An extract from The Tax Disputes and Litigation Review, 8th Edition
Commencing disputesi Corporation tax
The usual way in which a tax dispute arises, in the context of corporation tax, is with the filing of a tax return. A company is required to provide a self-assessment of its corporate tax liability on delivering a tax return. Most claims for relief must be made in the tax return, although it may be possible to claim for a relief, allowance or repayment separately within specified time periods.
Commonly, returns must be filed within 12 months of the end of the accounting period for which the return is made. Companies must file their returns, accounts, computations and any claims for relief via HMRC's online Corporation Tax service save for exceptional circumstances. A company may also, by notice to HMRC within 12 months of the filing date, amend its own return.
HMRC has a period of 12 months from the date the return was delivered to issue a notice of enquiry, with provisions to deal with returns that are filed late. An enquiry may relate to anything that is contained in or is required to be contained in the self-assessment return. This includes questions regarding any claim or election in the return and questions about any amount that might affect the tax liability of the company or another company, in that accounting period or another accounting period. HMRC can make only one enquiry into each tax return, unless the company has made subsequent amendments to the return. If HMRC is otherwise out of time to issue a notice of enquiry into the original return, the scope of enquiry is limited to the amended content. The scope of enquiry would also be restricted if the amendment giving rise to the enquiry consisted of the making or withdrawing of a claim for group relief.
There is no maximum duration set for an enquiry and HMRC is entitled to maintain an enquiry as long as it still reasonably requires information relevant to the company's tax position. Subject to the options discussed below, generally the taxpayer must await the conclusion of the enquiry before it can take any steps to commence litigation. An enquiry is completed once HMRC issues what is now termed a final closure notice. HMRC may only issue a final closure notice once it has reached a conclusion on all areas of dispute within an enquiry. The Court of Appeal has held that HMRC must carry out the following steps to validly issue a closure notice:
- decide whether to complete its enquiry;
- establish whether amendments need to be made to the self-assessment return and, if so, what they should be; and
- communicate the completion of the enquiry and the conclusions to the taxpayer.
Following consultation exercises in 2014 and 2015, provisions to enable 'partial closure notices' were introduced in Section 63 of, and Schedule 15 to, the Finance (No. 2) Act 2017. The new legislation allows HMRC and taxpayers to conclude discrete matters during an enquiry where more than one issue is in dispute. HMRC is able to issue a partial closure notice in agreement with a taxpayer, at its own discretion or when directed to do so by the First-Tier Tribunal on application by a taxpayer. HMRC's policy, however, is that partial closure notices should only be issued in serious or complex cases. The measure will supposedly give HMRC and taxpayers greater certainty about tax owed on individual discrete matters without having to wait for all matters in a tax enquiry to be resolved.
Closure notices, whether partial or final, only take effect once issued. Once a closure notice has been issued, HMRC cannot unilaterally withdraw it. A closure notice must state the officer's conclusions and what, if any, amendment is required to the return under enquiry to give effect to them. A final closure notice will take account of any partial closure notices and amendments to the return already issued. Taxpayers may appeal HMRC's conclusions and any amendments to the tax return within 30 days of being notified of the amendment.
If the taxpayer believes HMRC is unduly extending the enquiry (or certain parts of it), it can apply to the First-tier Tribunal for a direction that HMRC give a closure notice within a specified period. The Tribunal will give the direction unless it is satisfied that HMRC has reasonable grounds for not giving notice within the specified period. The powers of the First-tier Tribunal in determining an application for a closure notice are quite broad and in some circumstances it can be used as a mechanism to determine substantive legal issues in dispute and if necessary make a reference to the CJEU for a preliminary ruling on EU law. Enquiries should not be used as a method of obtaining information as to a third party's tax affairs. Alternatively, a taxpayer who believes that HMRC's actions have resulted in an unacceptable delay to the enquiry process may submit a complaint to HMRC.
Any question arising in connection with the subject matter of the enquiry while it is in progress may be referred to the First-tier Tribunal for determination while the enquiry continues, but only by agreement. Written notice of referral specifying the questions being referred must be given to the Tribunal jointly by HMRC and the company. The requirement of HMRC's consent to refer disputes for determination while an enquiry remains in progress renders this remedy of limited utility to the taxpayer. An enquiry can legitimately remain open for many years; for example, where the return might be affected by other pending litigation.
If, during an enquiry, HMRC forms the view that the amount of tax stated in the company's self-assessment is insufficient and that, unless it is immediately increased, there is likely to be a loss of tax to the Crown, HMRC may amend the company's self-assessment to make good the deficiency (a 'jeopardy amendment'). In doing so, HMRC can seek payment from a taxpayer without having to wait until it is ready to issue a closure notice. The circumstances likely to give rise to a jeopardy amendment include where a taxpayer intends to dispose of significant assets or become non-resident or insolvent.
Once a closure notice has been issued, HMRC has no power to amend the tax return other than to enforce the conclusions stated in the notice. However, if at the conclusion of an enquiry HMRC remains of the view that the original return is incorrect, it will issue a closure notice requiring the return to be amended. As mentioned, this notice can be appealed against, and this is the most common way in which tax disputes proceed to litigation.
Once the time limit for an enquiry has passed, or an enquiry has been closed, the only way in which HMRC can examine a chargeable period is through the discovery process. HMRC may issue a discovery assessment:
- when it becomes aware of the non-assessment of income or gains that ought to have been assessed;
- if an assessment is or has become insufficient; or
- if a relief given is or has become excessive.
If the taxpayer has submitted a tax return, HMRC's power is restricted by two conditions. First, a discovery assessment may only be made where the return was not made in accordance with 'practice generally prevailing'. Second, either the understatement must have been careless or deliberate, or HMRC could not reasonably have been expected to be aware of the understatement based on the information made available to it by the taxpayer at the relevant time. Similarly, if HMRC discovers that a return for an accounting period incorrectly states an amount that affects, or may affect, the tax payable for another accounting period or by another company, they may make a 'discovery determination' of the amount of tax due by the company based on the information available to the officer.
A taxpayer who disagrees with a closure notice, an assessment or other decision made by HMRC can appeal against it by giving notice in writing to HMRC, stating the grounds of appeal. The notice must normally be given within 30 days after the date of issue of the assessment or decision, although late appeals can be made in some circumstances.
Once a taxpayer has appealed, there are three main options:
- a different HMRC officer can carry out a review of the decision;
- the taxpayer may ask the Tribunal to decide the matter in dispute; or
- the appeal can be settled by agreement at any time.
Reviews are not compulsory and, where HMRC carries out a review but the taxpayer still disagrees with the decision, the taxpayer can ask the Tribunal to decide the issue or continue negotiations with HMRC to settle the appeal by agreement.ii Disclosure
During the course of an enquiry, HMRC may request that the taxpayer provide information and documents that are in that taxpayer's possession or power and that are relevant to its own tax position. If HMRC issues an information notice, the taxpayer must produce the information within such time, by such means and in such format as provided for in the notice. In relation to corporation tax enquiries, while the enquiry remains in progress, a company is entitled to amend its return, and to make or withdraw claims for group relief.
Unless the issue of the notice to provide information has received prior approval from the Tribunal, there is a right of appeal against it. However, this appeal does not extend to any information or documents that form part of a taxpayer's statutory records. An appeal must be made to HMRC, in writing and specifying the grounds of appeal, within 30 days of receipt of the notice. If a taxpayer fails to make an appeal within the normal time limit, an appeal can still be made if HMRC agrees or, where HMRC does not agree, the Tribunal gives permission.
Schedule 23 to the Finance Act 2011 introduced and extended a common set of information-gathering and inspection powers for HMRC covering income tax, capital gains tax, corporation tax and value added tax (VAT); these are also known as HMRC's 'bulk and specialist information powers'. HMRC may, by written notice (also known as a data-holder notice), require a 'relevant data-holder' to provide 'relevant data'. The objective behind these provisions is to improve HMRC's data-gathering processes to ensure that interventions are better targeted against those who underpay tax; for this reason, a data-holder notice must not be used to obtain information about the data-holder's own tax position. The data requested may be general data, or data specific to a particular person or matter including personal data. The type of information must be specified in the notice.
If Tribunal approval is not obtained for the issue of a Schedule 23 data-holder notice, the data-holder may appeal a notice on any of the following grounds: it would be unduly onerous to comply with the notice, the data-holder is not a relevant data-holder or the data specified in the notice are not relevant data.
There are four options for proceeding with an appeal:
- the appellant can require HMRC to review the matter in question;
- HMRC can offer to review the matter in question;
- the appellant can notify the appeal to the First-tier Tribunal for it to decide the matter in question; or
- the appeal can be settled by agreement between HMRC and the appellant.
Where the appellant requires HMRC to conduct a review, he or she can still appeal to the Tribunal if he or she disagrees with the review's conclusions, or if HMRC fails to complete a review within the required time.iii Other direct taxes
Virtually identical rules apply for other self-assessed taxes.iv VAT
For VAT, the onus is on the taxable person (i.e., the person registered for VAT) to file returns accounting for the VAT charged on and suffered in respect of any goods and services he or she supplies. In circumstances where HMRC disagrees with the content of a VAT return (or where the return has not been filed on time), it may issue an assessment to tax in respect of any VAT it considers owing. HMRC may also issue a default surcharge where a registered person has not filed their VAT return on time, or an inaccuracy penalty where they consider that a VAT return contains inaccurate information. Normally, HMRC will write to the taxable person in advance of issuing an assessment to highlight its concerns and provide an opportunity for that person to make representations to resolve the matter. In circumstances where the taxable person has sought a credit or refund of VAT, HMRC may either agree to the adjustment or issue a decision rejecting all (or some) of the amendments sought.
If the taxable person disagrees with all or part of an assessment or decision issued or made against him or her, he or she must appeal to HMRC within 30 days of the date on which the assessment or decision was issued or made. The taxable person may then either request an internal review (or accept an offer of one, if made) by HMRC, or notify his or her appeal to the First-tier Tribunal (Tax). If a review is requested, and the taxable person disagrees with the outcome of that review, he or she may still issue an appeal to the First-tier Tribunal (Tax), provided he or she does so within 30 days of the date of that review decision.
Where there are issues of public law, it may be necessary to seek redress by way of judicial review.v Stamp duty land tax
HMRC may investigate a land transaction return provided that it notifies the purchaser of its intention to do so within nine months of the filing date. The filing date is 30 days after the effective date of the transaction. Once the nine-month period ends, HMRC can still make a discovery assessment if the underpaid tax was caused by a deliberate or careless action by the taxpayer, or if the taxpayer did not provide sufficient information at the date of filing for HMRC to know that the tax was underpaid.vi Ruling procedures
Taxpayers can request guidance as to HMRC's interpretation of tax law and may also request a formal ruling from HMRC on specific facts and transactions, where appropriate. The Taxes Acts provide that advance clearance or approval may be given by HMRC, but only for certain types of transaction (e.g., clearance for a company purchase of its own shares).
HMRC will give a post-transaction ruling where there is doubt about the tax consequences of a transaction that has been carried out. The application must be made to the tax office dealing with the taxpayer's affairs.
Such a ruling is binding on HMRC provided all relevant information is supplied for the particular transaction concerned and in respect of the particular taxpayer. This applies even if there is a subsequent court decision. There is no appeal against a ruling as such, except where rights to appeal are set out in statute. The taxpayer is not, however, bound to follow it in completing its return. If HMRC does not accept the return, the issue can then be the subject of an appeal.