Upper Tribunal finds HMRC’s ‘fishing expedition’ into taxpayers’ tax returns unreasonable

The case (15-page / 333KB PDF) concerned HM Revenue and Customs (HMRC) enquiries into three taxpayers’ self-assessment tax returns over a 20-year-old dividend of £40 million paid by a Bermudan business of which the taxpayers were directors. The ruling provides a rare insight into when enquiries could be deemed unreasonable, so that HMRC could be directed to issue a closure notice to end the enquiries, according to tax experts at Pinsent Masons.

Steven Porter of Pinsent Masons said taxpayers should welcome the Upper Tribunal’s approach in the case. “The Upper Tribunal noted that all enquiries must be reasonably and proportionately conducted. Where HMRC continues to fish for further information in respect of a tax return after a number of years, this falls short of the proportional and reasonable approach to delaying the issue of a closure notice,” he said.

In this case, HMRC’s enquiries looked at whether the transfer of assets abroad (TOAA) regime, which is designed to prevent UK-resident individuals from avoiding UK tax by transferring assets overseas, applied to the dividend in question, which was paid in 2003 by the Bermudan business known as RHG to a UK resident named Relkeel.

The enquiries lasted for several years, leading to the taxpayers applying to the First-tier (Tax) Tribunal (FTT) to direct that HMRC issue closure notices to end the ongoing enquiries under section 28A of the Taxes Management Act.

The FTT found that HMRC’s enquiries regarding to whom the dividend was appointed, and whether any of the respondents could benefit from it, amounted to a “fishing expedition” in the absence of any evidence for believing that there were potential associated operations within the meaning of the TOAA and, in any case, the enquiries had gone on far too long. It sided with the taxpayers and accepted that the dividend was paid by RHG to a UK resident and not to a Bermudan entity. The FTT said that HMRC’s officer had misunderstood the facts, including by refusing to recognise the actual sequence of the transactions, and directed HMRC to issue the closure notices within six weeks of the ruling.

HMRC then appealed to the Upper Tribunal to reverse the decision on three grounds. It claimed that whilst the FTT stated the principles of the 2017 Beneficial House case in its decision, it did not show how it applied those principles to reach its decision. The FTT’s ruling in the Beneficial House case clarified the factors considered by the tribunal in determining the issuance of closure notice by HMRC in tax enquiries, emphasising the need for a balanced approach and justification for delays.

On this ground, HMRC argued that the FTT ignored the fact there was a lack of evidence of the funds being moved from RHG to Relkeel, because HMRC had not been given that information. In doing so, the FTT implied that HMRC was not entitled to ask for such information.

On the second ground, HMRC contended that the FTT was wrong in deciding that the taxpayers had “well known and reputable advisors”.

On the third ground, HMRC said that the FTT erred in law in finding that no liability could arise for any of the taxpayers because of the distribution from RHG to a UK resident and influenced the FTT’s conclusion in finding that HMRC had enough information to complete their enquiries.

The Upper Tribunal dismissed HMRC’s appeal on all three grounds. The tribunal confirmed that the guidance in Beneficial House was not a rigid list of criteria and instead offered general principles that would differ depending on the case by using a “value judgement” and “balancing exercise”.

The ruling reaffirmed that in any event all enquiries must be reasonable and proportionate. Here, given the lengthy exercise of the enquiries, there was a question as to whether HMRC was entitled to continue to request further information into the 20-year-old dividend. This is particularly the case where the taxpayers had, throughout the history of the enquiries, provided HMRC with a considerable volume of information on a voluntary basis to assist them in arriving at a conclusion on the matter.

In relation to the second ground, the Upper Tribunal found HMRC’s submissions failed to set out clearly what legal principle was being disputed in relation to the FTT’s decision that HMRC should issue the closure notices. It also decided that the FTT’s decision showed no error of law, stating that HMRC’s incorrect understanding of the facts extended the enquiry and even without taking into account the reasons for the delay, the FTT had the right to decide in its overall assessment that the enquiries should be brought to a close by the issue of closure notices to the taxpayers.

“Taxpayers should also be aware of the importance of establishing clear grounds of appeal and a lack of explanation as to the grounds raised – for example, merely stating a disagreement with the view of the FTT can be fatal to the outcome of an appeal of any nature,” said Shannon Mills, also of Pinsent Masons.

In the recent case of Marlborough DP Limited, in which HMRC successfully appealed against the FTT’s decision relating to a tax avoidance scheme, the Upper Tribunal stressed the importance of identifying grounds of appeal as clearly as possible, and pointed out that “it is not sufficient simply to state that the FTT erred in law by holding as it did” when appealing a decision on certain grounds. 

“It is rare to see an appeal against the FTT’s decision to require HMRC to issue a closure notice. The taxpayers in this case will be frustrated that by making such an appeal, HMRC has been able to further delay the issuance of the closure notices. It may be that HMRC has been waiting for information from other sources, for example, from overseas tax authorities and that this delay is beneficial to HMRC’s position,” added Mills.