New legislation will allow taxpayers to seek partial closure notices

29 March 2017. Published by Adam Craggs, Partner

Proposed legislation will enable partial closure notices to be issued in respect of discreet issues while other issues remain under enquiry by HMRC.


The Finance Bill 2017 will introduce new legislation which will enable HMRC to issue a partial closure notice (PCN) at its own discretion, or with the agreement of the taxpayer, as well as enable taxpayers to apply to the Tribunal for a direction that HMRC issue a PCN, should it refuse to do so. The new rules will therefore provide a mechanism for HMRC and/or taxpayers to achieve closure in relation to specific discrete issues while other issues remain under enquiry.  Where HMRC issues a PCN and amends a tax return, taxpayers will have the right to appeal the PCN and ask for payment of the tax claimed to be postponed.  

Before considering the proposed changes, it may be helpful to remind readers of the current position.

The enquiry process 

HMRC may enquire into any tax return made by an individual, a trustee or a partnership (sections 9A and 12AC, TMA 1970) or a company (paragraph 24(1), Schedule 18 FA 1998).  An enquiry may be commenced as a result of HMRC's scrutiny of a tax return, or on the basis of information held by HMRC.  

Completion of an enquiry

Sections 28A and 28B, TMA 1970, provide for the completion of an enquiry into a personal, trustee or partnership return and paragraph 32, Schedule18, FA 1998, for company tax returns.  Under the current rules, HMRC may only close an enquiry into a taxpayer's affairs when it has reached a conclusion on all areas of the tax return under enquiry. An enquiry is completed when an officer of the Board issues a closure notice informing the taxpayer that he has completed his enquiries and stating his conclusion. A closure notice must either:

state that in the officer's opinion no amendment of the return is required; or

make the amendments of the return required to give effect to his conclusions.

A closure notice takes effect when it is issued (sections 28A(3), 28B(3), TMA 1970 and paragraph 32, Schedule 18, FA 1998).  

Referral of questions during an enquiry

At any time during the course of an enquiry any question arising in connection with the subject-matter of the enquiry can be referred to the First-tier Tribunal (FTT) for determination before the enquiry is completed (section 28ZA, TMA 1970 or paragraph 31A, Schedule 18, FA 1998).  As such a referral has to be made jointly by the taxpayer and HMRC, if either party is unwilling to provide such consent a referral under these provisions is not possible. In addition, the FTT's determination (though binding) is not effective, nor is the tax payable, until a formal closure notice has been issued by HMRC. 

Requiring HMRC to issue a closure notice

As HMRC may enquire into anything contained in a return, or required to be contained in a return, an enquiry may continue for a considerable period of time (often many years) and a taxpayer is usually required to provide HMRC with a great deal of information and documentation as part of that process.  Although the legislation does not provide a time limit by which time HMRC has to conclude its enquiry, a taxpayer can apply to the FTT for a direction requiring HMRC to issue a closure notice within a specified period of time (sections 28A(4) and 28B(5), TMA 1970 and paragraph 33, Schedule 18, FA 1998). 

Significantly, the legislation provides that the FTT 'shall' direct that HMRC issue a closure notice within a specified period unless the FTT is satisfied that there are 'reasonable grounds' for not issuing a closure notice (sections 28A(6) and 28B(7), TMA 1970 and paragraph 33(3), Schedule 18, FA 1998).  There is therefore a presumption that an application should be granted unless HMRC is able to demonstrate, on a balance of probability, that there are reasonable grounds to refuse the application.

The problem with the current process

A long standing area of contention between HMRC and taxpayers is the length of time that an enquiry may take before it is concluded. This is largely because, as mentioned above, the current legislation does not provide a time limit by which HMRC must conclude its enquiries. Although HMRC and the taxpayer may jointly agree to refer certain issues to the FTT for resolution before the enquiry is completed, the lack of flexibility in the current enquiry process can lead to complex, or multi-issue tax disputes, taking an excessive amount of time to be resolved.  Further, if issues cannot be settled with HMRC and matters need to be litigated, the longer the period of time since relevant transactions took place, the harder it becomes to locate contemporaneous documents, witnesses cease to be available and memories fade, which can make it more difficult for there to be a fair hearing of the issues in dispute. 

Autumn Statement 2014

In its Autumn Statement in 2014, the Government announced that there would be a consultation on a new power enabling HMRC to close one or more aspects of a tax enquiry while leaving other aspects open which would allow for the early conclusion of some aspects of a taxpayer's return under enquiry.

On 18 December 2014, HMRC published a consultation paper setting out proposals to amend the tax return enquiry closure rules to enable it to close one or more aspects of a tax enquiry while leaving others open. HMRC noted that it would target the new power at cases or issues involving significant amounts of tax or involving issues which are novel, complex or had a wider impact. 

On 28 September 2015, HMRC published responses to the consultation. In summary, there was overwhelming disagreement by respondents to the suggestion that HMRC should be able to use the proposed changes unilaterally. Taxpayers, not unreasonably, felt that they should also have the same opportunity to close one or more aspects of a tax enquiry while others are left open.   

The new legislation 

Under the proposed legislation, HMRC will be able to issue a PCN at its own discretion, or with the agreement of a taxpayer, once any discreet issue can be resolved although other issues may remain under enquiry.  Taxpayers can also apply to the FTT for a PCN. The measures therefore allow for conclusion of discrete issues in an enquiry into a self-assessment, or corporation tax self-assessment, where one or more other issues remain open.  

In practice, a PCN will almost always be followed by HMRC making an amendment to a tax return which will generally mean additional tax is claimed. Where HMRC issues a PCN and amends a tax return, taxpayers will have a right of appeal and can ask for payment of the tax to be postponed.  

HMRC has stated that PCN's will be issued in those enquiries where the taxpayer's affairs are complex or where there is avoidance or large amounts of tax at risk.  The Government said in their Tax Information and Impact Note, published with the draft legislation on 5 December 2016, that the issue of PCNs will be overseen by existing governance procedures, for example, the Dispute Resolution Board.  HMRC is yet to publish guidance on the use of PCNs and the extent of any safeguards remains uncertain. 


HMRC said during the consultation process that it intends to seek partial closure in complex cases where there is significant tax at stake and long running issues are preventing final resolution of more straightforward issues, thus thwarting its ability to collect additional tax in relation to settled issues. HMRC referred to international issues involving transfer pricing, double taxation and enquiries regarding tax avoidance with multiple issues spanning several years, as examples of long running issues.  HMRC also noted during the consultation that the new rules would act as a deterrent to serial tax avoiders who it considers use the current inflexible enquiry framework to achieve a cash flow advantage by creating complex interactions to delay HMRC's determination of issues.  It is therefore anticipated that HMRC will seek to issue PCNs in avoidance cases where it is unable to issue Accelerated Payment Notices.  

The proposed changes will provide a useful mechanism for achieving closure in relation to specific discrete issues while other issues remain under enquiry. In practice, this procedure is likely to be used in relation to issues in respect of which HMRC and the taxpayer are unable to reach agreement and the dispute is likely to develop into an appeal to be determined by the FTT. It is to be hoped that a PCN will speed up the dispute resolution process and avoid some of the disadvantages associated with delay discussed above.  We have in recent months been instructed in an increasing number of applications to the FTT for a direction compelling HMRC to issue a closure notice and no doubt applications will be made to the FTT requiring HMRC to issue PCNs once the new provisions are in force.   

The above article was originally published in the Tax Journal on 16 February 2017 and a link to that article can be found here:

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