'Frustrating' delay on single tax enquiry issue closure, says expert

Respondents to a recent consultation on changes to the tax enquiry closure rules "overwhelmingly" disagreed with the proposal that only HM Revenue and Customs (HMRC) be entitled to refer a single issue to the first-tier tribunal (FTT) for determination without the consent of the other party, according to a summary of responses published by HMRC. However, there was "general consensus" that the rules should be improved, HMRC said.

Tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-Law.com, said that it was "frustrating" that HMRC had begun the review process by proposing a unilateral right to refer, with no corresponding rights for taxpayers caught up in lengthy disputes with the tax authority.

"It was always going to be obvious that taxpayers – often frustrated by lack of HMRC progress and the complexities of multi-issue enquiries - would want a route to be able to initiate a resolution of their outstanding issues," he said. "There are also, rightly, concerns about the safeguards and some binding restrictions are needed to ensure that any new power is exercised appropriately."

"However, as HMRC now has to go away and think again, the currently inadequate mechanics for taking discrete issues to the FTT will remain, at least until the 2017 Finance Bill," he said.

Currently, tax enquiry rules prevent HMRC from obtaining formal resolution of a single issue without it meaning the closure of an entire tax enquiry, unless the taxpayer agrees to the referral of the singly issue to the tax tribunal for determination. Last year, the government proposed giving HMRC the right to apply to the tax tribunal for a closure notice on a single issue without obtaining taxpayer consent, citing examples of taxpayers "[refusing] to co-operate fully with HMRC" and prolonging disputes unnecessarily.

Changes to the law last year mean that HMRC can now demand the payment of disputed tax associated with an avoidance scheme up front. So-called 'accelerated payment notices' (APNs) can be issued where schemes demonstrate certain avoidance "hallmarks", such as being subject to disclosure requirements under the Disclosure of Tax Avoidance Schemes (DOTAS) rules or where a general anti-abuse rule (GAAR) counteraction notice has been issued. However, these payments must be repaid with interest if the scheme is ultimately found to work.

Respondents were concerned both by the proposal that only HMRC should have the ability to approach the tribunal to seek closure of a single issue, and by the lack of "comprehensive and explicit" safeguards regarding the use of this power, according to the summary of responses.

"HMRC proposes to proceed on the basis that there is a need to provide a partial closure provision," the tax authority said in response. "However, as the best, most practicable way to give that effect is not clear cut, HMRC proposes to develop a small number of alternative models. HMRC will then consult stakeholders in order to identify the optimum model."

"HMRC's aim is to bring forward legislation in Finance Bill 2016. However, given the differing views of respondents on the optimum approach, and the time needed to consult further, it may be necessary to defer legislative change until Finance Bill 2017," it said.