Partners and closure notices: making amends
In R (on the application of Amrolia) v HMRC and R (on the application of Ranjit-Singh) v HMRC  EWCA Civ 488, the Court of Appeal held that notices amending individual partners’ tax returns under section 28B(4), Taxes Management Act 1970 (TMA), were not closure notices and therefore did not need to specify the final amounts of tax due.
This blog is based on an article first published in the Tax Journal on 14 May 2020. A copy of the article can be found here.
The taxpayers had participated in a tax avoidance arrangement designed to create trading losses. This involved investing in an LLP (the LLP), which was a successor to the LLPs that were the subject of the Supreme Court judgment in Tower MCashback 1 LLP v HMRC  STC 1143. In that case, the Supreme Court held that the arrangement was partially ineffective, so that 75% of the losses claimed by Tower MCashback 1 LLP were not available.
HMRC issued a closure notice to the LLP in June 2011, disallowing 75% of the losses claimed. In the meantime, the taxpayers had claimed their respective shares of the LLP’s trading losses through their Self-Assessment Tax Returns (SATRs) and received credit for these in their self-assessment accounts.
HMRC sought to reverse these credits by issuing notices under section 28B(4), TMA, which, so far as relevant, provided as follows:
“Completion of enquiry into partnership return
(1) An enquiry under section 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. In this section “the taxpayer” means the person to whom notice of enquiry was given or his successor.
(2) A closure notice must either –
(a) state that in the officer’s opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued.
(4) Where a partnership return is amended under subsection (2) above, the officer shall by notice to each of the partners amend–
(a) the partner’s return under section 8 or 8A of this Act, or
so as to give effect to the amendments of the partnership return”.
The notices stated the amounts by which the taxpayers’ losses would be reduced, but did not state the final amounts of tax due and payable for the years in question. The taxpayers therefore argued that, following R (on the application of Archer) v HMRC  EWCA Civ 1962, the notices were invalid.
The view of the Court of Appeal
The High Court had found in favour of HMRC and held that the notices were valid. The taxpayers appealed to the Court of Appeal.
The appeal raised three issues:
1. whether changes to the information in a tax return (here, information about the reduction of a loss claim) amounted to changes to the figure in the self-assessment for the year in which that loss arose;
2. whether section 28B(4) notices sent to the appellant taxpayers gave rise to an obligation to pay the sums sought by HMRC, despite the failure of the notices to include those sums as part of the amended self-assessments; and
3. whether HMRC has power to amend a self-assessment so as to include a sum representing the rebate paid in respect of a sideways loss relief claim for that year.
HMRC also argued that, in the event that the notices were held to be defective by reason of any want of form or omission, section 114, TMA, 'cured' any such defects.
The Archer case concerned a closure notice issued to an individual taxpayer, Mr Archer, on completion of an enquiry under section 9A, TMA, into his SATRs for two relevant years. Each closure notice stated that it was a closure notice issued under section 28A(1) and (2), TMA. Each closure notice explained why HMRC had concluded that the relevant loss claim failed, and dealt with certain other issues. The HMRC officer who issued the closure notices stated: “I am amending your return to reflect all of the above”, but did not state the amount of tax said to be due from Mr Archer.
The requirement in section 28A(2)(b) is that a closure notice must: “make the amendments of the return required to give effect to [the officer’s] conclusions”. It was submitted on behalf of Mr Archer that this requirement was not satisfied unless the closure notice itself informs the taxpayer of the amount of tax that he is required to pay, in accordance with the case of Hallamshire Industrial Finance Trust Ltd v IRC  1 WLR 620. The Court of Appeal agreed.
The section 28B(4) notices
The critical issue for the Court to decide was whether the reasoning in Archer applies to the notices served on the taxpayers under section 28B(4), TMA.
In the view of the Court, there was "obvious force" in the contention that similar principles must apply following the completion of an enquiry into a partnership return, when a closure notice is issued under section 28B(1) and (2), and consequential notices are then given to the individual partners under section 28B(4). However, the Court held that the section 28B(4) notices were not actual closure notices and so there was no requirement for them to recalculate the final amount of tax due. This was apparent, it said, from the statutory language (including the fact that no appeal rights attach to the notices) and also as a matter of practicality. Because the notices were merely an automatic incident resulting from the amendment to the partnership return, it would not be practical for multiple considerations that may arise as a result of any amendments to be considered when issuing a section 28B(4) notice. In other words, there was no reason to construe the provision as requiring all the issues in a tax return to be resolved before a notice could be given. The first taxpayer's appeal was therefore dismissed.
The second notice
The section 28B(4) notice in the second taxpayer’s appeal included an assumption in the calculation made by HMRC that the taxpayer would want to carry the amended loss back to earlier years, rather than use it in the current year as ‘sideways’ relief. The Court held that the purported amendment of the taxpayer's self-assessment (on the mistaken assumption that she would wish to carry back the whole of the reduced loss), and the requirement to pay additional amounts of tax and interest calculated on that basis, were invalid, because they went beyond amendments to the taxpayer's self-assessment which were purely consequential on the reduction in her share of the LLP’s allowable loss. Until the second taxpayer had been given an opportunity to reconsider the various options open to her to apply the losses, no final amendment to her self-assessment could properly be made, and the deemed enquiry into her SATR under section 12AC(6)(a), TMA, must have remained open. The Court concluded, at :
"I therefore conclude that [the second taxpayer] was in principle entitled to challenge the notice by way of judicial review, in so far as it purported to finalise her income tax liability for 2004/05 in relation to her share of the LLP’s trade loss, and required immediate payment of the amounts of tax and interest said to be due. The reason why the notice was ineffective, as I have sought to explain, was not that it infringed the Hallamshire principle, but rather that the amendments made by the officer on 16 March 2016 went beyond the limited scope of section 28B(4) and therefore could not found a valid demand for tax under section 59B(5)".
With regard to issue 3, the Court held that HMRC does have power to amend a self-assessment so as to include a sum representing the rebate paid by HMRC in respect of a sideways loss relief claim for that year. The Court also held that section 114, TMA, could not assist HMRC in Dr Ranjit-Singh's case as the defects in the notice given to her could not be described as a "want of form or omission", as the notice fell outside the proper scope of section 28B(4)(a) and defects of that nature are matters of substance, not form.
The issue of whether HMRC has opened or closed an enquiry using the correct statutory provision and procedure has been much litigated in recent years. The argument in this case arose from the additional layer of procedure that applies in the case of partnerships, namely, the requirement for a separate notice to be issued to each partner under section 28(4). The Court of Appeal's judgment provides some much needed clarification as to what HMRC is (or is not) required to do in order to issue valid notices under that provision.
One issue which arose in the recent case of Reid and Emblin v HMRC  UKUT 61 (TCC), was whether a deemed section 9A enquiry under section 12AC(6)(a) is into the totality of the individual partner's SATR, or only into "penumbral matters" of the SATR, as HMRC argued (see Reid and Emblin at ). The Upper Tribunal in that case highlighted how anomalies may arise if a section 28B(4) notice is not to be treated in the same way as a section 28A closure notice. It stated at :
"… if HMRC make a simple transcription error in a s28B(4) adjustment and therefore, as a matter of arithmetic, fail to reflect properly the outcome of the partnership closure notice in an individual tax return it is, perhaps, surprising that a taxpayer should be put to the expense of instituting judicial review proceedings to deal with a comparatively straightforward dispute. Similarly, if a particular partnership agreement is unclear, so it is not straightforward to determine how profits and losses are allocated as between partners, there will be a similar lack of clarity as to how adjustments made to the partnership return in the partnership closure notice should be reflected in s28B(4) adjustments. It is perhaps surprising that disputes of this kind cannot be aired in an appeal to the FTT but would have to be dealt with by judicial review. However, we regard these anomalies as simply the result of the scheme that Parliament has chosen to implement".
This issue was touched upon by the Court of Appeal in Amrolia and Ranjit-Singh at :
"… the legislation nowhere expressly states that a notice under section 28B(4) is to operate as a closure notice of the deemed enquiry into the partner’s personal tax return opened under section 12AC(6)(a) when notice was given of the enquiry into the LLP’s partnership return under section 12AC(1). Nor can I see any proper basis for reading in a necessary implication to that effect. On the contrary, it seems to me that the deemed enquiry into each partner’s individual return will remain open, if need be, following the giving of a notice under section 28B(4). If that is the position, the enquiry will then be terminated in due course by a closure notice under section 28A to which the requirements identified by this court in Archer will apply in the usual way".
It seems, therefore, that a full section 28A closure notice is required, even if the enquiry opened is only a deemed section 9A enquiry opened under section 12AC(6)(a). Given the increasing number of amendments being made to the TMA in an attempt to paper-over the cracks that have been revealed by recent case law, it is perhaps only a matter of time before a new administrative Act is enacted which caters for a more complex and diverse tax system.
A copy of the judgment can be viewed here.