Appeal Number: TC/2009/10151

[2010] UKFTT 60 (TC)

TC00373

Appeal number: TC/2009/10151

Issue of closure notice –whether enquiry opened under correct authority- whether reasonable grounds for keeping enquiry open

FIRST-TIER TRIBUNAL

TAX

BjhBuilding and PlumbingAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (income tax)Respondents

TRIBUNAL: MRS S.M.G.RADFORD (Judge)

MS. S.WONGCHONG

Sitting in public at Reading County Courton 18 November 2009

David Marsh, agent, for the Appellant

Jon Davis and Simon Bates for HMRC

DECISION

The Appeal

This is an appeal by the Appellant for a direction under Section 28B(5) TMA 1970 requiring HMRC to issue a closure notice to their enquiry into the Appellant’s 2006/07 tax return on the grounds that all the necessary questions have been answered and no tax is due.
Further, Mr Marsh for the Appellantbelieved that the enquiry was opened under the authority of a section of the Act which does not exist and therefore should be closed.
At a second review of the matter, the reviewing officer came to a different conclusion to those handling the case finding it to be low risk and unlikely to produce any further tax..
HMRC submitted that they had reasonable grounds for keeping the enquiry open.

Background and facts

The enquiry was opened by Simon Bates, an Inspector of Taxes for HMRC, and by letter dated 9 January 2009he informed Mr Marsh, agent for theAppellantthat he had issued the Appellant a notice under Section 12A Taxes Management Act 1970 stating his intention to enquire into their tax return for the year ending 5 April 2007.
Mr Marsh acknowledged receipt of the letter on 27 January and whilst surmising as to why the return had been selected and complaining that the enquiry had been raised some 14 months after the submission of the return, he supplied the information requested by HMRC in their letter.
A further exchange of queries and answers took place and on 17 April 2009 Mr Marsh wrote requesting the closure of the enquiry stating that if Mr Bates was not prepared to do so then his letter should be treated as a formal application to have the enquiry closed.
Mr Bates replied that he was not prepared to do this whilst there were unanswered questions concerning the return and explained to Mr Marsh the procedure to follow if he wished to apply for the enquiry to be closed.
Mr Marsh replied that he intended to make an application for the enquiry to be closed but that he also might ask for a second review.
Mr Bates replied again stating that he was not prepared to close the enquiry whilst there were still matters which had not been fully addressed. He explained why he wanted to see further records and again told Mr Marsh that it was open to him to apply to the Tribunal to have the enquiry closed; also that any complaint made to the complaints team had to be more specific than simply objecting to the enquiry continuing.
Mr Marsh wrote to the Tribunal service on 8 May 2009with copies of all the correspondence to date applying for the Tribunal’s instruction to HMRC that the enquiry be closed.
On the same day he wrote to Mr Bates “On 9 January you issued a letter informing the partners that you intended to inquire into their tax return for the year ended 5 April 2007. There is no dispute that you are perfectly entitled to issue such a letter”.
He asked that the matter be reviewed by the complaints department on the grounds that Mr Bates was not a competent official acting reasonably.
Mr Bates continued to pursue the matter and sent the Appellant a notice to produce documents under Para 1 Schedule 36 FA 2008. The documents he requested were those he had earlier asked Mr Marsh to provide.He gave the Appellant until 30 June 2009 to provide them to him.
Mr Marsh wrote to the complaints department which was handling his complaint. He did not mention that he had written to the Tribunal Service asking for a closure hearing but submitted that there was no reason to keep the enquiry open.
The complaints department replied that having considered the way the case had been handled from 9 January they could see no evidence of a failure to comply with HMRC published guidance. Although the information initially requested had been provided, the enquiry officer was still entitled to consider linked and relevant business records.
Mr Marsh was not satisfied with this explanation and wrote back to Mrs Chambers of the complaints department and asked for a detailed explanation from her or the Senior Manager responsible as to what had been discovered by Mr Bates to justify the continuance of the enquiry.
Mr Price, a senior officer at HMRC, replied referring to the Code of Practice booklet (COP11) sent to Mr Hart of the Appellant at the start of the enquiry. He informed Mr Marsh that Page 3 of the booklet states that the initial enquiry request may identify particular areas on which the enquiry will focus but goes on to state that if the information submitted so warrants, the enquiry may expand in scope. On page 8 the guide made clear that enquiries can include requests for clarification of particular enquiries and checking records on which particular entries were based.
He concluded that after due consideration he believed that the enquiry had been conducted in a manner entirely consistent with the published guidance and reiterated that as advised by both Mr Bates and Mrs Chambers, Mr Marsh should make a formal application for a closure notice.
Mr Marsh replied to Mr Price on 19 June 2009that his concerns had not been addressed and that Mr Bates should be instructed to close the enquiry.
Mr Price wrote to Mr Marsh on 26 June 2009to address the concerns raised by Mr Marsh in his letter of 19 June 2009. He told him that the purpose of a full enquiry was to check that the taxpayer had paid the right amount of tax, not to look for errors. From this it followed that the compliance officer did not need a reason before requesting information reasonably required to check the entries in the return. Invariably the full enquiry would involve the compliance officer comparing entries in the return with the underlying documentation, usually the business records. The compliance officer had some discretion as to which records he called for and there was no set procedure as to when that might be.
Turning to Mr Marsh’s second concern he wrote that the reason he had drawn Mr Marsh’s attention to the COP11 booklet was to alert him to the fact that at a later date Mr Bates might decide that additional information was required in order to check the entries in the partnership return. Historically a compliance officer starting an enquiry would typically have requested all the business books and records in their opening letter but more recently the department had encouraged its compliance officers to focus their checks on a limited number of documents to minimise the inconvenience to taxpayers and their agents. Mr Price told Mr Marsh that by seeking clarification of the entries in the partnership tax return before requesting sight of the underlying business records Mr Bates was endeavouring to ease the burden on Mr Marsh and his client.
He ended his letter by reiterating that the department would not be closing the enquiry before the business records had been viewed unless directed to do so by a Tribunal and that a formal appeal to the Tribunal was the means by which Mr Marsh should now make representation if he continued to seek the closure of the enquiry.
On the 29 June 2009 Mr Marsh sent Mr Price the documents requested by Mr Bates (see Para 14 above).
On the same day he replied to Mr Price’s letter of 26 June 2009 asking what had been in the information submitted that warranted further enquiry. Mr Bates replied on behalf of Mr Price that the law did not require him to have a “meaningful reason” for continuing with the enquiry. It was deemed entirely reasonable for him to check the entries in the Appellant’s tax return with the underlying business records. He ended by offering to chase the Tribunal on Mr Marsh’s behalf as Mr Marsh had not heard from them concerning his application to close the enquiry,
Mr Marsh continued to complain about Mr Bates handling of the enquiry and the fact that he was keeping it open. He objected to Mr Bates copying correspondence to the Appellant stating it was his job to keep the partners informed, not Mr Bates.
On 17 July 2009 Mr Bates wrote stating that his review of the business records had identified a number of purchases that on the face of it did not appear to be for the property at 14 Old Bath Road against which they had been charged – some because they were duplicate items and others because they were purchased after that property was sold. He asked whether there was an explanation for these apparent anomalies and whether the partnership had carried out work on any other properties during the year.
Mr Bates, at Mr Marsh’s request sent him copies of the relevant invoices together with a number of purchase invoices from throughout the year which Mr Bates alleged showed purchases which appeared consistent with those of a jobbing plumber.
Mr Marsh wrote to his clients concerning these questions and they replied that they had been required to install a second bathroom at the last moment in order to secure the sale. The fittings were purchased in bags of 25 because it was easier to buy them this way than separately. Some of their purchases although made in August were not invoiced or paid for until after they had sold the property.
Mr Marsh forwarded their letter to Mr Bates on 7 August 2009and again asked for the enquiry to be closed.
Mr Bates was not fully satisfied however as he still believed that the material purchases indicated that work had been done on more than one property. He had checked the partnership website and discovered that the Appellant partners were advertising themselves as plumbers who had been in the business for some 15 years. He suggested a meeting or that further records be made available to him.
Mr Marsh replied to these further queries by Mr Bates and wrote to Mr Price, the Senior Manager, complaining about the further enquiries and again asking that the enquiry be closed. He asked for a second review by an officer independent of their department.
Mr Giles from a different department did a second review and noted that there were still a number of unanswered questions regarding the purchases of building materials. In his summary of the risk he confirmed that he thought that the review of these invoices did give concern over the accuracy of the tax return. However although he did not consider that the case was of a risk free nature, he concluded that the enquiry was unlikely to result in any additional tax being payable. He recommended that both sides should agree to disagree and move to a closure of the case and wrote that he would be forwarding the file to the officer representing HMRC at the closure hearing.
Mr Marsh was then informed by Mr Price that the review officer Mr Davis was continuing with the enquiry and the hearing scheduled for 18 November proceeded as planned.
At the hearing Mr Marsh and Mr and Mrs Hart of the Appellant partnership attended.
Mr Marsh said that whilst the enquiry had been stated to be opened under Section 12A it should in fact have been Section 12AC.
Further he submitted that once an application for a closure notice had been made, HMRC were required to discontinue the enquiry until a Tribunal had ruled on whether or not the application should be granted.
He stated that the Appellants had made a loss in the year in question and an even bigger loss in the previous years which they were carrying forwards to use against future profits. There had not been a property boom for them. They had borrowed from the bank incurring interest charges, taken advances on their credit cards, a loan from Mrs Hart’s mother and cashed an endowment policy in early.
Their losses made it unlikely that there would be tax to pay.
In addition the enquiry had been opened late.
From the bundle of documents provided to the Tribunal it appeared that the return had been submitted with a letter dated 2 November 2007.
Mr Marsh told the Tribunal that having answered all the initial questions on his clients behalf, the enquiry should have been closed. The tax return showed that there were losses to be carried forward which would affect the partnerships profits for future years.
The partners had started with a £25,000 mortgage which because of their losses they had increased to £270,000.
There were few questions in the first letter from HMRC and Mr Marsh could not see where the risks were as far as his clients were concerned.
Mr Bates of HMRC stated that he had been an Inspector of Taxes for 10 years.
He still had concerns as he felt that the pattern of purchases was inconsistent with the accounts.
A quantity of materials appeared to have been purchased after the property at Old Bath Road was sold and some big purchases were made just before it was sold.
On an internet picture of the Old Bath Road property its roof tiles appeared to be grey slate tiling but antique red tiles had been purchased and claimed against the profit from the sale of this property.
Some of the building materials were delivered to the partnership home at Newton Roadand it appeared to have red tiles.
Guttering appeared to have been purchased before the Old Bath Road property had been bought and claimed against the profit from its sale.
Mr Hart of the Appellant partnership explained that if materials were collected rather than delivered they were invoiced against your home address.He confirmed that at the last minute the buyers of Old Bath Road had asked for an extra bathroom to be fitted to the property and that some materials were invoiced some time after their sale of the house.
He said that the red tiles had been used for the back of the Old Bath Road property which did not show on the internet photograph.
Mr Bates reiterated that he believed that he had reasonable concerns and he needed information together with evidence to substantiate such information. He needed to know more about how the purchases, claimed as expenses against the profit on the Old Bath Road property, had been used before he could reach a conclusion.
In conclusion Mr Marsh reiterated that there were losses to be carried forward, the accounts were right and his clients had not done any other building work.

The Law

Section 12AC Taxes Management Act 1970 which gives HMRC the power to enquire into a partnership return states that:

12AC(1) An officer of the Board may enquire into a partnership return if he gives notice of his intention to do so (“notice of enquiry”):-

(a) to the partner who made and delivered the return, or his successor,

(b) within the time allowed

12AC(2) The period referred to in subsection (1) above is:-

(a)in the case of a return delivered or amendment made on or before the filing date, the period of twelve months after the filing date

Section 12AC(2) was amended by FA2007 Section 96(2) and the words “after the day on which the return was delivered “ substituted for the words “after the filing date” as set out below

12AC(2) The time allowed is:-

(a) if the return was delivered on or before the filing date, up to the end of the period of 12 months after the day on which the return was delivered

but it is only applicable to tax returns which relate to the tax year 2007/08 or later.

12AC(4)An enquiry extends to anything contained within the return or required to be contained within the return including any claim or election included in the return ……

Section 28B states that:

(5) The taxpayer may apply for a direction requiring an officer of the Board to issue a closure notice within a specified period.

(6) Any such application shall be heard and determined in the same way as an appeal.

(7) The Tribunal hearing the application shall give the direction applied for unless they are satisfied that there are reasonable grounds for not issuing a closure notice within a specified period of time.

Findings

The Tribunal found that Mr Bates had opened the enquiry correctly by writing to each partner informing them that he was opening an enquiry into their 2006/2007 return as required by Section 12AC(1) TMA 1970.
The Tribunal found that the enquiry was opened in time as the old Section 12AC(2) TMA 1970 still applied to returns delivered in respect of tax year 2006/07 and Mr Bates had 12 months after the filing date of 31 January 2008 for the relevant return to open the enquiry, that is by 31 January 2009.
Whilst it is correct that when Mr Bates wrote to Mr Marsh informing him of the enquiry that he had notified to the partners, he stated that he had issued them a notice under Section 12A rather than Section 12AC, the Tribunal found that Mr Marsh had impliedly accepted the validity of the enquiry by stating in his letter of 8 May 2009 “on 9 January 2009 you issued a letter informing the partners that you intended to enquire into the partnership tax return for the year ended 5 April 2007. There is no dispute that you are perfectly entitled to issue such a letter”.
The Tribunal found that had he wished to take issue with the omission of the “C” from the citing of the statute in his letter from Mr Bates, he could have done so at the time and no doubt Mr Bates would have sent a corrected letter. In any event the letter to the partners was correct and that to Mr Marsh for his information only.
The Tribunal found also that after Mr Marsh applied to the Tribunal for a closure notice he could have informed HMRC that he did not intend to answer further questions until his application on behalf of the Appellants had been heard.
Whilst the second review officer was of the opinion that the matter was of low risk and unlikely to produce anymore tax he did not instruct Mr Bates and his senior officer Mr Price to close the enquiry but concluded by stating that both parties would have to agree to disagree and move to the closure of the case and he would forward the file to the officer representing HMRC at the closure hearing. This illustrated that in his view the decision as to the closure of the enquiry would have to be made at the hearing. He also confirmed Mr Bates’s concerns regarding the purchases made and their potential to relate to the building of an extension at the partners home at Newton Road.
The Tribunal found Mr Bates evidence to be straightforward and truthful. It found that it was reasonable of him to require more details of the purchases made and claimed as expenses against the house renovated by the Appellant.
The Tribunal found that Mr Hart of the partnership gave his evidence truthfully and provided reasons for some of the building material purchases appearing late or superfluous but understood Mr Bates concerns as to the lack of actual evidence, for example to back up Mr Hart’s statements concerning the use of the antique red tiles.
The Tribunal found that in carrying out the enquiry Mr Bates had acted in strict compliance with Section 12AC(4) TMA 1970.

Decision