Patel: Enquiry and closure notices held to be invalid
In Patel & Anor v HMRC  UKFTT 0185 (TC), the First-tier Tribunal (FTT), in finding in favour of the taxpayers at a preliminary hearing, has held that HMRC had not opened valid enquiries into the taxpayers' self-assessment returns, as the returns had not been made pursuant to a notice issued by HMRC under section 8(1) Taxes Management Act 1970 (TMA).
This blog is based on an article first published in Tax Journal on 10 May 2018. A copy of the article can be found here.
All statutory references below are to the TMA, unless otherwise stated.
The procedure by which HMRC opens an enquiry into a personal tax return, closes its enquiry and, if appropriate, issues an assessment, will be familiar to most readers.
Ordinarily, HMRC will require a return to be filed, under section 8(1), for the purposes of establishing any amounts in which a person may be chargeable to income tax and/or capital gains tax in respect of a particular year of assessment. HMRC may then issue a notice of enquiry, under section 9A, to a taxpayer in respect of a return and in due course close its enquiry by issuing a closure notice under section 28A. A closure notice must state HMRC's conclusions and make any necessary amendments to the return to give effect to HMRC's conclusions.
Many taxpayers, however, submit returns to HMRC on a voluntary basis i.e. not pursuant to a notice issued under section 8(1). Taxpayers are of course required to notify HMRC if they are chargeable to income or capital gains tax for a year of assessment, under section 7.
The facts were not disputed. Two taxpayers (the Appellants) completed paper self-assessment returns (in the form issued by HMRC) for the tax year ended 5 April 2009 (the Returns). The Appellants did not receive a notice, under section 8(1), to file a return. The Returns were therefore 'voluntary' or 'unsolicited' returns.
The Appellants' position was that, as the Returns were submitted voluntarily, they were not returns 'under section 8(1)' and therefore HMRC could not enquire into the Returns under section 9A, or subsequently issue closure notices under section 28A.
HMRC disagreed with the Appellants' analysis and issued closure notices under section 28A, amending the Returns further to the enquiries which it had carried out under section 9A.
The Appellants appealed to the FTT.
The FTT agreed to determine, as a preliminary issue, whether HMRC had the power, under section 9A, to enquire into the Returns and whether HMRC had the power, under section 28A, to amend the Returns in circumstances where the Returns were made and submitted voluntarily i.e. in circumstances where the Appellants were not sent a notice to do so by HMRC under section 8(1).
Essentially, the issue before the FTT was whether the Returns had been made 'under section 8' for the relevant purposes of the TMA. This phrase is significant because section 9A provides, so far as relevant, that HMRC may enquire into a return filed 'under section 8'. If the Returns were not returns filed 'under section 8', it followed that HMRC could not open an enquiry under section 9A. If there was no enquiry under section 9A, HMRC could not issue a closure notice under section 28A. HMRC did not dispute this analysis.
(i) Statutory construction
HMRC contended that the Returns were returns made 'under section 8'. HMRC argued that section 8 provided a discretion to issue a section 8 notice, but there was no duty on HMRC to issue such a notice. The purpose of a section 8 notice is to oblige the taxpayer to make a return containing information that is reasonably required for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment (and the amount of any such tax payable by him for that year). Where a taxpayer has submitted a voluntary return containing all relevant information, that is a relevant factor in the exercise of HMRC’s discretion and they may decide not to issue a section 8 notice. HMRC contended that such a voluntary return which contained all relevant information was nonetheless a 'return under section 8' as it gave effect to the statutory purposes referred to in the introductory wording of section 8(1) and the only aspect that was not engaged was the obligation to comply with a notice. HMRC argued that it was Parliament's intention, when drafting section 8, to ensure that there was a mechanism by which a voluntary return should be treated as a return under section 8. A purposive construction of section 8 should therefore be adopted to achieve the obvious intention of Parliament.
The Appellants contended that sections 8, 9A and 28A, provided a rigid statutory code for enquiries. In particular, each step taken by HMRC required a notice to be given to the taxpayer. First, a notice to file a return, under section 8, required a return to be filed and it determined the due date for that return. If a notice is given and a return is not filed by the due date, the taxpayer may become liable to penalties. Secondly, an enquiry notice must be issued within a specified timeframe and, if no notice is issued in time, there can be no valid enquiry. Thirdly, a closure notice terminates an enquiry and can charge tax by amending the return. It followed, therefore, that without the requisite statutory notice under section 8, there could be no corresponding statutory effects.
The Appellants argued that the Returns were not returns 'containing such information as may reasonably be required in pursuance of the notice', because there was no such notice.
(ii) Collection and management powers
HMRC also relied upon its collection and management powers in sections 1 and 5, Commissioners for Revenue and Customs Act 2005 (CRCA).
As an alternative to its argument concerning the correct construction of section 8, HMRC submitted that it is entrusted, by sections 1 and 5, CRCA, with wide managerial discretion in the collection and management of taxes and that its decision to treat voluntary tax returns as made under section 8 was a lawful exercise of that wide managerial discretion.
If the position was otherwise, so HMRC argued, HMRC would, upon the receipt of a voluntary return, need to consider whether the return constituted a notification of liability within section 7. If so, it would most probably issue a section 8 notice to the taxpayer requiring the taxpayer to make a return under section 8. This would involve the taxpayer submitting the same, or substantially similar, material to HMRC on the same self-assessment tax return. In the present case, HMRC was, by virtue of the Returns, in receipt of all the information required to be submitted for the purposes of section 8. HMRC argued that such a wasteful duplication of effort was avoided by its decision to treat voluntary returns as returns made under section 8.
The Appellants argued that HMRC’s care and management powers did not permit it to deem a voluntary return to be one submitted in response to a notice under section 8(1). HMRC's care and management powers did not permit HMRC to do more than a statute permitted.
(iii) Ancillary powers
In the alternative to its collection and management powers argument, HMRC argued that its 'ancillary powers', contained in section 9 CRCA, authorised HMRC to treat a voluntary return as a return under section 8 and operated to 'clothe' HMRC's actions with the force of law. Section 9 CRCA is a broad enabling provision which allowed HMRC, in order to fulfil its functions, to take any steps consistent with its public law duties which were necessary, expedient, incidental or conducive. The section prescribed no form and set no limitations on the manner in which HMRC may exercise its powers. It was submitted that where a policy or practice of HMRC was adopted in order to fill a legislative interstice, section 9 CRCA gave it statutory force and effect.
The Appellants advanced similar arguments to those relied upon in relation to sections 1 and 5, CRCA. It was submitted that section 9, CRCA, did not confer on HMRC a power to deem facts to exist which differed from the actual facts.
(i) Statutory construction
The FTT rejected HMRC's argument based on a purposive approach to statutory construction. In the view of the FTT, the statutory language is perfectly clear and no application of the doctrine of purposive construction could lead to a different result. Accordingly, the FTT concluded that the Returns were not returns made under section 8(1) and therefore an enquiry could not have been opened under section 9A.
In answering the question what is 'a return under section 8', the FTT said that a return under section 8 is a return which the taxpayer has been required by a notice given to him by HMRC to make and deliver to HMRC.
The FTT said at para :
"The obligation arises because of the notice and without the notice there is no obligation. It is when a taxpayer delivers a return in discharge of this obligation that the taxpayer has delivered a “return under s.8” TMA. Moreover, this conclusion is consistent with the reasoning of this Tribunal in the Bloomsbury (on the analogous company tax provisions) and Revell cases ...".
It went on to say at para :
"That conclusion cannot be changed by any application of the doctrine of purposive construction. The words used by Parliament in this statutory provision are entirely clear. Whilst a court or tribunal is not confined to a literal interpretation of the statutory words, but must consider the context and scheme of the Act as a whole, purposive construction cannot be used to give effect to a perceived different or wider policy objective in cases where the words used by Parliament do not bear that meaning…
... In this case, the meaning of the words used by Parliament is so clear that it cannot be changed by reliance [on] purposive interpretation – the legislature’s purpose is made manifest by its language: a return under s.8 is only made where a return is filed in pursuance of an obligation to do so created by a notice given to the taxpayer under s.8(1) TMA."
The FTT confirmed that giving a notice under section 8(1) is a formal step which creates a formal legal obligation to submit a return. The making of a return in response to that legal obligation created by a section 8(1) notice is also a formal step which has legal consequences. It was, therefore, clear to the FTT that Parliament intended that those formal consequences should only flow in cases where a taxpayer has submitted a return after being required to do so by a notice given under section 8(1).
(ii) Collection and management powers
On this issue, the FTT concluded that HMRC’s collection and management powers are circumscribed and cannot be used to override matters for which Parliament has expressly provided. The requirement for HMRC to serve a notice under section 8(1) for a return to be made 'under section 8', is an express statutory requirement that cannot be waived by the exercise of HMRC’s discretion.
(iii) Ancillary powers
In the view of the FTT, the deeming of the Returns as section 8 returns was not a power that was ancillary or incidental to HMRC's more general and specific powers. Accordingly, the FTT had little difficulty in rejecting HMRC's ancillary powers argument, commenting at para 125:
"I find it impossible to conclude that s.9 CRCA confers on HMRC the sweeping powers for which Ms Nathan argued. No authority was cited for such a dramatic and, to my mind, somewhat disturbing submission."
With over 450,000 taxpayers a year filing voluntary returns, the FTT noted that its decision would be an 'inconvenient conclusion' for HMRC.
As the FTT itself recognised, HMRC could have adopted a different route which would have been compliant with the legislation. It could have, having received the Returns: (1) issued discovery assessments (under section 29); (2) issued section 8 notices (thereby regularising the Returns); or (3) issued Simple Assessments under section 28H.
For reasons best known to itself, HMRC chose not to go down any of the above routes, preferring instead to rely upon an inappropriate application of the purposive approach to statutory construction and ambitious arguments in relation to its care and management powers, all of which were roundly rejected by the FTT.