18/04/23

UK: FTT orders HMRC to close enquiry into 20-year-old offshore company dividend.

As published on step.org/industry-news, Monday 17 April, 2023.

Three brothers who jointly owned their family business through a Guernsey discretionary trust have obtained a First-tier Tax Tribunal (FTT) judgment compelling HMRC to close its enquiries into a dividend paid to them 20 years ago.

The company, RHG, paid the GBP40-million dividend to Jeremy, Jonathan and Stephen Hitchins (the applicants) in 2003. In 2014, an HMRC inspector decided it could give rise to a charge under the transfers of assets abroad (ToAA) legislation. HMRC did not argue that the portion distributed to Stephen Hitchins ought to have been taxed on receipt, but sought to determine whether the receipt of that sum when he was non-resident meant he had the power to enjoy income arising to a person abroad. The position of the applicants was that they come from a wealthy family and have benefited from substantial gifts from their late parents. They argued that historic events being investigated by HMRC are not relevant for the ToAA legislation.

During the enquiry, HMRC issued six Schedule 36 information notices in respect of tax returns submitted by Stephen Hitchins alone. In each case, he answered questions he considered relevant and disputed others, resulting in the notices either being withdrawn or cancelled, the final one being withdrawn in February 2020. However, three months later HMRC decided to issue further notices, this time under s.748 of the Income Tax Act 2007. Such notices are specific to the ToAA legislation and cannot be appealed, although they can be challenged through judicial review.

A s.748 notice was duly issued to Jeremy Hitchins in October 2020, but due to 'administrative oversight' notices were not issued to either of the other applicants. These were ultimately issued in December 2021, although by then one of the applicants (Stephen Hitchins) had died. Their legal advisors, Reynolds Porter Chamberlain (RPC), applied for judicial review of the notices, but were turned down without a hearing. In the meantime, RPC gave HMRC some of the information sought in the s.748 notice. But some information remained outstanding and HMRC issued penalties to the living applicants for failure to comply with the notices. These penalties were later withdrawn.

The surviving applicants then applied under s.28A(4) of the Taxes Management Act 1970 for a direction that HMRC issue closure notices in respect of the remaining 13 open enquiries into their self-assessment tax returns. The legislation provides that the FTT must give such a direction unless it is satisfied that there are reasonable grounds for not doing so. The burden was on HMRC to demonstrate that there are reasonable grounds for refusing any such application.

The FTT has now held that the enquiries had gone on for 'far too long'. It was reasonable for HMRC to make an informed judgment of the matter even though it has not received answers to all its questions, said the FTT. It considered the outstanding questions relating to the GBP40-million distribution did not have a reasonable basis and amounted to a ‘fishing expedition’. The FTT has directed that HMRC issue closure notice within six weeks of the ruling (Hitchins and others v HMRC, 2023 UKFTT 127 TC).

The decision will be welcomed by taxpayers and advisors, said RPC. 'One of the keenest areas of contention between HMRC and taxpayers is the length of time enquiries can take before they are finally concluded', it commented. 'As the legislation does not provide a time limit by which HMRC is required to conclude an enquiry, enquiries often become unfocussed and protracted.'