In the recent case of Mabbutt v HMRC  UKFTT 0306 (TC), the First-tier Tribunal (FTT) determined that HMRC had not given a valid notice of intention to enquire into the taxpayer's return because the purported notice of enquiry referred to tax year ended 6 April 2009, rather than 5 April 2009.
As no valid notice of enquiry had been opened the purported closure notice was ineffective and the taxpayer's appeal was allowed.
As readers will be aware, section 114, TMA 1970, permits HMRC and taxpayers to rely on assessments, determinations and other proceedings containing errors, provided the documents concerned are in substance and effect in conformity with the intent and meaning of the Taxes Acts. Documents will not conform with the substance and effect of legislation if the error is fundamental.
The taxpayer appealed to the FTT against a closure notice dated 1 July 2014, relating to the 2008/09 tax year (the Closure Notice). The Closure Notice assessed additional tax of £653,000 in relation to the taxpayer's participation in a DOTAS registered tax planning arrangement in that year.
HMRC purported to issue a notice of enquiry to the taxpayer on 17 January 2011, pursuant to section 9A, TMA 1970 (the Notice of Enquiry). The Notice of Enquiry stated that HMRC was opening an enquiry "for the year ended 6 April 2009". HMRC had intended to refer to the tax year ended 5 April 2009. A letter of the same date was also sent to the taxpayer's agent.
The taxpayer appealed against the conclusions stated in the Closure Notice on the basis that no valid notice of enquiry had been given as the tax year ended 6 April 2009 did not exist and accordingly, if there was no valid enquiry, there could not be a valid closure notice.
Question for determination
The question for determination by the FTT, was whether the Notice of Enquiry was valid? If it was, then the taxpayer's appeal against the conclusions contained in the Closure Notice would continue on the basis of argument as to the effectiveness of the DOTAS planning arrangements. If it was not, no enquiry would have been opened and as HMRC were out of time to raise a discovery assessment, the taxpayer's tax liability for the ended 5 April 2009, would be settled on the basis of the calculations set out in his tax return for that year and the appeal would be allowed.
The taxpayer argued that it was important that a taxpayer was able to understand into which return an enquiry under section 9A had been opened as important consequences flow from the opening of an enquiry. Accordingly, HMRC had to be precise with dates and section 114, which was relied upon by HMRC to validate the Notice of Enquiry, did not allow HMRC to overcome an error relating to the date as such an error was gross rather than minor. The taxpayer relied upon Baylis v Gregory  1 AC 398,in support of his arguments.
The taxpayer also referred to Lee and others v HMRC (2008) SpC 715, where it had been suggested that best practice would be to refer to the relevant return. It was argued that there must be sufficient detail to enable identification of the return in question, and that detail must be correct.
The taxpayer accepted that it was not necessary to explicitly refer to section 9A in opening an enquiry, but that the failure to refer to it hampered HMRC when they sought to apply section 114(1) because that subsection only applied to documents which purported to be sent pursuant to a provision of the Taxes Acts.
The Notice of Enquiry attempted to open an enquiry into a non-existent return. Accordingly, it could not have effect unless it was remedied by section 114, and that section was prescriptive as to the circumstances in which it applied, and as this case did not fall within those prescribed circumstances, the appeal should be allowed.
HMRC accepted that there was an error in the Notice of Enquiry, but it argued that the error was minor in nature and did not affect its validity. HMRC referred to the surrounding correspondence, particularly correspondence with the promoter of the tax planning, which suggested that it must have been clear to the taxpayer which return was under enquiry.
In addition, HMRC argued that the taxpayer would have known which return the enquiry was into as he had only filed one tax return as at 17 January 2011 and therefore the enquiry could only have been into that return.
HMRC relied upon Coolatinney Developments Ltd v HMRC  UKFTT 252 (TC) and Portland Gas Storage Ltd v HMRC  UKUT 0270 (TCC), in support of its submission that it was possible for more than one document to be taken together as the notice of enquiry, and that in the instant case there were two letters sent to the taxpayer on 17 January 2011, one addressed to the taxpayer and one addressed to his agent, and both formed the notice of enquiry. HMRC argued that the letter to the agent made it clear that the enquiry was into matters which took place in the year ended 5 April 2009, and therefore the taxpayer knew which return the enquiry was into.
As HMRC relied upon section 114(1) to correct the error in the Notice of Enquiry, the burden of proof was on it to satisfy the FTT that the legislation applied.
In the view of the FTT, in order for HMRC to rely upon section 114(1), the following four requirements had to be met:
- the subsection only applies to certain documents and the Notice of Enquiry must be within these categories;
- the Notice of Enquiry must purport to be made pursuant to a provision of the Taxes Acts;
- the Notice of Enquiry must be in substance and effect in conformity with, or according to the intent and meaning of, the Taxes Acts; and
- the person or property charged or affected by the Notice of Enquiry must be designated therein according to common intent and understanding.
It was accepted that the Notice of Enquiry was an assessment or determination, warrant or other proceeding, for the purposes of section 114(1). The FTT then considered the remaining three requirements.
In relation to the second requirement, the FTT concluded that it was clear from the Notice of Enquiry that HMRC intended to give notice that it would open an enquiry into a return, albeit a non-existent return, for the year ended 6 April 2009. In the view of the FTT, the professing of intention was sufficient for it to conclude that the Notice of Enquiry did purport to be a notice of enquiry into a tax return and was therefore made pursuant to a provision of the Taxes Acts.
In relation to the third requirement, the FTT concluded that HMRC must be accurate in relation to the essential elements of a notice of enquiry, even if the taxpayer would be capable of discerning HMRC's true intention despite a minor error. For a notice of enquiry to meet the requirements contained in section 9A, the return into which the enquiry will be opened must be stated accurately and with sufficient detail for it to be clear which return is intended. The detail as to the relevant return must be correct.
The return which was described in the Notice of Enquiry was for a tax year which did not exist. Accordingly, the FTT concluded that the Notice of Enquiry was not in substance and effect in conformity with the intent and meaning of the Taxes Acts.
In arriving at its conclusion, the FTT relied upon the Court of Appeal's judgment in Bayliss, in which HMRC had issued an assessment to capital gains tax for an incorrect year. HMRC had unsuccessfully argued in that case that section 114 saved the assessment, arguing that the taxpayer must have appreciated that it was a mistake and that there was no confusion as to the year intended. The FTT also referred to an earlier decision of the FTT in Sokoya v HMRC  UKFTT 163 (TC), where it was held that section 114 could not save a penalty notice which contained the wrong deadline for compliance.
With regard to the fourth requirement, the FTT considered that the person affected, the taxpayer, was designated according to common intent and understanding, as the phrase “person or property charged or intended to be charged or affected” cannot refer to anyone or thing other than the person whose return it is. The FTT did not consider that "property charged or affected" could be a reference to the tax return itself. As there was no error in the name and address of the taxpayer in the Notice of Enquiry, the taxpayer was designated in the Notice of Enquiry according to common intent and understanding.
In order for HMRC to be able to rely upon section 114 to cure the error contained in the Notice of Enquiry, it had to satisfy the FTT that all four of the requirements in section 114 were satisfied. Although the FTT was satisfied that three of those requirements were met, it did not agree that the Notice of Enquiry was in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts. HMRC's error resulted in a stated intention to enquire into a tax return for a year which did not exist and the substance and effect did not conform to the intent and meaning of the Taxes Acts. Without a valid notice of enquiry, there could be no enquiry and the Closure Notice was invalid and had no standing. Accordingly, the taxpayer's appeal was allowed.
Taxpayers are entitled to finality in their tax affairs. Section 9A requires notice of an intention to open an enquiry into a return to be given by HMRC and such a notice must be given within a certain period of time after the return in question has been filed. As the FTT made clear in its decision, it is implicit from this requirement that the notice must specify the return into which the enquiry will be opened as there is no other way in which a taxpayer receiving such a notice could know if the notice had been given within the time permitted by statute.
This case is a reminder that an essential element of a valid notice of enquiry is that the specific return into which the enquiry is made is accurately referred to. In the instant case, the stated return was for a non-existent tax year. The fact that the taxpayer could discern HMRC's intention despite the error is irrelevant if the notice does not refer to the correct year.
Taxpayers need to ensure that they carefully inspect any notice received from HMRC to make certain that HMRC has accurately stated the relevant tax year. The FTT has reaffirmed the need for accuracy on the part of HMRC and any such mistakes are likely to be considered fundamental and as such section 114 will not provide an escape route for HMRC.
A copy of the judgment can be found here.
This is based on an article which was published in Tax Journal on 22 July 2016.