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Second bite of the apple

29 September 2009 / Adam Craggs
Issue: 4225 / Categories: Comment & Analysis , Admin
ADAM CRAGGS discusses a recent case in which HMRC invoked their information powers and continued with their enquiries in spite of having issued a closure notice


  • Purpose of the closure notice according to statute.
  • HMRC say it is only a procedural requirement.
  • Enquiries can continue.
  • Finality for taxpayer is lost.

The rumours that in some cases an application for a closure notice has led to an HMRC raid under TMA 1970, s 20C was referred to by Andrew Hubbard in his article Power to the people?

It should be noted that s 20C has now been repealed and applications for HMRC search warrants are now made under the Police and Criminal Evidence Act 1984, s 8 or Sch 1.

While none of my own clients have had the misfortune of being raided in such circumstances, I have recently been involved in a case where, following the issue of a closure notice, HMRC issued a notice pursuant to TMA 1970, s 20(3) and continued with their enquiries.

Such action demonstrates a surprising lack of appreciation of the closure notice regime and lends support to Andrew’s observation that the concept of the closure notice ‘has been transformed into something which occupies a very different place in the conduct of tax administration’.

Before discussing the facts of our case, it might be helpful to remind readers of when an enquiry is completed. As the case under discussion involved a limited liability partnership, I only refer to the relevant enquiry legislation applicable to partnerships.

The equivalent legislation relating to individuals and corporations adopts similar language.

Completing an enquiry

The law relating to completing an enquiry into a partnership return is found at TMA 1970, s 28B(1) and states:

‘An enquiry under s 12AC(1) of this Act is completed when an officer of the Board by notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions.’ [Emphasis added].

The equivalent provisions for enquiries into personal and trustee returns and company returns are found at TMA 1970, s 28A(1) and FA 1998, Sch 18 para 32, respectively.

HMRC’s own booklet IR160 Enquiries under self assessment accurately reflects the language of the legislation stating at page 4:

‘We will issue a notice of closure … which will explain that our enquiries have finished.’ [Emphasis added].

In addition, all HMRC’s relevant enquiry manuals of which I am aware, are consistent with the statutory language.

For example, Enquiry Manual EM 1990 Working an enquiry: Closure applications: Consequences of tribunal decision, advises HMRC officers that following a direction to complete an enquiry:

‘Despite the fact that you may subsequently have further contact with the taxpayer or agent… you will not be entitled to make any further enquiries into the return.’ [Emphasis added].

Given the plain and unambiguous language of the legislation and HMRC’s own guidance material, taxpayers could be forgiven for concluding that an enquiry is completed on issue of a closure notice.

It would appear, however, that HMRC no longer share this view.

Further questions

Having conducted a lengthy and in-depth enquiry into a limited liability partnership return which had lasted several years, HMRC informed the taxpayer that they had completed their enquiries and stated their conclusions in a closure notice issued pursuant to TMA 1970, s 28B.

The partnership, not unreasonably, assumed that as HMRC had decided to close the enquiry and state their conclusions they were satisfied that they did not need to make any further enquiries and that the enquiry was completed.

Being dissatisfied with HMRC’s stated conclusions, the partnership appealed against the closure notice pursuant to TMA 1970, s 31 and the appeal was registered with the Special Commissioners.

We wrote to HMRC’s Solicitor’s Office inviting them to agree bespoke directions, and were surprised to receive a letter in reply informing us that, notwithstanding the fact that a closure notice had been issued, HMRC intended to issue a third party notice under TMA 1970, s 20(3) and in effect continue with their enquiry.

An exchange of correspondence with Solicitor’s Office then followed.

This confirmed that HMRC do not consider that an enquiry is completed when a closure notice is issued. The position was expressed in the following terms:

‘ …closure notices are frequently issued before enquiries are completed. A closure notice is no more than a procedural requirement enabling HMRC to deny a claim for tax relief and enabling a taxpayer to appeal.’

Given the clear statutory language, and indeed HMRC’s own literature, this seems an extraordinary statement. As this is an important area of tax administration and given its wider ramifications for taxpayers in general, the matter was brought to the attention of Dave Hartnett (then acting chairman of HMRC).

He supported the position adopted by the Solicitor’s Office and did not contradict the view that had been expressed. He confirmed that, in HMRC’s view, a closure notice does not prevent notices being issued under TMA 1970, s 20.

It should be noted that this correspondence pre-dates the new information powers contained in FA 2008, Sch 36, which came into force on 1 April 2009.

I do not intend to debate whether such a view is correct; what is important for present purposes is the fact that following the issue of a closure notice, HMRC were prepared to use their information powers contained in s 20 and to continue with their enquiries.

No more certainty?

The closure notice process arose out of the self-assessment regime and was introduced in order to provide a degree of finality and certainty to taxpayers.

It is unfortunate that HMRC’s stated view is now inconsistent with this aim. Although in the present case HMRC relied upon their former third party information powers, there is no reason to suppose that following the issue of a closure notice HMRC would not invoke their new third party powers contained in FA 2008, Sch 36 para 2 in similar circumstances to those discussed.

It would be interesting to learn whether others have had a similar experience of the closure notice process, as it would seem that it no longer provides taxpayers with the certainty and finality which they might otherwise expect.

Adam Craggs is a solicitor with Reynolds Porter Chamberlain LLP (Tax Disputes Resolution Team). He can be contacted by email, or tel: 020 3060 6421.

Issue: 4225 / Categories: Comment & Analysis , Admin
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