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Patel – HMRC ordered to close enquiry which was  "drifting aimlessly"

26 November 2018

In Patel v HMRC [2018] UKFTT 0561 (TC), the First-tier Tribunal (FTT) has directed HMRC to close its enquiry.



Mr Patel (the taxpayer) is a chartered accountant who incorporated his practice to become Ashley King Ltd (the company). The company was charged a fee under a licence agreement for the use of the practice name, business contacts and web domains, the goodwill of which the taxpayer claimed was a personal asset.


The licence fee received under the licence agreement was declared on the taxpayer's self-assessment tax return as income. HMRC opened an enquiry into the taxpayer's 2014/15 tax return in late 2016, in relation to the licence fee and goodwill. The taxpayer provided HMRC with a copy of the licence agreement which explained the nature of the relationship and the payment terms.


HMRC suspected that the licensing arrangement was intended to avoid employer NICs and the matter was referred to various specialist teams within HMRC for advice over the course of the next 12 months.  


At no point did HMRC seek to enquire into the tax return of the company, despite HMRC considering that there could be charges to PAYE and employer NICs as a result of the licence fee arrangement.


The taxpayer made an official complaint, claiming that HMRC were ignoring the information he had provided and his technical arguments. He also informed HMRC that he would seek a direction from the FTT requiring HMRC to close its enquiry. HMRC sought further information from the taxpayer and some 21 months after the enquiry had been opened, issued an information notice to the taxpayer pursuant to paragraph 1, Schedule 36, Finance Act 2008.


The taxpayer considered that he had provided all relevant documents and information to HMRC and applied to the FTT for a direction requiring HMRC to issue a closure notice pursuant to section 28A, Taxes Management Act 1970.


FTT decision


The application was allowed.


HMRC argued that it had not concluded its enquiry in relation to the licensing of the goodwill. Its initial view was that the goodwill could not be personal, in which case the taxpayer would have no goodwill to licence. It was possible that the licence fee payments received from the company should be recharacterised as salary and it therefore required further information from the taxpayer in order to form a definitive view.


HMRC agreed at the hearing that the specialist teams from whom advice had been sought had not been provided with the full facts of the matter and when questioned by the judge, the HMRC enquiring officer confirmed that there was no investigation in respect of the company and that if Class 1 NICs were payable, it was the company, not the taxpayer, which would be liable to pay them. Additionally, if the licence fee payments were salary, then the company would be liable under the PAYE system and as such no amendments would be required to the taxpayer's return.


The FTT referred to Estate 4 Ltd v HMRC [2011] UKFTT 269 (TC) and concluded that HMRC's admission that no amendments could be made to the taxpayer's return settled the matter in his favour. There was no tax at risk since Class 1 NICs cannot be recovered from an employee. Additionally, it was not sensible for the enquiry to be kept open when there was no possibility of an enquiry into the company.


The FTT directed HMRC to issue a closure notice in respect of its enquiry into the taxpayer's tax return.




HMRC does not appear to have conducted its enquiry into the taxpayer's return in a timely and efficient manner. In the words of the FTT, the enquiry "drifted along aimlessly". Sadly, such aimless drifting is only too common in HMRC enquiries. HMRC seems to have been influenced in this case by its suspicion that the licence arrangements were a NICs avoidance scheme and this no doubt contributed to HMRC ignoring the taxpayer's technical arguments and dragging the enquiry out in the hope of finally finding some evidence to support its suspicions.


This decision confirms the willingness of the FTT to direct the closure of an enquiry where HMRC has failed to adequately direct and particularise its enquiries. Increasingly, taxpayers are applying to the FTT for a direction requiring HMRC to close its enquiry within a specified period of time. This latest decision confirms how effective such an application can be and how willing the FTT is, in appropriate cases, to issue such a direction.  


A copy of the decision can be viewed here.