Tribunal considers Tower M Cashback and scope of 'conclusion' in closure notice

16 October 2015

In B & K Lavery Property Trading Partnership v HMRC[1], the First-tier Tribunal (FTT) declined the Appellant's application to strike out HMRC's case and allowed HMRC's application to amend its statement of case.


B & K Lavery Property Trading Partnership (the Appellant) is a partnership of which two brothers are the partners.

The Appellant appealed against a closure notice issued by HMRC on 2 May 2013, following an enquiry into its tax return for 2009/10.

The Appellant's original tax return for 2009/10 showed a loss of £7,224,131. The closure notice amended this to a profit of £672,285. The difference of £7,896,416 was a reflection of the loss of value which had been incurred by the Appellant following the purchase of two properties in September 2007 and July 2008. The Appellant argued that the properties, having been purchased at the height of the property market, subsequently lost value and that their market value as at 5 April 2010 was less than their purchase price. The Appellant's tax return thus included a figure of £7,896,416 for "cost of sales", which the Appellant explained was a "net realisable value adjustment" for the two properties. This was disallowed by HMRC in the closure notice. The relevant words in the closure notice were as follows:

"My conclusion

I don't believe the partnership ever commenced trading for reasons already put to your agent and that any expense incurred so far would have to be treated as pre-trading expenditure. I further believe that all income and expenditure contained in the return relates to property investment income. I have therefore amended the return, removing the adjustment for the revaluation of both sites, retained the rental income and allowed the expenditure incurred on a without prejudice basis."

It was common ground that the Appellant's claim for the decline in value of the properties required both of the following two conditions to be met:

1) the properties must have been trading stock (as opposed to investment assets) (the Trading Stock Issue),and

2) the Appellant must have been engaged in a trade in 2009/10, the year in which the loss relief was claimed (the Commencement of Trade Issue).

The Application

The Appellant appealed the closure notice and applied to the FTT to strike out HMRC's case under Rule 8(2)(a) of the Tribunal Procedure (First-tier) Tribunal (Tax Chamber) Rules 2009 (the Rules), on the basis that the conclusion set out in the closure notice was confined to the Commencement of Trade Issue which HMRC had subsequently abandoned and the FTT therefore had no jurisdiction to entertain any argument on the Trading Stock Issue, which was the basis upon which HMRC now sought to argue its case.

The FTT's decision 

The FTT considered the leading cases in this area, most notably Tower M Cashback LLP 1 v HMRC[2], in which the Supreme Court dismissed the taxpayer's appeal on the closure notice issue. The Supreme Court confirmed in that case that a closure notice completes and states HMRC's conclusions as to the subject matter of its enquiry. The appeal against the conclusions is confined to the subject-matter of the enquiry and of the conclusions, however, the jurisdiction of the FTT is not limited to the issue whether the reason for the conclusions is correct. Accordingly, the FTT may hear any legal argument relevant to the subject matter and any evidence in support of such legal argument, subject to its obligation to ensure a fair hearing.

The FTT also considered the recent decision of the Upper Tribunal (UT) in Fidex Ltd v HMRC[3], in which the UT helpfully summarised the applicable principles relating to closure notices and appeals as follows:

(1) An appeal to the FTT is brought against an amendment of a return which is required to give effect to conclusions stated in a closure notice.

(2) The scope of the appeal is defined by and confined to the subject matter of the enquiry, the conclusions and amendments (if any) set out in the closure notice. An appeal does not permit HMRC to launch a new roving enquiry into a tax return.

(3) It is HMRC's conclusion/amendments in the closure notice which matter, and not the process of reasoning which has led to them.

(4) HMRC does not need to give reasons for its conclusions.

(5) HMRC has a duty to make the closure notice as helpful to the taxpayer as is possible.

(6) The FTT has jurisdiction to entertain legal arguments which have played no part in HMRC's reasoning for the conclusions stated in the closure notice; any element of ambush or unfairness must be avoided by proper case management.

(7) It is a matter for the FTT to identify the subject matter of the enquiry, the conclusions and, therefore, the appeal.

(8) In determining these matters the context is relevant and may include, in addition to the subject matter of the enquiry and the contents of the closure notice, any other relevant correspondence.

(9) In making its determination, the FTT should also balance protection of the taxpayer with the public interest in the collection of the correct amount of tax.

In refusing the Appellant's application and allowing HMRC's cross application to amend its statement of case to reflect its position on the Trading Stock issue, the FTT confirmed that evidence and legal and factual arguments relevant to the correctness of the conclusion stated in a closure notice can be considered by the FTT, even if they played no part in HMRC's reasoning for its stated conclusion. However, the conclusion stated in a closure notice would limit its jurisdiction.

In considering the Appellant's application, the FTT considered that the crux of the issue was whether the Commencement of Trade Issue was the sole conclusion in the closure notice so far as the net realisable value adjustment was concerned, or whether the Commencement of Trade Issue was merely a reason for a broader conclusion that the Appellant was not entitled to make the net realisable value adjustment.

The FTT considered the correspondence relating to the conduct of the enquiry and noted that it was apparent from the outset that the subject-matter of the enquiry was not limited to the Commencement of Trade Issue, or indeed even to the net realisable value adjustment.

The Appellant had argued that HMRC conceded the Trading Stock Issue in correspondence prior to the issue of the closure notice.  However, following careful consideration of the correspondence, the FTT concluded that HMRC had not conceded the Trading Stock Issue. The wording used by HMRC in correspondence was not inconsistent with the property being developed as an investment asset rather than as trading stock. Similarly, other correspondence during the enquiry suggested to the FTT that HMRC had declined to confirm that the Commencement of Trade Issue was the only issue to be decided in connection with the net realisable value adjustment and that there might be other issues in an appeal before the FTT. The FTT therefore concluded that the conclusion in the closure notice was that the net realisable value adjustment was disallowed.


The content of closure notices and the extent to which such content restricts the scope of any subsequent appeal is an important area of the law. This decision provides helpful confirmation of the principles which apply in relation to what information must be included in a closure notice and the scope of the issues to be determined in any subsequent appeal. It is clear from this case that where a taxpayer seeks to limit the issues before the FTT on the basis of the content of the closure notice, careful textual analysis of the enquiry notice itself and all relevant correspondence with HMRC will be required by the FTT in order for it to reach a decision.

For the full judgment please click here.

[1] [2015] UKFTT 0470 (TC).

[2] [2011] UKSC 19.

[3] [2014] UKUT 454 (TCC). 

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