Judgment summary
This decision concerns a preliminary issue in Mr Kabir Sharif's application to close an enquiry opened by HMRC into his 2021/22 Self Assessment tax return (1). The Appellant argued that HMRC had already opened an enquiry into the same tax year by a letter dated 10 May 2023, making a later enquiry notice dated 5 December 2023 invalid as a second enquiry into the same year (2).
HMRC denied that the 10 May 2023 letter opened an enquiry and maintained that the December Enquiry Notice, issued under s.9A Taxes Management Act 1970, was the only valid enquiry into that tax year (2).
The parties agreed that the sole issue for determination was whether the 10 May 2023 letter opened an enquiry (3). The Tribunal heard evidence from HMRC officer Mr John Page, found him credible, and noted the Appellant did not give evidence or attend the hearing in person (6, 7).
The Tribunal reviewed the relevant case law on the meaning of 'enquiry' under s.9A TMA, including Portland Gas Storage Limited v HMRC, HMRC v Raftapoulou, HMRC v Mabbutt, and Langham v Veltema (19-31), and applied the objective test of whether a reasonable taxpayer in the Appellant's circumstances would have understood the letter as opening an enquiry.
The Tribunal concluded that the 10 May 2023 letter did not open an enquiry, and therefore the December Enquiry Notice was valid (47, 48).
Background
On 29 January 2023, HMRC received the Appellant's Self Assessment tax return for the year ended 5 April 2022, in which he claimed Business Asset Disposal Relief (BADR) on £652,245 of his total gain, reducing his Capital Gains Tax liability to 10% (10).
On 10 May 2023, HMRC sent the Appellant a letter stating that its records showed his BADR claim had taken him over the lifetime limit of £1 million, and inviting him to amend his return, contact HMRC with reasons if he disagreed, or do nothing, in which case HMRC might amend the return itself or open an enquiry (11).
On 15 May 2023, the Appellant telephoned HMRC, though no record of the call's content exists (12). On 16 May 2023, HMRC wrote to the Appellant reviewing his Entrepreneur's Relief and BADR claims for 2017/2018, 2019/2020 and 2021/2022, concluding that £1,000,000 had been claimed in total and that no further action was required (13).
On 5 December 2023, HMRC issued a notice opening a compliance check into the Return under s.9A TMA, referring specifically to the need to check the Appellant's Capital Gains Tax return for 2021/22 (14, 15). Correspondence and partial document provision followed between the parties from December 2023 to September 2024 (16).
On 25 September 2024, the Appellant raised a complaint that HMRC had wrongly opened two enquiries into the same tax year (17). HMRC rejected the complaint on 19 November 2024, stating that the 10 May 2023 letter was an educational letter and not a formal enquiry (18).
The Appellant had previously been the subject of a compliance check for the tax year ended 5 April 2018, due to late filing, and had made earlier claims for Entrepreneur's Relief, predecessor to BADR, in his 2017/18 and 2019/20 returns (35, 36).
Core dispute
The issue for determination was whether the 10 May 2023 letter from HMRC opened an enquiry into the Appellant's 2021/22 Self Assessment tax return within the meaning of s.9A Taxes Management Act 1970 (3, 19).
If it did, the Appellant contended that the subsequent enquiry notice of 5 December 2023 would be invalid as a second enquiry into the same tax year (2(1)). HMRC contended the 10 May 2023 letter was an educational, one-to-many communication that did not open an enquiry, so the December Enquiry Notice was the only valid enquiry (2(2), 8).
The Appellant accepted that if the December Enquiry Notice were found valid, the enquiry should remain open (2(3)).
Court findings
The Tribunal found that no formalities are required to open an enquiry; what matters is whether HMRC gave the taxpayer notice of its intention to enquire into the return within the time limit, which was not disputed as being satisfied for both the 10 May Letter and the December Enquiry Notice (33).
Applying the objective test from Mabbutt, the Tribunal asked whether a reasonable taxpayer in the Appellant's circumstances would have understood from the 10 May Letter that HMRC intended to open an enquiry into the Return (33).
The Tribunal found that the Appellant had prior experience of a formal compliance check (for 2017/18) and of correspondence regarding ER/BADR claims that closed without further action, giving him the ability to distinguish between a formal enquiry and targeted correspondence (35, 36).
The Tribunal held that the 10 May Letter took the BADR claim figure from the Return together with HMRC's records at face value, without requiring an enquiry, and drew analogies to Portland and Raftapoulou, where similar letters were held not to open enquiries (37-40).
The Tribunal considered the wording inviting the Appellant to contact HMRC and stating 'We will consider any information you give us' could suggest an intention to enquire, but found this was counterbalanced by the statement that if the Appellant did nothing, HMRC 'might open an enquiry, also known as a compliance check', indicating the 10 May Letter was not itself opening an enquiry (42, 43).
The Tribunal considered the 16 May 2023 letter, HMRC's subsequent action following the Appellant's telephone call, and found it more consistent with expressing a conclusion based on information plain on the Return and HMRC's records, rather than evidencing that an enquiry had been opened (44, 45). The Tribunal noted that a single letter cannot both open and close an enquiry (45, citing Raftapoulou).
The Tribunal concluded that the 10 May Letter was more consistent with light monitoring than with the opening of a formal enquiry, drawing on the distinction in Veltema and Raftapoulou between light monitoring or informal enquiries and the exercise of the formal statutory power of enquiry (46).
Outcome
The Tribunal decided that the 10 May Letter did not open an enquiry (47).
Accordingly, the December Enquiry Notice is valid (48).
The Tribunal noted that it remained unclear whether a further hearing was required regarding HMRC's contention that there were reasonable grounds for not issuing a partial or final closure notice within a specified period, and directed that, if required, the parties should write to the Tribunal with proposed directions within 63 days of the decision being sent (49).
Major issues / areas of contention
- Whether the letter of 10 May 2023 opened an enquiry into the Appellant's 2021/22 Self Assessment tax return within the meaning of s.9A Taxes Management Act 1970.
- Whether the Enquiry Notice of 5 December 2023 was invalid as a second enquiry into the same tax year.
- The correct legal test for determining whether a communication from HMRC constitutes the opening of an enquiry, namely whether a reasonable taxpayer in the Appellant's circumstances would have understood HMRC intended to open an enquiry.
- The distinction between light monitoring or informal enquiries and the exercise of the formal statutory power of enquiry under s.9A TMA.
- The relevance of HMRC's subsequent actions, specifically the letter of 16 May 2023, in determining whether an enquiry had been opened.