Upper Tribunal confirms it’s the end of the road for HMRC's "fishing expedition"

In HMRC v Jonathan Hitchins & Ors [2024] UKUT 00114, the Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision, confirming that it was entitled to have granted the taxpayers' applications, made pursuant to section 28A, Taxes Management Act 1970 (TMA), for a direction requiring HMRC to issue closure notices and bring to an end HMRC's enquiries into the taxpayers' affairs which amounted to a "fishing expedition".

Background

Jeremy, Jonathan and Stephen Hitchins were three brothers whose father, Robert Hitchins, had founded a business, Robert Hitchins Group Ltd (RHG), in 1960. By the time HMRC opened its current enquiries, the business was ultimately owned by a discretionary settlement in Guernsey via companies incorporated and resident in Bermuda. 

In 2003, RHG paid a dividend of £40m and in 2014 HMRC opened enquiries into the returns of all three brothers, which focused mainly on whether the dividend could give rise to a charge under Chapter 2, Part 13, Income Tax Act 2007, relating to transfers of assets abroad (ToAA). This was not the first enquiry into the tax affairs of the taxpayers. The underlying events under enquiry had been disclosed to HMRC between 2006 and 2008, in the course of a previous enquiry which had been closed by the same HMRC Officer without any amendments in 2011.

Section 28A(4), TMA, enables a taxpayer to apply to the FTT for a direction that HMRC issue a closure notice within a specified period. Section 28A(6), provides that the FTT is obliged to give such a direction unless it is satisfied that there are reasonable grounds for not doing so. The burden is therefore on HMRC to demonstrate that there are reasonable grounds for refusing any such application. 

The taxpayers applied, under section 28A, for a direction compelling HMRC to issue closure notices in respect of a total of 13 open enquiries into their self-assessment tax returns.

FTT decision 

The applications were granted. 

The FTT held that HMRC's enquiries had been conducted to a point where it was reasonable for HMRC to make an “informed judgment” of the matter, even though every line of enquiry may not have been pursued to the end. Whilst HMRC had not received answers to all of its questions, the FTT considered that the outstanding questions relating to the distribution did not have a reasonable basis and amounted to no more than a "fishing expedition" on the part of HMRC.

The FTT disagreed with HMRC that if it was compelled to issue closure notices, it would be in vague and uninformative terms. The FTT commented that HMRC had sufficient information on which to be able to close its enquiries relating to the potential for a ToAA charge in respect of the distribution. The FTT further commented that the enquiries had "gone on for far too long".

Perhaps not surprisingly in the circumstances, the FTT concluded that HMRC had failed to demonstrate that there were reasonable grounds for refusing the taxpayers' applications for closure notices and directed that HMRC issue closure notice within 6 weeks of the FTT's decision.  HMRC appealed to the UT. 

A copy of the FTT decision can be viewed here. 

UT decision 

HMRC's appeal was dismissed. 

HMRC relied on three grounds of appeal. However, in a postscript to the UT's decision, the UT noted that it had had difficulty in ascertaining the exact nature of the errors of law that HMRC was alleging, which had been put forward in narrative form and seemed to consist of a series of interrelated complaints about, and disagreements with, the FTT's decision. The UT commented on this issue at paragraph 78 of its decision, in the following terms: 

"… the grounds of appeal should identify the precise nature of the error of law and why it constitutes an error of law (e.g. the misinterpretation of the statutory provision or a relevant authority, the failure to take account of a relevant factor and reaching a factual finding for which there was no supporting evidence) and not merely stating that the party disagreed with the view expressed by the FTT or that the FTT erred in expressing a particular view (e.g. “the FTT erred in law by holding …”)".

Notwithstanding the above, HMRC’s grounds of appeal, in summary, appeared to be that: 

(1) the FTT did not explain how it had come to its decision based on the relevant principles; 

(2) the FTT referred to the fact that the taxpayers had “well-known and reputable advisers”; and 

(3) the FTT had erred in law in finding that no liability arose for any of the taxpayers simply because the relevant distribution had been paid to a UK company. 

The UT had little difficulty in concluding that there were no errors of law in the FTT's decision. The FTT took account of (and balanced) a variety of factors in reaching its conclusion and the UT saw no reason to interfere with the FTT's decision.

Comment

One of the keenest areas of contention between HMRC and taxpayers is the length of time enquiries can take before they are finally concluded. As the relevant legislation does not provide a time limit by which HMRC is required to conclude an enquiry, enquiries often become unfocussed and protracted. There will therefore be occasions when a taxpayer decides that an enquiry has gone on for long enough and wishes to bring it to an end. Section 28A, TMA, provides an effective mechanism by which taxpayers can do just that and we are finding that clients are increasingly choosing to make such an application. Although each case will depend on its own facts, the UT's decision in this case demonstrates that the tax tribunals will not shy away from compelling HMRC to close its enquiries when it is appropriate to do so. 

Taxpayers and their advisers should also take note of the UT's comments in relation to preparing grounds of appeal and, in particular, its comments that the grounds should identify the precise nature of the error of law relied upon and why it constitutes an error of law.

A copy of the UT decision can be viewed here.