The Commissioners of HMRC v Jonathan Hitchins & Ors

In relation to Ground 1, Ms Choudhury KC, appearing for HMRC, argued that although the FTT had set out the relevant principles in the extract from Beneficial House it did not explain how it had come to its decision based on those principles. Equally, the FTT did not make any findings based on HMRC having “unreasonably protracted” the enquiries. The FTT had expressly declined to make findings as to the reasons for the delay. Instead, the only reason given by the FTT for allowing the applications was that HMRC’s outstanding questions constituted a “fishing expedition”. In the present case, HMRC’s enquiries were targeted on the destination of the £40 million distribution after it left the Settlement. If the Respondents were to provide the requested information and documents, HMRC would be able to complete their enquiries and issue closure notices.

According to Ms Choudhury, the FTT failed to acknowledge that the reason that there was no evidence of funds being transferred to or for the benefit of any of the Respondents, or the receipt of any undisclosed benefit from them, was that the Respondents had refused to provide that information.

Taken to its logical conclusion, Ms Choudhury submitted that the FTT’s Decision suggested that HMRC were not entitled to ask for information or conduct enquiries where they had no evidence of undisclosed income or gains. However, that was the reason why enquiries into taxpayers’ returns were opened and conducted i.e. to check whether the return and the self-assessment contained in the return was correct and complete.

Mr Gordon, appearing for the Respondents, submitted that the guidance in Beneficial House was not intended to be a rigid checklist. In any event, the FTT had in fact applied the Beneficial House principles. The FTT had reached an evaluative conclusion at [58], based on its findings at [56 (a), (b) and (c)] and [57], that HMRC were not entitled to further investigate the destination of the £40 million distribution. This was, Mr Gordon argued, a straightforward application of Principle 1, viz that the FTT was required “to exercise a value judgment determining what was reasonable on the facts and circumstances of the particular case… This involves a balancing exercise.”

Furthermore, there was a clear reference to Principle 4 at [60] when the FTT concluded that HMRC were now in a position to make an informed judgment, “even though every line of enquiry may not have been pursued to the end.”

Mr Gordon submitted that Principles 2 and 3 focused on the question of proportionality, but they were merely an expansion of Principle 1. The second sentence of [60] was an obvious reference to Principle 2. The reference to the terms of a closure notice being “vague and uninformative” were a reference to Principle 6. The reference at [63] to the protracted nature of the enquiry was a reference to Principles 1 and 3.

Therefore, Mr Gordon contended that the FTT had the guidance set out in Beneficial House clearly in mind and there was therefore no error of law in the FTT’s decision.

We reject HMRC’s submissions.

First, we accept Mr Gordon’s submission that the guidance in Beneficial House was not intended to be a mechanical checklist. Instead, it contained broad principles the relevance of which would vary from case to case.

The “value judgment” and “balancing exercise” which Beneficial House prescribes involves the FTT in an evaluative decision to be reached by the FTT in the light of all the relevant evidence. It is well-established that this Tribunal should be reluctant to interfere with an evaluative decision of the FTT, which heard the witness evidence and considered the documentary evidence, in a decision where the underlying legal principles – as in this case – are not in dispute, unless there is a clear error of law. Secondly, it is also clear that the FTT need not deal with every submission or piece of evidence, otherwise this would place an intolerable burden on the fact-finding tribunal. It was necessary only to deal with relevant evidence and submissions. Thirdly, the mere fact that the FTT does not refer to a piece of evidence does not mean that the evidence was overlooked or ignored. Furthermore, it is also well-established that if the FTT correctly states the applicable legal principles, there is a presumption that it applied those principles unless the contrary is apparent. Moreover, it is equally well-established that this Tribunal should not adopt a nit-picking or pernickety approach to decisions of the FTT. As Mummery LJ said at [30] of the judgment of the Court of Appeal in Brent v Fuller [2011] ICR 806:

Those words resonate here. The application of the principles set out in Beneficial House does not require the use of the same language or the application of the principles in the same order. It is a question of substance involving the FTT reaching a broad evaluative judgment. We accept the submission of Mr Gordon, summarised above, that the FTT had in substance applied the relevant and necessary Beneficial House principles. To conclude otherwise would involve us engaging in the nit-picking approach against which the Court of Appeal warned in Brent v Fuller.

We also reject Ms Choudhury’s submission that the logical conclusion of the Decision was that HMRC could not check a tax return or investigate an individual’s tax position where HMRC had no evidence of undisclosed income or gains. Ms Choudhury objected to the FTT’s characterisation of HMRC’s continued enquiries as a “fishing expedition.” We accept, and we did not understand this to be controversial, Mr Gordon’s submission that all enquiries must be reasonably and proportionately conducted. Nonetheless, HMRC are plainly entitled to check the tax return of any taxpayer and have ample powers to do so. The question in this case is not whether HMRC can check a tax return but whether HMRC were entitled to continue to check (or, so to speak, to continue to “fish” in respect of) a tax return after an enquiry lasting many years, bearing in mind that in the case of Jeremy and Jonathan, their enquiries were effectively parasitical on the lengthy enquiry into the affairs of their late brother. Moreover, the FTT at [52] was entitled to take account of the errors and mistakes made by HMRC in the course of their enquiry. The FTT, considering the evidence, concluded that HMRC were not so entitled and we see no reason to substitute our judgment for that of the FTT.

HMRC also complained that in making its findings at [56], the FTT 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.

We also reject that submission. It is clear from the Decision that the FTT was fully aware of the course of the enquiry and did not overlook the matters which HMRC allege. The FTT took into account at [60] the fact that ‘HMRC have not received answers to all of their questions’ but considered ‘that the outstanding questions relating to the £40m distribution do not have a reasonable basis and amount to a fishing expedition’. It gave reasons for this conclusion at [58]: ‘that in seeking full details of the beneficiary to whom the funds were appointed by the Settlement many years prior the year of enquiry, and details as to whether the beneficiary “passed it onwards, invested it on behalf of, or in any other way acted to direct that value to one or more of [the Applicants]” amounts to a fishing expedition in the absence of any evidence for believing that there may be associated operations.’ The FTT’s conclusion that HMRC’s outstanding questions did not have a reasonable basis was within a reasonable range of conclusions and one it was entitled to reach on the evidence. It gave sufficient reasons for its conclusion. Moreover, as Mr Gordon submitted, the Respondents had, throughout the history of the enquiries, handed over a considerable volume of information to HMRC on a voluntary basis.

We should add that HMRC’s complaints about the Respondents’ alleged failure to supply information pursuant to Schedule 36 information notices is not a matter which is appropriate for this Tribunal to investigate on appeal. We do not have a fact-finding role. We do not know whether the failure or refusal to supply information was justified or not.

We reject HMRC’s appeal on Ground 1.

In short, HMRC objected to the FTT’s reference to the fact that the Respondents’ well-known and reputable advisers had informed HMRC that they were satisfied the Respondents’ returns for the years in question were correct.

Mr Gordon submitted that HMRC had had every opportunity to request that Mr Cassidy be recalled as a witness to clarify his firm’s understanding of the statutory provisions, in case it differed from that of HMRC. They did not choose to take this course of action and it was inappropriate to use an appeal as a second opportunity to doubt Crowe LLP’s technical prowess.

It was not clear from Ms Choudhury’s submissions exactly on what legal principle this ground of appeal was based. As far as we could gather, it appeared to be that Ms Choudhury was arguing that the FTT had either taken into account an irrelevant factor or had reached a conclusion at which no reasonable tribunal could have arrived or that, perhaps, no reasonable tribunal could have reached the conclusion that the FTT did when taking account of this factor (Edwards v Bairstow [1956] AC 14).

It seems to us difficult to argue that this factor was irrelevant but exactly how much weight should be placed upon it was, in our judgment, a matter for the FTT in reaching its evaluative decision. Certainly, we thought it fell well short of satisfying the Edwards v Bairstow test and we did not understand Ms Choudhury to be impugning the Decision on this basis with any conviction.

We reject therefore HMRC’s appeal on Ground 2.

Ms Choudhury submitted that the FTT had erred in law at [53] by accepting the Respondents’ interpretation of the ToAA legislation, and finding that no liability arose for any of the Respondents because the distribution from RHG had been made to Relkeel. This appeared, Ms Choudhury contended, to have influenced the FTT’s conclusion at [61] that HMRC had enough information to complete their enquiries. The FTT had failed to appreciate that because the dividend was paid to Relkeel (a UK resident) the only consequence was that no income had become payable to a person abroad for the purposes of section 720 or section 732 ITA in respect of the transactions summarised by the FTT at [31] (see paragraph 15 above).

However, Ms Choudhury argued, a charge could still arise under the ToAA provisions because there could still be income arising to a person abroad, such as the Settlement or any other entity linked to the investment of the £40 million distribution by means of a subsequent relevant transfer and any associated operations (broadly defined under section 719 ITA) after its receipt by the Settlement. Thus (and this was HMRC’s one remaining concern) the £40 million distribution may have been reinvested so that income may have arisen to an unidentified person abroad. If benefits had been provided to one or more of the Respondents which could be matched to that income in the years under enquiry then section 732 ITA might still apply and that could result in a charge to tax under section 731 ITA.

HMRC, based on the information available to them to date, had not been able to identify the transactions by which (or whether) this had occurred. For this reason, HMRC had on 8 November 2022, shortly before the resumed FTT hearing on 28 November 2022, asked for financial statements of the Settlement for years after 2012/13 or any years for which statements were available. For the years before 2012/13 (for which Crowe LLP had stated no records were available) HMRC asked for:

If the Respondents provided that information, Ms Choudhury submitted, HMRC would be able to complete their enquiries.

Mr Gordon argued that HMRC misrepresented [53] of the Decision. The FTT did not say that no tax liability could arise simply because the distribution had been made to Relkeel. Instead, the FTT said that HMRC’s position was “undermined” by Mr Rolls’ misunderstanding of the actual sequence of the transactions relating to the distribution. The FTT had acknowledged that HMRC’s case turned on investigating whether [58] “the beneficiary to whom the funds were appointed by the Settlement many years prior to the years of enquiry, and… whether the beneficiary passed it onwards, invested it on behalf of, or in any other way acted to direct that value to one or more of [the Respondents].”

Mr Gordon observed that HMRC had progressively narrowed their case but had maintained their original arguments at the November 2022 hearing, even when it became obvious in the course of cross-examination in the May 2022 hearing that HMRC’s factual case was incorrect. It was only in their skeleton argument for this hearing that HMRC finally accepted that the case rested only on a possible charge under section 731 ITA.

Mr Gordon further submitted that HMRC’s acceptance that the dividend had been paid to Relkeel meant that HMRC were no longer asserting that there had been a relevant transfer for the purposes of the ToAA legislation. Instead, HMRC were now arguing that there could still be income arising to a person abroad linked to the investment of the £40 million.

There was no evidence to support HMRC’s position. In any event, this argument could have been put forward by HMRC years ago based on the public information available to HMRC. Instead, HMRC chose to base their case on a different and incorrect factual premise.

HMRC were, according to Mr Gordon, seeking to tax the value of any benefit that might have arisen from the investment of any part of those funds by a person abroad, assuming that the appointee(s) (or a subsequent recipient) actually transferred the funds (or part thereof) and only if such a benefit had somehow arisen to one or more of the Respondents in any one or more of the tax years under enquiry.

It was against this background that Mr Gordon contended that the FTT had concluded that the enquiries have gone on for “far too long.” Thus, even if HMRC’s interpretation of the ToAA had technical merit, the FTT’s overall analysis, applying the balancing approach to the facts, made it clear that the enquiries should not be prolonged any further.

We reject HMRC’s submissions.

It was clear that the FTT had section 732 ITA in mind – HMRC had raised the issue in their skeleton argument at the November 2022 hearing – and specifically addressed the issue at [58]. Moreover, we accept Mr Gordon’s submission that the FTT did not say at [53] that no tax liability could arise simply because the distribution had been made to Relkeel.

In our view, the FTT took an overall view, balancing the various factors, and concluded that the enquiry had been unduly prolonged and should be brought to a close. There seems no doubt that HMRC’s mistaken view of the facts (maintained even as late as the November 22 hearing) prolonged the enquiry, even though the FTT reached its decision without considering the reasons for the delay. The view that the enquiry had gone on for too long (see [63]) was one which the FTT was perfectly entitled to reach in its overall evaluative judgment as to whether the enquiry should be brought to a close. We do not consider that the FTT erred in reaching its conclusion.

We have decided that the Decision discloses no error of law. The FTT took account of (and balanced) a variety of factors in reaching its conclusion and we see no reason to interfere with its decision. Accordingly, we dismiss HMRC’s appeal.

Any application for costs in relation to this appeal must be made in writing and served on the Tribunal and the person against whom it is made within one month after the date of release of this decision as required by rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008.

We experienced some difficulty in ascertaining, from HMRC’s grounds of appeal, the exact nature of the errors of law which HMRC contended had been made in the Decision. The grounds of appeal were in a narrative form and seemed to consist of a series of interrelated complaints about and disagreements with the Decision.

This Tribunal has recently given guidance on the correct format for grounds of appeal in HMRC v Marlborough DP Limited [2024] UKUT 00098 (TCC) at [178] where the Tribunal said:

This guidance was given in the context of an unsuccessful Edwards v Bairstow challenge but is, in our view, equally applicable to any appeal against a decision of the FTT on the basis of an alleged error of law. We would merely add that the grounds of appeal should identify the precise nature of the error of law and why it constitutes an error of law (e.g. the misinterpretation of the statutory provision or a relevant authority, the failure to take account of a relevant factor and reaching a factual finding for which there was no supporting evidence) and not merely stating that the party disagreed with the view expressed by the FTT or that the FTT erred in expressing a particular view (e.g. “the FTT erred in law by holding…”).