FTT: Closure notice valid despite neither party retaining enquiry notice

Case highlights importance of instructing tax dispute specialists for complex tax enquiries so procedural issues are dealt with from outset

Important role of tax dispute specialists

In Alastair Cattrell v HMRC [2024] UKFTT 67 (TC) the First-tier Tribunal (FTT) dismissed the taxpayer's appeal against the validity of HMRC's closure notice in respect of an enquiry into the self-assessment return which had included participation in a Gilt Strip arrangement (the Arrangements). The Arrangements were implemented in 2003/04 and a copy of the enquiry notice said to have been issued by HMRC could not be located by HMRC or the taxpayer. Nonetheless the FTT held that all evidence pointed to the fact that an enquiry must have been opened. The taxpayer's appeal was therefore unsuccessful. 

The case highlights the importance of checking from the outset of an HMRC enquiry that HMRC have complied with all statutory requirements under the Taxes Management Act 1970. A failure to do this may lead to a taxpayer being unable to rely on any shortcomings in HMRC’s compliance with the statutory regime in relation to enquiry notices due to the decay of evidence over time.

In Cattrell, the taxpayer entered the Arrangements, under which an income tax loss was said to arise even though the taxpayer had made no corresponding economic loss. HMRC concluded that the Arrangements did not work and issued a closure notice. The taxpayer conceded the effectiveness of the Arrangements. Accordingly, the appeal focused on procedural issues as the taxpayer argued that HMRC had not issued a valid notice of enquiry and was therefore unable to amend his return to remove the loss claim by way of closure notice.

The unusual feature of this case was that shortly after HMRC sent the enquiry notice, the taxpayer had signed up to a ‘representative sample agreement’ (RSA) between HMRC and the taxpayer’s adviser. The RSA was an agreed framework for dealing with a high volume of enquiries, which involved making detailed enquiries into a sample of participants and amending all other participants' returns based on those enquiries. The taxpayer was not part of the sample. 

The taxpayer did not recall having received an enquiry notice and had never formally appointed the adviser to act on his behalf – his dealings with HMRC were through his accountants. He did, however, admit to knowing about the investigation.

On appeal to the FTT, HMRC had to prove on the balance of probabilities that the enquiry was validly notified to the taxpayer.

The FTT found for HMRC explaining that there was a shared assumption that a notice of enquiry had been given, as shown from their records and internal memoranda. The FTT reasoned that, as the taxpayer knew the Arrangements were under challenge and that he was a participant in the RSA, (albeit he was not one of the samples) on the balance of probabilities an enquiry notice had been given.

The FTT went on to consider (obiter) the issue of estoppel by convention. Although there was a common assumption that valid notice of enquiry had been given, the taxpayer did not, by signing up to the RSA, assent to that assumption in a way that ‘crossed the line’ (Tinkler v HMRC [2021] UKSC 39) or assume responsibility for the assumption. Crucially, the RSA was predicated on the need to issue a notice of enquiry if one had not already been issued.

The FTT concluded that had it not confirmed the validity of the enquiry notice, the taxpayer would not have been estopped from relying on any invalidity. The FTT found that an estoppel by convention did not arise. Unlike in Tinkler, there was a mutual understanding that a notice of enquiry had been given. This understanding was correct and there was no detriment to HMRC as the enquiry was valid.