Friday, April 03, 2009



1 April 2009 marks the demise of the Special Commissioners – although happily their Members have been reincarnated as judges of the First-tier Tribunal, which replaces both the General and Special Commissioners and the VAT and Duties Tribunal.

I thought that I would mark their passing by commenting on two recent Special Commissioners’ decisions that caught my eye – and both of which worry me!

The first is ECL Solutions Ltd v HMRC (Sp C 721). This was an application for a closure notice on a corporation tax enquiry. HMRC said that the enquiry depended on the outcome of outstanding appeals against assessments to income tax in relation to purported annual payments by the company. HMRC apparently told the Special Commissioner (or possibly he misunderstood them) that if the payments were annual payments they were not deductible for corporation tax although relief would potentially be available under ICTA 1988, s 338B (charges on income). An annual payment is not a deduction in computing trading profits but it is deductible in calculating profits chargeable to corporation tax, so that statement appears to be incorrect.

Be that as it may, HMRC’s reason for opposing the issue of a closure notice was that “the corporation tax position thus depended on the appeal as to the licence payments since the corporation tax assessments would have to be amended if the company’s appeal against the assessment fails … If a closure notice was issued the Revenue would make a conditional assessment”. The Commissioner held that these were reasonable grounds for not giving a closure notice while the income tax appeals remain to be determined.

This seems to me to completely undermine the rationale behind closure notice applications. The purpose of giving a taxpayer a right to ask for a closure notice is surely so that HMRC are not able to undermine the concept of finality, which is fundamental to the system of self-assessment, by refusing to make an appealable decision. If HMRC are required to issue a closure notice, they must state in it their conclusions from their enquiry. Clearly if they are forced to issue a closure notice such conclusions are likely to give the benefit of any doubt to HMRC, but that is a risk that a taxpayer takes in deciding to ask for a closure notice.

In the past the Special Commissioners have taken the view that if HMRC are in a position to reach a conclusion that will enable them to amend the self-assessment then they ought to be required to close their enquiry. In the case of ECL Solutions Ltd, HMRC freely admitted that they were in a position to make a conditional assessment, i.e. that they could quantify the amendment that they would make if they win on the income tax position. The rules for deductibility of charges on income are broadly similar to those for the deduction of trading expenses. Accordingly it is difficult to see that there is anything different for HMRC to enquire into whether or not they win on the income tax position.

In those circumstances ECL Solutions Ltd ought to have been entitled to its closure notice. Indeed it appears that the refusal seriously disadvantages both it and the public interest. It would surely be in the public interest for the income tax and corporation tax appeals to be heard together as they both relate to the same facts. Instead HMRC now get two bites of the cherry. If they lose the income tax appeals they are in a position to nevertheless amend the company’s self-assessment to disallow the payments, and then relitigate the same issue from a different angle.

The second decision is Morgan v HMRC (Sp C 722). This was a dispute over whether Mrs Morgan elected in 1967 to pay N.I. contributions at the married woman’s reduced rate. It was of course for her to prove that she had not done so and it is notoriously difficult to prove a negative, particularly one based on events that happened 40 years ago.

Accordingly my worry is not that Mrs Morgan lost. It is that HMRC explained to the Commissioners that although an election such as this will last for perhaps 40 years, it is their policy to destroy such elections after six years. I find this incredible. I can understand destroying correspondence after six years; many businesses do. But to destroy a formal document that not only governs a person’s tax position for the next 40 years but also seriously limits her pension, and accordingly is unlikely to be challenged until she retires and discovers that her expected pension entitlement does not exist, seems to me to be utterly unreasonable.

HMRC do not destroy everything. Indeed they kept their internal records of Mrs Morgan’s actual contributions and also their internal note recording that she had made the election – but obviously without the election itself could not say whether the officer who made the note had done it correctly or, perhaps, should have put it on the file of a different Mrs Morgan.

What is the HMRC policy on record retention? I assume it is not, “keep the secondary note and destroy the document so that the taxpayer cannot prove we were wrong and we can thus bury our mistakes”. Or even, “We know that we are always right and our staff are superhumans who never make mistakes like ordinary mortals, so there is no point in keeping important documents when we have our second-record that we received it (but not what is said because we are clever enough to be able to guess that in 40 years time)”. However that may well be the effect of the policy.

And what other important documents that clearly have a shelf life of well over six years do HMRC destroy? I think we should be told!



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