Review letter from HMRC should be read as cancelling discovery assessment
In Easinghall Limited v HMRC [2016] UKUT 105 (TCC), the Upper Tribunal (UT) has confirmed that where an agreement has been reached with HMRC under section 54, Taxes Management Act 1970 (TMA 1970), it cannot commence an enquiry or issue a discovery assessment unless they concern an issue which was not the subject of the agreement.
Background
On 25 June 2012, HMRC opened an enquiry into the tax return of Easinghall Limited (Easinghall) for the year 2010/11, pursuant to paragraph 24, Schedule 18, Finance Act 1998 (FA 1998). The enquiry was conducted by Mr Gavin Laurie (L). L concluded that Easinghall had understated its profits for the relevant period. He therefore issued a closure notice amending the company's return accordingly.
By the time L issued the closure notice, Easinghall had submitted its tax return for 2011/12. L considered it was likely the company had made the same error and understated its profits and tax liability for 2011/12. The officer had no direct evidence that this was indeed the case but relied on the presumption of continuity. L could have opened an enquiry into this return, but instead he decided to issue a discovery assessment pursuant to paragraph 41, Schedule 18, FA 1998, on the basis that Easinghall had carelessly or deliberately brought about an underassessment of tax (paragraph 43, Schedule 18, FA 1998). He also imposed penalties in respect of 2010/11 and 2011/12.
Easinghall appealed against the closure notice and amendment to its 2010/11 tax return, the discovery assessment in respect of 2011/12 and the imposition of penalties.
In December 2013, L wrote to Easinghall referring to the appeals and setting out the reasons for his view that the company's returns had understated its business takings in the tax years in question. He then informed the company of its right to request an internal review of his decision by an independent HMRC officer. Easinghall opted for a review.
The review was conducted by another HMRC officer, Mr Musgrove (M), who on 7 February 2014 notified Easinghall of his review decision. M determined that there was sufficient evidence to arrive at the opinion that the sales in respect of the 2010/11 tax return had been understated, thus upholding L's decision in that regard. However, he concluded that there was insufficient evidence to support the amount assessed in respect of 2011/12. The assessment and penalty for 2011/12 were therefore cancelled. Under section 49F(2), TMA 1970, the conclusions of a review are to be treated as if they were settled by agreement under section 54(1), TMA 1970.
Easinghall appealed to the First-tier Tribunal (FTT) in respect of M's decision concerning 2010/11.
A week after M had issued the conclusions of his review, L opened an enquiry into Easinghall's 2011/12 tax return pursuant to paragraph 24, Schedule 18, FA 1998 and sent a formal notice to the company requiring documents and information.
Easinghall applied to the FTT for a direction that HMRC close its enquiry. That application was dismissed. In the view of the FTT, M had not agreed that the company's profit had been correctly reported. M's letter concerned the narrower question of whether there had been sufficient evidence to show there was an understatement of business takings. It was therefore open to HMRC to continue its enquiry.
Easinghall appealed the FTT's decision to the UT.
In the meantime, the enquiry continued and was subsequently concluded. A closure notice was issued amending the company's profits in accordance with the conclusions of L. Easinghall appealed against that closure notice and its appeal was pending. HMRC accepted that if the company's appeal was allowed and it was decided that the FTT should have directed HMRC to close the enquiry because of M's review conclusions, then that would effectively dispose of the appeal against the amendment.
The UT's decision
The UT allowed Easinghall's appeal.
The UT reviewed the FTT's decision and concluded that it had erred in not considering the wording of M's letter in the context of the relevant statutory provisions. The question was not why M arrived at the conclusion he did but rather what that conclusion was.
In its view, M had been very clear in his letter as to the 'particular matter in question', which was a restatement of HMRC's view of the matter and his conclusions. His conclusions were that the 2011/12 tax decision and penalty assessment should be cancelled. That wording was entirely consistent with his obligations under section 49E(5), TMA 1970. The decision was final and conclusive.
Accordingly, the UT concluded that HMRC was bound by M's letter. They held the FTT should have directed HMRC to close the enquiry into Easinghall's 2011/12 tax return because the parties are treated as having agreed that there was no understatement of business takings by Easinghall for that year, by section 49F(2), TMA 1970.
Comment
Given that section 49F(2) provides that the conclusions of a review are to be treated as if they were settled by agreement under section 54(1), TMA 1970, it is surprising that HMRC thought they were entitled to open an enquiry into 2011/12.
Where an agreement has been arrived at under section 54(1), it is not open to HMRC to open an enquiry or issue a discovery assessment, unless it relates to an issue which was not agreed between the parties and was not therefore the subject of the section 54 agreement.
The wording of any agreement, or deemed agreement, with HMRC needs to be carefully considered. If the scope is too narrow, HMRC may be able to come back for a second bite at the cherry.