The Commissioners of HMRC v Jonathan Hitchins & Ors

This is an appeal by HM Revenue and Customs (“HMRC”) against the decision of the First-tier Tribunal (“FTT”) released on 16 February 2023 (“the Decision”) which directed HMRC to issue closure notices under section 28A Taxes Management Act 1970 (“TMA”) in respect of enquiries into the Respondents’ self-assessment tax returns.

The hearing before the FTT took place in two parts. The first hearing occurred on 26 May 2022, but it became apparent that there was insufficient time to conclude the hearing. We were informed that the parties encouraged the FTT to list a further hearing for later in the year in the hope that the parties would be able to narrow the issues between them. The second hearing took place on 28 November 2022.

Essentially, in this appeal, HMRC argue that in the Decision the FTT failed to apply the relevant legal principles in determining the closure notice applications and, alternatively, that the FTT erred in law in the way that it did so.

HMRC appeal with the permission of the FTT granted on 9 May 2023.

For the reasons given below, we dismiss HMRC’s appeal.

References in square brackets are to the Decision, unless the context otherwise requires.

Section 28A(4) TMA permits a taxpayer to 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 issuing a closure notice within a specified period. The burden is on HMRC to show that there are reasonable grounds for refusing the applications. In short, the FTT was not satisfied that there were reasonable grounds for not issuing a closure notice: see [64].

HMRC opened all the enquiries into the Respondents’ self-assessment returns in order to ascertain whether one or more of the Respondents was liable to a charge to income tax under Chapter 2, Part 13 Income Tax Act 2007 (“ITA”) which contains provisions known as the “transfer of assets abroad” (“ToAA”) legislation.

The ToAA legislation is complex anti-avoidance legislation which can give rise to a charge to tax in a number of circumstances. In their skeleton argument and at the hearing before us HMRC accepted that their enquiries, which had previously been broader, now related solely to section 731 ITA. This provision imposes a charge to income tax on income treated as arising to an individual section 732. Section 732, in broad terms, applies by virtue of subsection (1) if: (a) a relevant transfer occurs; (b) an individual receives the benefit in a tax year; and (c) the benefit is provided out of assets which are available for the purpose as a result of the transfer or one or more associated operations.

For the purposes of the ToAA legislation it was common ground that it was possible for relevant transactions to occur many years before the tax year in which the income arose or benefits were made available and which were subsequently subject to tax under the ToAA legislation in a later year. It therefore followed, that HMRC may, in the course of an enquiry, require information in relation to an earlier year if it was relevant to the tax position of an individual in a later year.

It was common ground before the FTT, at [8], and before us that the correct approach to be adopted by the FTT in determining an application for a closure notice was that outlined by Judge Falk (as she then was) in Beneficial House (Birmingham) Regeneration LLP & Stanley Dock (All Suite) Regeneration LLP v HMRC [2017] UKFTT 801 (TC) (“Beneficial House”) at [15]:

“There was no dispute as to the relevant principles to apply. Both parties referred to my decision in BCM Cayman LP and others v HMRC [2017] UKFTT 226 (TC), which reviewed the relevant case law. I would also refer to the subsequent Upper Tribunal decision in Frosh and others v HMRC [2017] UKUT 320 (TCC). In summary:

(1)

The procedure is intended as a protection to a taxpayer against enquiries being inappropriately protracted, providing a “reasonable balance” to HMRC’s substantial powers to investigate returns (HMRC v Vodafone 2 [2006] STC 483 at [33] and [34]) and protecting the taxpayer against undue delay or caution on the part of the officer in closing the enquiry (Eclipse Film Partners No 35 LLP v HMRC [2009] STC (SCD) 293 at [17]). The Tribunal is required to exercise a value judgment, determining what is reasonable on the facts and circumstances of the particular case (Frosh at [43]). This involves a balancing exercise.

(2)

The reasonable grounds that HMRC must show must take account of proportionality and the burden on the taxpayer (Jade Palace Limited v HMRC [2006] STC (SCD) 419 at [40]).

(3)

The period required to close an enquiry will vary with the circumstances and complexity of the case and the length of the enquiry: complex tax affairs and large amounts of tax at risk are likely to extend an enquiry, but the longer the enquiry the greater the burden on HMRC to show reasonable grounds as to why a time for closure should not be specified (Eclipse Film Partners, and Jade Palace at [42] to [43]). It may be appropriate to order a closure notice without full facts being available if HMRC have unreasonably protracted the enquiry: see Steven Price v HMRC [2011] UKFTT 264 (TC) at [40].

(4)

A closure notice may be appropriate even if the officer has not pursued to the end every line of enquiry. What is required is that the enquiry has been conducted to a point where it is reasonable for the officer to make an “informed judgment” of the matter (Eclipse Film Partners at [19]).

(5)

If it is clear that further facts are or are likely to be available or HMRC has only just received requested documents and may well have further questions, then a closure notice may not be appropriate: see for example Steven Price, and also Andreas Michael v HMRC [2015] UKFTT 577 (TC). The Tribunal should guard against an inappropriate shifting of matters that should be determined by HMRC during the enquiry stage to case management by the Tribunal. However, the position will turn on the facts and circumstances of each case: Frosh.

(6)

The Supreme Court’s comments on the subject of closure notices in HMRC v Tower MCashback LLP [2011] UKSC 19, [2011] 2 AC 457 are highly relevant. In particular, Lord Walker commented that whilst a closure notice can be issued in broad terms, an officer issuing a closure notice 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”, although 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” (paragraph [18]). Lord Hope also said at [85] that the officer should wherever possible set out the conclusions reached on each point that was the subject of the enquiry. In Frosh the Upper Tribunal commented at [49] that a closure notice in broad terms is “not the norm” and so should not be taken as an appropriate yardstick for assessing whether HMRC’s grounds for not closing the enquiry are reasonable.”

The FTT outlined the lengthy history of the enquiries into the Respondents’ returns at [6], [10]-[45]. Those findings are summarised below.

The Respondents are three brothers, Jonathan, Jeremy and the late Stephen Hitchins (referred to below, respectively, as Jeremy, Jonathan and Stephen and collectively as “the Respondents”).

The Respondents applied to the FTT under section 28A TMA for closure notices in respect of open enquiries into their self-assessment tax returns for the following years:

There were a number of underlying transactions which formed the background to the enquiries. These were summarised by the FTT at [20]-[26] as follows:

“20.

RHG was founded by the Applicants' father - Robert Hitchins. The company was incorporated in December 1960 and the two subscriber shares were transferred, and a further 98 shares allotted, to Robert and his wife Ada in 1962. They were resident in the UK at the time. In 1974 they emigrated to Guernsey, where they remained resident and domiciled until their deaths in 2001 and 1997 respectively.

21.

It appears that RHG was a very successful company. By way of example between March 1999 and March 2005 the company's P&L reserves grew from £46m to £84m, and its net assets increased from £49m to £86m.

22.

By 1984, RHG's issued share capital was divided into 100 ordinary shares and 100 deferred shares. Through a series of transactions, all the ordinary shares and 99 deferred shares became owned by Bay Investments Limited ("BIL") (a company incorporated and resident in Bermuda) and the other deferred share was owned by Investments Bermuda Limited ("IBL") (a company incorporated and resident in Bermuda). The shares in IBL and BIL were owned by Robert.

23.

In 1999, Robert settled the shares in BIL and IBL into a discretionary trust managed and resident in Guernsey, The Hitchins Family Settlement ("the Settlement"). HMRC have not been provided with details of the Settlement's beneficiaries or the nature of their interests, but Officer Rolls believes that the Applicants are all beneficiaries. In addition to the Settlement, the Hitchins Declaration of Trust ("the Trust") was established outside the UK following a reorganisation of the Settlement.

24.

The Applicants are (or in the case of Stephen, were) directors of RHG, but have never been shareholders of RHG.

25.

The accounts of RHG for the year ended 31 March 2004 show that it paid a dividend of £40,000,000. HMRC's enquires are mainly focussed on whether this dividend (and its onward transmission) could give rise to a charge under the ToAA legislation.

26.

In the course of an appeal against one of the many Schedule 36 notices, Mr Cassidy (Footnote: ¹)stated in his witness statement that the £40m dividend declared by RHG was not paid to Bay Group Limited ("BGL") (a company incorporated and resident in Bermuda). However, he did not state to whom the dividend was paid.”

The FTT at [27]-[33] discussed a difference in view between the parties which related to RHG’s form 363a Annual Return dated 14 February 2004. The FTT concluded at [32]-[33] that Mr Rolls, the HMRC officer handling the enquiry, had misinterpreted the information contained in form 363a Annual Return and preferred the Respondents’ view of the transactions which was summarised as follows at [31]:

“… [Bay Almanzora Limited (“BAL”)] (previously called Bay Holdings Limited) owned 999,899 ordinary shares and 100 deferred shares in RHG, and IBL owned 1 ordinary share in RHG. The following events then took place:

(a)

On 28 March 2003, BAL transferred its entire shareholding in RHG to [(New] Bay Holdings Limited (“NBH”)] (the newly incorporated company with the name Bay Holdings Limited). The shares in NBH were owned by the Settlement.

(b)

On 20 August 2023, NBH transferred its entire shareholding in RHG to its wholly owned subsidiary Relkeel.

(c)

On 25 August 2003, IBL transferred its entire shareholding in RHG to [Relkeel Limited (“Relkeel”)]. At this point Relkeel was the sole shareholder in RHG.

(d)

On 28 August 2003 RHG paid a £40m dividend to its sole shareholder Relkeel.

(e)

Relkeel was then liquidated and the £40m distributed in the liquidation to its shareholder NBH

(f)

On 21 October 2003, Relkeel transferred its entire shareholding in RHG to NBH - and although I have no express evidence on the point, this would be consistent with the RHG shares being distributed in specie in Relkeel's liquidation to NBH.

(g)

On 6 October 2003, BGL was incorporated and on 4 November 2003 NBH transferred its entire shareholding in RHG to BGL.

(h)

NBH was then liquidated and the £40m distributed in its liquidation to the trustees of the Settlement.

(i)

At some later stage, the shares in BAL were transferred to the Trust.”

The FTT concluded at [34]:

“34.

The evidence before me is that the £40m distribution received by the Settlement was appointed to a beneficiary or beneficiaries (not named) before 2005. The Applicants state that none of them were recipients of the amount distributed. This is supported by letters from the trustees of the Settlement confirming that no distributions or benefits were paid to the Applicants or their families in the relevant tax years. The Applicants refuse to give details of the recipient(s) on the grounds that this information is not relevant to enquiries into the Applicants' tax liabilities.”

BAL, BHL and MBH were all incorporated and resident in Bermuda. Relkeel was incorporated and resident in the UK.

The FTT referred to certain transactions concerning companies called Foxseal Limited (UK) and Saint Ledger Ltd (Bermuda) and to certain companies owning properties in Spain, but HMRC accepted that it could not justify keeping the enquiries open by reference to these companies and transactions.

HMRC had previously issued six information notices under schedule 36 Finance Act 2008 to Stephen, each of which had been withdrawn or successfully appealed. Two of those notices were withdrawn on the basis that they had not been correctly authorised and were then replaced. Two of the notices were withdrawn when HMRC’s case officer, Mr Rolls, considered the requests in them could be more closely targeted. Furthermore, two of the information notices were withdrawn after Mr John Cassidy of Crowe LLP, the Respondents’ accountants, filed a witness statement in the appeal against them.

At [43] the FTT noted that HMRC were not seeking to apply the legislation in order to tax the £40 million distribution in the year it was made but rather were seeking to establish whether any relevant transfers were made or procured by any of the Respondents that led to the receipt and/or further use of that sum so that the requirements were met that there be a relevant transfer for the purposes of section 732(1)(a) ITA.

In the appeal before us, HMRC did not seek to disturb the factual findings made by the FTT and recorded above.

The FTT at [51] noted that the parties disagreed about how the ToAA legislation was to be interpreted and it accepted HMRC’s submission that it should not determine whether HMRC’s interpretation of the legislation was correct in order to avoid entering into the kind of debate criticised by the Court of Appeal in Eastern Power Networks plc v HMRC [2021] 1 WLR 4742.

At [53] the FTT said that even if HMRC’s interpretation of the law was correct, their position was undermined because Mr Rolls had misunderstood the facts i.e. he refused to recognise the actual sequence of transactions relating to the £40 million distribution. Instead, the FTT accepted the Respondents’ submission that the dividend was paid by RHG to Relkeel, and not to a Bermudan entity.

Next, at [55] the FTT noted HMRC’s argument that the Respondents may have received the benefit in the light of the transactions which may have occurred after the appointment of the £40 million by the Settlement to a beneficiary. In that case, the condition in section 732(1)(b) ITA would be met. Therefore, if one or more of the Respondents had received a benefit from that £40 million appointed from the Settlement as a result of one or more subsequent transactions, the condition in section 732(1)(c) will be met. The subsequent transactions would, HMRC contended, constitute associated operations within the meaning of section 719. It was for this reason, the FTT noted, that HMRC wanted to know the entity or person to whom the Settlement had appointed the £40 million and how the £40 million was then applied. The FTT noted that the Respondents had argued that this simply amounted to a “fishing expedition” and that HMRC had to show some reason (based on evidence) to believe that there was a trail to be followed which would lead to a charge under the ToAA legislation.

On the evidence before it the FTT decided at [56]:

The FTT at [57] considered that the Respondents had been advised at all times by reputable and well-known advisers who had written to HMRC following the first hearing in May 2022 to say that they had re-examined matters and “can confirm that there are no known omissions or errors relating to the 2003 dividend on the three brothers’ tax returns for the years under enquiry.”

The FTT continued by stating at [58] that HMRC’s enquiries regarding to whom the dividend was appointed and whether any of the Respondents could benefit from it amounted to a “fishing expedition” in the absence of any evidence for believing that there may be associated operations.

The FTT then stated its conclusions:

“60.

I find that HMRC's enquiries have been conducted to a point where it is reasonable for Officer Rolls to make an “informed judgment” of the matter, even though every line of enquiry may not have been pursued to the end. Whilst HMRC have not received answers to all of their questions, I consider that the outstanding questions relating to the £40m distribution do not have a reasonable basis and amount to a fishing expedition.

61.

I note Ms Choudhury's submission that if HMRC were to issue closure notices now, they would be in vague and uninformative terms. I do not agree. HMRC are in full possession of information relating to the transmission of the distribution made by RHG on its journey up to the Settlement, and are aware that the distribution was not appointed to any of the Applicants. That should be more than enough information on which to be able to close the enquiry as regards the potential for a ToAA charge on the Applicants in respect of the distribution for the years under enquiry.

…

63.

There was considerable evidence and submissions on whether HMRC had unreasonably protracted their enquiries. These enquiries were first opened in 2014, over eight years ago. These enquiries have gone on for far too long. The reasons for the time taken cannot be ascribed solely to the fault of either HMRC or the Applicants. But as I have reached my decision without needing to consider the reasons for the delay, I have not analysed the history of the enquiries and the reasons for the delays in this decision.

64.

It is for HMRC to show that there are reasonable grounds for refusing the applications for closure notices. I find that HMRC have not so shown.

65.

The Applicants have submitted that I direct that closure notices be issued within 28 days of my decision being released. I consider that in the circumstances of this case, a slightly longer period should be allowed.”

The FTT at [66] therefore directed that HMRC issue a closure notice for the periods under enquiry within six weeks of the date on which the Decision was released. This direction was suspended pending HMRC’s appeal.

HMRC’s grounds of appeal were as follows.

The FTT had set out the principles in Beneficial House but nowhere in the Decision did it explain how it had come to its decision based on those principles. Instead, the FTT expressed the view that HMRC’s outstanding questions amounted to a “fishing expedition”, presumably on the basis of its findings at [56]. In making those findings, it failed to acknowledge that the reason there was no evidence of the funds being transferred to or for the benefit of any of the Respondents, or of the receipt of any undisclosed benefit from them was that the Respondents had refused to provide that information.

There was therefore, according to HMRC, a gap in the FTT’s reasoning on this point. If taken to its logical conclusion, it suggests that HMRC are not entitled to ask for information or conduct enquiries where they have no evidence of undisclosed income or gains. However, that is precisely the reason why enquiries into taxpayers’ returns are opened and conducted, i.e. to check whether the return and self-assessment included therein is correct and complete.

The FTT referred at [57] to the Respondents’ well-known and reputable advisers who had informed HMRC that they were satisfied the Respondents’ returns for the years in question were correct. However, the vast majority of professional advisers with whom HMRC deal were “reputable”. That does not mean that they may not be mistaken. Thus, when the advisers asserted that they had not received any distributions or “benefits” from any trusts or settlements during the years under enquiry, it was unclear whether they had appreciated all the situations in which a benefit is treated as arising under the ToAA legislation which includes benefits received indirectly. This response did not provide an answer to the question of whether there have been further relevant transactions involving the offshore structures that resulted in other income becoming payable to a person abroad which gave rise to a tax liability.

Further, the FTT had stated that it accepted HMRC’s interpretation of the legislation was arguable for the purposes of determining the applications. However, it accepted the Respondents’ argument that no liability arose for any of them under the ToAA legislation because the distribution from RHG had been made to Relkeel (at [53]). The argument that no liability arose if the distribution had been made to Relkeel appears to have then influenced the conclusion at [61] that HMRC had sufficient information to close the enquiries. This is the only basis on which it could hold that the closure notices would not be vague and uninformative and would satisfy the requirement in Archer v HMRC [2018] STC 38 that a closure notice should state the amount of tax due (but it could be an estimate).

The FTT failed to appreciate that under the ToAA legislation, the only consequence of the dividend being paid to Relkeel, which was UK resident, as opposed to a person abroad was that no income has become payable to a person abroad for the purposes of the charges under section 731 ITA in relation to the set of transactions referred to at paragraph 16 above. Based on those facts, the position was that the dividend was received in the form of income by a UK resident entity, Relkeel, before being converted into capital proceeds upon Relkeel’s liquidation so that it was received in the form of capital by the Settlement. However, HMRC’s position had always been that they are not seeking to tax the distribution in the year it was made and there was, in any event, no enquiry open in that year.

In accepting the Respondents’ argument that no liability arose, the FTT made a further error because it failed to acknowledge that even if the dividend had been paid to Relkeel a charge could still arise under the ToAA legislation for the years under enquiry because there would still be income arising to a person abroad such as the Trust or any other entity linked to the accumulation or investment of that £40m by means of associated operations which were defined broadly under section 719 ITA as including an operation effected in relation to the “asset transferred or an asset representing the asset transferred”.

Both parties agreed that we should proceed on the basis that the FTT had been correct at [51] to conclude that it should not seek to determine the disagreement between the parties on the interpretation of the ToAA legislation and how it applied to the facts before it, citing the decision of the Court of Appeal in Eastern Power Networks plc v HMRC [2021] 1 WLR 4742. The FTT dealt with the applications on the basis that HMRC’s interpretation of the legislation was arguable. However, the parties differed in relation to how this Tribunal should proceed if we considered that the FTT had been wrong to so conclude.

We consider that it was open to the FTT to decline to decide on the interpretation of the ToAA legislation and its application to the facts in the present case. The competing interpretations of the ToAA legislation were not argued before us. Certainly, we could not say with any confidence that the FTT’s decision on this point was wrong. Accordingly, since both parties agree that, for present purposes, we should proceed on the basis that the FTT was correct, we shall not consider this point further.