UK taxpayer prevented from challenging validity of tax enquiry

The Supreme Court, in its judgment, found that the legal concept of ‘estoppel by convention’ applied in this case. This was because, although HMRC had sent a notice of enquiry to the wrong address, the taxpayer’s advisers, who had received a copy, had indicated in correspondence with HMRC that they believed a valid enquiry had been opened.

An estoppel by convention arises in certain circumstances when the parties have acted on a common assumption that a given state of facts or law is true. They are then each ‘estopped’ from denying to the other the truth of their common assumption.

“This case highlights the importance of checking the validity of any notice given by HMRC, as soon as it is received,” said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law. “All too often taxpayers – and their advisers - assume that HMRC has complied with statutory requirements, but errors are made more often than you think.”

HMRC can enquire into a tax return if it gives notice to the taxpayer within the time allowed, usually 12 months from the filing date. The legislation provides that the notice is to be given to the taxpayer at their usual or last known place of residence. HMRC gave notice of its intention to open an enquiry into the taxpayer, Mr Tinkler’s, self assessment tax return but they sent it to a previous address of his. Mr Tinkler had appointed accountancy firm BDO to act as his agent and the notice was also copied to the firm.  BDO informed Mr Tinkler of the notice and corresponded with HMRC on the basis that an enquiry had been properly opened. 

Mr Tinkler did not challenge the validity of the notice opening the enquiry until after a closure notice had been issued and the case was due to be heard in the tax tribunal some nine years later.

“Standing back from the detail, what Mr Tinkler and his advisers have done is to take at a late stage what can fairly be described, on the facts of this case, as a technical point (that the notice of enquiry was sent to the wrong address) even though that has not caused Mr Tinkler any prejudice. It is entirely satisfactory that, by reference to estoppel by convention, the law has the means to avoid such a technical point succeeding,” Lord Burrows said in the judgment.

The Supreme Court confirmed that the principles as to when estoppel by convention can apply in relation to non-contractual dealings had been satisfied in Mr Tinkler’s case.

HMRC believed mistakenly that it had given the taxpayer notice of the enquiry and so had opened a valid enquiry. When BDO replied to HMRC, it was making the same mistake as HMRC in thinking that a valid enquiry had been opened because it too thought, by reason of the copy letter, that the necessary requirement of giving the taxpayer a notice of enquiry had been complied with. There was therefore a common mistaken assumption that a valid enquiry had been opened. BDO’s conduct ‘crossed the line’ because, by its reply, it was indicating to HMRC that it too believed that a valid enquiry had been opened and was acting on that belief, the Supreme Court said.

Even if BDO’s acknowledgement, by its initial letter to HMRC, would otherwise have been insufficient to make clear to HMRC that it shared that mistake, the court said the contents of that letter put that beyond doubt. BDO not only said that it would respond on the questions raised as requested by HMRC but it said it could not amend the return “as the Return is now the subject of a section 9A TMA 1970 enquiry”. By its reply, BDO had endorsed or affirmed HMRC’s mistaken assumption, the court said. Thereafter HMRC was relying, as BDO expected and intended, on the affirmation of the common assumption.

In order for estoppel by convention to apply the reliance on the mistaken assumption must have occurred in connection with some subsequent “mutual dealing” between the parties. The court said that HMRC’s reliance on the common assumption that a valid enquiry notice had been served was in connection with carrying out the enquiry, which included mutual dealings such as questions being asked by HMRC which were answered by BDO.

Detriment must also have been suffered by the person alleging the estoppel, or benefit have been conferred upon the person alleged to be estopped, sufficient to make it “unjust or unconscionable” for the latter to assert the true legal or factual position. The Supreme Court said that HMRC’s reliance was detrimental because, by acting on the affirmed common assumption that a valid enquiry had been opened, it did not send another notice of enquiry to Mr Tinkler before the expiry of the 12 months’ time limit for opening an enquiry. If the enquiry was treated as invalid, the closure notice would also have to be treated as invalid. HMRC would not be able to recover the outstanding tax and Mr Tinkler would stand to gain some £635,000, the court said.

The Supreme Court dismissed arguments on Mr Tinkler’s behalf that estoppel by convention could not apply to overrule the protection given to taxpayers by the requirement to give the taxpayer notice of an enquiry laid down in the legislation. The court said it would have been open to HMRC and Mr Tinkler to agree expressly the method by which the notice of enquiry was to be given, including that a notice of enquiry given to Mr Tinkler’s tax advisers would have counted. The court said that because the legislation was permissive as to the method of giving notice, an estoppel by convention did not undermine the purpose of the legislation. In addition, the court said that there could not be any conceivable undermining of the statutory purpose if, as was the case here, the taxpayer actually knew of the enquiry.

“It is concerning that the decision makes it more difficult for a taxpayer to challenge a notice issued by HMRC even if it is defective,” said Sophie Warren, a tax investigations expert at Pinsent Masons.

“This is the second recent Supreme Court decision where a defective notice from HMRC has not been held to be invalid. This is a worrying trend,” she said.

In July, although the Supreme Court quashed a follower notice on the basis that HMRC could not show that a ruling in a previous case was sufficiently relevant to the taxpayer, it dismissed an argument that the follower notice was invalid because it did not adequately set out why the reasoning in the previous case applied to the taxpayer’s circumstances. The Supreme Court said that although the follower notice was defective, it was not invalid because there was nothing in the legislation which said that any defect in the notice would render it invalid.