Closure Notices and HMRC’s “Fishing Expedition” (HMRC v Jonathan Hitchins & Ors)

In the recent case of HMRC v Jonathan Hitchins & Ors [2024] UKUT 00114, the Upper Tribunal (UT) upheld the First-tier Tribunal’s (FTT) decision, confirming that it was within its rights to grant the taxpayers’ applications under section 28A, Taxes Management Act 1970 (TMA). This ruling required HMRC to issue closure notices, effectively bringing an end to prolonged and unfocused enquiries into the taxpayers’ affairs, which the FTT deemed to be nothing more than a “fishing expedition.”

HMRC v Jonathan Hitchins, Jeremy Hitchins and Robert Hitchins

The case involves three brothers, Jeremy, Jonathan, and Stephen Hitchins, whose father, Robert Hitchins, founded Robert Hitchins Group Ltd (RHG) in 1960. By the time HMRC initiated its current enquiries, the business was ultimately owned by a discretionary settlement in Guernsey through companies incorporated and resident in Bermuda.

In 2003, RHG paid a substantial dividend of £40 million. Over a decade later, in 2014, HMRC opened enquiries into the tax returns of all three brothers. The primary focus was whether the dividend could trigger a charge under Chapter 2, Part 13, Income Tax Act 2007, which relates to transfers of assets abroad (ToAA). This wasn’t the first time HMRC had looked into the brothers’ tax affairs; the underlying events had been disclosed between 2006 and 2008 during a previous enquiry that was closed in 2011 without amendments.

The Taxpayers’ Application for Closure Notices

Under section 28A(4), TMA, taxpayers have the right to apply to the FTT for a direction requiring HMRC to issue a closure notice within a specified period. The FTT is obliged to grant such a direction unless HMRC can demonstrate reasonable grounds for refusing the application. The burden of proof, therefore, rests on HMRC.

In this case, the Hitchins brothers applied for a direction to compel HMRC to issue closure notices for a total of 13 open enquiries into their self-assessment tax returns.

First-tier Tribunal Decision

The FTT granted the taxpayers’ applications, holding that HMRC’s enquiries had reached a stage where it was reasonable for HMRC to make an informed judgment on the matter. Despite not receiving answers to all its questions, the FTT concluded that the remaining questions lacked a reasonable basis and amounted to a “fishing expedition.”

Moreover, the FTT disagreed with HMRC’s assertion that compelled closure notices would be vague and uninformative. The FTT found that HMRC had sufficient information to close its enquiries regarding the potential ToAA charge related to the dividend distribution. The FTT also remarked that the enquiries had “gone on for far too long.”

Unsurprisingly, the FTT directed HMRC to issue closure notices within six weeks of its decision, as HMRC failed to demonstrate reasonable grounds for refusing the applications. Dissatisfied with this outcome, HMRC appealed to the Upper Tribunal.

Download FTT Judgment Here

Upper Tribunal Decision: Upheld FTT Decision

HMRC’s appeal was dismissed by the Upper Tribunal. HMRC relied on three grounds of appeal, but the UT noted that it struggled to identify the precise nature of the alleged errors of law, which were presented as a series of interrelated complaints about the FTT’s decision.

In summary, HMRC’s grounds of appeal were:

1. The FTT did not adequately explain how it reached its decision based on the relevant principles.
2. The FTT referred to the taxpayers having “well-known and reputable advisers.”
3. The FTT erred in law by finding no liability for any of the taxpayers simply because the dividend was paid to a UK company.

The UT found no errors of law in the FTT’s decision, stating that the FTT had made a balanced and evaluative decision based on all relevant evidence. The UT saw no reason to interfere with the FTT’s conclusion that HMRC’s enquiry had been unduly prolonged and should be closed.

Download the Judgment Here

The Importance of Timely Enquiries

This case highlights a significant issue in tax disputes: the length of time HMRC enquiries can take. The relevant legislation does not impose a time limit on concluding an enquiry, which can result in prolonged and unfocused investigations. Section 28A, TMA, provides taxpayers with a mechanism to compel HMRC to close such enquiries, and as this case demonstrates, the tax tribunals are willing to support taxpayers when appropriate.

Expert London Tax Lawyers

At LEXLAW, we understand the complexities and challenges that come with prolonged HMRC enquiries. Our team is experienced in navigating these issues and can help you determine the right course of action, including applying for closure notices under section 28A, TMA. If you find yourself in a situation where an HMRC enquiry has gone on for too long, contact us today to discuss how we can assist you in bringing it to a resolution.

By staying informed and proactive, you can protect your rights and avoid the stress of unnecessary, prolonged investigations. Let us help you ensure that your affairs are handled efficiently and in compliance with the law.

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