For how long can HMRC pursue a tax investigation?

Tax enquiries

The self-assessment tax returns of Jonathan, Jeremy and the executors of Stephen Hitchins (H) had been subject to HMRC enquiries for over eight years. H were part of a wealthy family with overseas business interests and HMRC’s concerns related to special rules regarding the transfer of assets abroad (ToAA). These exist to prevent income and gains from such assets escaping the UK tax net. The amounts involved in this case meant that the tax lost could have been significant.

Application for closure

H had answered all the questions they believed HMRC was reasonably entitled to ask and an impasse was reached. HMRC was unable to prove unfair tax avoidance and H were unable to convince it that no avoidance had taken place. To break the deadlock H applied to the First-tier Tribunal (FTT) to issue closure notices which would force HMRC to give up its investigations.

If a stalemate has been reached in an HMRC enquiry you can apply to the FTT for it to be formally closed. The FTT will want to be satisfied that you have provided all the information and data which HMRC could reasonably expect to settle the enquiry.

FTT’s considerations

The FTT considered HMRC’s argument that despite several years of enquiries it did not have all the information it needed to say one way or the other if the ToAA rules applied. While the FTT accepted that not all HMRC’s questions had been answered in full by H, it was clear to it that HMRC had misunderstood the position. More worryingly, the tax inspector was unwilling to acknowledge any errors or mistakes he may have made and refused to budge from his initial view despite new information provided during the investigation. Sadly, this dog-with-a-bone approach is not uncommon with many HMRC officers.

FTT’s decision

The judge concluded that HMRC’s enquiries had gone on for far too long and HMRC was unable to show that it had reasonable grounds for the FTT to refuse H’s application for the enquiries to be closed. It therefore ruled in H’s favour and gave HMRC six weeks in which to issue closure notices.

Settling an enquiry

While the enquiries in this case had dragged on for several years, it’s not necessary to wait that long before asking the FTT to force HMRC to close an enquiry. The reason for a long wait in this case was because complicated facts and legislation were involved. With a simple situation and no dispute about how any rules involved work, HMRC should close an enquiry without unreasonable delay; that could be in a matter of months. It should not keep an enquiry open while it fishes for more information to widen its investigations.

Before going to the FTT to close an enquiry consider using one of the less confrontational options for settling a dispute, such as alternative dispute resolution