The First-tier Tax Tribunal (FFT) has ordered HM Revenue & Customs (HMRC) to close its enquiries into a dividend paid to three brothers from a Bermuda-resident family business through a Guernsey discretionary trust 20 years ago.
The company, RHG, paid the £40m ($50m, €45m) dividend to Jeremy, Jonathan and Stephen Hitchins in 2003. By the time, HMRC opened its current enquiries, the business was ultimately owned by a discretionary settlement in Guernsey via companies incorporated and resident in Bermuda.
In 2003, RHG paid a dividend of £40m and, in 2014, HMRC opened enquiries into the returns of all three brothers that focused mainly on whether the dividend could give rise to a charge under Income Tax Act 2007, relating to transfers of assets abroad (ToAA).
According to law firm RPC, this was not the first enquiry by HMRC into the tax affairs of the taxpayers. The underlying events under enquiry had been disclosed to HMRC between 2006 and 2008 in the course of a previous enquiry which had been closed by the same HMRC officer without any amendments in 2011.
Under Section 28A(4) of the Taxes Management Act 1970, a taxpayer can apply to the FTT for a direction that HMRC issue a closure notice within a specified period. Section 28A(6) provides that the FTT is obliged to give such a direction unless it is satisfied that there are reasonable grounds for not doing so. The burden is therefore on HMRC to demonstrate that there are reasonable grounds for refusing any such application.
The taxpayers applied under section 28A for a direction compelling HMRC to issue closure notices in respect of a total of 13 open enquiries into their self-assessment tax returns.
FTT decision
The brothers’ applications were granted. The FTT held that HMRC’s enquiries had been conducted to a point where it was reasonable for the UK taxman to make an “informed judgment” of the matter, even though every line of enquiry may not have been pursued to the end.
While HMRC had not received answers to all of their questions, the FTT considered that the outstanding questions relating to the £40m distribution did not have a reasonable basis and amounted to a “fishing expedition”.
RPC said: “The FTT disagreed with HMRC that if it was compelled to issue closure notices now, they would be in vague and uninformative terms. The FTT commented that HMRC had sufficient information on which to be able to close its enquiries relating to the potential for a ToAA charge in respect of the distribution. The FTT further commented that the enquiries had ‘gone on for far too long’.”
The FTT concluded that HMRC had failed to demonstrate that there were reasonable grounds for refusing the taxpayers’ applications for closure notices and directed that HMRC issue closure notice within six weeks of the FTT’s decision.
Industry welcome decision
Alexis Armitage, associate at law firm RPC, said: “This decision will be welcomed by taxpayers and their advisers. One of the keenest areas of contention between HMRC and taxpayers is the length of time enquiries can take before they are finally concluded. As the legislation does not provide a time limit by which HMRC is required to conclude an enquiry, enquiries often become unfocussed and protracted.
“There will therefore be occasions when a taxpayer decides that an enquiry has gone on for long enough and wishes to bring it to an end. Section 28A, TMA 1970, provides an effective mechanism by which a taxpayer can apply to the FTT for a direction requiring HMRC to close its enquiry within a specified time period and we are finding that clients are increasingly choosing to make such an application.”
