Does Mr Archer owe HMRC a debt which exceeds the current bankruptcy level of £5,000? If so, then HMRC are entitled to serve a statutory demand in order to pave the way for bankruptcy proceedings. HMRC claim that he owes them a debt in consequence of section 59B (5) of the Taxes Management Act 1970 (“the TMA”) which applies to an amount of tax payable as a result of the amendment or correction of a self-assessment under section 28A of the TMA. Mr Archer says that, at least at present, he owes them nothing because of the way in which HMRC have made mistakes in the necessary paperwork; but that if he owes them anything he is ready and able to pay. The answer to the ultimate question depends on the answers to three subsidiary questions. The logical order in which to take them seems to me to be as follows:

Did closure notices served by HMRC on Mr Archer comply with the requirements of section 28A of the TMA by amending Mr Archer’s self-assessments?

If they did not, was there a defect or omission in them which can be cured by section 114 of the TMA?

If the notices are invalid to create a debt can Mr Archer challenge steps taken by HMRC towards his bankruptcy in the ordinary courts or by judicial review; or is his only means of challenge by way of appeal to the First-tier Tribunal (“the FTT”) ?

In a closely reasoned judgment Jay J answered those questions:

The closure notices did not comply with section 28A.

The defects were incapable of cure by section 114 on an application for judicial review.

But Mr Archer ought to have appealed to the FTT which could have cured the defect by the application of section 114. He had not exhausted his available remedies and therefore his application for judicial review was dismissed.

The judge’s judgment is at [2017] EWHC 296 (Admin), [2017] 1 WLR 2066.

In order to understand the rival arguments, it is necessary first to describe the nature of the statutory scheme of self-assessment to tax. The details have changed from time to time but the basic scheme remains the same. A person may be required by notice to make and deliver a personal return: TMA s 8. The purpose of the return is to establish the amounts to which the taxpayer is chargeable for income tax and capital gains tax. It must provide the information required by the standard form on which it is made together with such accounts and other documents as may be required. The return must include a self-assessment: i.e. an assessment of how much income tax and capital gains tax is payable: TMA s 9 (1). In certain circumstances the taxpayer need not make the assessment himself but in that event HMRC will make it on his behalf, send it to him; and it will be treated as a self-assessment: TMA s 9 (2), (3) and (3A). Where a return is delivered to HMRC, HMRC may enquire into the return. The unrestricted power to open an inquiry is subject to time limits: TMA s 9A. Once under way an enquiry is brought to an end by a closure notice: TMA s 28A. This is at the heart of the appeal, so I need to quote it.

If the taxpayer does not file a return and self-assessment as required by section 8, then HMRC may make a “determination” of the amount on which the taxpayer is chargeable to income tax and CGT and the amount of tax payable by the taxpayer. Notice of the determination must be served on the taxpayer. Such a determination has effect as if it were a self-assessment made by the taxpayer: TMA s 28C.

There is a right of appeal to the FTT against “any conclusion stated or amendment made by a closure notice”: TMA s 31. On appeal the FTT may reduce or increase a self-assessment: TMA s 50.

Section 59B (5) provides:

Paragraph 5 of Schedule 3ZA provides that the tax is payable at the end of 30 days after the closure notice is given.

Section 113 (3) of the TMA provides:

Section 114 of the TMA provides:

The dispute arises out of Mr Archer’s attempt to claim tax losses and consequential tax relief in relation to two marketed tax mitigation schemes; one known as RDS (in his return for the tax year 2001/2); and the other as SHIPS (in his return for the tax year 2002/3). The details of the schemes need not concern us. Each return quantified both the losses and the tax relief claimed. Each return also stated in Box 18.3 of the form then in use what Mr Archer said his overall tax liability was. HMRC opened an enquiry into both returns. In 2009 the Court of Appeal decided that neither scheme worked.

On 30 October 2015 HMRC issued follower notices ('FNs') and accelerated payment notices ('APNs') in respect of the RDS losses, relating to both of the tax years in issue. An FN may be issued where a tax enquiry is in progress and HMRC consider that there is a judicial ruling relevant to a claimed tax advantage. An APN may be given during the course of a tax enquiry where an FN has been given in relation to the claimed tax advantage; and must specify the amount of understated tax due. For the tax year 2001/2, the amount said to be due was £7,246,913.60 (i.e. about £400,000 less than the amount specified in the tax return as an allowable relief); for the tax year 2002/3, the amount said to be due was £1,907,248.41 (i.e. the same amount as that specified in the tax return as an allowable relief). On 15 January 2016 an FN and an APN were issued in respect of the SHIPS loss claimed in the 2002/3 tax return. The APN showed an amount due of £5,070,904 being the same as the amount specified by the taxpayer as an allowable relief in his return. There is no right of appeal against an APN. Mr Archer has not paid the amounts stated in either APN. However, HMRC do not rely on either APN as creating a debt due from Mr Archer to HMRC because under section 223 (5) (b) of the Finance Act 2014 payment is not yet due.

On 5 January 2016 KPMG, who have acted on Mr Archer’s behalf throughout, applied to the FTT under section 28A (4) of the TMA for a direction that HMRC issue a closure notice in relation to the 2001/2 return. In support of the application KPMG stated:

HMRC (acting by Mrs Cook) issued what purported to be closure notices in relation to each return on 2 February 2016. The notice relating to the return for the year 2001/2 stated, so far as relevant:

There were some differences in wording between this notice and that relating to the return for 2002/3, but nothing turns on the differences.

Although the closure notice said that “I am amending your return to reflect all of the above” there was a factual dispute about what had in fact happened. HMRC maintained that Mr Archer’s on-line tax return had indeed been amended on 2 February 2016. HMRC also contended that the amendments would have been visible to KPMG on HMRC’s website and, in addition, that HMRC had sent revised tax calculations to KPMG. Mr Archer disputed these allegations. The judge heard evidence and reached the following conclusion at [31]:

There are two express statutory requirements of a closure notice. The first, under section 28A (1), is that the officer must “state his conclusions”. The second, under section 28A (2), is that the closure notice must either (a) state that in the officer's opinion no amendment of the return is required, or (b) make the amendments of the return required to give effect to his conclusions. We are concerned with the requirement in section 28A (2)(b).

Mr Goldberg QC, on Mr Archer’s behalf, submits that the requirement in section 28A (2) (b) is not satisfied unless the closure notice itself informs the taxpayer of the amount of tax that he is required to pay. In support of that submission he relies on the decision of Browne-Wilkinson J in Hallamshire Industrial Finance Trust Ltd v IRC [1979] 1 WLR 620. He held that an assessment made by the Inland Revenue was required to state the amount of tax payable. At 625 he said:

He concluded that the words of the statute did not compel that result. As he put it at 627:

Ms Nathan, on behalf of HMRC, does not challenge the decision in Hallamshire. But, she says, that was then and this is now. Hallamshire was decided at a time when all assessments were made by the Inland Revenue. A closure notice, even one that amends a return, is not an “assessment,” at least for the purposes of time limits: Morris v HMRC [2007] EWHC 1181 (Ch), 79 TC 184 at [38]. Moreover, there is no express requirement in section 28A (2) (b) that the amount of tax payable in consequence of the enquiry be stated in the closure notice itself. This contrasts with the position in earlier iterations of section 28A which said that an enquiry was completed when HMRC notified its “conclusions as to the amount of tax which should be contained in the taxpayer’s self-assessment”; but that requirement was removed by the Finance Act 2001, which enacted section 28A in its current form. Under the self-assessment regime it is the taxpayer who is required to make the assessment, and even where an officer of HMRC performs the calculation the statute provides expressly that he does so on behalf of the taxpayer, and the result is treated as a self-assessment. The Budget Notes 1994 introducing self-assessment described it as “the most fundamental reform of personal tax administration for 50 years”. The burden of making an accurate assessment has shifted from HMRC to the taxpayer himself; and that responsibility for making an accurate assessment applies just as much to an amended self-assessment as to the original self-assessment.

Finally, on the judge’s findings of fact HMRC did amend Mr Archer’s return, at least in its on-line version. Since the amendment consisted in disallowing the claims for loss relief that Mr Archer had made, it necessarily followed that he and KPMG knew the amount of tax for which he was liable. If any of that needed verification the on-line return was visible on HMRC’s website.

In agreement with the judge, I consider that Mr Goldberg is right on this issue. The self-assessment that the taxpayer is required to file as part of his return must state the amount of tax for which the taxpayer is liable. One would naturally expect that an amendment to that assessment must likewise state the amended amount of tax for which he is liable. The formal requirements for the validity of a closure notice must be the same irrespective of the sophistication of the particular taxpayer and the skill of his professional advisers, if indeed he has any. Section 28A (2) (b) requires the amendment of the return to be made by the closure notice itself; not merely by an officer of HMRC. So, unless incorporated by reference, Mrs Cook’s amendment of the on-line return cannot itself satisfy the words of the sub-section. I think that this conclusion coincides with the view of the FTT in Wong Yau Lam and Sau Yau Lam (t/a Sunlight Takeaway) v HMRC [2016] UKFTT 0659 (TC). That concerned a closure notice relating to a partnership return, to which section 28B rather than section 28A applies. At [25] the Tribunal stated:

They continued at [26]:

At [29] they said:

The Upper Tribunal reached a similar conclusion in B & K Lavery Property Trading Partnership v HMRC [2016] UKUT 525 (TCC), [2017] STC 829 at [26].

It is true that the self-assessment regime places the burden on the taxpayer, at least in the first instance, to work out the amount of tax for which he is liable and to state it in his return. It is also true that for some purposes, including time limits, an amendment to a self-assessment is not an “assessment”. But in functional terms an amended self-assessment is still a variety of assessment (even if preceded by the prefix “self”). Where it is HMRC that makes the amendment, I do not consider that the onus lies on the taxpayer to work out his liability all over again.

I do not consider that HMRC’s case gains support from the previous iteration of section 28A. Under that regime what was envisaged was a two-stage process. The first stage was the completion of the officer’s enquiries (which included his conclusions as to the amount of tax due). The second stage, which took place after the conclusion of those enquiries was the amendment of the self-assessment, either by the taxpayer (under section 28A (3)) or by HMRC (under section 28A (4)). Under the current version there is only a single step which is that the closure notice itself must amend the return. The two-stage process was that which this court considered in Bristol & West plc v HMRC [2016] EWCA Civ 397, [2016] STC 1491, so it does not bear directly on our case. It was also for similar reasons that the FTT in Sunlight Takeaway rejected the argument that a closure notice was not valid until a subsequent step had been taken; namely the notification by HMRC of the amendments.

Ms Nathan had two further arguments under this head. The first argument, as formulated in the written skeleton argument, was that the amendments to the on-line return were incorporated into the closure notice by reference. I accept that in principle a closure notice could incorporate another document by reference (and Mr Goldberg did not dispute this); and I am also prepared to accept that such a document could be one which is electronically accessible. However, this argument fails on the facts. The closure notice said nothing about any on-line amendment. If it had given a link to HMRC’s website that might have been enough: but it did not.

However, in oral submissions Ms Nathan put this argument somewhat differently. She argued that what had been incorporated by reference was Mr Archer’s original self-assessment as shown by the reference in the closure notice to “the loss you claimed to have sustained”. The only claim to the loss had been in the return; and thus the return was incorporated by reference. Since it was clear from the closure notice that that claim had been disallowed, it necessarily followed that it had to be added back to the amount shown in the return as the amount on which Mr Archer was chargeable to tax. It was also clear from the closure notice that the benefits in kind had to be added back. The closure notice said that Ms Cook was “amending your return to reflect all of the above” and therefore it was clear what HMRC said that Mr Archer owed. The requirement in section 28A (2) is that the closure notice must amend the return. These were amendments to the return. They may not have been explicit amendments to the ultimate self-assessment (in Box 18.3 of the return) but since the self-assessment forms part of the return, and the return had been amended, section 28A (2) (b) was complied with. I can accept this argument, up to a point, but it does not lead to HMRC’s desired conclusion. I accept that the closure notice incorporated Mr Archer’s original self-assessment by reference. I accept also that reading the closure notice alongside the original return a reader would have understood that the amount of the claimed loss and the benefits in kind both had to be added back to the parts of the return dealing with the amount upon which Mr Archer was chargeable to tax. But I do not accept that that amounted to an amendment of the self-assessment itself (i.e. the amount stated in Box 18.3) which would represent the amount that Mr Archer actually had to pay. Although a self-assessment is required to be included in the return, it does not follow that other parts of the return are a self-assessment. As Mr Goldberg submitted, liability under section 59B (5) arises in consequence of an amendment to a self-assessment: not merely an amendment to a return.

Second, she submitted that a reasonable person in the position of Mr Archer would have known what amount was due. That was sufficient to comply with section 28A (2)(b). In support of that proposition she relied on Bristol & West in which this court applied the ordinary principles applicable to the interpretation of notices to the interpretation of two purported closure notices. However, I agree with Mr Goldberg that if there was a failure to amend the self-assessment in the closure notice itself that failure cannot be cured by interpretation of the words that are there. At best, this argument means no more than that it is possible to work out what amendment to self-assessment would have been made by the closure notice, if it had made any amendment to that self-assessment at all.

In my judgment in principle Hallamshire still holds good where it is HMRC who calculate the tax due, despite the change to self-assessment. I consider, therefore, that the closure notices did not comply with section 28A (2). Unless section 114 can be successfully invoked to supply the omission to amend the self-assessment, no debt payable under section 59B (5) has been created. The application of section 114 was not addressed in Hallamshire, so it is to that question that I now turn.

I am bound to say that I find the judge’s decision on this question very hard to understand. On the one hand, he appears to have held at [83] that there was nothing upon which section 114 could bite, at least in the context of proceedings for judicial review. On the other hand, he appears to have held at [94] and [101] that section 114 could validate a closure notice, at least in the context of an appeal to the FTT, and that if there had been an appeal the FTT would have validated the closure notices on the facts of this case. I cannot reconcile those two conclusions. Counsel for both parties had the same difficulty.

In Baylis v Gregory [1989] AC 398, 438 this court held that where section 114 applies it gives HMRC or the taxpayer, as the case may be, “the statutory right to claim that the assessment, warrant or other proceeding in question shall not be affected by reason of a mistake etc.” This is not a procedural right but a substantive one. It is a right to have the document in question treated as if it had been in the correct form. I cannot see why it should make any difference to that statutory right in which forum the right is asserted. Suppose that HMRC had given a closure notice which was correct in all respects except that it had misspelled the taxpayer’s name, and HMRC then served a statutory demand based on that closure notice. It would be very surprising if, on an application to set aside that statutory demand, the bankruptcy court could not apply section 114 (1) to validate the closure notice.

At [94] the judge held that the closure notice was an “other proceeding” for the purposes of section 114, and recorded that Mr Goldberg did not submit otherwise. It is generally accepted that the phrase “other proceeding” in section 114 is intended to be a shorthand reference to the kinds of documents and matters listed in section 113, which include every “document required to be used in assessing, charging, collecting and levying tax”: McGuinness v HMRC [2013] UKFTT 088 (TC) at [53]. Although in his skeleton argument in this court Mr Goldberg’s preference was to consider section 114 on the footing that what was in issue was an amendment to the return, he also said that it made no difference which perspective was adopted. It seems to me that since section 28A (2) prescribes the contents of a closure notice, and the purported closure notices in this case omitted to amend the self-assessments, what we are dealing with are defective closure notices and we should approach section 114 from that perspective. In addition the closure notices stated in terms that they were given under both section 28A (1) and 28A (2). Thus they necessarily purported to amend Mr Archer’s self-assessments (reinforced by the statement that “I am amending your return”).

This court considered the scope of section 114 in HMRC v Donaldson [2016] EWCA Civ 761, [2016] STC 2511. That case concerned the payment of penalties for the late filing of a tax return. The statutory provisions required HMRC to give notice to the taxpayer: in one case “specifying the date from which the penalty is payable” and in another case stating “in the notice the period in respect of which the penalty is payable”. HMRC’s paperwork did not comply with these requirements. The taxpayer’s argument that section 114 could not apply because the notices failed to state any period at all failed. As Lord Dyson MR pointed out, section 114 covers omissions as well as mistakes or defects. So the fact that the closure notices did not in fact amend Mr Archer’s self-assessments is not necessarily a knock-out blow. The court held that section 114 did cure the omission. At [28] Lord Dyson endorsed the observation of Henderson J in Pipe v HMRC [2008] EWHC 646 (Ch), [2008] STC 1911 that some mistakes may be “too fundamental or gross” to fall within section 114. Mr Goldberg argued that a document which did not charge to tax was fundamentally different to one that did; and that an omission to charge to tax was indeed a mistake that was so fundamental that it could not be saved by section 114. However, as Ms Nathan submitted, Lord Dyson did not approach the question from some a priori categorisation of what kind of mistakes were fundamental or gross. Instead he concentrated on the nature and effect of the omission in the particular circumstances of the case. Lord Dyson reasoned as follows at [29]:

Although this passage is worded in terms that might suggest that the question was whether Mr Donaldson himself was misled, the test under section 114 must be an objective one: see Pipe v HMRC at [51]. However, in applying an objective test the reader of the closure notice must, I think, be taken to be equipped with the knowledge that Mr Archer and KPMG had, including knowledge of what had led to the enquiry and what HMRC’s conclusions were. This is consistent with Bristol & West at [26] and [38].

The judge found on the facts that:

Mr Archer had been notified of HMRC’s position, including the precise sums said to be due, by the APNs and the FNs before the date of issue of the closure notices.

The closure notices made it clear that HMRC were rejecting the whole of Mr Archer’s claims for loss relief.

Neither Mr Archer nor KPMG challenged HMRC’s arithmetic; and KPMG could have done the arithmetic themselves.

HMRC did in fact amend Mr Archer’s on-line returns and they were visible on HMRC’s website.

Although the conclusions in the closure notices were brief, they were sufficient to enable Mr Archer to understand where he stood with HMRC.

It was for those reasons that the judge concluded that at [101] that, on a hypothetical appeal to the FTT, the FTT would have remedied the omission by the application of section 114. Mr Archer does not have (nor did he ask for) permission to appeal against these findings of fact or the value judgment to which they led.

I do not consider that in reaching that conclusion the judge applied the wrong legal test. On the contrary, applying the test in Donaldson, Mr Archer’s liability could have been easily worked out, and he can have been in no doubt what he owed HMRC. He had in addition been informed by the APNs what HMRC asserted was his liability. He could not have been confused or misled. KPMG themselves had said in support of their application to the FTT that there was no amount of tax for 2001/2 which remained uncertain. HMRC’s omission to amend his return to accord with their conclusions was, in my judgment, a matter of form rather than substance on the particular facts of this case. I would hold, therefore, that the closure notices were validated by section 114; and that section 114 applies irrespective of the forum in which it is relied on.

I note also that in Pipe v HMRC at [30] Henderson J contrasted a mistake made internally by HMRC and a mistake made in giving notification to the taxpayer. In the case of a discrepancy between the notice and the internal assessment, section 114 would operate to cure the mistake in the notice. Although his observations were directed to a previous regime, in substance that is what happened in this case. Mrs Cook did in fact amend Mr Archer’s returns and self-assessments on line, but failed to tell him exactly what she had done.

In respectful disagreement with the judge, I would therefore dismiss the appeal on the ground that section 114 operated to validate the closure notices as amendments of Mr Archer’s returns and self-assessments. Mr Archer therefore owes HMRC a debt which exceeds the bankruptcy limit.

In view of my conclusion on the application of section 114 this question does not arise, so I can deal with it shortly. However, if Mr Goldberg had been correct in submitting that there had been no effective amendment of Mr Archer’s self-assessments, and therefore no debt presently owing to HMRC, I find it difficult to discern the principle upon which a taxpayer could have been compelled to appeal to the FTT entirely against his own interest.

Mr Archer could have appealed against the conclusions stated in the closure notices but has chosen not to do so. Had he wished to dispute those conclusions then recourse to the FTT would have been his only option. His point is an entirely technical one: no debt has been created for the purposes of the Insolvency Act 1986. That, as it seems to me, is not a question for the FTT. It does not depend on whether HMRC are right or wrong in their conclusions. Nor does it depend on whether the purported closure notices are or are not valid. It is not a question of what the closure notices should have contained: it is a question of what they did contain. The answer depends simply on whether as a matter of fact (taking into account section 114) there was an amendment of Mr Archer’s self-assessment. Proceedings to recover an amount of tax said to be due are collection proceedings. The mere fact that some tax issue arises in collection proceedings does not without more mean that the FTT is the only place that the dispute can be determined. If the dispute does not concern the correctness of HMRC’s view about how the tax code applies to the taxpayer’s case I do not consider that the civil courts are barred from dealing with that dispute: see HMRC v Cotter [2013] UKSC 69, [2013] 1 WLR 3514 at [32].

Accordingly, I consider that if HMRC had served Mr Archer with a statutory demand, Mr Archer would have been entitled to apply to set it aside on the ground that there was no debt owing to HMRC (if his legal arguments on the effect of the closure notice had been correct). HMRC did not argue (either before the judge or before us) that the availability of a potential challenge to a statutory demand either in the county court or in the Chancery Division was in itself a reason to refuse judicial review. On the assumption that such an argument would not have prevailed, I cannot see that it makes any difference if, instead, he seeks to challenge the decision to initiate proceedings towards his bankruptcy.

For these reasons, which differ from those of the judge, I would dismiss the appeal.

I agree.

I also agree.