We are often asked by advisors to assist them in closing down long-running enquiries by HMRC.  A key weapon in the taxpayers’ armoury is the right to apply to the Tribunal for a direction that HMRC issue a closure notice within a specified period. Such an application will normally be made in circumstances where a taxpayer is of the view that he has provided HMRC with all necessary materials and information. 

In the recent case of Estate 4 Limited v. HMRC [2011] UKFTT 269(TC) the First-tier Tribunal was of the opinion that there was ‘no basis for continuing to make further enquiries’ and granted the taxpayer’s application.

The facts in this case can be stated shortly. In December 2009, HMRC issued a notice under para 24(1) schedule 18 FA 1998 in respect of Estate 4′s return for the year to 31 December 2007.  The accounts showed turnover of £197,000 and directors’ salaries of £116,500.

HMRC became aware that a property in Howick Place, London, had been purchased by a company for £19.5 million and suspected that Estate 4 and one of its directors, Mr Alessandro Crivelli, had an interest in the site and were involved in its development.  As Estate 4′s return did not reflect a project on this scale, HMRC began to investigate the company’s affairs.

In 2005 Mr Crivelli had identified Howick Place as a suitable site to develop for living and working space for creative individuals.  The property was purchased by Fabbriche Ceramiche Investments SARL (‘FCI’), a Luxembourg company. Mr Crivelli held shares in the parent company of FCI. 

HMRC’s concern was that the only source of income shown by the directors in their personal tax returns was their salary from Estate 4.  HMRC considered that this was not sufficient to meet Mr Crivelli’s known expenditure; for example he had purchased another property in March 2007 for £5.25 million and had taken a lease of a further property at an annual rent of £200,000.  Mr Crivelli’s explanation was that he had placed €11 million in a Zurich bank account and had been able to draw on this capital as opposed to remitting income back to the UK, which would have had to have been included as income in his UK tax return.

HMRC wrote to Mr Crivelli’s accountants requiring information on the financing of Estate 4 and whether Mr Crivelli, or Estate 4, was acting as the UK permanent establishment  through which FCI carried on its property trade in the UK.  HMRC also requested information in connection with the directors’ bank statements relating to the year to 31 December 2007.

This request was resisted by the taxpayer’s tax advisors.  Mr Crivelli’s advisors argued that the scope of the enquiry was limited, under paragraph 25 schedule 18 FA 1998, to anything contained in the return and did not permit HMRC to ask general questions about the possible tax liabilities of other persons.  In any event, FCI was subject to a separate HMRC enquiry and was answering questions put to it by HMRC to the best of its ability.

The Tribunal found that the effect of paragraph 33(3) schedule 18 FA 1988 was to place on HMRC the burden of satisfying the Tribunal that a direction for a closure notice should not be given.  The Tribunal said:

“However desirable it may appear to an officer of HMRC that an enquiry should be continued, the test to be applied by the Tribunal is whether on an objective view it is appropriate for a closure notice to be issued.  This involves close scrutiny of the questions put to the taxpayer and its advisors, the information provided in response and its adequacy, and the extent to which it appears to the Tribunal that further enquiry would produce information enabling the company’s corporation tax liability to be adjusted to a level differing from that shown in the return.  Whereas an officer of HMRC may feel able to follow a suspicion (or a number of suspicions) in pursuing an enquiry, the Tribunal can only consider objective justification.  If on balance the Tribunal is not satisfied that such justification has been provided, it  must direct the issue of a closure notice.”

The Tribunal concluded:

“In order for us to have been satisfied to the contrary, we would have needed to have been persuaded that Alessandro Crivelli’s explanation as to his financial resources was not adequate.  None of the evidence presented to us was sufficient to draw us to such a conclusion.”

A common difficulty faced by taxpayers and their advisors in the course of an enquiry is limiting the scope of HMRC’s enquiry to issues that are relevant to the taxpayer the subject of the enquiry. In company enquiries the level of directors’ remuneration can be a legitimate area of concern for HMRC as the level of such remuneration may directly impact on the profits and therefore the tax payable by the company.  However, HMRC are not permitted to simply embark on a ‘fishing expedition’ for information and documentation that is not directly relevant to their enquiry. If they do attempt to expand their enquiry the availability of an application to the Tribunal for a closure notice is a very useful weapon which can be deployed in appropriate circumstances.

A further thing to note from this case is the importance of marshalling the facts at the earliest possible stage of an enquiry and presenting these to HMRC. In this case, Mr Crivelli was well advised and produced evidence to close down the line of enquiry by HMRC that his financial resources were not adequate to sustain his lifestyle.  It is important to remember that when dealing with HMRC it often pays dividends to be proactive. Taxpayers do not have to simply sit back and react to HMRC, they can seize the initiative and progress matters through to determination.