercising control over the Applicants on consideration of either the Voting Agreement or the increase in the voting threshold to 75%. The criteria was not therefore satisfied and the purpose test did not apply.

Comment

This decision is a timely reminder of the utility of a well formulated closure notice application to the FTT.

It is not uncommon for HMRC to seek to continue with its enquiries notwithstanding the fact that it has been supplied with sufficient information and documentation to enable it to form a view on the underlying facts and close its enquiries. In such circumstances, taxpayers should give serious consideration to making an application to the FTT for a direction, pursuant to paragraph 33, Schedule 18, FA 1998, that HMRC closes its enquiry.

Taxpayers will also welcome the confirmation from the FTT that it can, and will, order HMRC to issue a closure notice in appropriate circumstances even though HMRC has issued an information notice which has not been complied with.

A copy of the decision can be found here.