Last week, the Upper Tribunal (UT) dismissed an appeal by HMRC against the decision of the First-tier Tax Tribunal (FTT) in Hitchins v HMRC ([2023] UKFTT 00127), which directed HMRC to issue closure notices in respect of enquiries opened into the tax returns of three brothers. The apparent ease with which the UT reached its decision is unsurprising as the question of whether HMRC have reasonable grounds not to issue a closure notice is a value judgment that will rarely be disturbed on appeal.       

We have previously written about the FTT’s decision here. In summary, the FTT found that HMRC had no reasonable grounds for continuing their enquiries, which focused on the potential application of the transfer of assets abroad legislation. It was determined that HMRC’s continued questions amounted to a “fishing expedition”, and the enquiry had been conducted to a point where it was reasonable for the officer to make an informed judgment of the matter and issue closure notices.

HMRC appealed on three grounds, but in a postscript to the judgment the UT noted that it had difficulty in ascertaining the exact nature of the errors of law that HMRC were alleging, which had been put forward in narrative form. The narratives are not repeated here, but HMRC’s grounds in summary appeared to be that: 

1. the FTT did not explain how it had come to its decision based on the relevant principles; 
2. the FTT referred to the fact that the taxpayers had “well-known and reputable advisers”; and 
3. the FTT had erred in law in finding that no liability arose for any of the defendants simply because the relevant distribution had been paid to a UK company. 

The UT found that the FTT had applied the relevant legal principles (as outlined in Beneficial House v HMRC [2017] UKFTT 801 (TC)) when considering whether HMRC had reasonable grounds for not issuing closure notices. In doing so, the UT drew attention to the parameters of its role as the appellate tribunal. Its function is to correct errors of law made by the FTT, and not to re-examine the facts or substitute its own view of the merits of the case. In its decision, the UT applied the well-established principle that it should be reluctant to interfere with an evaluative decision of the FTT (unless it discloses a clear error of law) and that it should not adopt a “nit-picking or pernickety approach” to the FTT’s decisions.

The UT was unsure of the legal principle relevant to the complaint about the FTT’s reference to the “well-known and reputable advisers”, but it determined that the weight to be placed on this factor was for the FTT to determine.

Finally, the UT did not agree with HMRC that the FTT had found that no liability could arise for the defendants on the basis that the distribution had been paid to a UK company. The FTT did not say this in their decision and so it was not a reason for their conclusion.  Rather, the FTT balanced a variety of factors to conclude that the enquiry had been unduly prolonged.

The dismissal of the appeal should be welcome news for taxpayers as the FTT took a refreshingly robust approach in looking to the reasonableness of the information still sought by HMRC and identifying that HMRC were on a “fishing expedition”. Although applications for closure notices are very fact specific (as emphasised by the UT), a successful appeal would no doubt have confirmed to HMRC the approach being pursued with regard to similar lines of enquiry in other cases. Instead, the UT’s decision lends the FTT’s decision greater weight and should affect how HMRC conducts enquiries more generally and influence the FTT’s approach to similar applications. 

The decision also serves as an important reminder of the need to express grounds of appeal clearly and succinctly, and to identify the precise nature of the error of law.  The UT’s postscript noted the difficulty with the narrative form of the grounds, describing them as seeming to consist of “a series of interrelated complaints about and disagreements with the FTT decision”. The UT referred to its recent guidance on the correct format for grounds of appeal in HMRC v Marlborough DP Limited [2024] UKUT 00098 (TCC), where it stressed the importance identifying grounds of appeal as clearly as possible, ideally with each ground stated in a single paragraph with any further elaboration following below. 

While the UT did not comment on whether permission to appeal should have been given to HMRC in this case, it implied that the grounds of appeal were not sufficiently clear or persuasive. In light of the comments made by the Upper Tribunal in their decision, this may be an example of the FTT granting permission to appeal too readily given the absence of proper articulation of the errors of law HMRC contended had been made by the FTT.