Closure notices and the appeals process

In this blog (which is based on an article published in Tax Journal on 29 May 2024), we consider the process by which a taxpayer can appeal against a closure notice issued by HMRC.

Introduction

Historically, taxpayers have not taken the initiative in bringing long-running enquiries to an end. However, increasingly, taxpayers are adopting a more proactive approach and are seeking an appropriate direction from the First-tier Tribunal (FTT) requiring HMRC to issue a closure notice within a specified period. An enquiry is completed when HMRC issue a closure notice informing the taxpayer that they have completed their enquiries and stating their conclusion. We consider below, the process by which the FTT can compel HMRC to close its enquiry, HMRC’s internal review procedure and prosecuting an appeal before the FTT, with a focus on the provisions concerning enquiries and appeals in respect of income tax.

Closure notice applications

Where a taxpayer considers that HMRC has sufficient information and an enquiry has become protracted and HMRC is refusing to issue a closure notice, there is a statutory process whereby the taxpayer can apply to the FTT for a direction requiring HMRC to close its enquiry and issue a closure notice within a specified period. Section 28A, Taxes Management Act 1970 (TMA), relates to the completion of enquiries into personal or trustee returns, while the equivalent provisions in relation to partnerships and companies are contained in section 28B, TMA and paragraph 33, Schedule 18, Finance Act 1988,  respectively.

The purpose of the statutory right of a taxpayer to apply to the FTT for a direction requiring HMRC to issue a closure notice, is to provide some protection against enquiries that are left open without good reason (Jade Palace Ltd v HMRC [2006] STC (SCD) 419). Significantly, the legislation provides that the FTT ‘shall’ direct that HMRC issues a closure notice within a specified period unless satisfied that there are ‘reasonable grounds’ for not issuing a closure notice. There is therefore a presumption that an application should be granted unless HMRC is able to demonstrate (on a balance of probabilities) that there are reasonable grounds to refuse the application. The burden of proof in any such application is therefore on HMRC.

The view that an enquiry has gone on for too long is one that the FTT is entitled to reach in its overall evaluative judgement as to whether an enquiry should be brought to a close. This was most recently confirmed by the Upper Tribunal in HMRC v Hitchins [2024] UKUT 114 (TCC). A closure notice application should be considered in circumstances where the taxpayer considers that HMRC is in possession of all necessary information and documentation to enable it to reach a conclusion, conclude its enquiries and issue a closure notice. The longer the period of the enquiry, the greater the burden on HMRC to show reasonable grounds as to why a time for closure should not be specified (Jade Palace Ltd (supra)). However, the more complex the affairs of the taxpayer, the more detailed, wide-ranging and, in practice, the longer the enquiry is likely to be, before HMRC is in a position to reach the conclusion required to issue a closure notice (Eclipse Film Partners No 35 LLP v HMRC [2009] STC (SCD) 293).

The FTT has noted that it is implicit that a closure notice might be required, notwithstanding that HMRC has not pursued every possible line of enquiry. Rather, what is required is that HMRC should have conducted its enquiries to a point where it is reasonable to make an informed judgement as to the matter in question (Collinson v HMRC [2010] UKFTT 165 (TC)). The FTT has also confirmed that it may be appropriate to order a closure notice without full facts being available to HMRC where, for instance, HMRC has unreasonably protracted the enquiry (Steven Price v HMRC [2011] UKFTT 624 (TC)). In Jörg Märtin v HMRC [2017] UKFTT 488 (TC), the FTT noted that the taxpayer’s failure to provide information and documentation would ordinarily be sufficient ‘reasonable grounds’ for it to refuse to issue a direction requiring HMRC to issue a closure notice, even in circumstances where the tax at stake is quantified. However, the taxpayer had argued in that case that whilst the information was relevant, it was too late for HMRC to request it as nearly three years had elapsed since the enquiry was opened. The critical issue was therefore whether HMRC’s information request was too late, and the FTT concluded that HMRC’s three-year delay in making the information request was not justified and the closure application was granted.

Once a closure notice has been issued by HMRC, the taxpayer will then have a right of appeal, under section 31, TMA, should they disagree with HMRC’s conclusion.

The appeal procedure

There is a two-stage process for lodging a tax appeal. A taxpayer wishing to dispute an appealable decision must give notice of appeal to HMRC, and then:

• request that HMRC review the decision under appeal (section 49A(2)(a), TMA);
• accept or reject any offer made by HMRC to review the decision under appeal (section 49A(2)(b), TMA); or
• notify the appeal to the FTT (section 49A(2)(c), TMA).

Stage 1: Notice of appeal to HMRC

In direct tax cases, it is necessary for a taxpayer who disputes a decision to first make an appeal to HMRC (section 49D(1), TMA). The appeal is not, therefore, directly made to the FTT. The direct tax legislation therefore talks in terms of the taxpayer ‘notifying an appeal’ to the FTT if they wish, once they have made the initial appeal to HMRC, to pursue their appeal before the FTT.

Taxpayers need to ensure that they appeal to HMRC within the stipulated time period which depends on the statutory provision in question, but is usually within 30 days of the date of the decision being appealed. The time period for appealing starts to run from the date of the decision, not the date when it was received (John Wilkins (Motor Engineers) Ltd v HMRC [2009] STC 2485).

If notice of appeal is not given to HMRC within the relevant time period, it is possible to give notice of appeal out of time, but only with HMRC’s consent or, if that consent is not forthcoming, with the permission of the FTT (section 49(2)(a), TMA). HMRC must consent to the notice of appeal being given out of time if it is satisfied:

• that there was a reasonable excuse for not giving notice within the relevant time limit; and
• the request for permission to appeal out of time was made without unreasonable delay after the reasonable excuse ceased.

In deciding whether to give permission for a late appeal, the FTT must establish the length of the delay and whether it is serious and/or significant, establish the reason(s) why the delay occurred, and then evaluate all the circumstances of the case, using a balancing exercise to assess the merits of the reason(s) given for the delay and the prejudice which would be caused to both parties by granting or refusing permission. In doing so, the FTT should take into account ‘the particular importance of the need for litigation to be conducted efficiently and at proportionate cost, and for statutory time limits to be respected’ (Martland v HMRC [2018] UKUT 178 (TCC)).

Stage 2: Internal review and notifying the appeal to the FTT

As noted above, once a taxpayer has given notice of appeal to HMRC, there are three mutually exclusive options. If the taxpayer requires a review then HMRC must, within 30 days of being so notified (or such longer period as is reasonable), notify the taxpayer of its view of the matter in question (section 49B, TMA). It must then carry out a review of the matter in accordance with section 49E, TMA. In circumstances where a review is not first offered by HMRC, there is no specific statutory time limit in which a taxpayer has to request a review.

If HMRC offer to review the matter, it must, at the same time, inform the taxpayer of its view of the matter in question (section 49C(2), TMA). There is no specific statutory time limit in which HMRC has to offer a review. If, within 30 days from the date of notification by HMRC of its offer to review, the taxpayer notifies HMRC of acceptance of the offer of review, HMRC must review the matter in question in accordance with section 49E, TMA (section 49C(3), TMA). Significantly, if the taxpayer does not notify HMRC of their acceptance of the offer of review within the 30-day acceptance period, HMRC’s view of the matter in question is treated as if it were contained in an agreement made under section 54(1), TMA (section 49C(4), TMA). It is important for taxpayers to take note of this provision and its effect. If HMRC has offered a review and the taxpayer does not wish to be bound by HMRC’s view of the matter, they must either accept the offer of review (in which case a review will be carried out) or reject the offer of review and notify their appeal to the FTT within 30 days from the date of notification by HMRC of the offer of review under section 49H, TMA (in which case the appeal will proceed to determination by the FTT). Failure to take either course of action will lead to the appeal being treated as if settled in accordance with HMRC’s view of the matter.

The review itself gives HMRC latitude to review both the facts and the legal issues involved in the appeal. The nature and extent of the review will be as HMRC consider appropriate in the circumstances (section 49E(2), TMA). The review must take into account any representations made by the taxpayer, providing this gives HMRC a reasonable opportunity to consider them (section 49E(4), TMA). It is important, therefore, that a properly argued case is submitted to HMRC by the taxpayer as part of the review process.

The review may conclude that HMRC’s view of the matter is upheld, varied, or cancelled (section 49E(5), TMA). HMRC must notify the taxpayer of the conclusions of its review within 45 days beginning with, where the taxpayer required the review, the day when HMRC notified the taxpayer of its view or, where HMRC offer a review, the day when HMRC receives notification of the taxpayer’s acceptance of the offer (section 49E(6) and (7), TMA). The taxpayer and HMRC may agree an alternative review period which can be shorter or longer than the 45-day period (section 49E(6)(b), TMA).

Where HMRC is required to undertake a review but fails to give notice of its conclusions within the stipulated 45-day period (or such other period as may have been agreed with the taxpayer), the matter is concluded on the basis that HMRC’s view is upheld (section 49E(8), TMA). In such circumstances, HMRC is required to notify the taxpayer of the conclusion which the review is treated as having reached (section 49E(9), TMA).

Once HMRC has either given the taxpayer notice of its conclusions following the review, or has failed to notify the taxpayer of its review conclusions within the 45-day period (or such other period as may have been agreed with the taxpayer), the taxpayer has two options: they can either notify the appeal to the FTT within the ‘post-review period’ or do nothing and allow the matter to be treated as if it were agreed in writing under section 54(1), TMA (section 49F, TMA). The ‘post-review period’ begins either 30 days beginning with the date of the document in which HMRC gives notice of the conclusions of its review under section 49E(6), or the period that begins with the day following the last day of the 45-day period (or such other period as may have been agreed with the taxpayer) and ends 30 days after the date of the document in which HMRC gives notice of the conclusion which the review is treated as having reached under section 49E(9) (section 49G(5), TMA).

As a general rule, in direct tax appeals it is not a requirement that the tax in dispute must be paid before the taxpayer is able to lodge their appeal. However, in most cases the disputed tax is treated as due and payable, unless the taxpayer successfully applies to HMRC for postponement of payment of the tax (section 55, TMA). Therefore, interest and penalties for late payment may become payable if the taxpayer does not obtain HMRC’s agreement to postponement of payment of the tax claimed and subsequently loses the appeal. Postponement should be allowed in circumstances where the taxpayer is able to demonstrate that they have a reasonable belief that they have been overcharged to tax (Pumahaven v Williams (Inspector of Taxes) [2002] STC 1423 and Spring Capital Ltd v HMRC [2016] UKFTT 671 (TC)).

It is important that an appellant taxpayer adheres to all statutory time limits specified in the relevant legislation whenever possible as they cannot be certain that HMRC will consent to a late appeal or that permission will be given by the FTT for the appeal to be made or notified after the period specified in the legislation.

A decision can be appealed to the FTT via the online appeals system, and the taxpayer will need to upload the decision under challenge and/or HMRC’s review conclusions. Alternatively, a taxpayer can appeal in writing to the FTT and, provided that the information specified in rule 20 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, is included, an appellant taxpayer does not have to use any particular prescribed form of notice. However, there is a standard form of notice of appeal on the FTT’s website which may be used. On receipt of the notice of appeal, the Tribunal’s Service will acknowledge receipt in writing and the case will be registered and given a unique Tribunal Service Reference Number. On receipt of notice of appeal from a taxpayer, the Tribunal Service will notify HMRC, as respondent to the proceedings, of the appeal and proceed to allocate the appeal to a ‘track’ and issue case management directions to take the appeal through to a substantive hearing.

Conclusion

One of the keenest areas of contention between HMRC, taxpayers and their advisers, is the length of time that enquiries take before they are concluded. The legislation does not provide a time limit by which HMRC are required to conclude an enquiry and it is not uncommon for enquiries to become protracted, commercially disruptive, time-consuming and expensive. However, and as explained above, the ability to apply to the FTT for a direction requiring HMRC to issue a closure notice within a specified period of time, is an important taxpayer safeguard, and one that should not be overlooked by taxpayers who find themselves frustrated by HMRC’s unwillingness to bring an enquiry to an end.