HMRC v Tower MCashback LLP 1 [2011] UKSC 19

Your enquiry ended with a closure notice giving one reason. Beat that reason and you win, surely? Tower MCashback says otherwise. The notice fixes the subject matter of the appeal, not the arguments HMRC may run within it.

Why This Case Matters

Every enquiry ends in a closure notice, and every closure notice contains a stated conclusion. The natural assumption is that the appeal which follows is about that conclusion and nothing else, so that if the taxpayer defeats the stated reason, the appeal is won.

Tower MCashback holds otherwise. The closure notice defines the subject matter of the appeal, but HMRC is not restricted to the arguments it originally advanced within that subject matter, and the tribunal is not tied to the precise wording of the notice.

The Statutory Framework

• s28A TMA 1970: a closure notice must state the officer’s conclusions and either state that no amendment is required or make the amendments required to give effect to those conclusions. The equivalent for company tax returns is in Schedule 18 FA 1998.
• s31 TMA 1970: the right of appeal against the conclusion or amendment.
• s50 TMA 1970: the tribunal’s powers on determining an appeal: to reduce, increase or confirm the assessment as it thinks appropriate on the evidence before it.

The tension the case resolves is between s28A, which speaks of stated conclusions, and s50, which gives the tribunal a broad power to determine the correct amount.

The Facts

The appeal arose out of an expenditure claim in a software partnership arrangement. HMRC enquired into the partnership returns and issued closure notices disallowing the claim, stating a particular basis for doing so.

By the time the matter came before the tribunal, HMRC wished to advance a different analysis of why the expenditure claim failed, still directed at the same claim, but not the reasoning set out in the notice. The taxpayer objected that HMRC was confined to the conclusion it had stated.

The Ratio Decidendi

Lord Walker on the officer’s function

Lord Walker held that a closure notice may be issued in broad terms, and that an officer issuing one is performing an important public function in which fairness to the taxpayer must be matched by a proper regard for the public interest in the recovery of the full amount of tax payable.

He drew a practical distinction. Where only a single specific point is in issue, that point should be identified in the closure notice. But where the facts are complicated and have not been fully investigated, the public interest may require the notice to be expressed in more general terms.

Lord Hope on s50

Lord Hope added that although the scope and subject matter of the appeal are defined by the conclusions in the closure notice, s50 means the tribunal is not tied to the precise wording of the notice when hearing the appeal. He also said that the officer should, wherever possible, set out the conclusions reached on each point that was the subject of the enquiry.

Obiter and the Boundaries Left Open

• Where the outer limit of “subject matter” falls. The Court did not define it. HMRC may not use an appeal about one claim to open up an unrelated part of the return, but exactly how far a new argument may travel from the stated conclusion while remaining within the same subject matter is a question of degree that later cases have had to work out.
• The observations on drafting practice. Lord Walker’s remarks about when a notice may properly be general, and Lord Hope’s about setting out conclusions on each point, are guidance rather than rules. They are nonetheless the most useful part of the judgment for a taxpayer, because they give a standard against which a notice can be measured.
• Case management. The Court’s comments on the tribunal’s ability to control late changes of case, and on the need for the taxpayer to have a fair opportunity to meet a new argument, are procedural observations, but they are the practical remedy where HMRC changes tack.

Practitioner Application

When the closure notice arrives

• Read it for scope first, then for substance. What subject matter has HMRC brought into the appeal? Is it one point, or the whole return?
• Object to breadth at the time. Where the enquiry examined a specific issue and the notice is drafted in sweeping terms, say so in correspondence. Lord Hope’s direction that conclusions should be set out on each point gives you the standard.
• Consider a s28A application to force closure where an enquiry is drifting. Our resource on closure notice applications covers the procedure.

When HMRC changes its case

• Test whether the new point is within the same subject matter. If it concerns a different claim, a different source or a different year, it is outside the appeal.
• If it is within scope, do not fight the principle: fight the process. Insist on the new case being properly pleaded, on directions for further evidence, and on an adjournment if genuinely needed. A late change that prejudices the appellant is a case management problem for HMRC, not a reason to exclude the argument.
• Watch the burden. Where HMRC advances a new positive case, consider who must prove what. On the amount of an assessment the burden is generally the appellant’s, but on matters such as behaviour or the validity of a discovery it is HMRC’s.
• Preserve the point for appeal. If the tribunal permits a new argument over objection, record the objection and the prejudice. A scope point is an error of law capable of grounding an appeal to the Upper Tribunal: see Edwards v Bairstow.

Preparing the appeal

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