Were taxpayers estopped from arguing the validity of enquiry notices?

In Rakshit, the FTT considered whether the taxpayers’ conduct estopped them from arguing that the enquiry notices were invalid.

FTT: Estoppel and validity of enquiry notices

Our second article on the First-tier Tribunal (FTT) decision in Rakshit and Ors v HMRC [2023] UKFTT 01044 (TC) looks at whether the taxpayers were estopped from arguing the validity of enquiry notices due to their conduct and correspondence over the number of years of the enquiry. HMRC argued that the taxpayers’ continued correspondence over the years amounted to them accepting that HMRC had raised valid enquiries. The FTT disagreed. It applied the test set out by the Supreme Court in Tinkler which stated that there needs to be a common assumption that the enquiries were validly opened, the taxpayers’ must have affirmed this common assumption and HMRC must have relied upon this affirmation to its detriment. The FTT looked closely at the correspondence between HMRC and the taxpayers and found that because the taxpayers continued to assert that no valid enquiry had been opened throughout the duration of the enquiry, they were not estopped from arguing that there were no valid enquiries.

The case involved taxpayers entering into a marketed scheme in 2010 to eliminate Stamp Duty Land Tax (SDLT) on the purchase of a property. In 2011, HMRC raised enquiries into these returns and in 2017, HMRC raised discovery assessments on the basis that section 75A Finance Act 2003 applied. In 2018, the Supreme Court held in Project Blue that such schemes were subject to section 75A. Therefore, by the time the case went to the FTT, the taxpayers’ appeals were on procedural grounds only.

The taxpayers argued that the enquiry notices were invalid on the grounds that it was ambiguous as to which SDLT return they related to. This was because the enquiry notices referred to a single SDLT return however the taxpayers had submitted two different SDLT returns. The FTT dismissed this argument and held that a reasonable taxpayer, in the circumstances of the taxpayers, would have understood that HMRC intended to open an enquiry into both returns.

While not strictly necessary, the FTT then went on to consider HMRC’s contention that the taxpayers were estopped from arguing that the enquiry notices were not valid as they had continued to correspond with HMRC over the course of the enquiry, and this continued conduct by the taxpayers resulted in a common assumption that HMRC must have relied upon this affirmation to its detriment.

The FTT first considered whether the common assumption needed to be specific. It held that the common assumption does not need to be so precise that the parties agree the exact reason why the enquiry notices were valid. Instead, a general common assumption is sufficient. 

The FTT then turned to the HMRC correspondence throughout the years of the enquiry. It rejected the taxpayer’s argument that certain correspondence was marked as without prejudice and therefore couldn’t be brought into evidence. The FTT held that it was not privileged because it did not genuinely form part of negotiations towards a settlement.

The FTT held that the taxpayers were not estopped as they continued to assert the enquiry notices were not validly opened throughout. In addition, at no point did the taxpayers assume responsibility for the common assumption by conveying to HMRC that they intended and expected HMRC to rely on it.

This case highlights the importance for taxpayers to consider their procedural position at the start of any HMRC enquiry or assessment and assert their position at the earliest opportunity. A procedural challenge taken late may result in HMRC challenging the procedural points on the basis that the taxpayer is estopped from doing so due to its early acceptance of the validity of the enquiry or assessment.

This case also clarified the time limits for section 75A discovery assessments. This aspect is covered in our connected article.