The recent High Court judgement in Tower MCashback LLP v HMRC could have a significant impact on the way HM Revenue & Customs (HMRC) enquiries are conducted. The substantive issue in the case concerned Capital Allowances and a claim for First Year Allowances. Whilst a number of fundamental points on capital allowances were clarified by the judgement, this article concentrates solely on the other main point to arise from the judgement – the contents and restrictions of the enquiry closure notice.
The taxpayer’s claim for First Year Allowances was initially rejected by HMRC on the basis of Section 45(4) Capital Allowances Act 2001 – where expenditure on software is not available if ‘the person incurring it does so with a view to granting to another person a right to use or otherwise deal with any of the software in question’. HMRC subsequently issued an enquiry closure notice to the taxpayer, in which it stated that the Section 45(4) point was the single reason for the rejection of the claim.
During the Special Commissioners hearing, HMRC abandoned the Section 45(4) point and pursued a different argument. The taxpayer argued that in view of the wording of the closure notice, the Section 45(4) issue was the only one that could be raised in the appeal. This was rejected by the Special Commissioner, who decided that the closure notice did not limit HMRC’s grounds for argument. The taxpayer appealed to the High Court, arguing that HMRC was no longer pursuing the grounds upon which the original closure notice was issued and upon which the claim had been disallowed.
The High Court upheld the taxpayer’s appeal and decided that HMRC may not stray beyond the subject matter of the conclusions of the enquiry notice. Where HMRC has ‘pinned its colours to the mast’ and issued a closure notice on a specific basis, it is not open to pursue a completely new line of argument later.
Does this mean that we can now expect the conclusions in closure notices to be vague and open-ended to allow HMRC to retain maximum flexibility in case of litigation? Or will HMRC now become more defensive and only seek to conclude enquiries by the issue of closure notices once it feels that every avenue has been explored? The jury is still out ... so watch this space. However, what is clear is that any taxpayer or business under enquiry by HMRC would be well-advised to seek specialist professional help in managing the enquiry process. This will help close potential avenues for HMRC to attack and, hopefully, help conclude matters more quickly.
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