Mark McLaughlin points out that procedural error by HMRC can sometimes be to the taxpayer’s advantage.
The UK’s tax system might seem harsh to taxpayers who make a mistake, such as where a tax return error results in a penalty. Taxpayers (and their advisers) could be forgiven for thinking that in contrast, when HM Revenue and Customs (HMRC) makes a mistake such as a procedural or clerical error when opening an enquiry into a tax return, it suffers no significant repercussions. Whilst this will often be the case, the tax legislation does not always save HMRC from a fall when they slip up.
HMRC error
For example, in Mabbutt v Revenue and Customs [2016] UKFTT 306 (TC), HMRC issued by letter a notice of its intention to enquire (under TMA 1970, s 9A) into the appellant’s tax return ‘for the year ending 6 April 2009’ (emphasis added).
The appellant’s agent pointed out to HMRC that the notice of enquiry did not refer to the tax year ended 5 April 2009. HMRC’s response was that the letter was a valid notice of its intention to enquire into the appellant’s tax return for the year ended 5 April 2009. HMRC argued that the notice was ‘saved’ by legislation dealing with errors in assessments, etc. (see below).
HMRC later closed the enquiry. The difference between the calculations of HMRC and the appellant in respect of his tax liability for the year ended 5 April 2009 was around £653,000. The appellant appealed against HMRC’s conclusions in the closure notice, and contended that an enquiry was not opened because no valid notice of enquiry was given.
An escape route for HMRC?
HMRC sought protection from its error by relying on TMA 1970, s 114(1), which broadly provides that assessments etc., are not invalidated by errors in certain circumstances. The First-tier Tribunal in Mabbutt considered that there are four requirements in s 114(1):
- the provision only applies to certain documents, and an HMRC notice of enquiry must be one of them;
- HMRC’s notice of enquiry must purport to be made pursuant to a provision of the Taxes Acts;
- the notice of enquiry must be ‘in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts’; and
- the person or property charged or affected by the notice of enquiry must be ‘designated therein according to common intent and understanding.’
The tribunal held that the requirements in 1, 2 and 4 were all satisfied. However, the tribunal concluded that requirement 3 above was not satisfied, as the return described in HMRC’s letter giving notice of the enquiry was for a tax year which did not exist.
In order to rely on s 114 to cure the error in the notice of enquiry sent to the appellant, HMRC needed to satisfy the tribunal that all four requirements in s 114(1) were met. Although satisfied that three of them were met, the tribunal held that the error in HMRC’s letter resulted in a stated intention to enquire into a tax return for a year which did not exist, and that ‘the substance and effect did not conform to the intent and meaning of the Taxes Acts.’
The tribunal concluded that HMRC’s enquiry notice did not constitute a valid notice of enquiry into the appellant’s return for the tax year ended 5 April 2009, and s 114 did not apply to save the disputed notice. Without a valid enquiry notice, there was no enquiry. HMRC’s purported closure notice therefore had no standing. The appellant’s appeal was allowed.
Practical Tip:
Even though HMRC lost the above case, could they not have simply issued a new, correct tax return enquiry notice? In many cases, they can. However, in Mabbutt, HMRC were out of time to do so. In addition, by the time this case reached the tribunal, HMRC were also out of time to raise a discovery assessment (under TMA 1970, s 29) outside the normal tax return enquiry window. HMRC’s error was therefore costly – to the tune of about £653,000.
