Tinkler – Supreme Court decides taxpayer is estopped from denying validity of HMRC enquiry

In Tinkler v HMRC [2021] UKSC 39, the Supreme Court held that, due to the conduct of the taxpayer's advisers, the taxpayer was estopped by convention from denying that HMRC had opened a valid enquiry under section 9A, Taxes Management Act 1970 (TMA), when it had sent the notice of enquiry to the wrong address.

Background

On 1 July 2005, HMRC sent a letter to Mr Tinkler (the taxpayer) informing him of its intention to enquire into his self-assessment tax return for the year 2003/04 (the Return), under section 9A, TMA. The letter was addressed to the taxpayer at an address where he had previously been living, after his address on HMRC's system was erroneously changed back to his former address. Although the letter arrived at the address, the taxpayer did not receive it because it was not forwarded to him. On the same day, HMRC wrote to BDO, the taxpayer's appointed tax agent and adviser, attaching a copy of the letter which it had sent to the taxpayer.

Following correspondence with BDO in relation to the enquiry HMRC purportedly opened, HMRC decided that the taxpayer was not entitled to the income tax loss of some £2.5m which he had claimed in the Return and, on 30 August 2012, it issued a closure notice (the Closure Notice). 

The taxpayer appealed to the First-tier Tribunal (FTT) in relation to the conclusions set out in the Closure Notice. In addition to the arguments made in respect of his substantive appeal, the taxpayer amended his notice of appeal to contend that there was a preliminary issue determinative of his appeal, namely, that HMRC had failed to give him a valid notice of enquiry as the letter which HMRC had sent him on 1 July 2005, had been sent to the wrong address and accordingly the Closure Notice and its conclusions were also invalid. The FTT agreed that this discrete issue should be heard as a preliminary issue.

FTT decision

The FTT determined the preliminary issue in favour of HMRC, deciding that:

i) although BDO did not have actual or apparent authority to receive notices of enquiry on behalf of the taxpayer, he or his PA, knew of the enquiry in November 2005 (having been informed by BDO) before the enquiry window closed in January 2006; and actual knowledge of the enquiry by the taxpayer or his PA (who had authority to receive notice of a section 9A enquiry on behalf of the taxpayer) was sufficient for the purposes of the required notice of  enquiry; and

ii) in any event, estoppel by convention operated so that the taxpayer was estopped from denying that a valid enquiry had been opened; there was a shared mistaken assumption that a valid enquiry had been opened.

The taxpayer appealed to the Upper Tribunal (UT) and HMRC cross-appealed against the conclusion that BDO did not have actual or apparent authority to receive notices of enquiry on behalf of the taxpayer.

UT decision

The appeal was dismissed.

The UT decided that:

i) BDO did have actual or apparent authority to receive notices of enquiry on behalf of the taxpayer and a valid notice of enquiry had therefore been given to the taxpayer through the letter of 1 July 2005, a copy of which had been sent to BDO;

ii) where an enquiry notice has not been properly addressed, the notice cannot become properly given because the intended recipient knows of the enquiry by learning of it from a different source; it was therefore unnecessary to consider whether the taxpayer's PA was his agent for the purpose of receiving notice of the enquiry.

iii) estoppel by convention could not apply because, in line with Keen v Holland [1984] 1 WLR 251, the estoppel would undermine the statutory protection given by section 9A, TMA and in any event, the requirements of estoppel by convention were not made out because the taxpayer/BDO could not “properly be said to have assumed some element of responsibility for [the common assumption]”; and it would not be unconscionable for the taxpayer to deny that an enquiry had been validly opened.

The taxpayer appealed to the Court of Appeal against the UT's decision that BDO did have actual or apparent authority to receive notices of enquiry on his behalf. HMRC issued a respondent’s notice seeking, if necessary, to uphold the UT's decision on the ground that the UT should have held that there was an estoppel by convention.

Court of Appeal judgment

The appeal was allowed.

The following two issues were before the Court of Appeal: 

(i) was a valid notice of enquiry given by the copy notice sent to BDO?; and

(ii) if not, was the taxpayer estopped, by reason of estoppel by convention, from denying that HMRC had opened a valid enquiry?

In allowing the taxpayer's appeal and dismissing HMRC’s cross-appeal, the Court of appeal held that:

i) BDO did not have actual or apparent authority to receive a notice of enquiry on behalf of the taxpayer. Although by Form 64-8, the taxpayer had conferred wide-ranging authority on BDO to deal with HMRC on his behalf, the Form 64-8 made clear that some forms had to be sent to the taxpayer instead of the agent and the linked website page clarified that a formal notice of enquiry was one such form;

ii) the taxpayer was not estopped, by reason of estoppel by convention, from denying that HMRC had opened a valid enquiry. Applying the criteria laid down by Briggs J in HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch) (Benchdollar), as amended by the Court of Appeal in Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023 (Blindley Heath), estoppel by convention could not be made out in the present case for two reasons: (i) BDO had not assumed the requisite element of responsibility for the common assumption; and (ii) the requisite unconscionability was not made out.

HMRC appealed to the Supreme Court.

Supreme Court judgment

The appeal was allowed.

Lord Burrows, who delivered the lead judgment, confirmed that the Benchdollar principle, as amended by Blindley Heath, is a correct statement of the law on estoppel by convention in the context of non-contractual dealings.

Applying this principle, the Court decided it was largely irrelevant that HMRC could be said to have initiated the common mistake by a misrepresentation and to have been careless in doing so. The Court also disagreed with the Court of Appeal that BDO did not endorse or affirm the truth of HMRC's statement. BDO, by its reply to HMRC's letter of 1 July 2005,  was indicating to HMRC that it too believed, and was acting on the belief, that a valid enquiry had been opened. HMRC's reliance was "in connection with some subsequent mutual dealing between the parties" (carrying out the enquiry). Finally, HMRC's reliance was detrimental because, by reason of HMRC acting on the affirmed common assumption that a valid enquiry had been opened, HMRC did not send another notice of enquiry to the taxpayer within the relevant limitation period. 

Dismissing the other arguments raised on behalf of the taxpayer, Lord Burrows decided that: (i) the argument that "mutual dealings" needs to be given a narrow meaning, as analogous to a contract, is inconsistent with Benchdollar; and (ii) estoppel by convention would not outflank the statutory protection afforded to the taxpayer by sections 9A and 115, TMA, because the TMA is permissive as to the method of giving notice.

Comment

Although the Supreme Court accepted that HMRC was primarily at fault by carelessly sending the notice of enquiry to the wrong address, it had little sympathy for the taxpayer who it considered had taken a 'technical' point at a late stage in the proceedings even though HMRC's mistake had not caused him any prejudice. 

The taxpayer's knowledge of HMRC's enquiry and his failure to inform HMRC that he had not received an enquiry notice once he became aware of the enquiry appears to have influenced the conclusion reached by the Court.

Notwithstanding the ultimate outcome in this case, it remains important for taxpayers to carefully check, at the earliest opportunity, that HMRC has met all statutory requirements when it purports to exercise any of its powers.

The judgment can be viewed here.